TMI Blog2023 (8) TMI 570X X X X Extracts X X X X X X X X Extracts X X X X ..... 3) TMI 471 - ITAT BANGALORE] it would be just and appropriate to set aside the issue of determination of net margin of the assessee and in the trading segment, as claimed by the assessee in Scenario-3 before the TPO. If the margins are accepted as at arm s length and then applying the principles laid down in the case of Sony Ericsson Mobile Communications India P. Ltd. [ 2015 (3) TMI 580 - DELHI HIGH COURT] incurring of AMP expenses cannot be treated as international transaction and consequently determination of ALP would not arise for consideration at all. We therefore set aside the order of the AO and remand the issue to the TPO for consideration of ALP of the trading segment applying the net profit margin method and if by such method the price received in the international transaction is considered as at arm s length, then no separate addition needs to be made. Disallowance of Provision for Warranty - DR submitted that the assessee has not demonstrated that there is any scientific method adopted by the assessee - HELD THAT:- In the case on hand the method followed has not been shown to be not scientific by the revenue authorities - we are of the view that the method fo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 7 of the Act. therefore, the addition can not be made while calculating book profit u/s 115JB of the Act. for the year under consideration. Considering the rival submissions we allow these grounds. - SMT. BEENA PILLAI, JUDICIAL MEMBER AND SHRI LAXMI PRASAD SAHU, ACCOUNTANT MEMBER For the Appellant : Shri Padam Chand Kincha, C.A For the Respondent : Shri Sankar K Ganeshan, CIT (D.R) ORDER PERLAXMI PRASAD SAHU, ACCOUNTANT MEMBER: This is an appeal filed by the assessee against the order passed by the NFC dated 28-04-2021 DIN ITBA/AST/S/143(3)/2021-22/1032713409(1) with the following grounds of appeal :- I. General Ground: 1. The final assessment order dated 28 April 2021, passed by the learned AO under section 143(3) read with section 144C(13) of the Income-tax Act, 1961 ( the Act ), the directions issued by the Honourable Dispute Resolution Panel ( DRP ) under section 144C(5) and the order passed by the learned Transfer Pricing Officer ( TPO ) under section 92CA(3) of the Act, to the extent prejudicial to the Appellant, are not in accordance with the law and made in violation of the principles of equity and natural justice and are contrary ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 7. The Honourable DRP and the learned AO / TPO have erred in law and on facts by adopting the Transactional Net Margin Method ( TNMM ) as the MAM for benchmarking the international transaction of import of raw materials in relation to manufacturing segment. 8. The Honourable DRP and the learned AO / TPO have erred in law in rejecting the TP documentation maintained by the Appellant: a. Rejecting the TP documentation without providing cogent reasons, which has been prepared by the Appellant in the manner contemplated under the relevant provisions of the Act and the Income-tax Rules, 1962 ( the Rules ). b. Rejecting the TP documentation of the Appellant as not reliable or correct , under Section 92C(3) of the Act, merely because the learned TPO did not agree with the method adopted by the Appellant in its the TP documentation. 9. The Honourable DRP and the learned AO / TPO have erred in law in adopting the below filter for conducting TP analysis: a. Rejection of comparable companies having different financial year ending (other than March 31, 2016) b. Rejection of companies having persistent losses 10. The Honourable DRP and the learned A ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ut there being any order or reference from the AO in relation thereto. 17. The Honourable DRP and the learned AO / TPO have erred in unilaterally re-characterizing the AMP expenses being payments made by the Appellant to independent third parties as an international transaction under chapter X of the Act, and particularly when the jurisdiction of the TPO is only to compute arm s length margin of the international transaction. 18. The Honourable DRP and the learned AO / TPO have erred in law and on facts by not appreciating that no such TP adjustment can be made in respect of AMP expenses (being legitimate, bona fide and deductible business expenditure) incurred by the Appellant towards payments to independent parties, the benefit of which accrues to the Appellant alone. 19. In this regard, the Honourable DRP and the learned AO / TPO have failed to consider that the alleged AMP expenses were incurred exclusively in relation to the Appellant s business, which is also evident from the fact that the expenditure 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 t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Net profit margin approach: The net profit margin of the Appellant is compared with the net profit margin of the comparable companies. d. Scenario 4 - Adjusted marked-up net margin approach: The net profit margin of the Appellant after considering AMP expenditure along with mark-up is compared with the net profit margin of the comparable companies. 26. The Honourable DRP and the learned AO / TPO have erred in not considering scenario 3 approach as depicted in Ground 25 above, when the said approach has been upheld in Appellant s own case by the jurisdictional bench of Honourable ITAT for AY 2015- 16. 