TMI Blog2017 (10) TMI 1440X X X X Extracts X X X X X X X X Extracts X X X X ..... ision in its support. Also in the case of Sony India (P) Ltd [2018 (7) TMI 825 - ITAT DELHI] hold that the amount of write back of ₹ 37.49 crores which is on account of amounts written back of expenses / liabilities is to be considered as part of operating income. Before us, assessee also submitted that if the write back amount of ₹ 37.49 crores is included as operating income, the operating margin would works out to 42.94% as against the operating margin of 14.36% of the comparable companies and therefore the transactions of the assessee with it’s A.E’s would be at arms length requiring no adjustment to the income. We find that on this issue there is no finding of TPO. We therefore for the limited purpose of verifying the aforesaid contention of assessee remit the issue to the file of TPO - Ground of the assessee is allowed for statistical purposes. provision for warranty expenses disallowance u/s 37 - provision @ 1.15% of the total sales turnover uniformly on all the products - unascertained liability and not an accrued liability - contingent liability - HELD THAT:- We find that identical issue arose in assessee’s own case in earlier years. The AO was directed ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d by TPO and as against the computation of (27.25%) worked out by the assessee). Aggrieved by the order of DRP, assessee is now in appeal before us and has raised the following grounds : 1. The Ld. Dispute Resolution Panel ( DRP )/ Assessing Officer ( AO ), erred in making a transfer pricing adjustment of ₹ 18.99 crores, to the income of the appellant by holding that the international transactions of the appellant do not satisfy the arm's length principle envisaged under the Income-tax Act, 1961 ( the Act ). Erroneous rejection of the transactional analysis submitted by the appellant 2. The Ld. DRP/AP erred in applying the Transactional Net Margin Method ( TNMM ) on an entity level, which is contrary to the provision contained in the Indian Transfer Pricing Regulations ( ITPR ). 3. The Ld. DRP j AO erred by not taking cognizance of the audited segmental profitability statement submitted by the appellant wherein the appellant has, in accordance with the relevant provisions contained in the ITPR, computed the profit earned from respective international transactions separately. 4. The Ld. DRP/AO erred by not taking cognizance of t e price level comparabili ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng the arm s length price of the international transactions of the Appellant. On the facts and circumstances of the case and in law, the Hon ble DRP, learned AO and learned TPO have erred by not granting appropriate economic adjustments while determining the arm s length price of the international transactions of the Appellant. 4. Before us, at the outset, Ld.A.R. submitted that the various grounds raised by the assessee can be divided into two parts i.e., relating to Transfer Pricing (TP) matters i.e., TP matters and non-TP matters. He further submitted that except for ground No.12 which is with respect to disallowing the warranty cost, all the other grounds are with respect to TP matter. He further submitted that if ground No.5 raised by the assessee is decided in favour of the assessee then all the other remaining grounds raised by the assessee with respect to TP matters would be rendered academic and therefore would require no adjudication. The aforesaid submissions of Ld.A.R. was not objected by Ld.D.R. We therefore first proceed to decide ground No.5, which is with respect to excluding the amounts / liabilities written back of ₹ 37.84 crores to compute the oper ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... operating margin of the assessee to be considered at (23.18%) by observing as under :- 11.4 Erroneous computation of the assessee s operating margin by the TPO It was submitted by the assessee that on a without prejudice basis, even if the approach adopted by the TPO, wherein he has considered the amounts written back as non-operating, were to be given any credence, the assessee humbly submits that then it would also be essential to exclude the following items of expenditure as nonoperating in nature: Loss on revaluation of assets and provision made for impairment loss In this context, it is our contention that loss on revaluation of fixed assets and provision for impairment loss cannot be considered as operating expenses, based on the same reasons as provided by the TPO for excluding the amounts written back. Amounts written off During the FY 2006-07, the assessee has written off advances amounting to ₹ 0.53 crores as the same are no longer receivable. Taking into consideration the logic applied by the TPO that the amounts/liability written back represents an accounting entry only and has no relation with the operations of the company for th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... der of AO by observing as under :- 11 .. However contention of the assessee is not accepted. TPO vide letter dated 29/07/2011 has send his comments on the stand taken by the assessee. Relevant portion of the same is reproduced as under- 3.2 The main argument of the appellant on this issue is that the amounts/liabilities written back do actually pertain to the financial year under consideration as the same have accrued in that year i.e. FY 2006-07 and in any business situation, write back of a provision or a liability is normal and very much related to the business operations of the year in which these amounts/liabilities are written back. (emphasis supplied). 