TMI Blog2012 (5) TMI 283X X X X Extracts X X X X X X X X Extracts X X X X ..... oduct is sold with a warranty provision, it cannot be held that the assessee has no obligation for the said warranty but for making a provision for the said warranty a reliable estimate should be made on the amount of obligation and a scientific method should be used. - Matter remanded back for reconsideration. Revenue or capital expenditure - marketing support agreement - held that:- it is for efficient running of the business and deriving revenues there-from. In such circumstances, we are inclined to hold that the fees paid by the assessee for marketing support services rendered by IBM, is clearly revenue in nature and is allowable as deduction u/s 37 of the Income-tax Act. Taking over the business - discharge of the liability of the predecessor - held that:- held by the Hon'ble Supreme Court in the case T. Veerabhadra Rao, K. Koteswara Rao & Co. (1985 (7) TMI 2 (SC)), the successor of a business steps into the shoes of its predecessor and is liable to meet any claims against the predecessor. - Decided in favor of assessee. - IT APPEAL NO. 1457 (BANG.) OF 2010 - - - Dated:- 16-3-2012 - N. BARATHVAJA SANKAR, SMT. P. MADHAVI DEVI, JJ. Sriram Sesadri for the Appellant ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g the claim of risk adjustment and also the standard adjustment of 5 percent from the arithmetic mean margin computed for benchmarking under TNMM for manufacturing segment. (8) The DRP has erred in disallowing an amount of Rs. 272,796,488/- in respect of warranty without appreciating that the said warranty provision has been created in a scientific manner giving due regard to the nature of activity and industry requirements. (9) The learned DRP has erred in disallowing the R D cess payable u/s 43B of the Act. (10) The DRP has erred in law and on facts in arbitrarily confirming the disallowance of Rs. 271,418,028/- being marketing support fees paid to IBM as capital expenditure on the ground that if result enduring benefit of capital nature in the hands of the appellant. (11) The DRP has erred in law and on facts in arbitrarily disallowing Future Billing Adjustment (FBA) and Duty Free Replenishment Certificate (DFRC) receivable written off charged to profit and loss account amounting to Rs. 21,91,78,000/- and Rs. 5,26,89,000/- respectively on the ground that such expenditure was incurred by IBM India and not by the appellant. (12) The DRP has erred in law and on facts ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as followed various methods for computing the ALP of different transactions depending on the nature of transactions and the comparables available such as for the 'sale of parts imported for the purpose of manufacture', the assessee has adopted the resale price method, 'for purchase of imported parts of raw material', it has adopted internal CUP method, for 'software licence' it has adopted CUP method and for the royalty paid, the assessee has adopted external CUP method. The learned counsel for the assessee drew our attention to the order of the TPO to demonstrate that the TPO has not applied his mind to the facts of the case before him for rejecting the methods adopted by the assessee for arriving at the ALP of the various transactions. He has also drawn our attention to various judicial precedents on the issue to demonstrate that where TPO has not been able to find any fault with the method adopted by the assessee for the said purpose, the TPO is bound to accept the TP analysis conducted by the assessee and cannot take a different view. For this purpose he placed reliance upon the Circular No. 14 of 2001 issued by the CBDT to the effect that where there was no infirmity in the TP ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... en followed by the assessee. When the facts and circumstances are exactly the same, the Revenue cannot be permitted to take a different approach in two different assessment years. In view of the same, we deem it fit and proper to remit this issue of TP study to the file of the assessing authority with a direction to verify as to whether the similar transactions of the assessee with associated enterprises have been accepted by the TPO for the assessment year 2007-08 and 2008-09 and if it is found to be true, then the AO is directed to adopt the TP analysis conducted by the assessee for the relevant assessment year also to be at ALP and make the assessment accordingly. These grounds are accordingly allowed for statistical purposes. 13. As regards ground No. 8, the brief facts of the case are that the assessee had acquired the personal computer and laptops division of IBM India and continued business of trading and manufacture of PC's and MCs. The assessee has provided either 1 year or 3 years warranty on sale of PC's and laptops made to its customers in India and the prices for warranty services has been loaded in the sale price of PC's or laptops itself. The assessee debited the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the business by the assessee and that the provision made in the current year has been decreasing where as the actual expenditure on warranty has been increasing in the subsequent years, which would show that the provision made has been expended actually in the later years. He submitted that since the assessee has made the provision on scientific basis, the provision of warranty must be allowed as deduction in the light of the above cited decisions. 