TMI Blog2018 (3) TMI 1199X X X X Extracts X X X X X X X X Extracts X X X X ..... iving at the net profit to cost ratio. But, in our opinion, transactions with AE should not have been compared with the SAARC countries’ transactions. In short, the departmental authorities as well as the assessee had not followed the proper method to benchmark the IT's entered in to, during the year under consideration, by the assessee. Being the first year of TP adjustment, it was natural. Matter needs further verification of facts and application of the provisions of law which are very clear as on today. The confusion or ambiguity about applying the method or procedure is over and orders or higher judicial authorities are available as to how to apply CPM. Therefore, we are restoring back the matter to the file of the TPO/AO for fresh adjudication. Writing off under the head capital advances - Held that:- The basic analogy for allowing write-off is to consider the real nature of the transaction. The advances were made for the running of business. The expenditure was not incurred for a new project, neither it was totally disconnected with the business activities carried out by the assessee. The disputed amount was advanced for tractor divison of the assessee in the normal co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 8.10.2002 Rs.156,34,64,632/- 07.02.2005 Rs.74,46,61,305/- 2003-04 11.11.2003 Rs.107,83,98,160/- 30.12.2005 Rs.7,68,35,530/- ITA/5575/Mum/2012, AY. 2002-03: 2. During the course of hearing before us, the Representatives of both the sides agreed that except for the Grounds No. 1, 2, 17 and 18 all the remaining grounds are covered-i. e. they stand decided in favour of the assessee or against it or have been set aside-by the orders for the Tribunal for the AY. s. 2008-09(ITA/586/Mum/2015), 1999-2000(ITA. s/2344 3037/ Mum/2009), 2000-01(ITA. s. 3998 4542/Mum/2010 and 2001-02(ITA. s7581 7846/ Mum/ 2011). GOA Issue Issue covered in favour /against assessee 3. Development expenses-Horizon III project expenses tractor division ₹ 8.96 crore (including staff cost, material of ₹ 4.67 crores dealt with separately . Against 3.a. In-house revenue expenditure- staff cost, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 3. Similarly, in the appeal filed by the AO, it was agreed by the Departmental Representative (DR) and the Authorised Respresentative (AR) that except Ground No. 3, rest of the grounds are covered by the order of the earlier years. We are summarising the issue in tabular form. GOA Issue Issue covered in favour /against the AO 1. Provision for pending labour demand ₹ 4. 80 crore Against 3. Disallowance of appreciation on sale of undertakings Against 4. Addition of provision for labour demand-GOA-1 Consequential to GOA-1 3.1. Accordingly, we decide Ground. 1, 2, and 4 against the AO. 4. As indicated as paragraph 2. 2, we are taking up the remaining grounds of the appeal filed by the assessee for the AY. 2002-03 i. e. ITA/5575/Mum/2012. First Ground of appeal, is about adjustment made on account of Transfer Pricing(TP). During the assessment proceedings, the AO found that the assessee had entered into International Transaction (IT. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d to its AE. s was considered as under:- Particulars Export of AE Sale Price 8840.82 Material costs 6272.61 Manufacturing expenses 90.59 Freight 151.71 Total variable cost 7365.81 Direct marketing expense 549.06 Total costs 7914.87 Net profits 926.75 Net profit to costs ratio 11.71% On the basis of above comparison, the assessee contended that its mark-up on cost at 11. 70% was higher than average mark up in the case of unrelated enterprises (8. 24%) and that IT. s were at arm s length. 4.1. However, the TPO was not convinced by the submissions made by the assessee and held that a significant turnover of the comparable was in the domestic territory, that there export sales were limited , that the over-all profits of the comparable-which arose predominantly from domestic market-could no ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd a marginal pricing decision could not be justified for seven years at a stretch, that it had not produced any contemporaneous evidence to show that the pricing decision was actually made on the basis of any market analysis justifying the marginal consisting decision. Further, the TPO mentioned that even if the assessee's contention regarding adoption of Marginal costs for determination of ALP was to be considered, an adjustment was still required. She suggested following adjustments: ( Rs. in lakhs) Total cost of the assessee 8388. 70 Net profit @ 13. 44% on assessee's costs 1127. 44 Arms length price of the sales made by the assessee 9516. 14 Adjustments needed to bring the sales to ALP 675. 32 4.2. During the appellate proceedings before the First Appellate Authority (FAA) the assessee made elaborate submissions. After considering the available material, he held that computing a LP by considering only variable cost was against rule 10 B ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nsidered the volume difference, geographical consideration, that the USA market was more competitive, that the AE was the distributor, that semi knocked down tractors were exported to USA, that complete units sold to SAARC countries, that the US market was handled by the AE who would incur selling and promotional expenses, that there was functional difference in the US and non US market, that the TPO had ignored the credit difference and capacity utilization also, that there was substantial drop in the sale of tractors, that the assessee had applied the marginal costing theory, that it had received ₹ 17. 78 crores from the AE, that US marketing was at arm s length, that it was a buyers market, that the TPO had not taken into account the functional disability involved in sales to the AE which was a fairly large size distributor buying bulk quantities, that it resulted in differential costs of selling and distribution, that the dealers in other countries were not buying in bulk and that they were not required to incur cost of selling/distribution, that there profitability was bound to be more, that the TPO had not taken cognigance of the fact that functional profile of the ass ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n abnormal and additional cost and should not have been taken into account for computing margins, that the assessee did not stipulate the price at which the AE would sell the tractors in the US market, that net profit to cost ratio for export to non-US was 34. 