27. The Honourable DRP and learned AO / TPO have erred in law in not considering the detailed submissions of the Appellant that even after performing an AMP expense intensity adjustment to the comparable companies, the adjusted net margin earned from the trading activity by the Appellant is at arm s length. 28. The Honourable DRP and learned AO / TPO have erred 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ce. 34. The Honourable DRP and the learned AO / TPO have erred in determining the mark-up for the alleged international transaction of brand promotion services by selecting following companies which are not comparable to the Appellant due to reasons including functional dissimilarity, failing quantitative filters, etc. Further, the learned TPO has not provided any reasons for the same in the TP Order: a. Killick Agencies Marketing Limited b. Scarecrow Communications Limited 35. The Honourable DRP and the learned AO / TPO have erred in law and on facts in not accepting the following companies which are comparable 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. Showhouse Event Management Private Ltd b. MCI Management India Private Limited c. Quadrant Communication Limited d. Esha Media 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 secti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Honourable DRP and learned AO have erred in adding back the warranty provision created during the relevant AY amounting to INR 185,94,26,047 to the book profit of the Appellant. 45. The Honourable DRP and the learned AO have erred in law and on facts in holding that the warranty provision of INR 185,94,26,047 is an unascertained liability and therefore, not appreciating that the warranty provision is created on a scientific basis after considering technical estimates which is consistently followed by the Appellant year on year. 46. The Honourable DRP and the learned AO have erred in law by not following the order of the Honourable Karnataka HC in the Appellant s own case for AY 2007-08 and AY 2011-12 and Honourable ITAT in the Appellant s own case for the AY 2006-07, AY 2007-08, AY 2010-11, AY 2011-12 and AY 2015-16, wherein it was held that the provision for warranty has been created by the Appellant 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 exchan ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Instruction No 17/2008 issued by the Central Board of Direct Taxes ( CBDT ) which provides for guidelines for conducting assessment of banks and hence, not relevant to the present case. Further, the Honourable DRP and learned AO have erroneously concluded that unrealized foreign exchange loss is a contingent liability without appreciating that the same is computed as per the principles laid down in AS-11. 55. The Honourable DRP and learned AO have erred in law and on facts by relying on the Instruction No 3/2010 issued by CBDT which provides for allowability of losses on account of forex derivatives and hence, not relevant for the facts of the Appellant s case. VIII. Addition of unrealized foreign exchange loss under section 115JB of the Act 56. The Honourable DRP and learned AO have erred in law and on facts by adding back the unrealized foreign exchange loss 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... erred to the TPO u/s 92CA of the Act for determination of arms length price after obtaining prior approval from the competent authority. The ld. TPO after receipt of reference, called the documents maintained u/s 92D(3) of the Act. From the documents submitted, the ld. TPO noticed that the assessee company is engaged in the business of trading, manufacture and sale of desktops, lap tops, servers and smart phones. The company has its manufacturing unit at Pondicherry, India. The business operations of Lenovo India are primarily divided into following categories:- Manufacture/Assembly Under this segment, Lenovo India imports parts for the manufacture/ assembly of PCs and notebooks (Lenovo ldeapad range) from the group companies as well as third party vendors. The manufactured! assembled PCs and notebooks are sold to third party customers in India. 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 ve ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e to the contention of the Appellant that CUP should have been accepted as the MAM. It is submitted that as far as the issue of MAM in the case of the Appellant, the objections of the Appellant to each of the reasons put forth by learned TPO / DRP for the rejection of CUP as the MAM are as under: Sl. No. Reasons for rejection of CUP as the MAM Lenovo India s contention 1. Non-availability of reliable data in order to compare the degree of comparability between the international transaction and uncontrolled transactions. Assessee imported components from both AEs as well as unrelated vendors. These components have a unique identity and bear serial numbers or Sl. No. Reasons for rejection of CUP as the MAM Lenovo India s contention codes by which they are identified. Assessee has documented the comparability 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Honor s that in the AYs (i.e., AY 2006-07 to 2015-16), the Appellant had adopted CUP as MAM to benchmark its international transaction of Import of parts and components for manufacture of PCs pertaining to its manufacturing segment. The Appellant further submits that the functions performed for undertaking its manufacturing activity for all the years i.e., AY 2006-07 to AY 2015-16 have remained the same and accordingly, CUP was considered as the MAM for the