TaxTMI 
TaxTMI 
2018 (2) TMI 2020
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....hout appreciating the fact that the provision was made without any basis and the assessee is making the provision every year and reversing the same subsequently in the absence of actual utilization. 3. The DRP erred in directing the AO to delete the disallowance of provision for warranty amounting to Rs. 41,69,288/- without appreciating that a comparison of the provisions and the actual expenses do not disclose any scientific relationship amongst them and the claim was only an estimation which cannot be held as scientific and the SC in the case of Rotork Controls India (P.) Ltd., had held that the claim should be scientific. 4. For these and such other grounds, that may be urged at the time of hearing, it is humbly prayed that the order of the DRP be reversed and that of the Assessing Officer be restored. 5. The appellate craves leave to add, to alter, to amend or delete any of the grounds that may be urged at the time of hearing of the appeal." 2. Though various grounds are raised but they all relate to the disallowance of provisions of warranty of Rs. 41,69,288/- and in this regard the facts borne out from the order of the authorities below are that from the P & L A/c, it ....
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....ment year 2011-12 though further provisions were made in different assessment years. The AO further observed that year after year, provisions of warranty is being created and the same amount is being reversed in the next year since there has been no actual utilization in any of the previous and subsequent years. Based on these facts, the AO concluded that provisions are not being created in a technical or scientific manner. Relying upon the judgment of the Apex Court, it was observed by the AO that it is to be seen as to whether the working has been robust based on a historical data, whether minimal reversal, whether the estimates are reduced as one approaches at the end of warranty period and whether any detailed assessment of warranty provisions had been made. The AO accordingly observed that during the year there has not been a single claim of warranty. Therefore, the creation of warranty provision cannot be said to be genuine. Relying upon the judgment of the Apex Court in the case of Rotork Controls India (P.) Ltd., the AO held that creation of provision is not required in the given facts and circumstances of the case. Therefore it should be disallowed. But pursuant to the dir....
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....ade of the amount of the obligation. If these conditions are not met, no provisions can be recognized. Meaning thereby, for creating a provision, there should be some basis on the basis of the result of the past events. Their Lordship further held that liability is defined as a present obligation arising from the past events, the settlement of which is expected to result in the outflow of the enterprises of resources embodying economy benefits. The main emphasis is given to the past events which can only be the basis on which assessee can make a provision for liabilities on scientific basis. The relevant observation of the Hon'ble Apex Court is extracted hereunder: "12. A past event that leads to a present obligation is called as an obligating event. The obligating event is an event that creates an obligation which results in an outflow of resources. It is only those obligations arising from past events existing independently of the future conduct of the business of the enterprise that is recognized as provision. For a liability to qualify for recognition there must be not only present obligation but also the probability of an outflow of resources to settle that obligation. W....
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....rience of the company. Their Lordship further observed "A detailed assessment of warranty provision in policy is required particularly if the experience suggest that warranty provisions are generally reversed if they remain unutilized at the end of the period prescribed in the warranty. Therefore, the company should scrutinize the historical trend of the warranty provisions made and the actual expenses incurred against it. On this basis, a sensible estimate should be made. The warranty provisions for the products should be based on the estimate at the year end of the future warranty expenses. Such estimates needs reassessment every year. As one reaches close to the end of the warranty period, the probability that warranty expenses will be incurred is considerably reduced and that should be reflected in the estimation amount. Whether this should be done through a prorata reversal or otherwise would require assessment of historical trend". The Lordship further held "there are 4 important aspects of provisioning. They are provisioning which relate to the present obligation, it rises out of the obligating event, it involves outflow of the resources and lastly it involves reliable estim....
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....tion was done. Only reversal of the earlier provision was done. In the light of details available, we find that there was no obligating events which requires the provisions for liability. Moreover, there is no outflow of the resources required to settle the obligation. In the absence of the obligating event and the outflow of resources required to settle the obligations, we are of the view that estimate of provisions made by the assessee is not on scientific basis and also not reliable. It is also important to note that from assessment year 2011-12, assessee stopped creating provision of warranty. Under these circumstances, we are of the view that in the absence of any claim of warranty in earlier year, provisions of warranty was not required at all. Therefore, it cannot be allowed. We accordingly find force in the observations of the AO though he was required to allow the claim on account of directions of DRP. Therefore, we reverse his findings and direct the AO to disallow the claim of provisions of warranty. 10. IT(TP)A No.332/Bang/2015 This appeal is preferred by the assessee through which assessment order passed consequent to the direction of DRP is assailed on the following....
