Income Tax Appellate Tribunal - Delhi
Magneti Marelli Powertrain India Pvt. ... vs Addl. Cit, New Delhi on 31 January, 2018
IN THE INCOME TAX APPELLATE TRIBUNAL
DELHI BENCH "I-1", NEW DELHI
BEFORE SHRI R. K. PANDA, ACCOUNTANT MEMBER
AND
SHRI SUDHANSHU SRIVASTAVA, JUDICIAL MEMBER
ITA No.1599/Del/2017
Assessment Year : 2012-13
Magneti Marelli Powertrain India Pvt. Addl.CIT, Special Range-6,
Ltd., New Delhi.
Plot No.1, Subplot No.25 & 32, Vs.
Maruti Suppliers Park Sector- 3A,
IMT Manesar, Gurgaon.
PAN : AAFCM3204N
(Appellant) (Respondent)
ITA No.7038/Del/2017
Assessment Year : 2013-14
Magneti Marelli Powertrain India Pvt. Addl.CIT, Special Range-6,
Ltd., New Delhi.
Plot No.1, Subplot No.25 & 32, Vs.
Maruti Suppliers Park Sector- 3A,
IMT Manesar, Gurgaon.
PAN : AAFCM3204N
(Appellant) (Respondent)
Appellant by : Shri Ajay Vohra, Sr. Adv.
Shri Neeraj Jain, Adv.
Shri Sahil Sharma, CA
Respondent by : Shri Sanjay I. Bara, CIT-DR
Date of hearing : 21-12-2017
Date of pronouncement : 31-01-2018
ORDER
PER R. K. PANDA, AM :
The above two appeals filed by the assessee are directed against the separate orders of the Assessing Officer passed u/s 143(3) r.w.s. 144C for 2 ITA No.1599/Del/2017 ITA No.7038/Del/2017 assessment years 2012-13 and 2013-14 respectively. For the sake of convenience, both the appeals were heard together and are being disposed of by this common order.
ITA No.1599/Del/2017 (A.Y. 2012-13) :
2. Facts of the case, in brief, are that the assessee is a Joint Venture (JV) company between Magneti Marelli Powertrain S.P.A., Italy (MM Italy) holding 51%, Suzuki Motor Corporation, Japan (SMC) holding 30% and Maruti Suzuki India Limited (MSIL) holding 19% of the equity stake. The Joint Venture was incorporated in India in the year 2007. The assessee is engaged in the business of manufacturing and selling Engine Control Units (ECUs) in India. It filed its return of income on 23.11.2012 declaring total income 69,07,87,080/-. The Assessing Officer referred the matter to the TPO for determination of the arm's length price of the international transactions entered into by the assessee with its AEs.
2.1 The TPO during the TP assessment proceedings observed that the assessee during the impugned assessment year has undertaken the following international transactions :-
S.No. Head Value
1 Purchase of Raw Materials 384,866,702
2 Sale of Goods 38,126,025
3 Payment of Royalty 61,908,166
4 Payment of Technical Know-how fee 403,899,999
5 Re-imbursement of Legal and Professional Expenses 21,183,190
Total 90,99,84,082
3
ITA No.1599/Del/2017
ITA No.7038/Del/2017
3. For determination of the arm's length price of the above international transactions with its AE, the assessee considered TNMM as the most appropriate method for its activity pertaining to manufacture of ECUs. The TPO analyzed the various clauses of the Joint Venture agreement and the TP approach adopted by the assessee. After considering the various arguments advanced by the assessee, the TPO rejected the TNMM adopted by the assessee comparing the margin at entity levels. He, on the other hand, applied CUP method as the most appropriate method for determination of the arm's length price of the payment of technical assistance and accordingly made an upward adjustment at Rs.40,38,99,999/-. The assessee approached the DRP but was not successful. Accordingly, the Assessing Officer in the final order made addition of the same.
