TaxTMI 
TaxTMI 
2017 (3) TMI 1835
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....8 wherein the assessee has raised the following grounds : 1. " The order dated October 18, 2011 passed by the learned Commissioner of Income-tax (Appeals)-I, Bangalore under section 250 of the Income-tax Act, 1961 is bad in law and on facts. 2. Provision for Warranty 2.1 The learned CIT(A)-I has erred in law and on facts in disallowing an amount of Rs. 149,126,412 in respect of provision for warranty for the FY 2006-07 without appreciating the fact that Assessee maintains its books on a mercantile basis of accounting and that the said warranty provision has been created on a scientific manner, having due regard to the nature of activity, its global warranty accrual processes and the industry requirement in which the Assessee operates. 2.2 The learned CIT(A)-I has erred in law in disregarding the decision of the Honorable Supreme Court in the case of Rotork Controls Private Limited and has proceeded to disallow provision for warranty which has been created on a scientific and consistent basis. 2.3 The learned CIT(A)-I has erred in law, in disregarding the Honourable Delhi High Court decision which has held that formula used globally for c....
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.... was considered by this Tribunal in assessee's own case for the Assessment Year 2006-07 as well as for the Assessment Year 2011-12. We find that for the Assessment Year 2006-07, the Tribunal in the first round of appeal vide order dt.16.3.2012 in ITA No.1457/Bang/2010 remanded this issue to the assessing authority to reconsider its affairs in the light of the guidelines issued by the Hon'ble Supreme Court in the case of Rotok Controls India Pvt. Ltd. Vs. CIT 314 ITR 62. The issue was again brought before this Tribunal for the Assessment Year 2007-08 and vide its order dt.30.5.2016, the Tribunal decided this issue in favour of the assessee in IT(TP)A No.582/Bang/2015. We further note that this issue was again considered by this Tribunal in assessee's own case for the Assessment Year 2011-12 vide order dt.21.10.2016 in IT(TP)A No.373/Bang/2016 in para 10 as under : " 10. We heard rival submissions and perused material on record. The only issue in this ground of appeal is whether provision for warranty expenditure is allowable. It is no doubt true if the tests evolved by the Hon'ble Supreme Court in the above case are satisfied then the provision for warranty expe....
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....g year the expenditure incurred on warranty would be much less. The table above would show that expenditure on warranty was higher in almost all succeeding years except financial year 2009-09. In such circumstances we cannot say that assessee had followed a method which was not scientific. We are of the opinion that the three conditions set out by the Hon'ble Apex Court in the case of Rotork Controls India (Pvt) Ltd have been satisfied by the assessee, viz., establishing that there is a present obligation on account of a past event, working out the probable estimate of the outflow of the resources required and substantiating the reliability of such estimate. Especially so since the assessee was mandatorily required to follow AS-I and principles of prudence stipulated in such AS-I required provisioning for all known liabilities even if it could not be determined with certainty, but was made based on available data. We therefore delete the addition made by the AO disallowing the provision for warranty. Ground 7 of the assessee stands allowed. It is worth mentioning that the co-ordinate bench has considered the historical data pertaining to financial year 2005-06 to 2011-11 a....
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....6,78,19,000 paid to M/s. IBM India Pvt. Ltd. towards various services rendered by the said company to the assessee. This was disallowed for by the Assessing Officer for the reason that the expenditure was incurred by the assessee for retaining the customer / dealer base of M/s. IBM India Pvt. Ltd. which resulting in acquiring an enduring benefit. In its appeal before the CIT (Appeals) the argument of the assessee was that similar issue was decided by this Tribunal in assessee's own case for the Assessment Year 2006-07. Learned CIT (Appeals) relying on the decision of the Tribunal mentioned supra, allowed the claim. Ld. DR has fairly admitted that the issue stood covered in favour of the assessee. However, according to him, the marketing support service agreement was only an appendix to the main agreement for acquiring business form M/s. IBM India Pvt. Ltd. and therefore, the outgo was essential in the capital field. Nevertheless, we find that co-ordinate Bench of the Tribunal has allowed the claim of the assessee in its order dt.16.3.2012 in ITA No.1457(B)/10 for Assessment Year 2006-07, holding as under : " Having heard both the parties and having considered their riv....
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....r as well as in the subsequent Assessment Year we decide this issue in favour of the assessee and allow the claim of the assessee. 9. Ground No.4 is regarding disallowance of superannuation fund. 10. The Assessing Officer has disallowed an amount of Rs. 40,73,620 towards the payment to superannuation fund on the ground that the fund was not approved by the competent authority. On appeal, the CIT (Appeals) has confirmed the disallowance made by the Assessing Officer on the reason that though the approval was given on 13.7.2017 w.e.f. 13.03.2007 however the payment was made on 7.4.2007 when the assessee was yet to get the approval. Thus on the principle of impossibility the deduction was denied. 11. Before us, the ld. Senior Counsel has submitted that the CIT (Appeals) has accepted the fact that the approval was granted vide order dt.13.7.2007 w.e.f. 13.3.2007. Therefore the payment made by the assessee after the approval granted w.e.f. 13.3.2007 is an allowable deduction as it was the payment on or before the filing of return under Section 139(1) of the Act. The ld. Senior Counsel has pointed out that the CIT (Appeals) has denied this deduction only on the ground that on th....
