TMI Blog2019 (4) TMI 1929X X X X Extracts X X X X X X X X Extracts X X X X ..... nty by holding that the assessee had failed to furnish the scientific basis on which the provision for warranty has been created - DRP upheld the disallowance made by the AO - HELD THAT:- We deem it appropriate to respectfully follow the aforesaid decision of the Co-ordinate Bench of this Tribunal in the assessee s own case for Assessment Year 2009- 10 and remand the issue of provision for warranty to the file of the AO for de-novo examination and adjudication with the same directions that the assessee should bring on record all the details evidences to establish that the provisions made by the assessee is on scientific basis and the AO should pass a speaking and reasoned order after providing the assessee adequate opportunity of being heard and to file details / submissions which shall be duly considered by the AO. We hold and direct accordingly. Annual Licence Fees / R D Expenses - AO observed that the assessee had not furnished any evidence of the nature of expenses and therefore held them to be capital in nature and disallowed the assessee s claim - in its objections before the DRP, the assessee claimed that these expenses are towards annual licence fee for the R D wor ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ly taken up for scrutiny for this Assessment Year. The Assessing Officer (AO) made a reference under section 92CA of the Act to the Transfer Pricing Officer (TPO) for determination of the arm s length price (ALP) of the assessee s international transactions with its Associated Enterprises (AE) in the year under consideration. The assessee has reported three segments, namely manufacturing, trading and services segments. While the international transactions in the manufacturing and trading segments were found to be at arms length by the TPO, the TPO made certain adjustments to the service segment of the assessee. 2.2 In respect of the services segment, the assessee classified its services as contract R D services. The assessee conducted its comparability analysis applying TNMM as the most appropriate method (MAM) with operating profit to total cost as the PLI (-10.8%), and chose the following 5 companies as its comparable companies:- Sl. No. Name of Comparable Company 1. Accuspeed Engineering Ltd., 2. Axis IT T Ltd., 3. CSS ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ns thereto before the DRP. The DRP issued its directions thereon under section 144C(5) of the Act dated 14.12.2015. Pursuant thereto, the AO passed the impugned final order of assessment under section 143(3) r.w.s. 144C of the Act dated 14.01.2016, wherein the assessee s loss was determined at ₹ 31,80,37,446/-; which, inter alia, included the TP adjustment of ₹ 8,43,63,985/-. 3. The assessee, being aggrieved by the final order of assessment dated 14.01.2016 for Assessment Year 2011-12, has filed this appeal before the Tribunal, wherein it has raised the following grounds:- I. Transfer Pricing The grounds mentioned hereinafter are without prejudice to one another. 1. The learned Assessing Officer ( learned AO ), learned Transfer Pricing Officer ( learned TPO ) and the Honourable Dispute Resolution Panel ( Hon'ble DRP ) erred in proposing an adjustment of INR 8,43,63,985/- to the arm's length price of the Appellant's international transactions with Associated Enterprises ( AEs ) with respect to the services rendered by the Appellant u/s 92CA of the Income-tax Act, 1961 ( the Act ). 2. The learned TPO / Hon'ble DRP erred in rejecting summa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d TPO / Hon'ble DRP erred in not considering the multiple year / prior year financial data of comparable companies while determining the arm's length price. 9. The learned TPO / Hon'ble DRP ought to have applied an upper limit for sales turnover filter of ₹ 200 Crores in the comparability analysis. 10. The learned TPO / Hon'ble DRP erred in applying export earning filter of 25% of the total sales, leading to a narrower comparable set. 11. The learned TPO / Hon'ble DRP erred in not applying the employee cost filter wherein companies having an employee cost greater than 25% of revenue should be accepted while selecting companies that are comparable to the Appellant. 12. The learned TPO / Hon'ble DRP erred in application of different financial year ending filter wherein companies with financial year ending other than March 2011 have been rejected. 13. The learned TPO / Hon'ble DRP erred in applying onsite filter to reject the companies that are comparable to the Appellant. 14. The learned TPO / Hon'ble DRP erred in not considering the provision for bad and doubtful debts as operating in nature. 15. The learned TPO erred in com ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e learned AO and Hon'ble DRP ought to have appreciated that Research Development ['R D] is only a nomenclature used by the Appellant in the financial statements and the said expense is towards annual license fees paid by the Appellant to its group companies for use of technology of the Continental Group for manufacture of its products c. The learned AO has erred in concluding that approval under section 35(2AB) of the Act from the prescribed authority such as the Department of Scientific and Industrial Research [-DSIR] is mandatory for claiming expenses in the nature of such annual license fee. d. The learned AO and Hon'ble DRP has failed to appreciate that the annual license fees expenditure has been claimed as a deduction under section 37(1) of the Act which does not arrant any approval from DSIR and the said expenditure is solely for the purpose of business and are recurring in nature [from the second year of incorporation of the Company]. e. The learned AO and Hon'ble DRP has erred in not appreciating the fact that the applicable withholding tax on the payments has been deducted and remitted. f. The learned AO has erred in contending that the expen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... services rendered as ITES and benchmarked the same in his TP study /analysis carried out by him. The Co-ordinate