TMI Blog2018 (2) TMI 2020X X X X Extracts X X X X X X X X Extracts X X X X ..... and the outflow of resources required to settle the obligations, we are of the view that estimate of provisions made by the assessee is not on scientific basis and also not reliable. It is also important to note that from assessment year 2011-12, assessee stopped creating provision of warranty. Under these circumstances, we are of the view that in the absence of any claim of warranty in earlier year, provisions of warranty was not required at all. Therefore, it cannot be allowed. We accordingly find force in the observations of the AO though he was required to allow the claim on account of directions of DRP. Therefore, we reverse his findings and direct the AO to disallow the claim of provisions of warranty. TP Adjustment - MAM selection - TNMM or RPM - HELD THAT:-Undisputedly, assessee is a distributor of AO Smith China which is involved in the manufacture of water heaters and sells the water heater imported from AO Smith China in India without making any value addition to the product, in a similar type of case, it has been repeatedly held by the Tribunal and the Hon'ble High Court of Bombay that in case of distributor, whether the product is being sold to the uncontroll ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... anty of ₹ 41,69,288/- and in this regard the facts borne out from the order of the authorities below are that from the P L A/c, it was observed that assessee has debited an amount of ₹ 55,66,204/- towards warranty provisions. Out of the above, it was noticed that assessee had not utilized any amount. It was also noticed that assessee had not shown any utilization in any of the earlier years. Therefore, it was proposed to disallow the unutilized portion of provision of warranty amounting to ₹ 55,66,204/- and add back the same to the taxable income. It was contended on behalf of the assessee that provisions are based on the estimation of a specialized warranty accounting team, which estimate the warranty cost for each product country wise and associated cost of providing warranty services. The assessee has also informed that company has scientific principle for ascertaining the warranty cost, which consider the nature of the equipment and periodicity of warranty based on the global principles. He however placed reliance upon the judgment of the Apex Court in the case of Rotork Controls India (P.) Ltd. v. CIT [2009] 314 ITR 62 with the submission that it satisfies ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d that creation of provision is not required in the given facts and circumstances of the case. Therefore it should be disallowed. But pursuant to the direction of DRP it was allowed by the AO. 4. Aggrieved, the Revenue has preferred an appeal before the Tribunal and placed . heavy reliance upon the judgment of the Apex Court in the case of Rotork Controls India (P.) Ltd. (supra) with the submission that it is appropriate to provide for warranty as percentage of turnover based on past experience as it satisfies the actual concept as well as matching concept. A Provision is a liability which can be measured only by using substantial degree of estimation. Liability is a present obligation arising from past events, the settlement of which is expected to result in an outflow from the enterprises of resources embodied economy benefit. A past event that leads to present obligation is called as an obligating event. For a liability to qualify for recognition, there must be not only present obligation but aiso the probability of an outflow of resources to settle the obligation. In the instant case, one has to examine whether the working has been robust based on historical data, whether th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... liability to qualify for recognition there must be not only present obligation but also the probability of an outflow of resources to settle that obligation. Where there are a number of obligations (e.g. product warranties or similar contracts) the probability that an outflow will be required in settlement, is determined by considering the said obligations as a whole. In this connection, it may be noted that in the case of a manufacture and sale of one single item the provision for warranty could constitute a contingent liability not entitled to deduction under Section 37 of the said Act. However, when there is manufacture and sale of an army of items running into thousands of units of sophisticated goods, the past event of defects being detected in some of such items leads to a present obligation which results in an enterprise having no alternative to settling that obligation. In the present case, the appellant has been manufacturing and selling Valve Actuators. They are in the business from assessment years 1983- 84 onwards. Valve Actuators are sophisticated goods. Over the years appellant has been manufacturing Valve Actuators in large numbers. The statistical data indicates th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... visioning which relate to the present obligation, it rises out of the obligating event, it involves outflow of the resources and lastly it involves reliable estimation of obligations . If all these conditions are satisfied, the provisions of liability can be allowed. In para 17 of this judgment, their Lordship of the Apex Court has further put emphasis that to allow the provision for liability, liability should be present obligation arising from past events, the settlement of which is expected from the result of the outflow of the resources and in respect of which the reliable estimate is possible of the amount of obligation. If any of the conditions are not fulfilled, the provisions of liabilities cannot be allowed. 