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....e 4(1)(1), Bangalore ("learned AO") under section 143(3) read with section 144C(13) of the Income-tax Act, 1961 ("Act") is not in accordance with the law and is contrary to the facts and circumstances of the present case. Transfer Pricing Adjustments 2. Non-implementation of the directions of the Honorable DRP by learned TPO a. The learned AO and the TPO have erred in passing an order without following the clear directions of the Honorable Dispute Resolution Panel ("DRP"), which is directly in violation of section 144C(10) of the Act and hence liable to be struck down as beyond the jurisdiction of the AO and as being bad in law. b. The learned AO and the TPO have erred in adopting the Transaction Net Margin Method ("TNMM") as the Most Appropriate Method ("MAM") when the DRP, based on elaborate reasons and after examining the merits of the appellant's case had held that the Comparable Uncontrolled Price ("CUP") method was the MAM for the benchmarking of the import transactions undertaken by the appellant during the year. c. The learned AO and the TPO have erred in rejecting the CUP method despite the appellant's request for rectification ....
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....had an influence on the determination of arm's length price 5. Manufacturing segment a. Without prejudice to the above, the Honorable DRP and the learned AO/TPO erred in law and in facts in adopting the following filters for conducting TNMM analysis, without appreciating the TP documentation prepared by the Appellant: * Rejection of companies whose data is not available for FY 2009-10; * Rejection of companies whose income from Manufacturing / Industrial segment is less than 75 percent of total operating revenue; * Rejection of companies having different financial year ending (other than March 31, 2010); and * Rejection of companies which have persistent operating losses. b. The Honorable DRP and the learned AO / TPO, has erred in law and on facts, by including the following additional comparable companies without considering the detailed submissions of the Appellant: * Fatpipe Networks India Limited; and * Smartlink Network Systems Limited c. The Honorable DRP has erred in law and on facts in not providing any directions on VXL Instruments Limited and WEP Peripherals Limited despite the fact ....
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.... Lenovo India provides warranty for a period from one year to three years on its products and accordingly, the entire provision could not be utilized in one year and has to be spread over multiple years. The Appellant further craves to adjudicate upon the following grounds for the first time before the Honourable ITAT which were not raised before the DRP. These grounds are purely legal grounds requiring no further examination of facts and therefore, it is humbly prayed that these grounds be admitted based on the decision of Honourable Supreme Court in the case of National Thermal Power Corporation - 229 ITR 383. 9. Addition of provisions under section 115JB of the Act 9.1 The learned AO has erred in law and on facts in holding that the warranty provision of Rs. 28,87,73,978 and provision for leave encashment amounting to Rs. 19,05,538 are unascertained liabilities and not appreciating that the provisions have been created as per the provisions of the relevant accounting standards / principles which is consistently followed by the Assessee year on year. 9.2 The learned AO has erred in law by treating the provisions as unascertained liabilities and....
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....epresentative has submitted that while passing the directions, the DRP has not properly understood the directions of the Tribunal for the Assessment Year 2007-08 and therefore the TPO/A.O. has given the reasons for not following the directions of the DRP. Thus the learned Departmental Representative has submitted that when the DRP has passed incorrect directions, the TPO/A.O. has rightly not followed the same. 19. We have considered the rival submissions as well as the relevant material on record. It is pertinent to note that an appeal before the Tribunal lies only when the final order is passed to frame the assessment in pursuant to the directions of the DRP. Therefore before the final order is passed no appeal lies against the directions of the DRP. It is also undisputed proposition of law as per the provisions of section 144C that directions of the DRP are binding on the TPO/A.O. Therefore the cause of action to file the appeal arises only after passing order framing assessment is passed in pursuant to the directions of the DRP. If the final order is not against or prejudicial to the interest of revenue then the revenue would have no grievance against the final order as well ....
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....application before the DRP which held as under at paras 2.2 to 2.4 of its order dt.29.12.2014 : 2.2 In giving effect to the above directions the TPO has mentioned that in both AY 2007-08 and 2008-09, the respective TPOs had not accepted the CUP methodology followed by the tax payer in its TP analysis as the Most Appropriate Method (MAM). After rejecting the CUP as MAM the TPOs in both the years proceeded to conduct separate analysis following the Transaction Net Margin Method (TNMM) as MAM. The result of this independent analysis by the TPO was that in both the manufacturing and trading segment the TPO found that the tax payer's profit margin was higher than the TPO's analyzed margin, and, hence no adjustment was called for. The fact that the TPOs in both the years had rejected the CUP as MAM and applied TNMM was taken by the AO, while giving effect to the ITAT's direction, to indicate that those TPOs had not accepted the TP analysis of the assessee in AY 2007-08 & 2008-09. It was, therefore, concluded that the tax payer's claims made before the Hon'ble ITAT were incorrect to the extent that a TP analysis of the assessee was accepted by the TPO in both ....
