TaxTMI 
TaxTMI 
2023 (8) TMI 570
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....e principles of equity and natural justice and are contrary to the facts and circumstances of the present case. II. TP adjustment of INR 4,27,47,621 in relation to manufacturing segment: 2. The Honourable DRP and the learned AO / TPO have erred in law and on facts in making transfer pricing ("TP") adjustment of INR 4,27,47,621 to the returned income of the Appellant and in holding that the international transactions undertaken by the Appellant with its associated enterprises ("AEs") in the manufacturing segment were not at arm's length. Rejection of Internal Comparable Uncontrolled Price Method adopted as the most appropriate method by the Appellant: 3. The Honourable DRP and the learned AO / TPO have erred in law by rejecting the application of Internal Comparable Uncontrolled Price ("Internal CUP") method selected as the most appropriate method ("MAM") by the Appellant for benchmarking the international transaction of import of raw materials in relation to manufacturing segment, without giving any cogent and valid reasons for such rejection. 4. The Honourable DRP and the learned AO / TPO have erred in rejecting the Internal CUP method ....
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....6) b. Rejection of companies having persistent losses 10. The Honourable DRP and the learned AO / TPO have erred in law and on facts in not rejecting the following companies which are not comparable to the Appellant due to reasons including functional dissimilarity, presence of significant R&D etc.: a. Bhagwati Products Limited b. Exicom Tele-Systems Limited 11. The learned AO / TPO has erred in law and on facts in not accepting the following companies which are comparable to the Appellant and thereby not considering the detailed submissions of the Appellant. Further, the learned TPO has not provided any reasons for the same in the TP Order: a. Hitachi Hi-Rel Power Electronics Pvt. Ltd b. Powersonic Electric Solution India Pvt. Ltd c. V X L Instruments Ltd d. CCS Infotech Limited e. TVS Electronics Limited 12. The Honourable DRP and the learned AO / TPO have committed arithmetical errors in computing the margin of the following company: a. Exicom Tele-Systems Limited 13. The Honourable DRP and the learned AO / TPO have erred in law by not granting appropriate favoura....
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....iture has been accepted by the AO under section 37 of the Act. 20. The Honourable DRP and the learned AO / TPO have erred in law and on facts in concluding that the "conduct of the Appellant clearly shows the presence of an arrangement for promotion of marketing intangibles". 21. The Honourable DRP and the learned AO / TPO have erred in law and on facts by not appreciating that the Appellant is a distributor of products imported from its AEs on a principal-to- principal basis, and hence has incurred the AMP expenses solely for improving its business market and increasing the sales of its products in India. 22. The Honourable DRP and the learned AO / TPO have failed to appreciate that the Appellant has been uninterruptedly using the said brand for the last several years and till date, thus, all benefits endured to the Appellant, for which the Appellant has not even been paying any royalty to its AE. Consequently, for all purposes the Appellant is the sole beneficiary of all the benefits of AMP expenditure incurred during financial year ending 31 March 2016. 23. The Honourable DRP and the learned AO / TPO have erred in law and on facts, by holding ....
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....in not appreciating that if for the comparable trading companies selected by the Appellant and accepted by the learned TPO, an additional revenue (AMP expenditure incurred plus a mark-up as determined by the learned TPO) is imputed to the respective revenues of comparable companies on account of the alleged brand building activity, the net margin earned by Appellant will still be within the tolerance band of the adjusted net margin of the comparable companies. 29. The Honourable DRP and learned AO/TPO have erred in applying the Bright Line Test as a methodology to quantify the brand promotion service alleged to have been rendered by the Appellant to its AE. Further, the Honourable DRP and learned AO / TPO have erred in selecting companies that are not comparable to the intensity of AMP functions of the Appellant for computing the AMP/Sales ratio and thereby considered companies that have very low AMP/Sales ratio. 29. The Honourable DRP and the learned AO / TPO have erred in law and on facts in concluding that the distribution and AMP are two distinctive functions and requires to be remunerated separately. 30. The Honourable DRP and the learned AO / TPO ha....
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.... Research Limited e. Nielsen (India) Private Limited IV. Other TP related grounds 36. The Honourable DRP and the learned AO / TPO have erred by not carrying out the determination of arm's length price as required under section 92C of the Act read with Rule 10D of the Rules. 37. The Honourable DRP and the learned AO / TPO have failed to appreciate the Appellant's commercial judgment about the application of arm's length principle which is tied to the business realities. 38. The Honourable DRP and the learned AO / TPO have erred in law and on facts, in making several observations and findings, which are based on incorrect interpretation of law and contrary to facts of the case. V. Disallowance of provision for warranty 39. The Honourable DRP and the learned AO have erred in law in arbitrarily disallowing the provision for warranty amounting to INR 185,94,26,047 claimed as a deduction by the Appellant, holding the same to be contingent and unascertainable in nature. 40. The Honourable DRP and the learned AO have erred in law by not following the order of the Honourable Karnataka High Court ("HC") in the Appellant'....