subject AY as well. It is also submitted that the Hon'ble ITAT of Bangalore in Appellant's own case has upheld the application of CUP Method adopted by the Appellant for benchmarking the subject transaction in following Assessment Years: AY ITAT 2006-07 ITAT directed TPO to give effect to DRP directions holding CUP as MAM. (Refer page 7 of ITAT order dated May 30, 2016) [refer page 139 of Case Law Compilation] 2009-10 Upheld CUP method as MAM. (Refer page 19 to 22 of ITAT order dated July 06, 2018) [refer page 126 of Case Law Compilation] 2010-11 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... AT for AY 2006-2007 AY 2009- 2010 to AY 2015-2016 (except AY 2011-2012) have upheld the CUP method as MAM rejecting the above-mentioned reasons of learned TPO. The nature of the transaction and other facts remaining same, internal CUP is the MAM for transaction in question as was held in previous Assessment Years by various appellate authorities. 5. Following the above said decisions and argument of Appellant, it is humbly prayed before the Hon ble Tribunal that CUP should be accepted as the MAM for the manufacturing segment of the Appellant and the TP adjustment carried out by the Ld. TPO/DRP by using TNMM as MAM should be deleted. 3. The ld.DR relied on the orders of the lower authorities. 4. After considering the rival submissions and perusing the entire materials available on record and facts narrated above, we noticed that the import of part and components for manufacturing of PCs valued at Rs. 191,26,33,153/- and the assessee suo moto made adjustment of Rs. 1,38,18,647/-. During the financial year, the assessee has imported different parts of products from its AEs and it can be identified on the basis of distinctive code. Out of 387 products 254 products were ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in CUP method. The TPO placed reliance on decision of Special Bench ITAT Bangalore in the case of Aztec Software Technology Vs. ACIT. The Assessee s reply to this objection was that the said case related to a Software Industry which was different from import of components/parts and that the method used in that case of external CUP and not internal CUP as in Assessee s case. The last objection of the TPO was that there was no publicly available information on prices charged in independent transactions of similar or identical nature, so external CUP cannot be applied. The reply of the Assessee on this objection was that when internal CUP is used there is no need to look at publicly available information and doing so will be against the basic feature of CUP method of determination of ALP. 7. The Assessee also submitted that for the prior AYs (i.e. AY 2006-07 to 2015-16), the Assessee had adopted CUP as MAM to benchmark its international transaction of Import of parts and components for manufacture of PCs pertaining to its manufacturing segment. The Assessee submitted that the functions performed for undertaking its manufacturing activity for all the years i.e. AY 2006-07 to AY ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rder of the DRP upholding CUP as MAM. There are no changes in the facts and circumstances in the present AY and hence the decision of the Tribunal rendered in the past will apply to the present AY 2015-16 also. 11. We are therefore the view that CUP should be adopted as the MAM. We direct the TPO to apply CUP as the MAM and determine ALP after due opportunity of being afforded to the Assessee. Ground II sub-grounds 2 to 6 are allowed. In view of the above conclusions the other sub-grounds 7 to 11 raised in Ground No. II does not require any adjudication. 4.2 Respectfully following the above judgment of the coordinate bench of the Tribunal in assessee s own case, we allow the grounds raised by the assessee that the CUP is MAM for the determination of international transactions for the computation of PLI in above terms. Accordingly ground No. 2 to 6 are allowed. In view of our above conclusions, the ground No. 7 to 13 raised by the assessee does not require any adjudication. AMP Expenditure pertaining to trading segment - Ground No. 14 to 36 5. Ground No. III relates to the adjustment of alleged excess AMP expenditure pertaining to trading segment as an intern ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ations of the ld. TPO. 5.1 The appellant reiterated the submissions made before the lower authorities and filed written submission which is as under:- The Appellant s arguments before ITAT 15. It is submitted before your Honor s that incurring of AMP expenses does not constitute an international transaction and in this regard, the Appellant has summarized its arguments as below: AMP expenditure is not an international transaction under purview of Section 92 of the Act (Refer page 1497 of PB Vol 3) Reliance on various case laws that have directed deletion of transfer pricing adjustments determined by the lower authorities by alleging the excess AMP expenditure as a separate international transaction. (Refer page 1497 of PB Vol 3) AMP expenses are paid to third parties and not to AEs. AMP expenses do not also fall within the definition of international transactions. AMP expenditure is essential to boost sales and the direct benefit is received by Appellant and not by its AEs (Refer page 1528 of PB Vol 3) The Appellant is solely responsible for improving its market share (Refer page 1532 of PB Vol 3) Principal-to-principal relationship (R ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... treated