4. Aggrieved with such order of the Assessing Officer/TPO/DRP, the assessee is in appeal before the Tribunal by raising the following grounds :-
"1. That on the facts and in the circumstances of the case and in law, the Learned Dispute Resolution Panel ("DRP")/ Learned Assessing Officer ("AO")/ Learned Transfer Pricing Officer ("TPO") erred in re-computing the arm's length price of the international transactions under Section 92 of the Income-tax Act, 1961 ("the Act") of payment of lump sum technical fees to be Rs. Nil, resulting in making an addition of Rs. 17,32,06,899/- to the returned income of the Appellant and the orders are bad in law and void ab-initio.
2. DRP/AO/TPO erred in questioning the commercial wisdom of the Appellant in entering into international transaction of payment of lump sum technical fees to its Associated Enterprise ("AE").
3. Payment of lump sum technical fees:
a. The DRP has erred in not passing a speaking order against the objections raised by the Appellant and has refrained from interfering with the action of AO/TPO by merely stating that the matter is similar to the issues pertaining to Assessment Year ("AY") 2009-10 where the matter was set aside by Hon'ble Tribunal to the TPO for 4 ITA No.1599/Del/2017 ITA No.7038/Del/2017 fresh adjudication.
b. The AO / TPO / DRP has erred in determining the value of international transaction pertaining to payment of technical fees of Rs. 403,899,999 by the Appellant to its AE as NIL by:
i. Disregarding the arm's length and independent nature of negotiations between the Joint Venture ("JV") Partners which are also listed in the JV agreement & the uncontrolled nature of underlying transaction between JV Company and JV partners.
ii. Rejecting the Appellant's contention that the payment of technical know-how fee is a composite transaction which is closely linked with other international transactions and hence should be benchmarked by application of Transactional Net Margin Method ("TNMM") under the aggregation approach as adopted by the Appellant as per provisions of Rule 1OC of the Income-tax Rules, 1962 ("the Rules") without providing any basis/ reasons for the same. iii. Not providing any search, name of the tangible comparable companies adopted, etc. to determine the arm's length price as Nil under the Comparable Uncontrolled Price ("CUP") method and ignoring the fact that the availability of the comparable data is the basic principle of the adoption of CUP methodology for determination of arm's length price.
iv. Not following the binding decision of the jurisdictional Delhi High Court dated 25 October 2016, in the Appellant's own case for the A Y 2009-10, wherein the Delhi High Court has, in identical circumstances, directed the TPO to consider TNMM for determining the arm's length price of the lump sum technical fees paid to the AE.
4. Disallowance of depreciation on lump sum technical fees The AO/ TPO erred in disallowing the depreciation on the lump sum technical fee by determining ALP of lump sum technical fee as nil. The AO ought to have allowed the full depreciation claimed by the appellant on lump sum technical fees.
5. Enhancement of disallowance of depreciation on lump sum technical fees:
Without prejudice to ground no 4, the AO has erred in disallowing depreciation on lump sum technical fees, amounting to Rs. 17,32,06,899 by enhancing the disallowance of depreciation in the final assessment order as compared to the disallowance of depreciation proposed of Rs 6,79,83,765 in the draft assessment order.
6. The AO failed to appreciate the fact that DRP while upholding the disallowance made by the AO in the draft assessment order, had not directed the AO to enhance the disallowance made in the draft assessment order. The AO ought to have considered only Rs 6,79,83,765 towards depreciation on lump sum technical fees for the purpose of disallowance.
7. Disallowance of depreciation on lump sum technical fees on the basis of the amount appearing in the financial statements:
Without prejudice to the ground no 4 to 6, for the purpose of disallowance, the AO erred in computing depreciation on the basis of the amount appearing in the financial statements of the appellant for the financial year ended 31 March 2012 as against the tax written down ('WDV') value as per provisions of section 43(6) of the Act.