3.3 The above arguments of the appellant are not acceptable for following reasons: a) The assessee, during the FY 2006-07, had received waiver letters from its creditors, on the basis of which the amounts/liabilities were written back. These amounts/liabilities written back are in connection with expenses accrued for the raw materials' procured, custom duty payable in earlier years and not for the raw materials procured, custom duty payable during the financial year under consideration. b) The re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... DCIT, it is not known whether the department has accepted the findings of the Tribunal or has filed the appeal before hi her authorities. In view of the above, objection raised by the assessee is rejected. Aggrieved by the order of DRP, assessee is now in appeal before us. 6. Before us, Ld.A.R. submitted that the TPO while coming to the conclusion that for computing the operating margin of the assessee held that the amounts / liabilities written back needs to be excluded for the reason that they do not pertain to the operations of the assessee. He submitted that the aforesaid conclusion of the TPO is not correct. He submitted that before DRP assessee had furnished additional evidences and made detailed presentation to prove that the amounts written back are part of the operations of the assessee and are therefore to be considered as operating margin. He submitted that during the Financial Year 2006-07 based on the waiver letters received from it s A.E. s and the business associates had written back provisions / liabilities amounting to ₹ 37.84 crores as the same were no longer payable. He pointed to the details of the liabilities written back which are placed at pag ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fore the Hon ble Delhi High Court meaning thereby that the Revenue has accepted the order of Tribunal, wherein the Hon ble Delhi Tribunal has held it to be part of operating income. He further submitted that in the case of ACIT Vs. Gillete Diversified Operations Pvt. Limited in ITA No.400/DEL/2013 dt.01.04.2016, similar issue of liabilities no longer written back was arose, wherein it was held that the provision should be considered as operating income. He submitted that the Hon ble Tribunal has further held that if the liabilities originally created were on account of capital amounts and then their write back cannot be considered as normal instances of the business and has to be excluded as operating income. He submitted that against the aforesaid order of Tribunal, the matter was carried by Revenue before Hon ble Delhi High Court and the issue of exclusion of write back for computation of operating income was also not agitated by the Revenue. He therefore submitted that the issue of including the write back as part of operating income is now well settled by the decisions of Hon ble Delhi Tribunal and Hon ble Delhi High Court. He further fairly admitted that out of the amount of & ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... identical issue arose before the Coordinate Bench of the Tribunal, Delhi in the case of Sony India (P) Limited (supra) and the Co-ordinate Bench of the Tribunal of Delhi decided the issue in favour of the assessee by observing as under : 106.1 The first of these items is, provision written back amounting to ₹ 57,02,000. For exclusion of above item and for balances written back interest received from customers and other miscellaneous revenue receipts, the learned CIT(A) gave the following consolidated reasons : (A) I find that interest received is a financial income and as such cannot be considered as operational receipts. (B) The items which have been written back as mentioned in sub-paras (i) and (ii) of this para, are nothing but merely accounting entries and are not connected to the operations of the appellant. On merit we see no good reason to exclude provisions written back as not forming part of computing operating profit of the taxpayer. In our considered, exclusion of above provision is based upon misconception of real nature of the entry generating Income. It is not practically possible for a businessman to actually disburse all expenses incur ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e