as a separate international transaction. The relevant extract of the ruling is as follows: (v) Where the Assessing Officer/TPO accepts the comparables adopted by the assessed, with or without making adjustments, as a bundled transaction, it would be illogical and improper to treat AMP expenses as a separate international transaction, for the simple reason that if the functions performed by the tested parties and the comparables match, with or without adjustments, AMP expenses are duly accounted for. It would be incongruous to accept the comparables and determine or accept the transfer price and still segregate AMP expenses as an international transaction (Emphasis supplied) 17. In the case of Maruti Suzuki (ITA 110/2014 ITA 710/2015), it was held that the AMP expenditure cannot be considered as an international transaction. Below is the relevant paragraph from the order: 44. However, in the present appeals, the very existence of an international transaction is in issue. The specific case of MSIL is that the Revenue has failed to show the existence of any agreement, understanding or arrangement between MSIL and SMC regarding the AMP spend of MSI ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Date: 06.03.2020 AY: 2015-2016 Relevant Para: 17. We have considered his submission and are of the view that it would be just and appropriate to set aside the issue of determination of net margin of the assessee and in the trading segment, as claimed by the assessee in Scenario-3 before the TPO. If the margins are accepted as at arm s length and then applying the principles laid down by the Hon ble Delhi High Court in the case of Sony Ericsson Mobile Communications India P. Ltd. (supra), incurring of AMP expenses cannot be treated as international transaction and consequently determination of ALP would not arise for consideration at all. We therefore set aside the order of the AO and remand the issue to the TPO for consideration of ALP of the trading segment applying the net profit margin method and if by such method the price received in the international transaction is considered as at arm s length, then no separate addition needs to be made. In view of the above conclusion, we are of the view that sub- grounds (23) to (34) in ground III does not require adjudication at this stage. [refer page 89 of Case Law Compilation] ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ht out certain facts and also placed reliance on the decision rendered by Hon'ble Delhi High court in the case of Maruti Suzuki Ltd (supra). We notice that the facts surrounding the AMP expenses have to be examined by AO/TPO vis-a-vis the decision rendered by Hon'ble Delhi High court in the above said case. Further, we notice that the co-ordinate bench has restored an identical issue to the file of AO/TPO in AY 2015-16, we prefer to restore this issue to the file of AO/TPO in this year also. We also direct AO/TPO to first examine the applicability of decision rendered by Hon ble Delhi High court in the case of Maruti Suzuki India Ltd. (supra) to the facts of the present case and accordingly first determine the question as to whether the AMP expenses would fall under the category of international transaction. If it is held to be not an international transaction, then the question of making any transfer pricing adjustment will not arise. After hearing the assessee and examining the facts afresh, the AO/TPO may take appropriate decision in accordance with law. [refer page 5 of Case Law Compilation] 20. From the above order of the Hon ble Tribunal cle ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hich was confronted to the assessee by show-cause notice. It is undisputed fact the AE is the legal owner for brands marketed by the assessee and located outside India. The expenses incurred by the assessee enhances the value of the marketing intangibles of the AE, therefore the assessee needs to be compensated for such additional functions undertaken by it, since the assessee is only distributor. It is also evident from the agreement between the parties that the assessee has to undertake advertisement. The assessee has incurred huge expenses towards AMP which is dictated by the AE which is over and above the level of AMP spent by a routine distributer needs to be identified and compensated by the AE. The TPO has rightly benchmarked the AMP expenses. 7. Considering the rival submissions, we are of the view that this issue is covered from the order of the co-ordinate bench of Tribunal in favour of the assessee in the assessee s own case for assessment year 2015-16 in ITA No. 2444/Bang/2019, the relevant part of the order is reproduced as under:- 13. As we have already seen the assessee company is engaged in the business of manufacturing and distribution of desktop, laptop, se ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tion without bifurcation and segregation, it would lead to an unusual and incongruous results as AMP is the cost or expense and is not diverse. It is factored in the net profit of the interlinked 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 ld. counsel for the assessee pointed out that in the present case, the TPO accepted the international transaction of trading of AE s product as at arm s length and in this regard drew our attention to para 6 of the TPO s letter ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ions India P. Ltd. (supra), incurring of AMP expenses cannot be treated as international transaction and consequently determination of ALP would not arise for consideration at all. We therefore set aside the order of the AO and remand the issue to the TPO for consideration of ALP of the trading segment applying the net profit margin method and if by such method the price received in the international transaction is considered as at arm s length, then no separate addition needs to be made. In view of the above conclusion, we are of the view that sub-grounds (23) to (34) in ground III does not require adjudication at this stage. 