Income Tax Appellate Tribunal - Panji
Suessen Asia Pvt. Ltd., Merged With ... vs Asst. Comm. Of Income-Tax,, Pune on 20 October, 2017
आयकर अपील
य अ धकरण] पण
ु े यायपीठ "बी" पण
ु े म
IN THE INCOME TAX APPELLATE TRIBUNAL
PUNE BENCH "B", PUNE
BEFORE SHRI ANIL CHATURVEDI, AM
AND SHRI VIKAS AWASTHY, JM
आयकर अपील सं
. / ITA No.1629/PUN/2011
नधा रण वष / Assessment Year : 2007-08
Suessen Asia Private Limited (merged .......... अपीलाथ /
With Rieter India Private Limited w.e.f.
Appellant
April 01, 2007), GAT No.768/2, Village
Wing, Shindewadi Bhor Rod, Taluka
Khandala, District Satara - 412801.
PAN : AAECS1310G.
बनाम v/s
Asst.Commissioner of Income Tax, .......... यथ /
Circle 6, Pune.
Respondent
Assessee by : Shri M.P. Lohia.
Revenue by : Ms. Nirupama Kotru.
सन
ु वाई क तार ख / घोषणा क तार ख /
Date of Hearing : 05.10.2017 Date of Pronouncement: 20.10.2017
आदे श / ORDER
PER ANIL CHATURVEDI, AM :
1. This appeal filed by the assessee is emanating out of the order of Dispute Resolution Panel (DRP) Pune dt.26.09.2011 for the assessment year 2007-08.
2. The relevant facts as culled out from the material on record are as under :-
2.1 Assessee is a Subsidiary of Spindelfabrik Suessen, Gmbh, Germany and is stated to be engaged in manufacturing of Textile 2 spinning machines, parts, components and post-sales service support of these products in India and abroad. Assessee electronically filed its return of income for A.Y. 2007-08 on 30.11.2007 declaring total income at Rs.Nil after setting of brought forward losses. The case was taken up for scrutiny and the first notice u/s 143(2) of the Act was issued and served on assessee on 23.09.2008. In this case it was observed that the international transactions with Associated Engineer's (A.E.'s) were at Rs.55 crore (rounded off) and therefore the case was referred to Transfer Pricing Officer (TPO) U/s 92CA(3) of the Act. The TPO proposed upward adjustment to Arms Length Price (ALP) at Rs.21,52,03,376/- on account of International Transactions. Thereafter a draft assessment was passed wherein the adjustments as indicated by TPO were made. Aggrieved by the draft assessment order, assessee raised objections before Dispute Resolution Panel (DRP), who passed order dt.26.09.2011 u/s 144C(5) of the Act whereby DRP directed that the operating margin of the assessee to be considered at (23.18%) as against 14.36% considered by TPO and as against the computation of (27.25%) worked out by the assessee). Aggrieved by the order of DRP, assessee is now in appeal before us and has raised the following grounds :
"1. The Ld. Dispute Resolution Panel ("DRP")/ Assessing Officer ("AO"), erred in making a transfer pricing adjustment of Rs. 18.99 crores, to the income of the appellant by holding that the international transactions of the appellant do not satisfy the arm's length principle envisaged under the Income-tax Act, 1961 ("the Act").
Erroneous rejection of the transactional analysis submitted by the appellant
2. The Ld. DRP/AP erred in applying the Transactional Net 3 Margin Method ("TNMM") on an entity level, which is contrary to the provision contained in the Indian Transfer Pricing Regulations ("ITPR").
3. The Ld. DRP j AO erred by not taking cognizance of the audited segmental profitability statement submitted by the appellant wherein the appellant has, in accordance with the relevant provisions contained in the ITPR, computed the profit earned from respective international transactions separately.
4. The Ld. DRP/AO erred by not taking cognizance of t e price level comparability analysis submitted by the appellant, pertaining to import of textile machinery components and parts from AEs.
Erroneous computation of the operating profits of the appellant
5. The Ld. DRP / AO erred in excluding the amounts/liabilities written back of Rs. 37.84 crores to compute the operating income of the appellant or the application of the TNMM.
6. The Ld. DRP / AO erred in including foreign exchange loss as an operating expense for computing the operating income of the appellant.
Erroneous inclusion/rejection of comparables
7. The Ld. DRP / AO erred in rejecting the appellant's plea that Schlafhorst Engineering (India) Limited ("Schlafhorst India"), based on the similarity in the functional profile and the business circumstances, should be considered to be the only comparable for evaluation of arm's length nature of the international transactions of the appellant.
8. The Ld. DRP / AO erred in rejecting Schlafhorst India as a comparable merely on the ground that the said Company has incurred a loss during the year under consideration.
9. The Ld. DRP /AO erred in considering Lakshmi Machine Works Ltd as a comparable despite evidences submitted to the contrary, which demonstrated the differences in economies of scale, market positioning, turnover levels, etc. Others Grounds
10. The Ld. DRP/AO erred in rejecting the appellant's plea for granting the benefit of proviso to Section 92C(2) of the Act, for computation of the arm's length price.
11. The Ld. DRP / AO erred in rejecting the appellant's plea that the transfer pricing adjustment, if any, should be computed on a 4 proportionate basis by following the principle laid down in the ruling made by the Honourable Delhi Tribunal in the case of II Jin Electronics (I) (P) Ltd vs. ACIT (36 SOT 227).
12. The Ld. DRP/AO erred in disallowing warranty costs amounting to Rs. 52.19 Lakhs."
3. Assessee thereafter has raised additional ground which reads as under :
"Ground No.13 Incorrect computation of operating profit margins of the Appellant and comparable companies.