17. The learned DR however supported the orders of the authorities below and submitted that although in principle, the Hon'ble Supreme Court in the case of Rotork Controls India (P.) Ltd., ( supra ) has held that provision for warranty can be made and claimed against the income for the relevant previous year subject to the fulfillment of the condition mentioned therein, the assessee has not furnished the statistical information with regard to the sale of desk tops and lap tops, as the warranty provision is loaded on the sale price of the products on the basis of the warranty provisions and, therefore, according to him the matter should be remanded back to the AO for reconsideration of the issue afresh. 18. Having heard both ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that the assessee wanted to take support from IBM as IBM has well established enterprise sales force and established global sales infrastructure, such as client representation centre etc. for more than 52 years and for this service, the assessee is required to pay IBM a percentage of its revenue. He submitted that for the year under review, the assessee has paid a sum of Rs. 27,14,18,028/- as market support agreement fees to IBM and the Assessing Officer has treated the same as the payment for acquisition of goodwill and considered it to be in the nature of capital expenditure and not allowable u/s 37 of the Income-tax Act. He submitted that the DRP has merely concurred with the AO without considering the facts and circumstances of the case. The learned counsel for the assessee emphatically submitted that the payment does not result in any enduring benefit to the assessee but it results only in smooth and efficient carrying on of the business of the assessee. He submitted as per the terms of the agreement, the payment is for marketing and business support services for a fixed period at an agreed consideration and, therefore, it cannot be termed as good will as it is not for using a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ture? The assessee has filed the copy of the marketing support agreement which is in paper book No. 2 at pages 23 to 120. The article 2 of the said agreement describes the market support services to be delivered by IBM. From a reading of the said services, it is clear that the IBM was to provide the services to the purchaser as provided in the services description attachment to facilitate the sale of the products by the assessee and to extend services to the customers through one or more of its subsidiaries or 3 rd parties under contract with the seller/IBM or one of its subsidiaries. Thus, it is clear that the services rendered by IBM are for smooth and efficient carrying on of the business of the assessee for a period of 5 years. This might give an enduring benefit to the assessee but every activity which gives enduring benefit to the assessee would not get the character of capital nature. It has been held by the various high courts in a catena of decisions that the enduring benefit is not the only criteria to decide the nature and character of an expenditure. The necessary test is whether it is for acquisition of any capital asset or for the purpose of carrying on the business, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t and loss account as revenue expenditure, since the assessee was also in the same line of business. The learned counsel for the assessee submitted that these two expenses have been disallowed by the AO on the ground and these expenditure are incurred by IBM and not by the assessee for the purpose of its business and that these liabilities must have been included in the purchase prices paid to IBM. He submitted that the AO held that to claim any expenditure as written off, it must be taxed as income in the hands of the assessee in the previous years and as the assessee has not offered the above expenditure as income for the earlier years, the same cannot be allowed in this year. The learned counsel for the assessee further submitted that since the dealers have not submitted the claim in full to IBM before the acquisition of business by the assessee, the IBM has failed to record or recognize such liability in its books of accounts and the assessee has incurred the expenditure after its taking over of business only to protect its business interest and for smooth functioning of the routine business operations of the assessee. He submitted that the future billing adjustment is done due ..... X X X X Extracts X X X X X X X X Extracts X X X X
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