2%, that for the USA it was 25. 17%. He also referred to paragraph 2. 32, 2. 39, 2. 4 1. 3 and 1. 31 of the TP guidelines issued by OECD. Refering to page No. 27 of the PB-1, he contended that tractors were sold at best available price, that the effective tax rate was 7. 5%, that AE was paying tax at 30. 45%, that the assessee wanted penetration in the US market, that it sold more units for that purpose. The DR stated that the assessee was paying 100 dollars for each tractor sold in US, that it was a variable cost, that it was not considered by the assessee , that even if method adopted by the assessee was correct and variables were considered the TPO was authorised to make adjust - ments, that the assessee did not produce documents to support its claim, that it did not explain as to how the difference in value would affect the ALP, that geographical distances were not relevant to decide the issue before the Tribunal, that as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e at arm s-length, that the claim made by the assessee was accepted by the TPO for those two transactions, that the assessee had bench-marked the IT. s by applying CPM, that it was claimed that in view of lower demand in the domestic segment it had adopted a business strategy of exploring foreign market, that it sold 3153 tractors to its AE in US , that it claimed that units sold in USA were of very low horsepower and were different from the tractors sold in the domestic market, that the tractor sold through SARC countries were similar to those sold in domestic market, that as per the assessee the export sales were initiated by it as per the requirement of the US market, that the TP study report was prepared on the basis of marginal costing methodology of OECD(para 2. 4 of TPGL), in the TP study report three companies , namely Eicher Limited, Punjab Tractors Ltd. and Escorts Ltd. , were selected by the assessee as comparables, that the assessee claimed that it had mark up of 11. 70% on marginal cost and the mean mark up of the comparables was 8. 24%, that it claimed exports made by it to the AE were at arm s length, that that the TPO held that TNMM was most appropriate method to de ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... been considered as per sub rule (c)(i). It is found that the TPO has not given due attention to the functional profiles of the assessee as well as of the AE/non-AE. s. Business transaction with the AE were not at the same footing that of the non AE entities. Besides, that with the non- AE. s it had to take market risk, credit credit risk and inventory risk. We find that the TPO had clubbed sales to the SAARC countries for arriving at the net profit to cost ratio. But, in our opinion, transactions with AE should not have been compared with the SAARC countries transactions. In short, the departmental authorities as well as the assessee had not followed the proper method to benchmark the IT. s entered in to, during the year under consideration, by the assessee. Being the first year of TP adjustment, it was natural. Considering the above, we are of the opinion that matter needs further verification of facts and application of the provisions of law which are very clear as on today. The confusion or ambiguity about applying the method or procedure is over and orders or higher judicial authorities are available as to how to apply CPM. Therefore, we are restoring back the matter to th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 9-00(supra), wherein the issue of writing off of foundry expenses at Baramati was deliberated upon. The DR strongly supported the order of the FAA and stated that amount in question was a capital expenditure. 5.3 . We have heard the rival submissions. We find that the Tribunal had dealt with the issue of writing off of foundry expenses at Baramati as under: 2.2. Aggrieved by the order of the AO the assessee preferred an appeal before the First Appellate Authority (FAA). Before him, it was contended that expenditure was incurred in the course of carrying on of business, that the foundry formed part of existing business of the assessee , that the entire expenditure should be allowed as revenue expenditure/business loss notwithstanding the fact that the foundry project was abandoned, that foundry was essential for manufacturing components for vehicles and tractors, that the assessee had foundries at its existing plants, that the project for setting up additional foundry was in the course of efficiently carrying out its existing business, that such write off had to be allowed as deduction u/s. 37(1) of the Act. After considering the assessment order and the submiss ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed the genuineness of the expenditure. Considering the peculiar facts and circumstances of the case, we are reversing the order of the FAA and decide ground no. 1 in favour of the assessee. We are of the opinion that the basic analogy for allowing write-off is to consider the real nature of the transaction. The advances were made for the running of business. The expendi - ture was not incurred for a new project, neither it was totally disconnected with the business activities carried out by the assessee. The disputed amount was advanced for tractor divison of the assessee in the normal coursr of business. Therefore, following the above order of the Tribunal, we decide ground number two in favour of the assessee. 6. Ground number 16 deals with addition of provision for doubtful debts, u/s. 115JB of the Act, amounting to ₹ 6. 16 crores. The AR fairly considered that the issue had to be decided against the assessee, because of the retrospective amendment to the section. Accordingly, we dismiss ground. 7. Last ground of appeal is about addition of provision for warranty, u/s. 115 JB of the Act, of ₹ 14. 