Bench of this Tribunal, in the assessee s own case for Assessment Year 2009-10 (supra), had remanded the issue of characterization of services rendered by the assessee back to the file of the TPO for fresh examination; holding as under at paras 4 and 5 thereof:- 2. Regarding the appeal of the assessee, it was submitted by ld. AR of assessee that ground nos. 1 and 2 are general. Regarding ground no. 3A, he submitted that as per this ground, the assessee is requesting for inclusion of three companies but now he is requesting for inclusion of only one company i.e. R Systems International Ltd. and as per ground no. 3B, the request of the assessee is for inclusion of 4 companies i.e. Infosys BPO Ltd., Accentia Technologies Ltd., Cosmic Global Ltd. and Eclerx Services Ltd. Regarding ground nos. 3 to 7, he submitted that these grounds are not pressed and accordingly these grounds are rejected as not pressed and part of ground 3A is also rejected as not pressed. It was submitted that as per Para no. 15.1 of the order of DRP, it was held that the company R Systems Internati ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... at this stage. CORPORATE TAX 6. Ground No.1 (a to g) - Provision for Warranty 6.1.1 In respect of these grounds (supra), the learned AR submitted that the AO has disallowed the provisions for warranty amounting to ₹ 3,61,87,333/- by holding that the assessee had failed to furnish the scientific basis on which the provision for warranty has been created. The DRP upheld the disallowance made by the AO. 6.1.2 Before us, it was submitted that for Assessment Year 2009-10, the DRP had allowed the provision for warranty by giving a finding that the provision has been made on a scientific basis. However, Revenue carried the matter to the Tribunal and the Co-ordinate Bench of this Tribunal in its order in IT(TP)A No.165 and 254/Bang/2014 dated 28.09.2017 for Assessment Year 2009-10 had remanded the matter back to the file of the AO for fresh determination. 6.2.1 We have considered the submission of both the parties and perused the material on record; including the judicial pronouncement cited. In Assessment Year 2009-10, the DRP had allowed the assessee s claim on this issue. Revenue had raised the issue before the Tribunal in grounds 3 and 4 of Revenue s appeal, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the assessee is not in line with the actual expenditure incurred by the assessee in these years at least and the assessee has to make provision on same basis in all years and therefore, in the present year also, the basis of provision cannot be said to be scientific although there may be small difference in the amount of provision and actual expenditure. The bench also wanted to see the basis of computation done by the assessee for making the provision. In reply, it was submitted by ld. AR of the assessee that these details are not readily available and therefore, this matter may also be restored back to AO for fresh decision. 10. We have considered the rival submissions. In view of this fact that the basis of computation of the provision by the assessee on account of warranty is not established to be on scientific basis before us and there is no finding of the authorities below in the aspect of this aspect of the matter, we feel it proper to restore back this issue to the file of AO for fresh decision with the direction that the assessee should bring all the details and evidence on record to establish that the provisions made by the assessee is on scientific basis and the A ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 2 declined admission of the evidence produced by the assessee and upheld the addition. 7.2.1 We have considered the rival contentions of both parties and perused and examined the material on record in respect of the issue of R D expenses; which is for consideration before us. The assessee has debited these expenses in the Profit Loss Account under the head R D Expenses . However, in its objections before the DRP, the assessee claimed that these expenses are towards annual licence fee for the R D work carried out by the group company, which was used by the assessee. This claim, though not put forth before the AO has been made before the DRP. The DRP, however, declined admission of this claim and also the details / documents filed in support thereof. In doing so, the DRP has relied upon the decision of the DRP for Assessment Year 2009-10. 7.2.2 We find that the Co-ordinate Bench of this Tribunal in its order in IT(TP)A No.165 and 254/Bang/2014 dated 28.09.2017 in the assessee s own case for Assessment Year 2009-10 had remanded this issue back to the file of the AO for fresh examination and adjudication. The grounds raised by the assessee in this regard before the Tribu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... should provide complete details and evidence which may be required by the AO to examine and decide the claim of the assessee. The AO should provide reasonable opportunity of being heard to assessee. Ground no. 8 is allowed for statistical purposes. 7.2.4 In view of the above order of the Co-ordinate Bench of this Tribunal in the assessee s own case for Assessment year 2009-10 (supra), and considering that the claim of the assessee regarding the expenses being for annual licence fees has not been examined at all and that the details / evidences submitted by the assessee before the DRP has not been admitted for consideration, we deem it appropriate to follow the order of the Co-ordinate Bench of this Tribunal in the assessee s own case for Assessment Year 2009-10 (supra); admit the details filed by assessee before DRP and remand this issue back to the file of the AO with the same directions as contained in the Tribunal order for Assessment Year 2009-10 (supra). The assessee is directed to provide complete details and evidence of its claim which may be required by the AO to examine and decide the matter. Needless to add, the AO shall provide adequate opportunity of being heard to ..... X X X X Extracts X X X X X X X X Extracts X X X X
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