not making and writing back provision of liabilities no more required. There is no material nor there any finding to support action of the Revenue authorities. We can therefore make a general observation that all business enterprises are making and writing back liabilities as a normal incident of operating business. The expenses for which provisions were originally made were considered operating in nature and allowed in assessment. These provisions no longer required by the taxpayer during the year under review were reversed in the books of account as per mercantile system of accounting and shown as income. Therefore, on facts we do not see any justification for excluding provisions written back in the P L a/c as not forming part of the operating profit of the taxpayer. Accordingly, claim of the taxpayer is accepted. 9. We further find that against the order of the Tribunal, the matter was carried by the Revenue before Hon ble Delhi High Court but no ground with respect to the treatment of liabilities written back as being operating or non-operating income was raised by Revenue before Hon ble Delhi High Court meaning thereby that the decision of Delhi Tribunal was accepted ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 10.1 AO noticed that assessee had claimed warranty expenses of ₹ 52,19,740/-. He noticed that assessee had made provision for warranty expenses at 1.15% of the total sales turnover uniformly on all the products. He noticed that assessee had sold different kinds of finished products and some of them are parts of machines and some of them are machines themselves. AO was of the view that in view of the difference in the products sold, there was no justification for providing the same percentage of warranty on all the products. He also noticed that assessee had not maintained a proper accounting system for capturing the relationship between nature of sales, the warranty provisions made and the actual expenses incurred subsequently. He accordingly held that the expenses claimed by assessee as warranty cost was merely an unascertained liability and not an accrued liability and since the expenditure was a contingent liability, it did not qualify for deduction u/s 37(1) of the Act. He accordingly disallowed ₹ 52,19,740/-. Aggrieved by the order of TPO, assessee carried the matter before DRP, who upheld the order of AO by holding as under : 10. Warranty Provision T ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssessee for acquiring the provision and decide the issue keeping in mind the decision of Hon ble Supreme Court in the case of Rotork Controls India (P) Limited Vs. CIT reported in (2009) 314 ITR 62 (SC). The relevant observations of Co-ordinate Bench are as under : 13. The second Ground in the appeal is with respect to an addition of ₹ 8,95,141/- made by the Assessing Officer which represented assessee s claim for deduction on account of product warranty liability. The claim of the assessee was that the Provision for warranty was claimed as a deduction in view of the decision of the Hon ble Supreme Court in the case of Rotork Controls India P. Ltd. vs. CIT, (2009) 314 ITR 62 (SC). The DRP dealt with the issue in the following manner :- 6.5. Warranty Provision: The objections raised in this matter have been already noted. The Assessing Officer has disallowed the assessee's claim on account of provision for warranty mainly on the ground that the said provision was only an arrangement for setting apart of money for a contingent liability and till that liability became real, there was no expenditure. We cannot confirm the stand thus taken by the Assessing Officer, m ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ast history of warranty claims, method adopted by the assessee for quantifying the provision, etc. and to decide the issue thereafter keeping in mind the judgement of the Hon ble Supreme Court in the case of Rotork Control India P. Ltd. (supra). 15. However, we find that in para 5 of the assessment order, the Assessing Officer has summarily sustained the disallowance of ₹ 8,95,141/- on account of provision of warranty existence without determination the issues, which the DRP required him to address. Therefore, we are unable to uphold the order of the Assessing Officer on this aspect also. As a consequence, we set-aside the assessment order on this aspect also and direct the Assessing Officer to pass a speaking order after taking into consideration each of the points enumerated by the DRP in its order dated 30.08.2010 on this aspect. Needless to mention, the assessee shall furnish relevant material as would be required by the Assessing Officer to carry out the directions of the DRP. The Assessing Officer shall consider the material and submissions put-forth by the assessee and thereafter pass an order on this aspect afresh in accordance with law. Thus, on this Ground also a ..... X X X X Extracts X X X X X X X X Extracts X X X X
|