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....llant on a scientific basis and that the same should not be treated as an unascertained liability and therefore, provision for warranty should not be added back while re-computing book profits under section 115JB of the Act. VII. Disallowance of unrealized foreign exchange loss 47. The Honourable DRP and learned AO have erred in disallowing the unrealized foreign exchange loss amounting to INR 17,55,00,000 claimed as a deduction under section 37 of the Act while computing the taxable income. 48. The Honourable DRP and learned AO have erred in law and on facts by treating the unrealized foreign exchange loss as marked-to-market loss, arising to the Appellant on account of restatement of financial instruments, i.e., forex derivatives/ forward contracts and thereby, categorizing the same to be 'speculative' under section 43(5) of the Act, disregarding the fact that the unrealized foreign exchange loss is on account of restatement of debtors, creditors and other trade advances, which does not fall under the purview of section 43(5) of the Act. 49. The Honourable DRP and learned AO have erred in not appreciating that the unrealized foreign exchange ga....
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....s amounting to INR 17,55,00,000 to the book profit of the Appellant. 57. The Honourable DRP and learned AO have erred in concluding that unrealized foreign exchange loss is an unascertained liability without appreciating the fact that the treatment of unrealized foreign exchange loss is in line with AS-11 issued by ICAI and also, the principles of 'prudence' prescribed in AS-1, which is required to be complied by the Appellant under section 145(2) of the Act. 58. The Honourable DRP and learned AO have erred in not appreciating the fact that the foreign exchange loss has been incurred by Lenovo India in the course of its business on account of restatement of debtors, creditors and other trade advances which is not an unascertained liability and therefore, should not be added back while computing book profits under section 115JB of the Act. 59. The Honourable DRP and learned AO have erred in disregarding the decisions of the SC and various other courts relied by the Appellant in support of its arguments during the course of assessment proceedings. 60. Without prejudice to the above, the learned AO has erred in law and on facts in not providing the ....
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..... Trading Under this segment. Lenovo India imports finished products from Lenovo Group such as desktops, notebooks, mobile phones. computer peripherals and servers from its AEs and resells the same to local customers in India through its distribution network. Further. Lenovo India has the following business verticals: Commercial - Caters to private institutional customers and government orders through standard tendering process. Home and small business - Caters to retail customers. The distribution is carried out through channel partners (Tier 1). They sell onward to Tier 2 and Tier 3 distributors. Enterprise business - Consists of the server business, currently Model X86. Very large business - Caters to corporate customers such as Infosys. TCS etc. Smart phone business Lenovo India currently has a workforce of about 700 people. About 350 are housed at headquarters i.e. Bangalore and balance are spread across locations in India. Budgets and forecasts Lenovo India does not prepare economic and market analyses in the form of forecasts which have bearing on the pricing of the international transactions entered int....
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....rability analysis in respect of the comparison of the prices for all the components that have been imported from its AEs. 2. Weighted average rate is not an uncontrolled transaction that can be compared with the purchases made from AEs / Non-AEs since the level of obsolesce in the computer hardware industry is very high • Assessee has procured components throughout the year which indicates that the components are not obsolete and is actively used in the production process. • Where transactions are large in number, it would not be practically possible to compare each and every import transaction. • Components used in the manufacture of PCs are dependent on the quantity imported and therefore it would be more prudent to compare the average prices rather than the transaction price. • Assessee had compared the average price of each product purchased from the AEs throughout the year with the average price of products purchased from unrelated parties. 3. Industry average billing rate cannot be considered in this method by relying on the decision of the Bangalore ITAT in the case of Aztec Software & Technology Services vs ACI....
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.... 2010-11 Upheld CUP method as MAM and directed the AO/TPO to give effect to the DRP directions having carried merit. (Refer page 16 to 23 of ITAT order dated March 31, 2017) [refer page 189 of Case Law Compilation] 2012-13 Held CUP to be the MAM for the manufacturing segment (Refer page 3 of ITAT order dated 05 May 2022) [refer page 3 of Case Law Compilation] 2013-14 Held CUP to be the MAM for the manufacturing segment (Refer page 19 of ITAT order dated 21 March 2022) [refer page 29 of Case Law Compilation] 2014-15 Held CUP to be the MAM for the manufacturing segment (Refer page 08 of ITAT order dated 13 June 2022) [refer page 55 of Case Law Compilation] 2015-16 Held CUP to be the MAM for the manufacturing segment (Refer page 18 of ITAT order dated 06 March 2020) [refer page 86 of Case Law Compilation] 3. Further, it is respectfully submitted before your Honor's that the contentions of the TPO has been duly dealt by the Hon'ble Tribunal and Hon'ble DRP in Appellant's own case for AY 2010-11. The Hon'ble DRP has independently considered the matter and concluded that CUP is the MAM. Following is the relevant extract from the D....
