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TMI Blog2016 (5) TMI 1524X X X X Extracts X X X X X X X X Extracts X X X X ..... he assessee with its AEs for previous years relevant to A. Ys. 2007-08 and 2008-09, were accepted by the TPO in such years. As per the Ld. AR, Tribunal had directed the AO to accept the pricing of thee international transaction of the assessee for the impugned year to be at arms length, if similar transactions with AEs were accepted by the TPO to be at arms length for previous years relevant to A. Ys. 2007-08 and 2008-09. 03. Continuing his submissions, Ld. AR pointed out to the consequential order passed by the TPO, on 30.01.2014 wherein TPO mentioned that TP analysis done by the assessee for A. Y.s.2007-08 and 2008-09, were not accepted. As per the TPO in such earlier years, assessee had applied CUP method for analysing the pricing of the international transactions, whereas TPO had gone by TNMM. According 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 p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sessment 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. 07. Thereafter on 30.01.2014, TPO had passed a fresh order u/s.92CA of the Act, purportedly to comply with the directions of the Tribunal. In the said order, TPO stated that assessee had relied on RPM method for A. Ys. 2007-08 and 2008-09, whereas in the assessment for these assessment years TNMM was adopted by the Revenue. Thus as per the TPO, TP analysis of the assessee could not be considered as accepted for A. Ys. 2007-08 and 2008-09. Taking this view, TPO chose not to make any change to its original order dt.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). ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ginal order dt. 28.09.2010 is inappropriate. However, a reading of the final assessment order passed by the AO on 30.01.2015 show that TPO had pursuant to the DRP directions passed an order dt.29.01.2015 not complying with the directions of the DRP. AO had therefore persisted with the same adjustment that he had done earlier. Section 144C which dwells on the powers of the DRP, states as under at sub-section (10): 144C(10) : Every direction issued by the Dispute Resolution Panel shall be binding on the Assessing Officer. 08. It is clear that the directions of the DRP is binding on the AO. No doubt as per Section 92CA(4) of the Act, an AO has to compute total income in conformity with the arms length price determined by the TPO. However, once there is an order of DRP, AO is bound by the directions 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is ground is accordingly allowed for statistical purposes. 10. Pursuant to the above proceedings, AO had considered the question of of warranty provisioning once again. Assessee there upon submitted a letter dt.06.03.2014 to the AO wherein it gave the methodology for warranty provisioning. As per the assessee, warranty obligations were worked out based on the number of laptops and desktops sold by it, which carried a warranty obligation as on 31st March every year. Assessee also gave the details of the work out. As per the assessee it was considering the unexplained warranty period in respect of each machine which was sold and multiplying it by the repair rate and cost per claim. As per the assessee, repair action rate was a percentage of the claims out of the total sales based on 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 provi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... formula submitted by the assessee for working out the warranty provision required for desktops and laptops manufactured and traded by it. Assessee had adopted the repair percentage rate followed at Asia Pacific level by IBM. Assessee had also taken the cost claim as per the Asia Pacific level of IBM. There was no finding by any of the lower authorities that the repair percentage or cost per claim which were the basic building blocks of the warranty provision were estimated without scientific basis or without sufficient back-up data. Lower authorities had not considered this, but simply went by a turnover ratio. As per the Ld. AR, even if relations between actual warranty expenditure and warranty provisioning were to be reckoned, assessee was still on 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e have perused the materials and heard the rival contentions. Question before us is whether assessee had made the provisioning for warranty in a scientific manner. It is not disputed that in the impugned assessment year it had started doing the business of sale of laptops and desktops. Obviously assessee had no historical data with it. It is also not disputed that assessee had taken over this business from IBM, who had substantial experience in such business. Hence if the assessee relied on the methodology followed by IBM for working out the warranty provision we cannot say that it was incorrect. There is no case for the Revenue that any provisioning made by IBM in respect of such business in any earlier years were disallowed for a reason that it 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... done for a year should be compared with the actual spending in the succeeding year. This is for the simple reason 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. In such circumstances we cannot say that assessee had followed a method which was not scientific. We are of the opinion that the three conditions set out by the Hon'ble Apex Court in the case of Rotork Controls India (Pvt) Ltd have been satisfied by the assessee, viz., establishing that there is a present obligation on account of a past event, working out the probable estimate of the outflow of the resources required and substantiating the reliability of ..... X X X X Extracts X X X X X X X X Extracts X X X X
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