8. In the light of above judgment of the Apex Court, it has become abundantly clear that one has to examine whether all the 4 conditions are fulfilled while allowing the claim of provision of liability. In the assessment order, the AO has prepared a table in which details of provisions made and its utilization and reversal was given. For the sake of reference, we are extracting the table as under: SI. No. Asst. Year ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the light of details available, we find that there was no obligating events which requires the provisions for liability. Moreover, there is no outflow of the resources required to settle the obligation. In the absence of the obligating event and the outflow of resources required to settle the obligations, we are of the view that estimate of provisions made by the assessee is not on scientific basis and also not reliable. It is also important to note that from assessment year 2011-12, assessee stopped creating provision of warranty. Under these circumstances, we are of the view that in the absence of any claim of warranty in earlier year, provisions of warranty was not required at all. Therefore, it cannot be allowed. We accordingly find force in the observations of the AO though he was required to allow the claim on account of directions of DRP. Therefore, we reverse his findings and direct the AO to disallow the claim of provisions of warranty. 10. IT(TP)A No.332/Bang/2015 This appeal is preferred by the assessee through which assessment order passed consequent to the direction of DRP is assailed on the following grounds:- Transfer Pricing 1. The Hon'ble Dispute Re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ternational transactions. The facts in brief borne out from the record are that assessee is a trading company and carries out distribution and marketing of the products of AOS group in India. M/s. AO Smith India Water Heaters India Ltd. (the assessee) is a direct subsidiary of AOS Netherland. The products sold by the company are imported from AOS China which is involved in the manufacture of water heater. The tax payer company imports water heaters from AO Smith China and sells them in India. AO Smith India, according to the TP document, are distributors of AO Smith Water Heaters India. 12. Having noted the international transactions of the assessee with its AE. a reference was made to the TPO and the TPO accordingly issued a notice to the assessee for filing the copies of documents maintained by the taxpayer u/s. 92D of the I.T. Act. A showcause notice was therefore issued to the taxpayer proposing to reject the TP documents of the taxpayer being based on unreliable data as RPM is not the most appropriate method for determining the ALP of the international transactions of the taxpayer in the trading segment. The reasons for rejection of the TP document was discussed by the TPO ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t for expenditure incurred in the current year, the benefit of which will be received in the future year. In the absence of reliable adjustment, the selection of TNMM will not result in arriving at the ALP of the international transaction. In transactions method like RPM or Cost Plus method, the effect of these factors may be eliminated as natural consequences of insisting upon greater product of function similarity. Depending upon the facts and circumstances of the case and particular on the effect of functional differences on the cost structure and the revenue of the potential comparables, the net profit indicators can be less sensitive than the gross margin to the difference in the extent of complexity of function and difference in the level of risk. 15. It was further contended that comparability should not be interpreted in isolation because of the conditions and circumstances of the controlled transactions should be taken into consideration while comparing the net margin. Under the facts and circumstances of the assessee, the net margin comparability is more volatile than the gross margin comparable. In the light of these facts, it was contended that if the cost structure ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ale. If there is no value addition to the finished goods purchased from the AE are sold in the market as it is, then gross profit margin earned on such transactions become a determining factor to analyse the gross compensation after the cost of sales. Accordingly the Tribunal held that the RPM is the most appropriate method. 17. Similarly, in the case of Bose Corpn. (P.) Ltd. (supra), the assessee company was engaged in the business of distribution of sound and audio assistant for individual customers and public places. It was a wholly owned subsidiary of Bose Corporation, USA. During the relevant year, assessee purchased furnished goods from its AE and resold the same in India to unconnected parties. The assessee adopted resale price method (RPM) as most appropriate method (MAM) for determining the ALP of the said international transactions. The profit level indication (PLI) adopted by the assessee was gross profit/sale and the assessee has made itself tested party for the purpose of international transactions. The TPO rejected the transfer pricing study of the assessee and opined that transactional net margin method was to be applied for determining ALP of international transa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ution. In respect of business of distribution, the TPO suggested transfer pricing adjustment by applying the TNMM and rejected the resale price method (RPM) adopted by the assessee because the TPO found that assessee was incurring loss consistently and hence the price police was not at arm's length. The Hon'ble High Court, having examined all aspects have finally concluded that RPM is the most appropriate method. The relevant observation of the Hon'ble High Court is extracted hereunder for the sake of reference: 7. After having perused the relevant part of the order passed by the Commissioner and the Tribunal on this question, we are in agreement with Mr. Pardiwalla that the Tribunal did not commit any error of law apparent on the face of the record nor can the findings can be sold to be perverse. The Tribunal has found that the TPO has passed an order earlier accepting this method. The Tribunal has noted in para 19 of the order under challenge that this method is one of the standard method and the OECD (Organization of Economic Commercial Development) guidelines also state in case of distribution or marketing activities when the goods are purchased from associated ..... X X X X Extracts X X X X X X X X Extracts X X X X
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