8. The AO erred in not considering submissions made by appellant vide letter dated 27 January 2017.5 ITA No.1599/Del/2017 ITA No.7038/Del/2017
9. The AO erred in levying interest of Rs. 3,33,17,920 under section 234B of the Act. The appellant denies the liability under section 234B of the Act.
10. The AO erred in initiating penalty proceedings under section 271(1)(c) of the Act in respect of furnishing of inaccurate particulars.
11. The Appellant craves leave to add, amend, alter, delete, rescind, forgo or withdraw any of the above grounds of objection either before or during the course of proceedings in the interest of the natural justice.
That the above grounds are independent and without prejudice to each other."
5. Grounds no.1, 2 and 11 being general in nature are dismissed.
6. So far as grounds of appeal no.3 to 8 are concerned, the ld. counsel for the assessee at the outset submitted that identical issue had come up before the Tribunal in assessee's own case in the immediately preceding assessment year and the Tribunal vide ITA No.801/Del/2016 order dated 12.07.2017 for the assessment year 2011-12 has discussed the issue and restored the issue to the file of the Assessing Officer/TPO. Therefore, he has no objection if the issue is restored to the file of the Assessing Officer/TPO with similar directions. Ld. DR has no objection for the same. We find the Tribunal in assessee's own case in the preceding assessment year vide ITA No.801/Del/2016 order dated 12.07.2007 has restored the issue to the file of the Assessing Officer/TPO by observing as under :-
"7. After hearing both sides, we find identical issue had come up before the Tribunal in assessee's own case in the immediately preceding AY 2009-10. We find the Tribunal in ITA No.6728/Del/2013 order dated 10.03.2014 has set aside the issue to the file of the AO/TPO with certain direction for fresh determination of the ALP of the international transaction. The relevant observation of the Tribunal from para 5 onwards reads as under:-
5. "We have heard the rival submissions and perused the relevant material on record. At the outset, we note that the recording by the TPO that the assessee made payment of Rs. 38.58 crore in the year in question for which deduction 6 ITA No.1599/Del/2017 ITA No.7038/Del/2017 was claimed, is not correct. It has been demonstrated by the ld. AR that the amount so paid was capitalized and the assessee claimed allowance for depreciation on such capitalized amount to the tune of Rs. 6 crore and odd. Be that as it may, the simple fact that the assessee capitalized the amount in the year and claimed depreciation on it, will not take the transaction outside the ambit of `international transaction'. It is an undisputed fact that the assessee incurred liability for the said amount and did acquire technical assistance in the financial year relevant to the assessment year under consideration in respect of ECUs to be manufactured distinctly for Suzuki Swift car application; MS Swift application ; Tata Indica car application; and Fiat India Palio-Linea car application. Hence, the character of international transaction is intact. Even, this aspect has not been disputed on behalf of the assessee either before us or the authorities below.
6. It is seen that the assessee clubbed transactions of import of raw material, sub-assembles and components, payment of technical assistance fees, payment of royalty, payment of software and purchase of fixed assets under one segment of 'Manufacturing of the automotive components' and analyzed all such transactions on a combined basis. This type of combined benchmarking of all the international transactions is not in accordance with law. The mere fact that the overall profit earned by the assessee is more, would not ipso facto lead to the interference then all the international transactions are at ALP. The Special Bench of the Tribunal in the case of LG Electronics India Pvt. Ltd. Vs ACIT 2013 140 ITD 41 (Delhi) (SB) has held to this extent. Thus, the approach so adopted by the assessee in combining so many international transaction for determining ALP on a consolidated basis, is incorrect.
7. The next major flaw in the assessee's calculation is that it took into consideration the 'Projected operating profit margin' to show that its international transaction for the current year was at ALP. The requirement under the relevant provisions of the Act along with the rules is to consider the `actual' figures and not any `projected' figures. It is beyond our comprehension as to how the projected figures can be substituted for the actuals when the requirement is to benchmark actual international transactions at ALP. We, therefore, do not approve the methodology adopted by the assessee in this regard.