75 crores. During the assessment proceedings, the AO c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... provisions. We are reproducing the judgment of the honorable Court. Paragraph 5 of the judgment contains the facts of the case, as noted by the Tribunal. The judgment reads as under: The Revenue has come forward with these appeals raising the following substantial questions of law : 1. Whether, on the facts and in the circumstances of the case, the Income-tax Appellate Tribunal was right in holding that the provision for warranty was an allowable deduction, even though the provision had not been made on any scientific basis ensuring a fair degree of accuracy, thereby resulting in huge deferment of revenue and tax liability thereon ? 2. For the assessment year 2003-04 and 2004-05 : Whether, on the facts and in the circumstances of the case, the Income-tax Appellate Tribunal was right in holding that the provision made by the assessee should be allowed as a deduction for the purpose of section 115JB of the Income-tax Act even though such provision has not been made on any scientific basis and huge excess provision had been made resulting in deferment of revenue ? 2. The question concerns the provision for warranty claims made and it is allowable. 3. Mr. K. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ell as the matching concept. For determining an appropriate his torical trend, it is important that the company has a proper account ing system for capturing the relationship between the nature of the sales, the warranty provisions made and the actual expenses incurred against it subsequently. Thus, the decision on the warranty provision should be based on past experience of the company. A detailed assess ment of the warranty provisioning policy is required particularly if the experience suggests that warranty provisions are generally reversed if they remained unutilised at the end of the period prescribed in the warranty. Therefore, the company should scrutinise the historical trend of warranty provisions made and the actual expenses incurred against it. On this basis a sensible estimate should be made. The war ranty provision for the products should be based on the estimate at the year end of future warranty expenses. Such estimates need reassess ment every year. As one reaches close to the end of the warranty period, the probability that the warranty expenses will be incurred is considerably reduced and that should be reflected in the estimation amount. Whether this should be do ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... said case, may not arise significantly. The four important aspects of provisioning have also been highlighted by the hon'ble Supreme Court and keeping those aspects in mind, when a case is analysed and the facts involved therein satisfied those principles, no interference should be made. 5. Keeping the above legal principles in mind, when we examine the order of the Tribunal impugned in these appeals and the questions of law raised before us, we find that the Tribunal has in effect applied the principles and has held that the assessee herein made a scientific approach while making a provision for warranty account for the relevant years and, therefore, there was no scope to disallow the claim made by the assessee. The assessment years related to 1999-2000 to 2004-2005. Before the Tribunal, on behalf of the assessee, the provisions for warranty made in the books of account and the actual settlements of warranty claims for the assessment years 1997-98 to 2009-10 were furnished and the same has been set out in paragraph 7. Similarly, the details of the year-wise sales and the percentage, at which the quantum of provision for warranty was worked out in each year by the assesse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... htly held by the Tribunal, there was no arbitrary approach made by the assessee while making the provision for warranty claims. Therefore, looked at from any angle, we do not find any flaw in the order of the Tribunal in having decided to confirm the order of the Commissioner of Income-tax (Appeals) for the relevant years. We are, therefore, not inclined to entertain the appeals, as we do not find any question of law, much less substantial question of law arising in these appeals. These appeals fail and the same are dismissed. No costs. Consequently, M. P. Nos. 1 of 2010 (5 petitions) are also dismissed. Now, coming back to the facts of the case, it is found that in the AY. 1989-90, the AO had considered provision for warranty as an and admissible expenditure on the ground that such provisions was in the nature of contingent lability, that in the subsequent assessment years he considered the enhanced portion of warranty provisions as this allowable expenditure, that the Tribunal has reverse the order of the departmental authorities, while deciding the appeal for the AY. s 1989-90 to 1991-92, that the Tribunal had held that provision for warranty was not contingent lability, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f ₹ 23.48 crore Set aside 10. Interest on income tax refund ₹ 1.26 crore Against 8.1. Respectfully following the orders of the AY. s. 2006-0, 1999-00, 2000-01and2001-02 (supra), we decide grounds no. 3a. 4, 5, 6, 7 and 10 against the assessee, ground no. 9 is set aside and remaining grounds are decided in favour of the assessee. 9 . First ground of appeal is about TP adjustment of ₹ 21. 29 crore. Following our order for the earlier AY. we direct the TPO/AO to follow the directions of that AY, while decide the issue afresh. The assessee should be given an opportunity of effective hearing. GOA. 1 is partly allowed. 10. Third ground of appeal, is about writing off of ₹ 17. 26 lakhs. During the assessment proceedings, the AO found that the assessee had written off and amount of ₹ 17, 26, 752/- under the head obsolete system. While dealing with ground number two for the earlier AY. , we have decided the similar issue in favour of the assessee. Following the same, GOA 3 is decided in favour of the assessee. 11. Next Ground of appeal is about addition made ..... X X X X Extracts X X X X X X X X Extracts X X X X
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