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....ssessee that this issue has been continuously held in favour of the assessee that the CUP is the most appropriate method for determining the ALP of the assessee for the importing of goods for manufacturing segment. In the assessee's own case for the assessment year (AY) 2015-16 in IT(TP)A No. 2444/Bang/2019 order dated 06.03.2020 at para No. 06 to 11 in which it has been held that the CUP is the most appropriate method for computing the ALP. The relevant part of the order is as under:- 6. The Transfer Pricing Officer (TPO) to whom the question of determination of ALP was referred to by the Assessing Officer (AO) u/s. 92CA of the Act, did not accept the aforesaid TP analysis for the reasons given in his show cause notice(SCN) to the AO dated 26.9.2018. In the said SCN, the TPO firstly, expressed his opinion that for applying CUP method, reliable data is required for comparing controlled transaction with an uncontrolled transaction and such reliable data was not available. The reply of the Assessee in this regard was that each of the component/parts were identified with a unique identification number and the details were captured in the TP Analysis. The second objection of t....
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.... in Assessee's own case has upheld the application of CUP Method adopted by the Assessee for benchmarking the subject transaction in AY 2006-07 to AY 2009-10 and AY 2010-11. Copies of ITAT Orders with clear findings for these years was also filed before the TPO. 8. The TPO however applied the Transaction Net Margin Method (TNMM) as the MAM and determined ALP which resulted in an addition of Rs. 67,09,25,862 to the total income of the Assessee in the draft assessment of the AO. The Assessee filed objection to the proposed addition before the Dispute Resolution Panel (DRP) but the DRP upheld the order of the TPO. The DRP upheld the order of the TPO by observing that in CUP method strict comparability is required and such comparability is not possible in the case of the Assessee. The DRP also upheld application of TNMM as MAM and methodology adopted to determine ALP under the TNMM by the TPO. 9. Aggrieved by the order of the DRP, the Assessee has raised Grd. No. II before the Tribunal. We shall first take up Gr. No. II sub grounds 2 to 6 which grounds relate to the contention of the Assessee that CUP should have been accepted as the MAM. We have heard the rival s....
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....ufacturing and distribution of desktop, laptop, servers, and smartphones. During the relevant previous year, the Appellant incurred expenditure in connection with advertisement marketing , sales promotion campaigning, depicting features of new products, providing information to the public about details of product, its specification etc. The aforesaid advertisement and business promotion activities undertaken by the Appellant are specific to the products sold in India. As per the TPO the assessee should be compensated for additional AMP functions performed in the form of above noted functions. But the assessee's contention is that the selling of the products in India is the function of the Appellant therefore, there are no approvals sought by the Appellant in connection with the incurrence of said expenses which influences the volume of sales of the Appellant. Also to clarify further, the advertisement contents are decided by the Appellant and the said expenses does not require any approval from its AEs. The aforesaid activities are primarily to promote the business of Appellant and the same is done to influence the volume of sales of the Appellant in India. The ld. TPO issued show ....
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.... AEs and these transactions are carried out on a principal-to-principal basis. o The essence of the transaction is appointment of the Appellant as a non-exclusive distributor of Lenovo products imported from its AEs, such transaction being on principal-to-principal basis. o The Appellant's intention to buy products from AEs and sell the same in India on principal-to-principal basis. o Thus, the Appellant only acts as a distributor of the products imported from AEs and at no point of time acts as their agent. 6. Without prejudice to the above argument that the AMP expenditure incurred by the Appellant does not constitute an international transaction under Chapter X of the Act, the Appellant would like to bring to your Honor's notice the principles coming out of the Delhi HC ruling in the case of Sony Ericsson Mobile Communications India P. Ltd. v. CIT, 374 ITR 118 (Del). The relevant extract of the ruling of the Delhi High Court is as under: "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/seg....
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.... considered view of the Court the Revenue has failed to demonstrate the existence of an international transaction only on account of the quantum of AMP expenditure by MSIL. Secondly, the Court is of the view that the decision in Sony Ericsson holding that there is an international transaction as a result of the AMP expenses cannot be held to have answered the issue as far as the present Assessee MSIL is concerned since finding in Sony Ericsson to the above effect is in the context of those Assessees whose cases have been disposed of by that judgment and who did not dispute the existence of an international transaction regarding AMP expenses." 86. .................... As far as MSIL is concerned, its operating profit margin is 11.19% which is higher than that of the comparable companies whose profit margin is 4.04%. Therefore, applying the TNMM method it must be stated that there is no question of TP adjustment on account of AMP expenditure. (Emphasis supplied) 18. In a recent case of Hon'ble Bangalore Tribunal in the case of HP India Sales Private Limited [IT(TP)A No.524/Bang/2017] it was held that merely because the AE has a financial interest, it cannot be presu....
