AI Drafter 
TaxTMI 
TaxTMI 
2022 (12) TMI 626
X X X X Extracts X X X X
X X X X Extracts X X X X
....f INR 24,92,08,416. The return of income was picked up for scrutiny. During the course of the assessment, the AO made a reference of international transactions entered into by the Assessee to the Transfer Pricing Officer ("the TPO") for determining the Arm's Length Price ("ALP") of such transactions under section 92CA of the Income-tax Act, 1961 ("the Act"). The assessee filed submissions on the information / details called for. On conclusion of the Transfer Pricing ("TP") proceedings, the TPO passed an order dated 23.10.2017 u/s. 92CA of the Act proposing the following adjustments: Particulars Amount (In INR) Adjustment to the manufacturing segment 13,52,88,149 Adjustment on account of excess AMP expenditure 123,25,95,287 Assessed Income 136,78,83,436 3. The AO, taking note of the above, concluded the assessment proceedings as per the provisions of section 143(3) r.w. section 92CA of the Act and forwarded a Draft Assessment Order ("DAO") to Assessee determining the revised total income at INR 113,97,14,831 without setting off brought forward losses and unabsorbed depreciation, as against the returned loss of INR 24,92,08,416. Further, the AO made ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....st of the products imported from its associated enterprises for the financial year 2013-14. This list provides for the weighted average of the prices paid during the year for the products imported from associated enterprises. Each of these parts is identified based on a distinctive product code. The taxpayer has imported 581 different varieties of products from its AEs which can be identified from distinctive codes. Out of the 581 products, 348 products were purchased from the AEs exclusively whereas the rest 223 were purchased from the AEs as well as the third party vendors. With respect to the imports from associated enterprises, the Company conducted a search (based on product code) to identify similar products, imported from unrelated vendors for the financial year 2013-14 and the weighted average price per unit for these products. This process resulted in the identification of potential internal comparables for 233 of the products imported. A detailed analysis is as follow: Products imported from associated enterprises only With respect to the imports made only from associated enterprises, the prices paid by associated enterprises to its ven....
X X X X Extracts X X X X
X X X X Extracts X X X X
....national transaction with AEs only (E) 13,73,456,156 P r o p o r t i o n o f A E t r a n s a c t i o n t o t o t a l 14.75% Proportionate adjustment to ALP (G=F*D) 15,85,79,577 Less: Suo-moto adjustment made by Lenovo India (H) 3,28,51,891 Transfer Pricing adjustment in relation to manufacturing segment (GI-1) 12,57,27,686 7. The assessee raised objections before the DRP. The DRP gave partial relief to the extent of revision in the PLI's of comparable companies considered for TP adjustment. The revised average of OP/OC of comparables came to 3.51% and hence the AO in the final order revised the TP adjustment towards manufacturing segment to Rs.10,88,68,102.. 8. The assessee is in appeal before the Tribunal against the final order of the AO. The learned AR made the following submissions:- * The assessee imported components both from AEs as well as unrelated vendors. * These components have a unique identity and bear serial numbers of codes by which they are identified. * The assessee has documented he comparability analysis in respect of the comparison of the prices for all the components that have been im....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ing the above decision of this Tribunal, we direct the TPO to apply CUP as the MAM and recompute the ALP after giving the assessee a reasonable opportunity of being heard. Ground Nos. 2 to 6 are allowed. In view of the above conclusion, the other grounds 7 do not require any adjudication. TP adjustment of AMP expenditure pertaining to trading segment - Grounds 11 to 33. 12. The assessee through these grounds is contending the treatment of alleged excess AMP expenditure pertaining to trading segment as a separate international transaction and making the consequent TP adjustment. The assessee raised grounds contending treatment of AMP expenditure as a separate international transaction 11 to 21 and also on merits Ground 22 to 33. 13. We will first take up the issue of treatment of AMP expenditure as international transaction. The TPO noticed that for the year under consideration, the assessee has incurred substantial amount towards AMP expenditure in comparison to the earlier years. These expenses are incurred by the assessee towards campaigning, depicting features of new products, providing information to the public about the details of product, specifications, etc. The afo....
