TMI Blog2022 (12) TMI 626X X X X Extracts X X X X X X X X Extracts X X X X ..... t source, bank statement, etc., to substantiate that the expenditure towards advertisement expenditure is actually incurred and that the payments are made to the vendor, Mudhranna Creations. The fact that the vendor has wound up the operations is supported by the report from MCA website and that can be inferred as a reason for non-response from the vendor for the notice under section 133(6) which cannot be the only reason for disallowance, when other documents submitted by the assessee evidences the genuineness of the expenditure. We are, therefore, of the considered view that no disallowance is warranted for the advertisement expenditure incurred by the assessee, which is otherwise substantiated based on the various details submitted. This issue is allowed in favour of the assessee. - IT(TP)A No.35/Bang/2019 - - - Dated:- 13-6-2022 - SHRI. GEORGE GEORGE K, JUDICIAL MEMBER AND MS. PADMAVATHY S, ACCOUNTANT MEMBER Assessee by : Shri Padamchand Khincha, CA Revenue by : Dr. Manjunath Karkihalli, CIT(DR)(ITAT), Bengaluru. ORDER Per Padmavathy S, Accountant Member This appeal is against the final Assessment Order passed by the Income Tax Officer, Ward 4(1)( ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e final Assessment Order giving effect to DRP directions. 4. The assessee raised several grounds and the issue wise summary of the same is as given below: (i) Ground 1 - General (ii) Grounds 2 to 10 - TP adjustment relating to manufacturing segment. Out of this, the learned AR during the course of hearing submitted that if the main grounds are allowed in favour of the assessee, alternate grounds need not be adjudicated. (iii) Grounds 11 to 33 - TP adjustment on account of Advertising, Marketing Promotion [AMP] expenses. (iv) Grounds 34 to 36 - Other TP related grounds. The learned AR submitted that these grounds are general and would get subsumed with the main grounds relating to TP adjustment. Hence, these grounds do not warrant separate adjudication. Hence, these grounds are dismissed accordingly. (v) Ground Nos.37 to 42 - Disallowance of provision for warranty. (vi) Grounds 43 to 45 - Addition of provision for warranty to book profits. (vii) Ground Nos.46 to 50 - Disallowance of advertisement and business promotion expenditure. (viii) Other ground regarding initiation of section 271(1)(c) of the Act. TP adjustment relatin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 5. The financials of the manufacturing segment as computed by the assessee is as under:- FINANCIALS OF THE SEGMENT Particulars Mar-14 12 months Income Sales and Services (Gross) 9,60,62,07,525 Less: Excise duty (95,11,76,798) Sales and Services (Net) 8,65,50,30,727 Less: non- operating income Total operating income 8,65,50,30,727 Expenditure Cost of Materials and components consumed 8,89,91,56,566 Increase/(decrease) in Inventory (32,26,84,823) Employee benefit expense 2,86,65,362 Operating and Other Expenses 39,13,08,152 Depreciation 62,48,357 Interest 7,41,66,801 Less: non- opera ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... for TP adjustment. The revised average of OP/OC of comparables came to 3.51% and hence the AO in the final order revised the TP adjustment towards manufacturing segment to Rs.10,88,68,102.. 8. The assessee is in appeal before the Tribunal against the final order of the AO. The learned AR made the following submissions:- The assessee imported components both from AEs as well as unrelated vendors. These components have a unique identity and bear serial numbers of codes by which they are identified. The assessee has documented he comparability analysis in respect of the comparison of the prices for all the components that have been imported from its AEs. 9. The learned AR also brought to our attention that the Co-ordinate Bench of ITAT in assessee s own case for AYs 2006-07 to 2010-11, 2012- 13 to 2013-14 and 2015-16 has upheld CUP method as MAM. 10. We have heard the rival submissions and perused the material on record. The Co-ordinate Bench of the Tribunal in assessee s own case for AY 2015-16 in IT(TP)A No.2444/Bang/2019 by order dated 6.3.2020 has considered the issue in detail and held as under:- 9. Aggrieved by the order of the DRP, the Ass ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... transaction and making the consequent TP adjustment. The assessee raised grounds contending treatment of AMP expenditure as a separate international transaction 11 to 21 and also on merits Ground 22 to 33. 13. We will first take up the issue of treatment of AMP expenditure as international transaction. The TPO noticed that for the year under consideration, the assessee has incurred substantial amount towards AMP expenditure in comparison to the earlier years. These expenses are incurred by the assessee towards campaigning, depicting features of new products, providing information to the public about the details of product, specifications, etc. The aforesaid expenses, according to the assessee, are entirely attributable to products sold in India and not towards any brand promotion of foreign AE. The TPO was of the view that in the trading segment, the activities are not confined to trading alone, but includes advertisement, marketing and sales promotion which are value addition functions for which the assessee is not adequately compensated. He adopted Resale Price Method (RPM) as the most appropriate method. The TPO chose 7 unrelated comparables and calculated the AMP as a % of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... aring the profits and loss account of the tested party with the comparable. The TNM Method proceeds on the assumption that functions, assets and risk being broadly similar and once suitable adjustments have been made, all things get taken into account and stand reconciled when computing the net profit margin. Once the comparables pass the functional analysis test and adjustments have been made, then the profit margin as declared when matches with the comparables would result in affirmation of the transfer price as the arm's length price. Then to make a comparison of a horizontal item without segregation would be impermissible. 