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....priate method which is to be adopted for computing the ALP of the international transactions. The facts in brief borne out from the record are that assessee is a trading company and carries out distribution and marketing of the products of AOS group in India. M/s. AO Smith India Water Heaters India Ltd. (the assessee) is a direct subsidiary of AOS Netherland. The products sold by the company are imported from AOS China which is involved in the manufacture of water heater. The tax payer company imports water heaters from AO Smith China and sells them in India. AO Smith India, according to the TP document, are distributors of AO Smith Water Heaters India. 12. Having noted the international transactions of the assessee with its AE. a reference was made to the TPO and the TPO accordingly issued a notice to the assessee for filing the copies of documents maintained by the taxpayer u/s. 92D of the I.T. Act. A showcause notice was therefore issued to the taxpayer proposing to reject the TP documents of the taxpayer being based on unreliable data as RPM is not the most appropriate method for determining the ALP of the international transactions of the taxpayer in the trading segment. The ....
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....e adjustment to arrive at the operating profit i.e., adjustment for expenditure incurred in the current year, the benefit of which will be received in the future year. In the absence of reliable adjustment, the selection of TNMM will not result in arriving at the ALP of the international transaction. In transactions method like RPM or Cost Plus method, the effect of these factors may be eliminated as natural consequences of insisting upon greater product of function similarity. Depending upon the facts and circumstances of the case and particular on the effect of functional differences on the cost structure and the revenue of the potential comparables, the net profit indicators can be less sensitive than the gross margin to the difference in the extent of complexity of function and difference in the level of risk. 15. It was further contended that comparability should not be interpreted in isolation because of the conditions and circumstances of the controlled transactions should be taken into consideration while comparing the net margin. Under the facts and circumstances of the assessee, the net margin comparability is more volatile than the gross margin comparable. In the light ....
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.... value addition or not on the cost purchased for resale. If there is no value addition to the finished goods purchased from the AE are sold in the market as it is, then gross profit margin earned on such transactions become a determining factor to analyse the gross compensation after the cost of sales. Accordingly the Tribunal held that the RPM is the most appropriate method. 17. Similarly, in the case of Bose Corpn. (P.) Ltd. (supra), the assessee company was engaged in the business of distribution of sound and audio assistant for individual customers and public places. It was a wholly owned subsidiary of Bose Corporation, USA. During the relevant year, assessee purchased furnished goods from its AE and resold the same in India to unconnected parties. The assessee adopted resale price method (RPM) as most appropriate method (MAM) for determining the ALP of the said international transactions. The profit level indication (PLI) adopted by the assessee was gross profit/sale and the assessee has made itself tested party for the purpose of international transactions. The TPO rejected the transfer pricing study of the assessee and opined that transactional net margin method was to be a....
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....n 2 segments viz., manufacturing and distribution. In respect of business of distribution, the TPO suggested transfer pricing adjustment by applying the TNMM and rejected the resale price method (RPM) adopted by the assessee because the TPO found that assessee was incurring loss consistently and hence the price police was not at arm's length. The Hon'ble High Court, having examined all aspects have finally concluded that RPM is the most appropriate method. The relevant observation of the Hon'ble High Court is extracted hereunder for the sake of reference: "7. After having perused the relevant part of the order passed by the Commissioner and the Tribunal on this question, we are in agreement with Mr. Pardiwalla that the Tribunal did not commit any error of law apparent on the face of the record nor can the findings can be sold to be perverse. The Tribunal has found that the TPO has passed an order earlier accepting this method. The Tribunal has noted in para 19 of the order under challenge that this method is one of the standard method and the OECD (Organization of Economic Commercial Development) guidelines also state in case of distribution or marketing activities wh....