2022 (4) TMI 1506 - AT - Income Tax

TP Adjustment - difference in ALP of its international transactions with its AEs relating to availment of supervision services SAP services and Central services - HELD THAT - Keeping in view the rule of consistency and more so the position that the facts for the assessment year 2017-18 remain the same as that of assessment year 2014-15 2021 (11) TMI 967 - ITAT DELHI in respect of the impugned transactions with its AE we respectfully following the order of the Hon ble Tribunal (supra) direct the Ld. AO to delete the addition - Ground pertaining to the adjustment to the total income of the assessee on account of difference in ALP of its international transactions with its AEs relating to availment of supervision services SAP services and Central services are thus allowed. Provision for warranty - HELD THAT - The assessee has been consistently making the claim of deduction for provision of warranty every year following the same methodology which in our view is tenable. The provision for warranty has been made @3% of the contract value and the unutilized portion has been reversed at a regular intervals from year to year. We also note that this issue has been under litigation every year beginning from the assessment year 2008-09. The coordinate bench of the Tribunal in assessee s own case (supra) has in all the prior years decided this issue in favour of the assessee by allowing the deduction of provision for warranty. It is also the case of the assessee that in the case of Rotork Controls India (P) Ltd. 2009 (5) TMI 16 - SUPREME COURT allowed the provision for warranty as a permissible deduction on the basis of certain parameters fulfilled by the assessee in that case. Since the parameters/ conditions laid down by the Hon ble Supreme Court in Rotork Controls case (supra) are fulfilled by the assessee the ratio of the said case squarely applies to the case of the assessee. Thus we note that the Rotork Controls case (supra) has been duly considered by the Tribunal wherein the Tribunal has categorically recorded its finding that Rotork Controls case is squarely applicable to the case of the assessee. There is no merit in the argument of the Ld. DR that the assessee has not applied any scientific/ reasonable methodology for claiming deduction of provision for warranty in view of the explanation offered by the assessee. We allow the deduction of provision for warranty.

Summary

Issues Involved:
1. Transfer Pricing Matters: Adjustment of Rs. 1,56,78,332
2. Corporate Tax Matters: Adjustment of Rs. 11,11,70,277
3. Levy of Interest under Section 234B of the Act
4. Initiation of Penalty Proceedings under Section 270A of the Act

Detailed Analysis:

1. Transfer Pricing Matters: Adjustment of Rs. 1,56,78,332
The assessee challenged the adjustment made by the Revenue on account of the difference in the arm’s length price (ALP) of its international related party transactions. The Revenue disallowed the mark-up portion charged by the associated enterprises (AEs) without providing cogent reasons, disregarding the comprehensive benchmarking analysis undertaken by the appellant. The Tribunal noted that similar issues had been decided in favor of the assessee in earlier years (AY 2014-15 and AY 2016-17). The Tribunal highlighted that the AE charged a net profit mark-up of 4% on supervision services and 5% on central services, which had been disallowed by the TPO. The Tribunal found that the Revenue’s argument that the parent company benefits from better synergies and coordination was not a valid ground for disallowing the mark-up. The Tribunal emphasized the rule of consistency, noting that the facts for AY 2017-18 remained the same as those for earlier years. Therefore, the Tribunal directed the AO to delete the addition of Rs. 1,56,78,332.

2. Corporate Tax Matters: Adjustment of Rs. 11,11,70,277
The assessee contested the disallowance of the provision for warranty. The DRP had directed the AO to verify details related to the provision for warranty, but the AO disallowed the provision, treating it as an unascertained liability. The Tribunal noted that the issue had been consistently decided in favor of the assessee in earlier years (AY 2008-09 to AY 2016-17). The Tribunal observed that the provision for warranty was made based on historical trends and other relevant factors, and the methodology followed by the assessee was tenable. The Tribunal referred to the Supreme Court’s judgment in Rotork Controls India (P) Ltd. vs. CIT, which allowed the provision for warranty as a permissible deduction. The Tribunal found that the conditions laid down in Rotork Controls were fulfilled by the assessee. Therefore, the Tribunal directed the AO to allow the deduction of the provision for warranty amounting to Rs. 11,11,70,277.

3. Levy of Interest under Section 234B of the Act
The Tribunal noted that the issue of levying interest under Section 234B of the Act amounting to Rs. 2,44,71,350 was consequential to the main issues decided. Therefore, the Tribunal did not provide a separate detailed analysis for this issue.

4. Initiation of Penalty Proceedings under Section 270A of the Act
The Tribunal noted that the initiation of penalty proceedings under Section 270A of the Act for underreporting of income was also consequential to the main issues decided. Therefore, the Tribunal did not provide a separate detailed analysis for this issue.

Conclusion:
The Tribunal allowed the appeal of the assessee on merits, directing the AO to delete the adjustments related to transfer pricing and the provision for warranty. Consequently, the stay application became infructuous and was dismissed. The order was pronounced in the open court on 27th April 2022.