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....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. [refer page 59 of Case Law Compilation] Lenovo India Private Limited Bangalore Tribunal ITA No. 2833/Bang/2017 Order Date: 21-03-2022 AY: 2013-2014 Relevant Para: Respectfully following the above we uphod CPM to be the MAM in computing the ALP of the trading segment. Further, based on the categorical observation by the Ld.TPO regarding the trading segment to be at arm's length, we direct the Ld.AO/TPO to delete the adjustment proposed, in respect of the AMP expenses as it cannot be treated as international transactions in the present facts of the case. [Page 25 of the ITAT order] [refer page 35 of Case Law Compilation Lenovo India Private Limited Bangalore Tribunal ITA No. 2833/Bang/2017 Order Date: 21-03-2022 AY: 2013-2014 Relevant Para: Respectfully following the above we uphod CPM to be the MAM in computing....
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....r, it is respectfully submitted that the Hon'ble Tribunal in AY 2013-2014 at page 25 of the order clearly stated that the issue of AMP should not be remanded back. Further, considering Ld. TPO has accepted the ALP of Appellant in trading segment to be at arm's length, Hon'ble Tribunal directed Ld. TPO to delete the adjustment proposed, in respect of the AMP expenses as it cannot be treated as international transactions in the present facts of the case. 22. Therefore, the said issue should not be sent back to the Ld. TPO for further verification and applying the principles laid down by the Hon'ble Delhi High Court in the case of Sony Ericsson Mobile Communications India P. Ltd. (supra) and following the Hon'ble Tribunals ruling in Appellant's own case for AY 2015-16,AY 2014-2015, AY 2013-2014 & AY 2012-2013 it should be concluded that no separate TP adjustment for alleged AMP expenses is warranted. 23. In light of the above para, we request the Hon'ble Tribunal to providea clear direction to the TPO to delete the AMP adjustment. In view of such finding, the argument whether AMP is an international transaction in the present case becomes academic. 6.....
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....t of desktop, laptops etc., it decides on advertisement, training etc. According to the Assessee the expenditure so incurred was to improve its sale and it cannot be said that by incurring such expenses, the assessee promoted the brand of its foreign AE. It was the case of revenue that assessee did not confine itself to distribution of trading goods, but has performed additional functions in the form of advertisement and marketing promotion to promote the brand of foreign AE and therefore the assessee needs to be adequately compensated for such additional function. The TPO adopted Resale Price Method (RPM) as the most appropriate method. The TPO chose 9 comparable companies and arrived at the AMP to sales of those companies and compared the same with that of the assessee. By such comparison, the TPO came to the conclusion that assessee was incurring much higher AMP expenditure than the industry average and incurring of excessive AMP expenses constitutes an international transaction of promotion of AE's brand. The TPO concluded that assessee performed additional functions which promoted the marketing intangibles of the AE and that the assessee should have been reimbursed by the AE t....
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....bmitted that following the decision of the Hon'ble Delhi High Court in the case of Sony Ericsson Mobile Communications India P. Ltd. (supra), incurring of AMP expenses cannot be regarded as an international transaction at all. 16. The Bench queried that in the case decided by the Hon'ble Delhi High Court, TNM Method was adopted whereas in the case of assessee in the trading segment RPM has been adopted and that would make a difference. The ld. counsel for the assessee firstly pointed out that the AMP addition on account of determination of AMP expenses has been made only in the trading segment and in this regard drew our attention to an order dated 14.11.2018 passed by the TPO u/s. 154 of the Act wherein the fact that AMP expenditure is in relation to trading segment only has been accepted by the TPO. His next submission was that the assessee has also demonstrated in its TP study with regard to the trading segment that the net margins earned by it were at arm's length. In this regard, the ld. counsel for the assessee brought to our notice that even before the TPO, the assessee had given the net margins by way of alternative submission and those details are at pages 1392 an....
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....orksheet demonstrating the same was submitted. .The appellant submitted as under:- The Appellant is engaged in manufacturing and trading of computer system and components thereof. In line with the practice followed by companies in this industry, the cost of providing warranty services is factored into the selling price of the product. Therefore, at the time of sale, Lenovo India commits to repair the product in case it fails in the future and in order to pay such commitment, Lenovo India sets aside funds when the products are sold. There are a number of factors affecting the determination of warranty provision to be set aside by the company at the time of sale, which also includes fixed or standing charges for which payments are accrued and payments have been made during the year. As already submitted to the learned AO, the amount that is set-aside for meeting the warranty obligations of Lenovo India is computed based on a scientific and technical estimate of the costs to be incurred in meeting these obligations over the period of the warranty. The formula used by the Appellant is provided below: Machine months X Repair rate X Cost per claim Wher....
