TMI Blog2022 (5) TMI 1534X X X X Extracts X X X X X X X X Extracts X X X X ..... uestion as to whether the AMP expenses would fall under the category of international transaction. If it is held to be not an international transaction, then the question of making any transfer pricing adjustment will not arise. After hearing the assessee and examining the facts afresh, the AO/TPO may take appropriate decision in accordance with law. Disallowance of provision for warranty - HELD THAT:- Identical disallowance made by the AO in assessment year 2011-12 has since been allowed by Hon ble High Court of Karnataka [ 2021 (2) TMI 1337 - KARNATAKA HIGH COURT] in the assessee s own case following the decision rendered in the case of Bharat Earth Movers [ 2000 (8) TMI 4 - SUPREME COURT] by holding that no substantial question of law has arisen on this issue. Accordingly, following the decision rendered by the coordinate bench as well as Hon ble jurisdictional High Court, we direct the A.O. to delete the disallowance relating to provision for warranty. Addition of provision for warranty to the net profits under Explanation 1 to sec. 115JB for the purpose of computing book profits, holding the same as contingent liability - HELD THAT:- We hold that there is no re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f to the assessee and accordingly transfer pricing adjustment came to be reduced to Rs.9.79 crores. 3.1 The Ld. A.R. submitted that an identical issue has been examined by the coordinate bench in the assessee s own case in IT(TP)A No.2444/Bang/2019 relating to assessment year 2015-16 and the tribunal, vide its order dated 6.3.2020, restored the matter to the file of the TPO with the direction to apply CUP method as most appropriate method and accordingly determined arm s length price. The Ld A.R submitted that the co-ordinate bench had examined the Most Appropriate Method adopted for earlier years and accordingly gave the above said direction. The Ld. A.R. prayed that this issue may be restored to the file of the AO following the decision rendered by the coordinate bench in assessment year 2015-16. 3.2 We heard Ld. D.R. and perused the record. We notice that an identical issue has been considered by the coordinate bench in the assessee s own case in assessment year 2015-16. The Tribunal noticed that the CUP method has been accepted in the earlier years and accordingly directed the TPO to adopt CUP method as most appropriate method. The decision rendered by the coordinate benc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... boost its market share and the same was not incurred at the instance of overseas A.E. He further submitted that there was no mutual agreement or understanding or arrangement with the A.E. towards reimbursement of expenses incurred by the assessee for AMP. Accordingly, by placing reliance on the decision rendered by Hon ble Delhi High Court in the case of Maruti Suzuki Ltd. (ITA No.110/2014 ITA 710/2015), the Ld. A.R. submitted that the AMP expenses will not fall under the purview of international transaction as defined u/s 92 of the Act and hence, the transfer pricing adjustment made by the AO is liable to be deleted. 4.2 We heard Ld. D.R. on this issue. According to the Ld. A.R., the decision rendered by Hon ble Delhi High Court in the case of Maruti Suzuki Ltd. squarely applies to the facts of the present case. We also notice that the coordinate bench in the assessee s own case for A.Y. 2015-16 has restored an identical issue to the file of the A.O. with the following observations:- 17. We have considered his submission and are of the view that it would be just and appropriate to set aside the issue of determination of net margin of the assessee and in the trading segmen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... opriate decision in accordance with law. 5. Ground No.4 consisting of 4.1 to 4.6 relate to disallowance of provision for warranty. During the year under consideration, the assessee had provided for provision for warranty to the tune of Rs.103.75 crores and claimed the same as deduction. The A.O. took the view that the provision for warranty is a contingent liability. Accordingly, he held that the same is not allowable as deduction. However, the A.O. allowed actual expenditure incurred during the year on meeting the warranty claims, which was Rs.100.25 crores. Accordingly, the AO made net disallowance of Rs.3,49,28,600/-. 5.1 The Ld. A.R. submitted that this is a recurring issue and the Tribunal in A.Y. 2015-16 allowed the claim of the assessee, following the decision rendered in assessment year 2006-07. He submitted that an identical issue was decided in the assessee s own case in favour of the assessee in assessment year 2011-12 by the Hon ble High Court of Karnataka in ITA No.289 of 2017 dated 6.2.2021. 5.2 We heard Ld. D.R. on this issue and perused the record. We notice that the Tribunal, in assessment year 2015-16 (supra), has decided this issue in favour of the ass ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... provision for warranty is not contingent liability and accordingly allowed the deduction for computing total income under normal provisions of the Act. We also notice that the coordinate bench has also adjudicated this issue u/s 115JB in assessment year 2015-16 expressing the view that the provision for warranty need not be added to the net profit u/s 115JB, since it is not a contingent liability. The relevant observations made by the coordinate bench in AY 2015-16 are extracted below:- 35. As far Gr.No. VII raised by the assessee is concerned, the same relates to addition made to the book profits u/s 115JB of the Act on account of provision for warranty liability treating the same to be a liability of a contingent nature and hence liable to be added to the profit as per profit and loss account prepared in accordance with companies act to arrive at the book profit of the Assessee for the purpose of levy of tax on book profit under sec. 115JB of the Act. We have already held that the provision for warranty expenses is not contingent and has to be allowed as deduction while computing income under the head Income from Business Profession . As a consequence of such finding, the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ovision. Sub-section (2) of Section 115 JB requires every company for the purposes of the said section to prepare its profit and loss account in accordance with the provisions of paras 2 and 3 of Schedule 6 of the Companies Act. Explanation 1 to said section provides that for the purposes of the said section, book profit means the net profit as shown in the profit and loss account for the relevant previous year prepared under subsection (2), as increased by various items specified in Clauses (a) to (0 provided therein. Clause (c) thereof reads as thus: \ (c) The amount or amounts set aside to provisions made for meeting liabilities, other than ascertained ' In other words, if an amount is specified for provision which is for meeting with the liabilities not ascertained such provision so made shall have to be added back to the book profit of the company. Put it differently, if such provision is made for ascertained liability, no such addition back shall be made. In this context, the Tribunal was called upon to decide whether the assessee having made provision of Rs. 5,10,000/- towards gratuity would be covered under Clause (c) to Explanation 1 to Section 115.18 of the A ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 2 (SC), the Supreme Court' in the context of an assessee making provision for estimated expenditure towards warranty observed that provision is a liability which can be measured only by using substantial degree of estimation. Such provision is recognized when an assessee had a present obligation as a result of past events, and it is possible that any outflow of resources will be required to settle the obligation and further a reliable estimate can be made of the amount of obligation. 21. Considering the above judicial pronouncements and the facts on hand, we have no hesitation in upholding the Tribunal's view that though actual payment of gratuity may be made at a later point of time upon periodical release of the employees from service, it is provision having been made on actuarial basis it cannot be stated to be an uncertained liability so as to add it back in terms of Clause (c) to Explanation 1 to Section 115JB. Respectfully following the above decision, we hold that provision for leave encashment need not be added back to book profits for the purpose of determining tax liability u/s 115JB of the Act. 7.1 Following the above said decision, we hold that the p ..... 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