X X X X Extracts X X X X
X X X X Extracts X X X X
....dentical issue:- 101. However, once the Assessing Officer/TPO accepts and adopts TNM Method, but then chooses to treat a particular expenditure like AMP as a separate international transaction without bifurcation/segregation, it would as noticed above, lead to unusual and incongruous results as AMP expenses is the cost or expense and is not diverse. It is factored in the net profit of the inter-linked transaction. This would be also in consonance with Rule 10B(1)(e), which mandates only arriving at the net profit margin by comparing the profits and loss account of the tested party with the comparable. The TNM Method proceeds on the assumption that functions, assets and risk being broadly similar and once suitable adjustments have been made, all things get taken into account and stand reconciled when computing the net profit margin. Once the comparables pass the functional analysis test and adjustments have been made, then the profit margin as declared when matches with the comparables would result in affirmation of the transfer price as the arm's length price. Then to make a comparison of a horizontal item without segregation would be impermissible. 15. The Hon'ble ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....h in assessee's own case for AY 2013-14 relied on the decision of the Tribunal for AY 2015-16, but instead of remitting the case back to the TPO, the Tribunal had deleted the addition specifically on the basis of the fact that the TPO has in his order (para 4.1) has specifically recorded that the assessee's margin in trading segment is within arm's length. The Tribunal had therefore held that there was no necessity to remit the issue back to the TPO. 19. In the present case, the TPO has not recorded specifically that he is satisfied about the ALP of trading segment. Given this, we respectfully follow the decision of the Co-ordinate Bench in assessee's own case for AY 2015-16 and remit the issue to the TPO for consideration of ALP of the trading segment applying the net profit margin method, and if as a result, the price received is found to be at arm's length, no separate addition needs to be made. The assessee may be given a reasonable opportunity of being heard. In view of this conclusion, we are of the considered view that grounds (22) to (33) does not warrant adjudication at this stage. Further ground (34) to (36) are general and subsumed in the main TP grounds, hence, dismi....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... 51,91,74,867 51,49,28,474 2008-09 51,49,28,474 108,79,40,662 103,94,28,778 56,34,40,358 2009-10 56,34,40,358 97,20,25,066 68,32,51,088 85,22,14,336 2010-11 85,22,14,336 147,74,52,660 101,70,66,189 131,26,00,80 2011-12 131,26,00,80 103,75,04,656 100,25,76,056 134,75,29,40 2012-13 134,75,29,40 148,76,96,121 135,36,26,321 148,15,99,20 2013-14 148,15,99,20 197,19,70,205 190,52,83,337 154,82,86,07 22. The AO did not accept the contention of the assessee and analysed the provision and utilization of warranty and concluded that the assessee has been using only 55% of the total provision. The AO noticed the mismatch between the actual expenditure and the provision created and concluded that provision created is not done scientifically and not reliable. He also made an analysis of the warranty provision with turnover for earlier years and concluded that the sales and the warranty provision are not proportionate i.e., there is higher movement of warranty in few years when the actual sales had come down. This was another reason to conclude that the method of provision for warranty is not reliabl....
X X X X Extracts X X X X
X X X X Extracts X X X X
....e assessee for the succeeding assessment years reveals the following: Provision For warranty account FY 2005-06 Particulars Debits (Rs.) Particulars Credits (Rs.) Opening balance Warranty provisions during the year 349,449,249 Warranty Utilisation Closing balance of provision required based on machine months under warranty 76,652,762 272,796,487 Total 349,449,249 Total 349,449,249 FY 2006-07 Particulars Debits (Rs.) Particulars Credits (Rs.) Opening balance Warranty provisions during the year 272,796,487 551,839,359 Warranty Utilisation Closing balance of provision required based on machine months under warranty 402,712,947 421,922,899 Total 824,635,546 Total 824,635,846 FY 2007-08 Particulars Debits (Rs.) Particulars Credits (Rs.) Opening balance Warranty provisions during the year 421,922,899 612,180,442 Warranty Utilisation Closing balance of provision required based on machine months under warranty....
X X X X Extracts X X X X
X X X X Extracts X X X X
....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." 32. The learned DR relied on the order of the AO/DRP. 33. We have carefully considered the rival submissions. The basis for creating provision adopted by the Assessee is Machine months x repair rate x cost per claim Where: Machine Months = Factor of the unexpired warrant period in months and the nu....
X X X X Extracts X X X X
X X X X Extracts X X X X
....educted and the nature of payment with respect to 'other expenses' debited to the P & L A/c. The assessee produced the details called from time to time for the purpose of further cross verification. The AO issued notice under section 133(6) of the Act to five parties selected on random basis. Out of these 5, one party namely Mudhrana Creations Ind. Pvt. Ltd., did not respond / reply to the AO. The AO therefore treated the payment made to the said party as not genuine and disallowed the same under section 37(1). The DRP confirmed the addition. 27. Before us, the learned AR submitted to substantiate the genuineness of expenditure and existence of the vendor, the following documents were filed during the assessment proceedings:- 1. Copy of Form 16AS evidencing the tax deducted by assessee on advertising services availed from Mudhranaa. 2. Copy of sample invoices issued by Mudhranaa. 3. Extracts from website of Mudhranaa evidencing its existence and its business of providing advertising and marketing related services. 4. Screenshot of the clientele of Mudhranaa which includes the assessee, Lenovo India. 5. Extract of balance sheet of Mudh....