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2020 (3) TMI 471 - AT - Income TaxTP Adjustment - MAM selection - contention of the Assessee that CUP should have been accepted as the MAM - HELD THAT:- We direct the TPO to apply CUP as the MAM and determine ALP after due opportunity of being afforded to the Assessee. Treatment of alleged excess AMP expenditure pertaining to trading segment as an international transaction - determining the ALP and making the consequent addition to the total income of the assessee TPO adopted Resale Price Method (RPM) as the most appropriate method - HELD 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. [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. Determination of ALP in respect of price received by the assessee from its AE for providing sales facilitation services and for providing administrative and business support services - HELD THAT:- Due to increasing presence of composite contracts and ‘package deals’ in an MNE group, the aggregation of transactions become necessary as a composite contract may contain a number of elements including royalties, leases, sale and licenses all packaged into one deal. One would usually want to consider the deal in its totality to understand how various elements relate to each other, but the components of the composite package deal may or may not, depending on the facts and circumstances of each case, need to be evaluated separately to arrive at the appropriate transfer price. Aggregation issue may also arise when looking at uncontrolled comparables. This is because third party information is not often available at the transaction level. In such circumstances, entity level information is the only recourse available. Therefore, whether ALP-principle is to be applied on a transaction by transaction basis or on an aggregation basis depends on the facts of each case and is not universally or generally applied in all composite contracts involving multiple transactions. Since this specific objection of assessee has not been met by the TPO/DRP, we deem it fit and proper to set aside the order of AO in this regard and remand the matter to the TPO for fresh consideration of the question, whether international transactions can be aggregated in the given facts and circumstances. If aggregation is not possible, then the ALP of the sales facilitation services segment and administrative & business support services segment should be determined separately. The assessee will be afforded opportunity of being heard in this matter. In view of the above, the other grounds related to manner of determination of ALP by aggregating the above two transactions does not require consideration at this stage. Disallowing provision for warranty - HELD THAT:- 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 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. Addition made to the book profits u/s.115JB on account of provision for warranty liability - Addition 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 account prepared in accordance with companies act to arrive at the book profit of the Assessee for the purpose of levy of tax on book profit under Sec.115JB - HELD THAT:- As 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.
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