7.1 Respectfully following the above judgment of the coordinate bench of the Tribunal in assessee s own case, we are of the view that ground No.14 to 24 is allowed in above terms and ground No.25 to 36 does not require any adjudication at this stage. 8. Ground No.37 to 39 are general in nature, hence does not require any adjudication. Disallowance of Provision for Warranty Ground No.40 to 44 The AR submitted written synopsis which is as under:- Ground NO. V DISALLOWANCE OF PROVISION FOR WARRANTY 9. During the course of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... her, 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 provision. On the third condition, it would be relevant to note that the Company, af ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ities 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 Placing the reliance on the Appellant s own case for the AY 2011-12 the Hon ble ITAT has concluded: Para 5- Thus the Tribunal has taken a consistent view on this issue. The Id. Senior Counsel has also relied upon the decision dt. 10.4.2013 of Hon ble jurisdictional High court in the case 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hold that provision for warranty expenditure is allowable . AY 2014-15 Para 24- We notice that the Tribunal has been consistently taking the similar view in assessee s own case for Assessment Year 2006-07, 2007-08, 2010-11 to 2015-16 also. Therefore, we respectfully follow the decisions of the Co-ordinate Bench and hold that the provision for warranty is an allowable expenditure. AY 2015-16 (supra) Para 34- The hypothetical computation by the revenue authorities of percentage 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 Assesse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to Rs-97.20 crores in FY. 2009-10, inspite of increase in turnover from Rs. 1286.92 crores in FY.2008-09 to Rs. 1329.58 crores in FY. 2009-10. Here, provision created has fallen from 8.40% to 7.31% in FY. 2009-10. Even if it is presumed that the reason for increase in provision created was due to increase in service cost including labor, travelling expenses. etc., the same does not justify the fall in provision created in the very next year though there is increase in turnover. 5.15 The Warranty provision utilized over the years has always been less than the provision created. Never ever the provision utilized has crossed the water mark of provision created. Consequently. the closing balance of the provision created has increased over the year Rs. which has reached as high as Rs. 407.24 crores in FY 2015-16 when compared to Rs. 27.27 crores in FY.2005-06. This shows that such a huge amount of Rs. 407.24 crores has been claimed as expense over the years without actually incurring the same and the claim of the provision for warranty though increasing year after year has not been charged to tax. 5.16 During the current financial year 2015-16, the provisionade is Rs. 407, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... warranty is dependent on the sales, the repair rate, cost of servicing the warranty claims and the utilisation of warranty provision for each year. The details of provision for warranty created over years is enclosed in the paper book. 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 to AY 2015-16, wherein the Hon ble ITAT has held the issue in favour of the assessee. The detailed written synopsis filed by the ld. AR. Of the assessee are 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he 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 provision. On the third condition, it would be relevant to note that the Company, after having considered the present obligation arising from the past event, the outflow of resource and the past experience has a scientific methodology which is followed consistently year on year for the creation for provision for warranty. The scientific methodology followed by the Company year on year for creation of provision for warranty is dependent on the sales, the repair rate, cost of servicing the warranty 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 yea ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eeding 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. AY 2015-16 Para 34- The hypothetical computation by the revenue authorities of percentage 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ovision for warranty has been created on a scientific basis and hence allowable as expenditure under section 37 under the Act. The relevant extract of the orders passed by Honourable ITAT in the Company s case for AY 2006-07, AY 2007-08, AY 2010-11 and AY 2011-12, AY 2012-13, AY 2013-14, 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 Placing the reliance on the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t year 2011-12 has since been allowed by Hon ble High Court of Karnataka in the assessee s own case following the decision rendered by Hon ble Supreme Court in the case of Bharat Earth Movers Vs. CIT 245 