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....claims and the utilisation of warranty provision for each year. The details of provision for warranty created over years is enclosed as Appendix-1. The Appellant submits that it provides warranty ranging from 1 to 3 years on sale of desktops, laptops and smartphones made to customers in India. The utilization of a particular year cannot be compared with the provision of the same year but should be compared to provision of the preceding year against which such utilization is made. Accordingly, the learned AO has erred in comparing the utilization over provision of the same year to arrive at the conclusion that the provision for warranty is an unascertained liability. In this regard, a specific reference is made to the ruling of Hon'ble ITAT in Appellant's own case for AY 2006-07 and AY 2015-16, wherein the Hon'ble ITAT has held as under: Further in this context, we submit that the Honourable ITAT in the Company's own case for AY 2006-07, AY 2007-08, AY 2010-11, AY 2011-12, AY 2012-13, AY 2013-14 and AY 2015-16 has upheld that provision for warranty has been created on a scientific basis and hence allowable as expenditure under section 37 under the Act. The relevant....
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.... 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 the this issue for the Assessment Year 2007-08, this ground stands allowed. • AY 2011-12 "Para 10- It is worth mentioning that the co-ordinate bench has considered the historical data pertaining to financial year 2005-06 to 2010-11 and came to conclusion that the provision was made based on historical data and following scientific method. Therefore, we do not find any reason to interfere with the conclusion reached by the co-ordinate bench. Accordingly, we hold that provision for warranty expenditure is allowable".(Refer page 3149- 3152 of PB Vol IV) The Honourable ITAT had relied on the decision of the Honorable Supreme Court ("SC") in the case of Rotork Controls India Private Limited (supra), while upholding Lenovo India's claim for deduction of provision for warranty as an allowable expenditure • AY 2012-13 "Para 5.3- We also notice that an identical disallowance made by the AO in assessment year 2011-12 has since been allowed by Hon'ble High Court of Karnataka in the assessee's own case following the decis....
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....e method followed by the Assessee should be accepted as proper and the deduction allowed as per the provision created by the Assessee. We hold and direct accordingly". 9.1 The AO noticed During the current year that the assessee has debited an expenditure of Rs. 4,07,24,39,923/- and utilized during the year is Rs. 2,21,30,13,876/-. The movement of the warranty is as under:- 9.2 In this regard, the assessee was asked to file details and assessee submitted that the warranty outstanding as on 31/03/2016 are number of desk tops, laptops and smart phone that carried valid warranty. He further submitted that the warranty has been created as per Accounting Standard 29 and is based on the work formula, which as under:- 9.3 The movement in the provision for warranty on the earlier years and on account year is as under:- 9.4 The AO did not accept the contentions of the assessee and he relied on the judgment of the Hon'ble Supreme Court in the case of Rotork Controls India Pvt. Ltd., Vs. CIT (2009) reported in 314 ITR 62. Further the AO from the above tables noted as under:- "5.13 From the above, it can be noted that the sales turnover has increased from Rs. 1044.24 crore....
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....ax liability. 5.17 From the above discussion and in view of above mentioned discrepancies, it is concluded that the assessee does not have a reasonable, scientific and reliable basis for the calculation of the provision for warranty. Accordingly. provision for warranty of Rs. 407,24,39,923/- created by the assessee is contingent and unascertainable in nature and hence not allowed as a revenue expense u/s. 37 of the I.T. Act. However, in the interest of natural justice, it would be fair to allow the actual expenditure incurred of 221,39,13,876/-. Hence, an amount of Rs. 185,94,26,047/- being difference of provisional warranty created and actual expenditure incurred (Rs. 407,24.39.923 - 221.39,13,876) is disallowed and added to the income. 9.5 The assessee filed objection before the ld. DRP, the ld. DRP, upheld the Draft order of the AO, accordingly the AO passed final assessment order. 9.6 In regard to the disallowance of excess provision for warranty the assessee challenged before the ITAT against the final assessment order. The ld.AR reiterated the submissions made before the lower authorities and filed written synopsis and he submitted the assessee has maintained s....
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....t aside by the company at the time of sale, which also includes fixed or standing charges for which payments are accrued and payments have been made during the year. As already submitted to the learned AO, the amount that is set-aside for meeting the warranty obligations of Lenovo India is computed based on a scientific and technical estimate of the costs to be incurred in meeting these obligations over the period of the warranty. The formula used by the Appellant is provided below: Machine months X Repair rate X Cost per claim Where: - Machine months is the factor of the unexpired warranty period in months and the number of desktops/ laptops/ smartphones which are under warranty at the end of the year; - Repair rate is the percentage of claims out of the total sales made on the historical data for the region; and - Cost per claim is the average expected repair cost per desktops/ laptops/ smartphones based on historical data for the region Therefore, the Appellant submits that the method followed for creation of warranty is scientific and the same has not been created on an ad- hoc basis. As per the provisions laid down....