8. It is further seen that the assessee showed mean operating margin of certain comparables at 6.65% on the basis of past three years data. We do not approve this kind of approach adopted by the assessee for the obvious reason that Rule 10B(4) provides that the data to be used in analyzing the comparability of an uncontrolled transaction with an international transaction shall be the data relating to the financial year in which the international transaction has been entered into. Proviso of this rule for use of multiple year data is only an exception and not a rule, which can be invoked if the data for the current year does not result into the determination of correct prices.
Nothing of the sort has been shown as to why the data of the comparables for 7 ITA No.1599/Del/2017 ITA No.7038/Del/2017 the current year was not appropriate. We, therefore, reject this point of view canvassed by the assessee in making comparability.
9. We further observe that the approach adopted by the TPO is also not correct. He rejected TNMM as applied by the assessee by holding that CUP method was applicable. However, he computed the ALP of such transaction under CUP as Nil. There is no dispute on the fact that the assessee did receive technical information in respect of ECUs to be manufactured by it for four different models of cars pertaining to Maruti, Fiat and Tata. When technical information was admittedly obtained, it could not be said that the assessee ought not to have paid any consideration for that to its A.E. The TPO seems to have gone wrong by considering that the foreign A.E contributed capital to the tune of Rs. 20 crores and odd and took away a sum of Rs. 38 crores and odd in the shape of fees for technical services. This type of comparison made by the TPO for determining that the ALP of the international transaction of payment of technical fee at Nil, has no legal legs to stand on. When he resorted to the application of CUP method, it was incumbent upon him to ask the assessee for the submission of details of some comparable uncontrolled transactions. There is no reference to the asking or supplying of any such information by the assessee in the first instance, or the TPO thereafter venturing to find out such comparables at his own. What is required under the CUP method is to compare the price paid with certain uncontrolled comparable transaction to analyze if the price paid in an international transaction is at ALP. Nothing of the sort has been done by the TPO to make comparison of any comparable case with that of the assessee. He simply proceeded to adopt nil value of as ALP of the international transaction of payment of technical fee and proposed addition for the full amount. In our considered opinion, when the assessee did receive technical information and earned income by using the same, it cannot be said that it has ALP at nil. Some sort of comparison is inevitable under this method, unless it is shown that the assessee did not get any advantage at all by making payment to its AE.
10. Thus it is seen that neither the assessee followed correct methodology for determination of ALP of this international transaction, nor the TPO/DRP applied the CUP method for determination of ALP in correct perspective. In such a situation, the order passed by the A.O making addition proposed by the TPO, cannot be upheld. In our considered opinion, the ends of justice would meet adequately if the impugned order on this issue is set aside and the matter is restored to the file of AO/TPO for a fresh determination of ALP of this international transaction. We order accordingly. The ld. AR has agreed to assist the TPO in providing data of certain comparable cases which could assist in the determination of ALP. In such fresh proceedings, the TPO will ascertain as to which method can be correctly applied and then decide the question before him. Needless to say, a reasonable opportunity of being heard will be given to the assessee."
8. We find when the assessee challenged the order of the Tribunal before the Hon'ble High Court, the following questions of law were framed: 8 ITA No.1599/Del/2017 ITA No.7038/Del/2017
1. "Whether the Income Tax Appellate Tribunal was right in holding that royalty and technical assistance fee did not form part of a composite transaction and have to be treated as two separate transactions for the purpose of benchmarking and computing arms length price?
2. Whether the Income Tax Appellate Tribunal was right in holding that Transactional Net Margin Method should not be applied for benchmarking/computing arm's length price in respect of transaction relating to "technical assistance fee"."