ITR 278 by holding that no substantial question of law has arisen on this issue. Accordingly, following the decision rendered by the coordinate bench as well as Hon ble jurisdictional High Court, we direct the A.O. to delete the disallowance of Rs. 3,49,28,600/- relating to provision for warranty AY 2013-14 Placing the reliance on Appellant s own case for AY 2006-07, AY 2007-08, AY 2010-11 and AY 2011-12 the Hon ble ITAT has concluded: Based on the consistent view taken by coordinate bench of this Tribunal in assessee s own case for preceding and subsequent assessment years relying of the decision of the Hon ble Supreme Court in the case of Rotork Controls India Pvt.Ltd (supra), we hold that provision for warranty expenditure is allowable . AY 2014-15 Para 24- We notice that the Tribunal has been consistently taking the similar view in assessee s own case for Assessment Year 2006-07, 2007-08, 2010-11 to 2015-16 also. Therefore, we r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... not been charged to tax. 11. Considering the rival submissions, we are of the view that this has been considered by the co-ordinate bench in the assessee s own case for assessment year 2015-16, the relevant part is reproduced as under:- 31. We have heard the rival submissions. The learned counsel for the Assessee submitted before us that the approach of the AO and the DRP is flawed because they have compared the provision made in AY 2015-16 with the actual liability incurred on account of performance of warranty claims of the same AY 2015-16. The proper approach should be to compare the current year provision with the actual of the succeeding year because the discharge of the warranty obligation will have only in the subsequent years and not in the year in which the products are sold. Our attention was drawn to the decision of the Hon ble ITAT in AY 2006-07 in IT(TP) A.No.582/Bang/2015 dated 30.5.2016 wherein the Tribunal pointed out and explained how a similar approach of the revenue authorities are not correct. The following were the relevant observations of the Tribunal:- 16. We have perused the materials and heard the rival contentions. Question before us is wheth ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ially 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 number of PCs which are under warranty at the end of the year Repair Rate = Percentage of claims out of the total sales made on the historical data for the region. Cost per claim =Average expected repair cost per PC on historical data for the region. 34. The hypothetical computation by the revenue authorities of percentage 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 repa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lated to addition of provision for warranty loss to the book profit u/s 115JB 12. The AO observed as per clause (i) of explanation 1 to sec. 115JB that the profit from the profit and loss account shall be reduced by the amount withdrawn from any provision for said amount is credited to the profit and loss account. But as per the assessee neither any such provision is withdrawn from the profit and loss account and he further observed that even otherwise the utilization during the year is utilization from the provision credited during the earlier previous years to which the utilization pertains and hence the above provisions are not allowable. The assessee failed to increase book profit by the addition towards provisions for warranty of Rs. 185.94 crores on account of provision for warranty and Rs. 17.55 lakhs on account unrealized foreign exchange loss while computing the income u/s 115JB of the Act. The AR of the assessee has relied on his written submission which are as under:- The learned AO has erred in law and on facts in not appreciating that the warranty provision has been created on a scientific basis after considering technical estimates which is consistently f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... We wish to submit that the Hon'ble HC in the case of Lenovo India for the year AY 2007-08 and AY 2011-12 has held ruled against the revenue and in favor of the Appellant. Hon'ble HC in the case of Lenovo India for the year AY 2011-12 has held ruled against the revenue and in favour of the Appellant. The relevant extract of the orders passed by Hon ble HC in the Company s case for the AY 2011-12, has been mentioned below: Learned Senior counsel for the assessee submitted that the second substantial question of law has been answered against the revenue in decision of the Supreme Court in Bharath Earth Movers vs. Commissioner of Income Tax , 245 ITR 278, the aforesaid submission could not be disputed by learned counsel for the revenue. (Refer page 3200- 3201 of PB Vol IV) For the reason assigned in the aforesaid decision, the second substantial question of law is answered against the revenue. In this context, we also wish to submit that the Honourable ITAT in the Appellant 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 the provision for warranty has been computed on a scientific bas ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 3-14 In the preceding paras, following the ration laid down by Hon ble Supreme Court in case of Rotork Control(supra) we have held that the provision for warranty cannot be treated as unascertained liability. Under such circumstances we do not find any merit in the manner in which the book profits for purposes of section 115JB has been computed. Accordingly, we direct the Ld.AO to exclude the