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....warranty is an unascertained liability. In this regard, a specific reference is made to the ruling of Hon'ble ITAT in Appellant's own case for AY 2006-07 and AY 2015-16, wherein the Hon'ble ITAT has held as under: • AY 2006-07 "Para 16- We have perused the materials and heard the rival contentions. Question before us is whether assessee had made the provisioning for warranty in a scientific manner. It is not disputed that in the impugned assessment year it had started doing the business of sale of laptops and desktops. Obviously assessee had no historical data with it. It is also not disputed that assessee had taken over this business from IBM, who had substantial experience in such business. Hence, if the assessee relied on the methodology followed by IBM for working out the warranty provision we cannot say that it was incorrect. There is no case for the Revenue that any provisioning made by IBM in respect of such business in any earlier years were disallowed for a reason that it was unscientific. It is true that assessee had adopted two factors namely, repair action rate and cost per claim from IBM data available at Asia Pacific Level. It might also be true ....
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.... The warranty obligation is not just for one year and it spreads over a period of more than 1 year and therefore the comparison as done by the revenue authorities is unsustainable. The method followed by the Assessee for creating provision for warranty has been held to be scientific and based on historical data of sales and repair ratio in every region in which the products are sold. The method has been accepted by the Tribunal in its order for several AYs. The method followed has not been shown to be not scientific by the revenue authorities. In such circumstances, we are of the view that the method followed by the Assessee should be accepted as proper and the deduction allowed as per the provision created by the Assessee. We hold and direct accordingly". Without prejudice to the above, the Appellant wishes to draw the attention to the ratio of utilization to provision of immediate preceding year tabulated in Appendix-1, the Appellant has consistently incurred atleast 75% of the immediately preceding year's provision. This goes on to show that the Appellant is incurring warranty cost against its provision and the same is being tracked in a robust manner. The Appe....
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....se of CIT Vs. IBM India Limited for the Assessment Year 1998-99 wherein the Hon'ble Supreme Court has held that the conditions as stipulated by the Hon'ble Supreme Court in the decision in the case of Rotork Controls India Pvt. Ltd. Vs. CIT (supra) were found to be fulfilled and no case of interference with the finding of the Tribunal is made out. It is pertinent to note that in this case the assessee has acquired this business from IBM and for the Assessment Year 2006-07, the claim of the assessee for the provision of warranty was based on historical data of IBM. Thus in view of the above facts and circumstances of the case as well as by following the decision of Tribunal in assessee's own case, we decide the issue in the favour of the assessee and allow the claim of the assessee on the account of provision for warranty which was found to be based on scientific basis and method." (Refer page 3115- 3119 of PB Vol IV) • AY 2010-11 "We have heard the Id Senior Counsel as well as Id. 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 the this ....
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....ercentage of actual claim for the year and provision made for the very same year, cannot be sustained because the basis of providing warranty is Machine months x repair rate x cost per claim. The tribunal has already pointed out the flaw in the approach of the revenue authorities in its order for AY 2006-07 that the basis should be the actual expenditure incurred on discharge of warranty claims in future which is much more than the provision made in an earlier year. The warranty obligation is not just for one year and it spreads over a period of more than 1 year and therefore the comparison as done by the revenue authorities is unsustainable. The method followed by the Assessee for creating provision for warranty has been held to be scientific and based on historical data of sales and repair ratio in every region in which the products are sold. The method has been accepted by the Tribunal in its order for several AYs. The method followed has not been shown to be not scientific by the revenue authorities. In such circumstances, we are of the view that the method followed by the Assessee should be accepted as proper and the deduction allowed as per the provision created by the Assess....
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....al data with it. It is also not disputed that assessee had taken over this business from IBM, who had substantial experience in such business. Hence if the assessee relied on the methodology followed by IBM for working out the warranty provision we cannot say that it was incorrect. There is no case for the Revenue that any provisioning made by IBM in respect of such business in any earlier years were disallowed for a reason that it was unscientific. It is true that assessee had adopted two factors namely, repair action rate and cost per claim from IBM data available at Asia Pacific Level. It might also be true that assessee had not produced records relating to IBM to show that these rates were correctly worked out by IBM. Nevertheless a look at the warranty provisioning table of the assessee for the succeeding assessment years reveals the following : There is much strength in the argument of the Ld. AR that provision done for a year should be compared with the actual spending in the succeeding year. This is for the simple reason that expenditure incurred against warranty given on sales made in any given year would be reflected in the succeeding year, when the provisioning ....
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....rranty claims in future which is much more than the provision made in an earlier year. The warranty obligation is not just for one year and it spreads over a period of more than 1 year and therefore the comparison as done by the revenue authorities is unsustainable. The method followed by the Assessee for creating provision for warranty has been held to be scientific and based on historical data of sales and repair ratio in every region in which the products are sold. The method has been accepted by the Tribunal in its order for several AYs. The method followed has not been shown to be not scientific by the revenue authorities. In such circumstances, we are of the view that the method followed by the Assessee should be accepted as proper and the deduction allowed as per the provision created by the Assessee. We hold and direct accordingly. 11.1 In the case on hand the method followed has not been shown to be not scientific by the revenue authorities. In such circumstances, we are of the view that the method followed by the Assessee should be accepted as proper and the deduction should be allowed as per the provision created by the Assessee following the above judgement in assess....