9. So far as Question No.1 is concerned, the Hon'ble High Court decided the issue against the assessee; so far as Question No.2 is concerned, the Hon'ble High Court answered the issue in favour of the assessee holding that "TNMM had to be applied by the TPO/AO in respect of the technical fee payment too." The relevant observation of the Hon'ble High Court from para 14 onwards read as under:-
14. "The assessee/appellant during 2008-09 entered into four License & Technology Assistance Agreements (LTAAs) with its overseas AE for four products for obtaining ECU technology. In return for the technical knowhow, the assessee agreed to compensate the AE through a fee amounting to US $ 2 million for each LTAA (total US $ 8 million equivalent to over Rs.38 crores) on installment basis. It explained that the overseas AE provides crucial and pivotal support to the assessee in carrying out its business in India by providing access to patented products and technology developed by it. The assessee argued that without receiving such technology/technical know-how/ information/assistance from the overseas AE, the assessee would not be able to conduct/carry out manufacturing and sales of ECUs in India at all. The assessee strengthened this contention by saying that it earned revenue of Rs.42.23 crores from the sale of ECUs using the above mentioned technical know-how as a result of payment of Rs.38.59 crores during FY 2008-09.
Further, the assessee also earned aggregate revenue of Rs.174.89 crores during a period of 3 consecutive years (i.e. FY 2008-09, FY 2009-10 and FY 2010-11) against a total payment of US $ 8,000,000, equivalent to Rs.38.59 crores paid in FY 2008-09. During the transfer price proceedings, the assessee was unable to substantiate the need for payment of technical assistance fees to its foreign AE. The TPO has observed that the assessee tried to establish its case for the arm's length nature of the transaction by stating that it gained in the form of higher sales. The TPO observed that neither any cost benefit analysis nor any benchmarking exercise was undertaken at the time of entering into the agreement. The TPO‟s rejection of the TNMM method at entity level was undoubtedly not correct. That, however, would not conclude the issue.
15. The assessee‟s argument that the technology itself would not have been given to it, but for the substantial fee (paid over and above the royalty payable), in the opinion of this court, requires a closer scrutiny. The initial burden is always upon the assessee to prove that the international transaction was at Arm‟s Length. Its TP report necessarily had to draw a comparison with other entities (maybe competitors) to show the general degree of 9 ITA No.1599/Del/2017 ITA No.7038/Del/2017 profitability of the venture in question. The lower authorities quite correctly turned down the method of explaining the justification of the technical fee with "proof" of its necessity by relying on profits. Undoubtedly the assessee was obliged to make the payment and that obligation arose from the agreements, a pre-incorporation binding contract. However, that such contractual obligation existed cannot ipso facto be the end of the enquiry. ALP determination in respect of every payment that is part of an international transaction is to be conducted irrespective of such obligation undertaken by the parties. If the transactions are, in the opinion of the TPO, not at arm's length, the required adjustment has to be made, as provided in the Act, irrespective of the fact that the expenditure is allowable under other provisions of the Act. There can conceivably be various reasons not to subject such payments, such as for instance, if no similar data exists at all; or that sectional data for such payments is absent. Quite possibly, this may also be a general pattern of expenditure which AEs may insist to part with technology; further, similarly, other models of payment- deferred or lump sum, along with royalty or inclusive of it, may be discerned in comparable transactions. However, to say that such a substantial amount had to necessarily be paid and that it was a commercial decision, dictated by need for the technology, in the light of a specific query, it could not be said by the assessee that later profits justified it, or that has essentiality precluded the scrutiny.
16. In the light of the above discussion, this court holds that the explanation by the assessee that the payment of Rs.38.58 crores in the circumstances was correctly not accepted. The first question is answered against the assessee. The remit directed by the impugned order is, therefore, upheld.
