TMI Blog2016 (5) TMI 1524X X X X Extracts X X X X X X X X Extracts X X X X ..... above cannot stand in the face of the clear legal mandate. We delete such additions. Disallowance of warranty provision - whether assessee had made the provisioning for warranty in a scientific manner - assessee doing the business of sale of laptops and desktops - HELD THAT:- Expenditure incurred against warranty given on sales made in any given year would be reflected in the succeeding year, when the provisioning is done on the basis of machine months. Assessee had done the provisioning based on machine months. If by application of the formula of multiplying machine months with repair action rate and cost per claim, an excessive warranty provisioning had resulted, then definitely in the succeeding year the expenditure incurred on warranty would be much less. The table above would show that expenditure on warranty was higher in almost all succeeding years except financial year 2009-09. We cannot say that assessee had followed a method which was not scientific. We are of the opinion that the three conditions set out in the case of Rotork Controls India (Pvt) Ltd [ 2009 (5) TMI 16 - SUPREME COURT] have been satisfied by the assessee, viz., establishing that there is a prese ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing to the Ld. AR, based on this erroneous persisted with the original recommendations made by him. 04. Ld. AR submitted that further to the TP order mentioned above, and based on a draft assessment proposed by the AO, assessee had once again moved in appeal before the DRP. As per the Ld. AR, DRP vide its order dt. 29.12.2014 had accepted the stand of the assessee. However, as per the Ld. AR, despite directions of the DRP, TPO vide order passed on 29.01.2015 persisted with his earlier recommendation and pursuant to such TP order assessment was completed without bypassing the DRP order. Hence according to Ld. AR, the adjustment recommended by the TPO / AO was to be set aside. 05. Per contra, Ld. DR submitted that the AO was bound by the order passed by the TPO u/s.92CA(4) of the Act, and hence AO could not be faulted for following the directions of the TPO. 06. We have perused the materials and heard the rival contentions. Directions given by the Tribunal in the earlier round of proceedings as it appears at para 12 of its order is reproduced hereunder : 12. Having heard both the parties and having considered the rival contentions and the material on record, we find ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 28.09.2010. Assessee had thereafter moved an application before the DRP which held as under at paras 2.2 to 2.4 of its order dt.29.12.2014 : 2.2 In giving effect to the above directions the TPO has mentioned that in both AY 2007-08 and 2008-09, the respective TPOs had not accepted the CUP methodology followed by the tax payer in its TP analysis as the Most Appropriate Method (MAM). After rejecting the CUP as MAM the TPOs in both the years proceeded to conduct separate analysis following the Transaction Net Margin Method (TNMM) as MAM. The result of this independent analysis by the TPO was that in both the manufacturing and trading segment the TPO found that the tax payer's profit margin was higher than the TPO's analyzed margin, and, hence no adjustment was called for. The fact that the TPOs in both the years had rejected the CUP as MAM and applied TNMM was taken by the AO, while giving effect to the ITAT's direction, to indicate that those TPOs had not accepted the TP analysis of the assessee in AY 2007-08 2008-09. It was, therefore, concluded that the tax payer's claims made before the Hon'ble ITAT were incorrect to the extent that a TP analysis of the a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rections of the DRP by virtue of sub-section (1) to Section 144C of the Act. AO is not required to refer the matter which has been decided by the DRP to the TPO again. We are therefore of the opinion that the addition made by the AO without considering the directions of the DRP reproduced by us above cannot stand in the face of the clear legal mandate. We delete such additions. Grounds 2 to 6 of the assessee is treated as partly allowed. 09. Vide its ground 7, grievance of the assessee is on disallowance of warranty provision of ₹ 42,19,22,899/-. Directions of the Tribunal with respect to the provision for warranty in the earlier round of proceedings, which appear at paras 19 and 20 of its order dt.15.03.2012, is reproduced hereunder : 19. Having heard both the parties and having considered the rival contentions, we find that the Hon ble Supreme Court in the case of Rotork Controls Ind. Pvt. Ltd., (cited Supra) has held that when a product 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 sci ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n historical data. Similarly cost per claim was the average of cost based on historical global data. Assessee pointed out that relevant previous year was the first year of operation of the assessee, having taken over the PC business of IBM as a going-concern basis. In other words assessee argued that provision for warranty was based on historical data and principles adopted by IBM for making similar provision. Assessee also gave a perspective of the expenditure incurred on warranties for assessment years up to A. Y. 2009-10. As per the assessee, such expenditure was increasing, and the provisioning was justified. 11. However, AO did not find the above contentions acceptable. According to him, percentage of utilisation for warranty provision made by the assessee in the impugned assessment year as well as subsequent assessment years proved that only about 22% of such provisions were utilised. According to the AO there was a great mismatch between the provision created and the actual expenditure. He made a correlative study of the actual warranty spending with the warranty provision for F. Ys. 2005-06 to 2009-10. According to him, there was an increase of sales turnover from ͅ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a safe wicket. As per Ld. AR, financial year 2005-06 was the first year in which assessee was doing a business of desktops and laptops. It was due to this reason that the provisioning for that year was much higher than what was incurred for warranty repairs. As per the Ld. AR provision made on 31.03.2006 ought to be compared with actual spendings for F. Y. 2006-07. If that was considered, Ld. AR submitted that spending of the assessee on warranty were much higher than the provisioning made. Thus according to him warranty provisioning was done by the assessee on a scientific basis and the disallowance was unjustified. 14. Per contra, Ld. DR submitted that assessee had relied on data pertaining to IBM for arguing that it was following scientific method. But how it had arrived at the repair rate or cost per claim from historical data of IBM was never brought before the lower authorities. Assessee had simply produced certain figures and relied on it without any back-up data. As per the Ld. DR, Hon ble Supreme Court in the case of Rotork Controls India (Pvt) Ltd vs CIT [(2009) 314 ITR 62] specifically stipulated that an assessee should prove the scientific method followed by it for ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... was unscientific. It is true that assessee had adopted two factors namely, repair action rate and cost per claim from IBM data available at Asia Pacific Level. It might also be true that assessee had not produced records relating to IBM to show that these rates were correctly worked out by IBM. Nevertheless a look at the warranty provisioning table of the assessee for the succeeding assessment years reveals the following : F.Y. 2005-06 Particulars Debit (Rs.) Particulars Credit (Rs.) Opening balance - Warranty utilisation 76,652,762 Warranty provision during the year 349,449,249 Closing balance of provision required based on machine months under warranty 272,796,487 Total 349,449,249 Total 349,449,249 F.Y. 2006-07 Particulars Debit (Rs.) Particulars Credit (Rs.) Opening bala ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Addition during the year Utilised /reversed during the year Closing balance Ratio Of CY provision with next year utilisation 2005-06 - 349,449,249 76,652,762 272,796,487 86.77 2006-07 272,796,487 551,839,359 402,712,947 421,922,899 106.29 2007-08 421,922,899 612,180,442 519,174,867 514,928,474 58.90 2008-09 514,928,474 1,087,940,662 1,039,428,778 563,440,358 159.23 2009-10 563,440,358 972,025,066 683,251,088 852,214,336 95.57 2010-11 852,214,336 1,477,452,660 1,017,066,189 1,312,600,807 There is much strength in the arg ..... X X X X Extracts X X X X X X X X Extracts X X X X
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