15. The Hon ble High Court also held that, where the learned AO/TPO accepts comparables as a bundled transaction, AMP expenditure cannot be treated as a separate international transaction. The relevant extract of the ruling is as follows:- (v) Where the Assessing Officer/TPO accepts the comparables adopted by the assessed, with or without making adjustments, as a bundled transaction, it would be illogical and improper to treat AMP expenses as a separate international transaction, for the simple reason that if the functions performed by the tes ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e ALP of trading segment. Given this, we respectfully follow the decision of the Co-ordinate Bench in assessee s own case for AY 2015-16 and remit the issue to the TPO for consideration of ALP of the trading segment applying the net profit margin method, and if as a result, the price received is found to be at arm s length, no separate addition needs to be made. The assessee may be given a reasonable opportunity of being heard. In view of this conclusion, we are of the considered view that grounds (22) to (33) does not warrant adjudication at this stage. Further ground (34) to (36) are general and subsumed in the main TP grounds, hence, dismissed as not pressed. Disallowance of provision for warranty (Ground V (37) to (42). 20. During the year the assessee has debited the P L account with an amount of Rs.1,97,19,70,205 under the head warranty expenses . The warranty utilized during the period is Rs.1,90,52,83,337. The provision for warranty is created as the assessee provides warranty period of one to four years against the manufacturing or other defects as per the terms of contract with the customers. The movement in the provision for warranty account is as under:- ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 1,49,28,474 2008-09 51,49,28,474 108,79,40,662 103,94,28,778 56,34,40,358 2009-10 56,34,40,358 97,20,25,066 68,32,51,088 85,22,14,336 2010-11 85,22,14,336 147,74,52,660 101,70,66,189 131,26,00,80 2011-12 131,26,00,80 103,75,04,656 100,25,76,056 134,75,29,40 2012-13 134,75,29,40 148,76,96,121 135,36,26,321 148,15,99,20 2013-14 148,15,99,20 197,19,70,205 190,52,83,337 154,82,86,07 22. The AO did not accept the contention of the assessee and analysed the provision and utilization of warranty and concluded that the assessee has been using only 55% of the total provision. The AO noticed the mismatch between the actual exp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing 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: Provision For warranty account FY 2005-06 Particulars Debits (Rs.) Particulars Credits (Rs.) Opening balance Warranty provisions during the year 349,449,249 Warranty Utilisation Closing balance of provision required based on machine months under warranty 76,652,762 272,796,487 Total 349,449,249 Total 349,449,249 FY 2006-07 Particulars Debits ( ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the year Utilized/Reversed during the year Closing balance Ratio of CY provision with next year utilisation 2005-06 - 34,94,49,249 7,66,52,762 27,27,96,487 86.77 2006-07 27,27,96,487 55,18,39,359 40,27,12,947 42,19,22,899 106.29 2007-08 42,19,22,899 61,21,80,442 51,91,74,867 51,49,28,474 58.90 2008-09 51,49,28,474 108,79,40,662 103,94,28,778 56,34,40,358 159.23 2009-10 56,34,40,358 97,20,25,066 68,32,51,088 85,22,14,336 95.57 2010-11 85,22,14,336 147,74,52,660 101,70,66,189 1 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rovision made for the very same year, cannot be sustained because the basis of providing warranty is Machine months x repair rate x cost per claim. The tribunal has already pointed out the flaw in the approach of the revenue authorities in its order for AY 2006-07 that the basis should be the actual expenditure incurred on discharge of warranty claims in future which is much more than the provision made in an earlier year. The warranty obligation is not just for one year and it spreads over a period of more than 1 year and therefore the comparison as done by the revenue authorities is unsustainable. The method followed by the Assessee for creating provision for warranty has been held to be scientific and based on historical data of sales and repair ratio in every region in which the products are sold. The method has been accepted by the Tribunal in its order for several AYs. The method followed has not been shown to be not scientific by the revenue authorities. In such circumstances, we are of the view that the method followed by the Assessee should be accepted as proper and the deduction allowed as per the provision created by the Assessee. We hold and direct accordingly. 24 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a scientific basis. 29. The learned DR submitted the report from MCA to substantiate that the company Mudhrana Creations is struck off from the register of Registrar of Companies and supported the decision of the lower authorities. 30. We heard the rival submissions and perused the material on record. For the purpose of an expenditure to be claimed under section 37(1), the expenses should not be capital in nature and should have been incurred wholly and exclusively for the purpose of business. The assessee has submitted various details, including the details of tax deducted at source, bank statement, etc., to substantiate that the expenditure towards advertisement expenditure is actually incurred and that the payments are made to the vendor, Mudhranna Creations. The fact that the vendor has wound up the operations is supported by the report from MCA website and that can be inferred as a reason for non-response from the vendor for the notice under section 133(6) of the Act, which cannot be the only reason for disallowance, when other documents submitted by the assessee evidences the genuineness of the expenditure. We are, therefore, of the considered view that no disallowance ..... X X X X Extracts X X X X X X X X Extracts X X X X
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