17. As far as the second question is concerned, the TPO accepted TNMM applied by the assessee, as the most appropriate method in respect of all the international transactions including payment of royalty. The TPO, however, disputed application of TNMM as the most appropriate method for the payment of technical assistance fee of Rs.38,58,80,000 only for which Comparable Uncontrolled Price ("CUP") method was sought to be applied. Here, this court concurs with the assessee that having accepted the TNMM as the most appropriate, it was not open to the TPO to subject only one element, i.e payment of technical assistance fee, to an entirely different (CUP) method. The adoption of a method as the most appropriate one assures the applicability of one standard or criteria to judge an international transaction by. Each method is a package in itself, as it were, containing the necessary elements that are to be used as filters to judge the soundness of the international transaction in an ALP fixing exercise. If this were to be disturbed, the end result would be distorted and within one ALP determination for a year, two or even five methods can be adopted. This would spell chaos and be detrimental to the interests of both the assessee and the revenue. The second question is, therefore, answered in favour of the assessee; the TNMM had to be applied by the TPO/AO in respect of the technical fee payment too. 10 ITA No.1599/Del/2017 ITA No.7038/Del/2017
18. In view of the above conclusions, the appeal has to fail; subject to the findings and observations regarding applicability of TNMM, it is dismissed."
10. Respectfully following the order of the Hon'ble High Court in assessee's own case, we restore the issue to the file to the AO with the direction to follow the order of the Hon'ble High Court and apply the TNMM in respect of the technical fee payment for determining the ALP. The Ground raised by the assessee is accordingly allowed for statistical purposes.
11. So far as Ground No.5 is concerned, Ld. Counsel for the assessee referred to the findings of the DRP on this issue which read as under:-
10. Finding "DRP has duly examined the issue, TPO has rightly applied CUP as MAM rejecting approach of the assessee to benchmark all transactions on aggregated basis following TNMM. Hon'ble ITAT in assessee's own case for AY 2009-10 has also held that combined benchmarking of all the international transactions is not in accordance with law. TPO has rightly determined ALP of said international transaction at NIL by observing that independent enterprises shall not enter into such transaction when Euro 5 technology is not on horizon in India and this technology is relevant for European countries whereas assessee is barred from selling its products abroad. However, entire R&D cost has been capitalized by the assessee and no depreciation on it has been claimed by the assessee in its P&L a/c nor any claim of deduction has been made by the assessee in its computation of income. Hence, no adjustment to income is called for and entire adjustment shall be balance sheet item only. The objection is accordingly disposed off."
12. He submitted that since no adjustment has been made during the year, therefore, this issue is academic for the time being. However, the assessee reserves its right for the future.
13. After hearing both sides, we find merit in the above submission of the Ld. counsel for the assessee. It is an admitted fact that no adjustment to income on account of R & D has been made, therefore, the issue has become academic in nature for the time being. The assessee may raise this issue in future. The Ground raised by the assessee is disposed of in the above terms.
7. Respectfully following the decision of the Tribunal in assessee's own case in the preceding year, we restore the issue to the file of the Assessing Officer/TPO for applying the TNMM in respect of technical fee payment for determination the arm's length price. The grounds no.3 to 8 are accordingly allowed for statistical purposes.
11ITA No.1599/Del/2017 ITA No.7038/Del/2017
8. So far as ground no.9 is concerned, the same relates to levy of interest u/s 234B, which in our opinion is mandatory and consequential in nature. Accordingly, the said ground is dismissed.
9. Ground no.10 relates to initiation of penalty proceedings u/s 271(1)(c) being premature on this juncture is dismissed.
ITA No.7038/Del/2017 (A.Y. 2013-14) :
10. The grounds raised by the assessee are as under :-
"1. That the assessing officer erred on facts and in law in completing assessment under section 144C/143(3) of the Income-tax Act, 1961 ('the Act') at an income of Rs. 115,62,01,030/- as against the income of Rs.112,20,39,550 returned by the appellant.