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....ich can be measured only by using substantial degree of estimation. Further, provision can be recognized on fulfillment of the following conditions: * There is a present obligation as a result of past event; * It is probable that an outflow of resources embodying economic benefit will be required to settle the obligation; and * A reliable estimate can be made of the amount of obligation. In light of the aforementioned conditions, it can be said the Company had a present obligation to make good the claims under warranty, which is arising out of the past sales . Since the Company has no other realistic alternative in settling the warranty obligation arising due to sale, it is an obligating event for the Company and thus, the Company satisfies the first condition stipulated in AS 29 for the recognition of provision. Further, in case of warranty claims made by the customers, the Company is obligated to make good the claim by virtue of warranty agreement and this essentially results in outflow of resources embodying economic benefit to the Company and thus, the same satisfies the second condition stipulated in AS 29 for the recognition of pro....
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....e Company's case for AY 2006-07, AY 2007-08, AY 2010-11, AY 2011-12, AY 2012-13, AY 2013-14, AY 2014-15 and AY 2015-16 has been mentioned below: • AY 2006-07 "Para 16- 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." (Refer page 3108- 3111 of PB Vol IV) • AY 2007-08 and AY 2010-11 Placing the reliance on assessee's own case for the AY 2011-12 the Hon'ble ITAT has concluded: "Following the earlier order of this Tribunal in assessee's own case, we decide this ground of favour ....
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.... of the Act. We have already held that the provision for warrant expenses is not contingent and has to be allowed as deduction while computing income under the head "Income from Business & Profession". As a consequence of such finding, the addition made to the book profits is to be deleted because the liability cannot be said to be contingent. We hold and direct accordingly". Accordingly, the same ought not to be added for computing book profit. 13. The ld. DR relied on the order of the lower authorities. 14. In the judgement cited by the assessee for the AY 2015-16 in which it has been held that the provision for warrant expenses is not contingent and has to be allowed as deduction while computing income under the head "Income from Business & Profession". As a consequence of such finding, the addition made to the book profits is to be deleted because the liability cannot be said to be contingent, accordingly, the same ought not to be added for computing book profit. Considering the facts of the case this issue is also covered in favour of the assessee, accordingly we allow the ground No.45 to 47. Ground No.48 to 56 disallowance of unrealized foreign exchange loss 15. T....
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....ating to disclosure of prior period extraordinary items and changes in accounting policies. The notification is effective from assessment years 1997-98 and subsequent yeaRs. AS -1 - Disclosure of Accounting Policies is one of the Accounting Standards notified by the CBDT in terms of section 145 of the Act. Vide this Standard; the CBDT has recognized accrual as one of the fundamental accounting assumptions. In terms thereof, revenues and costs have to be accrued, that is, recognized as they are earned or incurred (and not as money is received or paid) and recorded in the financial statements of the period to which they relate. The aforementioned AS - 1 as notified by the CBDT also states that prudence should be one of the major considerations governing the selection and application of accounting policies. In other words, as per the Standard, provisions should be made for all known liabilities and losses even though the amount cannot be determined with certainty and represents only a best estimate in the light of available information. Since prudence has been similarly defined in both the CBDT as well as ICAI Accounting Standards, it follows that accounting for MTM ....
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.... deduction." The Appellant further wishes to place reliance on the following rulings to substantiate its claim: i. Sutlej Cotton Mills Ltd. [1979] 116 ITR 1 (SC) ii. Oil & Natural Gas Corpn. Ltd. [2010] 189 Taxman 292 (SC) iii. International Combustion (I) (P.) Ltd. [1982] 11 Taxman 128 (Cal HC) iv. Acer India Private Limited (ITA 473/ Bang/ 2016) (Bang-ITAT) v. Amrit Steels Ltd. [2001] 79 ITD 498 (Delhi ITAT) vi. Dow Agrosciences India (P.) Ltd. [2017] 88 taxmann.com 676 (Mumbai ITAT) vii. Oil & Natural Gas Corpn. Ltd. [2002] 83 ITD 151 (Delhi ITAT) The issue no more res integra and is held in favour of the Appellant. The entire premise of the learned AO to frame the addition i.e. notionalmarked-to-market loss on account of fair value of forex derivatives/forward contract is applicability of section 43(5) of the Act. In this regard, the Appellant wishes to bring your Honor's attention to note no. 43 of the Financial statement (Refer Pg 27 of PB Vol I) which states that the Appellant has not entered into any foreign currency forward contracts to hedge its risk associated with foreign currency ....