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.... Ground No.4 of assessee's appeal for the A.Y. 2007-08, these grounds of the assessee's appeal become infructuous and being consequential. 22. Ground No.8 is regarding disallowance of provision of warranty. 23. We have heard the ld. Senior Counsel as well as ld. CIT, DR and considered relevant material on record. This issue is identical as involved in the assessee's own case for the Assessment Year 2007-08, in view of our finding on this issue for the Assessment Year 2007-08, this ground stands allowed. 24. Ground No.9 is regarding addition in respect of warranty provision as well as leave encashment while computing the book profit under Section 115JB of the Act. 25. We have heard the ld. Senior Counsel as well as ld. CIT, DR and considered relevant material on record. As regards the adjustment on account of warranty provision while computing the book profit under Section 115JB of the Act, in view of our finding on the issue of allowability of warranty provision the same cannot be treated as uncertain liability/provision. As regards the provision for leave encashment though the said claim was not allowable in view of the provision of Section 43B however in v....
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....n 115JB of the Act as is well known pertains to special provision for payment of tax by certain companies. Sub-section (1) of Section 115JB of the Act provides that a minimum alternative tax to be paid by the companies as computed under the said provision. Sub-section (2) of Section 115 JB requires every company for the purposes of the said section to prepare its profit and loss account in accordance with the provisions of paras 2 and 3 of Schedule 6 of the Companies Act. Explanation 1 to said section provides that for the purposes of the said section, "book profit" means the net profit as shown in the profit and loss account for the relevant previous year prepared under sub-section (2), as increased by various items specified in Clauses (a) to (i) provided therein. Clause (c) thereof reads as thus: "(c) The amount or amounts set aside to provisions made for meeting liabilities, other than ascertained liabilities;" In other words, if an amount is specified for provision which is for meeting with the liabilities not ascertained such provision so made shall have to be added back to the book profit of the company. Put it differently, if such provision is made for asc....
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....ts his liability to pay a certain sum towards gratuity liabilities of the employees. If such liability is properly ascertainable and it is possible to arrive at proper discounted present value. 20. In case of Rotork Controls India (P.) Ltd. v. CIT [2009] 314 ITR 62/180 Taxman 422 (SC), the Supreme Court in the context of an assessee making provision for estimated expenditure towards warranty observed that provision is a liability which can be measured only by using substantial degree of estimation. Such provision is recognized when an assessee had a present obligation as a result of past events, and it is possible that any outflow of resources will be required to settle the obligation and further a reliable estimate can be made of the amount of obligation. 21. Considering the above judicial pronouncements and the facts on hand, we have no hesitation in upholding the Tribunal's view that though actual payment of gratuity may be made at a later point of time upon periodical release of the employees from service, it is provision having been made on actuarial basis it cannot be stated to be an uncertained liability so as to add it back in terms of Clause (c) to Ex....
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....anty utilisation 972,025,066 Closing balance of provision required based on machine months under warranty 1,535,465,425 Total Credit (Rs) 76,652,762 272,796,487 349,449,249 Credit (Rs) 402,712,947 421,922,899 824,635,846 Credit (Rs) 519,174,867 514,928,474 1,034,103,341 Credit (Rs) 1,039,428,777 563,440,359 1,602,869,136 Credit (Rs) 683,251,088 852,214,337 1,535,465,425 Financial year Opening Balance Addition during the year Utilised/ reversed during Closing balance the year Ratio of CY provision with next year utilisation 2005-06 349,449,249 76,652,762 272,796,487 86.77 2006-07 2007-08 272,796,487 421,922,899 551,839,359, 612,180,442, > 2008-09 514,928,474 1,087,940,662 2009-10 563,440,358 972,025,066 402,712,947 519,174,867 1,039,428,778 683,251,088 421,922,899 106.29 514,928,474 58.90 563,440,358 159.23 852,214,336 95.57 2010-11 852,214,336 1,477,452,660 1,017,066,189 1,312,600,807 Document 2 4.5 Further, it was also pointed out that in the Lenovo's own case for th....
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....g profits, consider comparison of aggregate (average) rather than of individual items when applying CUP (where there are high/low variations in prices), cherry picking of comparables" 3. CUP method is transactional method, the same has to be 4. applied for each variety of goods sold This method is applied for purchases to the extent of 91 percent of the value of total purchases made from AE and not applied on substantial value of international transactions. First, we submit that CUP is a price based method and not a transactional method. Second, the learned TPO has mentioned that it has to be applied for each variety of goods, which is exactly what the assesse has done. It has benchmarked and determined the arm's length price of each of the products, identified by unique codes. We submit that the CUP method has been applied to all products imported from AES, and the percentage of 91 percent calculated does not appear to have a rational basis. Please provide us with the basis of this calculation. Document 4 5. Industry average billing rate cannot be considered in this method by relying ....