2. That the assessing officer (AO) erred on facts and in law in making addition of Rs. 10,26,00,000 on account of the alleged difference in the arm's length price of the international transaction of payment of Technical Know How Fees on the basis of the order passed under section 92CA(3) of the Act by the TPO. 2.1 That the Ld. Dispute Resolution Panel (DRP)/ Transfer Pricing Officer (TPO) erred on facts and in law in allegedly holding that the arm's length pricing of the international transaction of payment of technical know-how fees at Nil by observing that independent enterprises shall not enter into such transaction. 2.2 That the Ld. DRP/ AO/ TPO erred on facts and in law in arbitrarily applying the CUP method for benchmarking the international transactions of payment of technical know-how fees without bringing on record any comparable as per Rule 108(1 )(a) of the Income Tax Rules, 1962 ("the Rules").
2.3 That the Ld. DRP/ AO / TPO erred on facts and in law in rejecting Transactional Net Margin Method (TNMM') as the most appropriate method for benchmarking the international transaction of payment of technical know-how fees. 2.4 That the Ld. DRP/ AO/ TPO erred on facts and in law in holding that benchmarking analysis undertaken by the appellant in respect of the international transactions of payment of technical know how fee by aggregating with other transactions and applying TNMM was incorrect and each such transaction is required to be analyzed separately.
2.5 That the Ld. DRP/ AO/ TPO erred in law in not appreciating that the TPO having accepted application of TNMM for benchmarking of royalty, which along with payment of technical assistance fee form part of the composite consideration for rights flowing to the appellant under the License and Technical Assistance Agreement, it was not permissible to benchmark payment of technical assistance fee applying any other method/ on any other basis.
2.6 The Ld. DRP/ AO / TPO erred on facts and in law in observing that since the 12 ITA No.1599/Del/2017 ITA No.7038/Del/2017 assessee is paying royalty, therefore there is no need to pay technical know-how fee not appreciating that the same was part of the composite fee paid for obtaining the license in terms of the License Technical Assistance Agreements. 2.7 The Ld. DRP/ AO / TPO erred on facts and in law in not appreciating that the technical know-how fee was paid in consideration for the right and license to manufacture ECUs and also the extensive information and documentary evidences furnished by the appellant to substantiate actual receipt of technical know-how from the AE and the benefits derived therefrom. 2.8 The Ld. DRP/ AO / TPO erred on facts and in law in not appreciating that the price paid/ payable by the appellant as technical know-how fee to its AE was negotiated between independent third parties, being joint venture partners and shareholders.
2.9 Without prejudice that the Ld. AO/ TPO erred on facts and in law in not appreciating that as per the DRP directions the TP adjustment on technical know- how fees ought to be made only to the extent of depreciation amount allowable.
3. The Ld. DRP/ AO has erred in facts and in law in making disallowance of 'provision of warranties' to the extent of Rs.58,63,194 allegedly holding that the appellant has consistently been making excess provision and has been shifting the tax liability.
The appellant craves leave to add, alter, supplement, amend, vary, withdraw or otherwise modify the ground mentioned herein above at or before the time of hearing."
11. Ground no.1 being general in nature is dismissed.
12. Ground no.2 to 2.9 are identical to ground no.3 to 8 in ITA No.1599/Del/2017. We have already decided the issue in the preceding paragraphs and restored the issue to the file of the TPO/Assessing Officer with certain directions. Following similar reasoning, we restore the issue to the file of the Assessing Officer for deciding the issue in the light of the direction in the preceding year. The grounds raised by the assessee are allowed for statistical purposes.