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....ome or expense in the period in which they arise, except in cases of exchange differences arising on repayment of liabilities for acquiring fixed assets. 28. In the present case, the Assessee had stated that it was reinstating its debtors and creditors in connection with execution of contracts entered into with foreign entities on the basis of the value of the foreign exchange. Thus, clearly the loss on account of Forward Contracts would require to be recognized as well. 29. It is also relevant to refer to the findings of the learned CIT(A) in this regard. Paragraph no. 13 of the appellate order reads as under: "13. It may be noted that the valuation-loss is reflected on the debit side of the P&L account whereas the corresponding valuation Gains resulting on the valuation of the debtors is reflected on the credit side included as part of sales/exchange Gains and in respect of imports as reduction in the import price on the debit of the Profit & Loss account. In other words, the entire transaction of either realization of debtors in foreign exchange/payment for imports in foreign exchange which are designated in foreign currency and the entering into Forwa....
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....alized Foreign exchange loss is as unascertained liability and it should be added while computing Book Profit u/s 115JB. In this regard the ld. AR of the assessee submitted as under:- During the FY 2015-16 (relevant to AY 2016-17), an amount of INR 100,33,14,795 representing foreign exchange loss (net) was claimed as a deduction in arriving at the taxable income. Such loss was computed after considering the unrealized foreign exchange loss of INR 17,55,62,222 due to restatement of debtors, creditors and other advances, using the exchange rates as on the date of drawing up the financial statements (viz 31 March 2016) as against the date on which the transactions were entered into with the concerned debtor, creditors and other parties. Further, we wish to submit that foreign exchange loss (net) was claimed as a deduction in computing the book profits, since the same represents genuine business expenditure. The Appellant, being incorporated under the Companies Act, 1956, is required to prepare its books of accounts on an accrual system of accounting. Further, as per section 211(3A) of the Companies Act, 1956, it is mandatory for each company to follow and apply all t....
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....ted by the department in a particular Assessment year, if the facts and circumstances of the case remain more or less the same, the same method cannot be rejected in subsequent cases of the assessee that are taken up. Each of the objections raised by the TPO to the adoption of CUP by the assessee was responded to by the taxpayer in the following manner. SI No 1. Reasons for rejection of CUP as the MAM Non-availability of reliable data in order to compare the degree of comparability between the international transaction and uncontrolled transactions Lenovo's contention As mentioned earlier, Lenovo imports raw materials from both AEs as well as unrelated vendors for the manufacture of PCs. You would appreciate the parts. being components have a unique identity and bear serial numbers or codes by which they are known. Lenovo has documented the analyses in respect of the comparison of the prices for all the products that have been imported from its AE. Hence the reasons provided in the subject notice are not acceptable. Document 4 SI No Reasons for rejection of CUP as the MAM Lenovo's contention 2.....
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.... decision of the Bangalore ITAT in the case of Aztec Software & Technology Services vs ACIT There is no publicly available information on prices charged in independent transactions of similar or identical nature, so external CUP cannot be applied. Lenovo's contention Inthis regard, we are of the view of the reliance placed on the case of Aztec Software and Technology Services Vs ACIT by learned TPO, wherein the use of average hourly rate as the CUP was rejected, is misplaced as the facts of the case are very different from that of Lenovo's case. At this juncture, we wish to bring to your kind attention that the case relied upon by learned TPO specifically pertains to a taxpayer in the software services industry which is materially different from Lenovo's business, ie, the hardware segment In the Aztec case, the rates were dependent on the expertise and technical level of the person performing the function and measurement of such qualitative service can be subjective. However, in the instant case, we have components which have distinctive codes by which they are known in the industry and the measurem....
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....y the TPO is found to be unjustified. The TPO is directed to adopt the CUP method as the basis for TP analysis this year. The objections raised are, therefore, accepted. Document 7 Provision for warranty Amount (in 1) Opening balance 266,73,00,000 Provision made during the year 407,24,39,923 Utilisation 221,30,13,876 Document 8 Sales . Particulars F.Y.2005-06 F.Y.2006-07 F.Y.2007-08 F.Y.2008-09 Manufacturing 611,36,83,000 810,08,07,000 801,01,33,000 633,27,11,000 Trading Extended Warranty Packs 432,88,08,000 721,91,68,000 1003,17,64,000 652,54,79,000 TOTAL 51.10.000 1.21.98.000 1.10.11.000 1044,24,91,000 1532,60,85,000 1805,40,95,000 1286,92,01,000 Document 9 Warranty provision created 34,94,49,249 55,18,39,359 61,21,80,442 108,79,40,662 Warranty Utilized/Reversed 7,66,52,762 40,27,12,947 51,91,74,867 103,94,28,778 Provision created/Turnover 3.34% 3.60% 3.39% 8.40% Provision utilized/Turnover 0.73% 2.62% 2.87% 8.07% Particulars Sales F.Y.2009-10 FY 2010-11 FY 2011-12 . Manufacturing âš« Tradin....