two items from the book profits for purpose of computing tax liability under section 115JB of the Act . AY 2014-15 Para 25- Ground Nos. (43) to (45) on the issue of addition of provision for warranty to the book profits under section 115JB is incidental. In view of the decision on the allowability of provision for warranty, this ground which is incidental, does not warrant any separate adjudication and hence dismissed. AY 2015-16 Para 35- As far Gr.No.VII raised by the Assessee is concerned, the same relates to addition made to the book profits u/s. 115JB of the Act on account of provision for warranty liability treating the same to be a liability of a contingent nature and hence liable to be added to the profit as per profit and loss ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... concerned debtor, creditors and other parties. The break- up of of unrealized foreign exchange losses amounting to INR 17,55,62,222 is enclosed as Appendix- 2. 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 the accounting standards issued by the ICAI. Accordingly, the Appellant has accounted for the foreign exchange loss in accordance with AS 11 - Effects of changes in foreign exchange rates issued by the ICAI. As per section 145(1) of the Act, income chargeable under the head Profits and gains of business or profession shall, subject to the provisions of sub-section (2), be computed in accordance with either cash or mercantile system of accounting regularly employed by the assessee. Sub-section (2) to section 145 states that the Central Government may notify in the Official Gazette from time- to-time accounting standards to be followed by any class of assesses or in respect of any class of income. The Central Government has notified two Accounting Stan ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... current assets and liabilities, is allowable as a deduction in the computation of income of the assessee, if such loss was in respect of a trading asset or in respect of circulating capital. The issue is squarely covered in the Appellant s case by the ruling of the Hon ble Supreme Court in the case of Woodward Governor P Ltd (179 Taxman 326). The question before the Court was whether the increase in liability due to foreign exchange fluctuation as per the exchange rate prevailing on the last day of the financial year cannot be considered as notional and can be allowed as a deduction or not. The Hon ble Supreme Court held as follows: The accounts and the accounting method followed by an assessee continuously for a given period of time needs to be presumed to be correct till the AO comes to the conclusion for reasons to be given that the system does not reflect true and correct profits. The fact that the department taxed the gains on fluctuation on the basis of accrual while disallowing the loss is important and indicates the double standards adopted by the Department; The increase in liability on account of the fluctuation in the rate of foreign exchange re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... vide Hon ble High Court of Delhi judgment in the case of Pr.CIT Vs. Simon India Ltd., reported in [2022] 145 taxmann.com 389 (Del). The relevant paras are as under:- 26. The Revenue's contention is unmerited. There is no dispute that the Forward Contracts were entered into by the Assessee to hedge against foreign exchange fluctuations resulting from inflows/outflows in respect of the underlying contracts for provisions of consultancy and project management. Concededly, the Assessee is not dealing in foreign exchange. Clearly, the said transactions were to hedge against the risk of foreign exchange fluctuations and thus, fall within the exceptions of proviso (a) to section 43(5) of the Act. The Forward Contracts were to guard against any loss on account of future exchange fluctuations in respect of inflows and outflows relating to contracts for execution of the works entered into by the Assessee. 27. It is material to note that there is no allegation that the Assessee has not been following the system of accounting consistently. In Woodward Governor India (P.) Ltd. (supra), the Supreme Court had referred to AS-11. In terms of AS-11, the exchange difference arising on f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g into account the foreign exchange value as it stands on the due date. It is well settled that the CBDT Instructions and circulars which are contrary to law are not binding. 31. This Court finds no fault with the order of the learned CIT(A) as well as the learned Tribunal in finding that the loss, on account of Forward Contracts, cannot be considered as speculative and the AO had erred in disallowing the same. The questions raised (Questions I and II) are thus, covered by the decision of the Supreme Court in Woodward Governor India (P.) Ltd. (supra). 32. No substantial question of law arises from the ITA 976/Del/2013. 16.1 In that above judgement it has been held that loss on account of Forward Contracts, cannot be considered as speculative loss. The assessee has reinstated its debtors and creditors from the underlying transactions on the value of the foreign exchange at the year end. Respectfully following the above judgment of the Hon ble High Court of Delhi in the case of Simon India Ltd., cited supra, the loss is allowed u/s 37 of the I.T. Act. 1961, accordingly the ground Nos.48 to 56 are allowed. Unrealized Foreign Exchange Loss under section 115JB ..... X X X X Extracts X X X X X X X X Extracts X X X X
|