13. Ground no.3 relates to disallowance of provision of warranty to the extent of Rs.58,63,194/-.
13ITA No.1599/Del/2017 ITA No.7038/Del/2017
14. Facts of the case, in brief, are that the assessee company claimed an amount of Rs.63,44,240/- as deduction on account of provision for warranty. The Assessing Officer asked the assessee to explain as to why the amount should not be added back to the income of the assessee. The assessee in its reply submitted as under :-
"As per company's sales policy, it is required to provide two years warranty to its customers for the products sold to them. Accordingly, the company has a policy to maintain a provision as on the end of every financial year, an amount equivalent to 0.5% of the sales (net of excise duty) made, which are still covered under the warranty period of two years. The percentage of 0.5% of the sales (net of excise duty) for the two years covered under the warranty is determined by the company on the basis of its experience in operating in the automobile components industry and the information about sales return/free supplies. The quality team of the assessee consisting of qualified engineers have identified the risks which could lead to a defect in the product manufactured i.e., risk of components used (0.2%), designing risk (0.05%), critical manufacturing process (0.05%) and shorting/campaign risk/penalty (0.2%)."
15. The assessee also relied on the decision of the Hon'ble Supreme Court in the case of Rotork Controls India (P) Ltd. reported in 314 ITR 62. However, the Assessing Officer was not convinced with the arguments advanced by the assessee. He observed that as per the decision of the Hon'ble Supreme Court, the reversal of excess provision of warranties, the part of the "provision of warranties" that can be claimed as deduction should be the actual utilization of "provision of warranties". This correction to "provision for warranties" can be done either by way of the said 'reversal' in the accounts or by way of adding back to income in the "computation of income". Since the assessee in the 14 ITA No.1599/Del/2017 ITA No.7038/Del/2017 present case has done neither of them, therefore, he made addition of Rs.58,63,194/-.
16. The assessee was unsuccessful before the DRP who held that the basis of 5% sale on which provision was made is far from reality. They observed that the assessee was consistently been making excess provisions and has been shifting the tax liability. The DRP accordingly upheld the action of the Assessing Officer in computing the provision by taking into account the actual expenditure.
17. Aggrieved with such order of the Assessing Officer/DRP, the assessee is in appeal before the Tribunal.
18. We have considered the rival arguments made by both the sides on this issue. From the assessment order, we find the Assessing Officer has analyzed the sales and provisions for warranty as well as the utilization of such provision on actual basis for assessment year 2009-10 to 2013-14, the details of which are as under :-
AY Sales Provision for Utilization of provision
warranties of warranties (actual)
2013-14 314,43,33,263 63,44,240 4,81,046
2012-13 227,39,04,332 59,05,744 9,70,475
2011-12 198,21,51,618 78,00,273 10,95,138
2010-11 155,78,29,397 77,88,887 3,55,115
2009-10 42,29,54,932 21,15,567 0
19. From the above, it is seen that although as per the submissions of the assessee before the Assessing Officer, they are required to provide two years 15 ITA No.1599/Del/2017 ITA No.7038/Del/2017 warranty to its customers for the product sold to them, however, it is not discernable from the records as to whether the excess provision that has been made for warranty after the period of two years has been reversed by the assessee or not. The assessee has not demonstrated before us as to how it has reversed such excess provisions of earlier year in the subsequent year i.e. after the lapse of two years period for which warranty is given to customers for the product sold to them. We, therefore, restore the issue to the file of the Assessing Officer with the direction to give one more opportunity to the assessee to substantiate with evidence to his satisfaction regarding the policy adopted by the assessee and the reversal of such excess provisions after the warranty period is over. The Assessing Officer shall decide the issue after giving due opportunity of being heard to the assessee. We hold and direct accordingly. The ground raised by the assessee is allowed for statistical purposes.
20. In the result, both the appeals filed by the assessee are allowed for statistical purposes.
Order pronounced in the open Court on this 31st day of January, 2018.
Sd/- Sd/-
(SUDHANSHU SRIVASTAVA) (R. K. PANDA)
JUDICIAL MEMBER ACCOUNTANT MEMBER
Dated: 31-01-2018.
Sujeet
16
ITA No.1599/Del/2017
ITA No.7038/Del/2017
Copy of order to: -
1) The Appellant
2) The Respondent
3) The DRP-2, New Delhi
4) The DR, I.T.A.T., New Delhi
By Order
//True Copy//
Assistant Registrar
ITAT, New Delhi