On the facts and circumstances of the case and in law, the Hon'ble DRP, learned AO and learned TPO have erred while computing operating profit margins of the Appellant and comparable companies.
Ground No.14 : Not granting appropriate economic adjustments while determining the arm's length price of the international transactions of the Appellant.
On the facts and circumstances of the case and in law, the Hon'ble DRP, learned AO and learned TPO have erred by not granting appropriate economic adjustments while determining the arm's length price of the international transactions of the Appellant."
4. Before us, at the outset, Ld.A.R. submitted that the various grounds raised by the assessee can be divided into two parts i.e., relating to Transfer Pricing (TP) matters i.e., TP matters and non-TP matters. He further submitted that except for ground No.12 which is with respect to disallowing the warranty cost, all the other grounds are with respect to TP matter. He further submitted that if ground No.5 raised by the assessee is decided in favour of the assessee then all the other remaining grounds raised by the assessee with respect to TP matters would be rendered academic and therefore would require no adjudication. The aforesaid submissions of Ld.A.R. was not objected by Ld.D.R. We therefore first proceed to decide ground No.5, which is with respect to excluding the 5 amounts / liabilities written back of Rs.37.84 crores to compute the operating income of the assessee.
5. During the course of assessment proceedings, on perusing the Transfer Pricing Study Report, TPO had observed that assessee had undertaken various international transactions aggregating to Rs.55.04 crore with it's A.E.'s. He also noticed that all the international transactions were aggregated and Transactional Net Margin Method (TNMM) was applied on the aggregate level considering the data of the entire company as a whole. Seven companies were identified as comparable companies by the assessee. The Profit Level Indicator (PLI) adopted by assessee was that of Profit Before Tax (PBT) / turnover (the comparable companies identified by the assessee are reproduced at page 4 of the TPO order). Out of the seven companies considered as comparable companies, TPO rejected three companies and considered the remaining companies (listed at page 5 of the order) as comparables. He also noticed that an amount of Rs.37,84,26,000/- (being the amount written back of deferred credit and import payments pursuant to waiver received from respective companies) were credited by the assessee and were considered as part of operating income. TPO was of the view that the aforesaid amount of write back was only an accounting entry and had no relation with the operation of the company for the year under consideration. He thereafter excluded it for working out the margin of the assessee and after considering the margins of the comparables, worked out the operating margin of the assessee at 14.36%. He also noticed that the Transfer Pricing Report submitted by the assessee was 6 incomplete and the required details were missing for the establishment of A.L.P. for international transactions. He therefore determined the ALP of international transactions by adopting the approach followed in the immediate preceding year which was also upheld by the DRP. He thereafter considering the operating margin of the assessee at 14.36% as worked out by him, determined the adjustment to the income at Rs.21,52,03,376/-. Aggrieved by the order of TPO, assessee carried the matter before DRP, who after considering the submissions of the assessee directed the exclusion of Schlafhorst Engineering (India) Limited from the list of comparable companies for computing the arithmetic mean of profit margin for benchmarking of the international transactions and directed the operating margin of the assessee to be considered at (23.18%) by observing as under :-
"11.4 Erroneous computation of the assessee's operating margin by the TPO It was submitted by the assessee that on a without prejudice basis, even if the approach adopted by the TPO, wherein he has considered the amounts written back as non-operating, were to be given any credence, the assessee humbly submits that then it would also be essential to exclude the following items of expenditure as non- operating in nature:
• Loss on revaluation of assets and provision made for impairment loss In this context, it is our contention that loss on revaluation of fixed assets and provision for impairment loss cannot be considered as operating expenses, based on the same reasons as provided by the TPO for excluding the amounts written back.
• Amounts written off During the FY 2006-07, the assessee has written off advances amounting to Rs. 0.53 crores as the same are no longer receivable. Taking into consideration the logic applied by the TPO that the amounts/liability written back represents an accounting entry only and has no relation 7 with the operations of the company for the year under consideration, and thus cannot form a part of the operating income. The amounts written off by the assessee too should be excluded by application of the same logic as this amount too represents an accounting entry only and has no relation with the operations of the company for the year under consideration.
Based on our above contentions, the operating margin of the assessee would work out to:
Particulars Refere Amount
nce (Rs.in
crores)
Total income as per P&L Account 77.99
Less : Non-operating income
Interest Income (0.60)
Misc. receipts (0.68)
Amounts written- back (37.84)
Operating Income [a] 38.87
Total Expenses as per P&L Account 56.62
Less : Non-operating expenses
Interest expenses (3.20)
Loss on revaluation of fixed assets (1.60)
Provision for impairment loss (0.69)
Amounts written off (0.53)
Operating Expenses [b] 50.60
Operating Profit [c=a-b] (11.73)
Operating profit/Operating expenses [d=c/b] (23.18)%
On the basis of facts and submission of the assessee we found that there is a merit in the argument of the assessee. Accordingly, objection raised by the assessee is accepted. We direct that operating margin of the assessee shall be considered as (23.18%)."
With respect to the exclusion of amounts / liabilities written back for computing the operating margin of the assessee, DRP after considering the submissions of the assessee, remand report of the TPO and comments of the assessee on the remand report, upheld the order of AO by observing as under :-
"11..............
However contention of the assessee is not accepted. TPO vide letter dated 29/07/2011 has send his comments on the stand taken by the assessee. Relevant portion of the same is reproduced as under-8
3.2 'The main argument of the appellant on this issue is that the amounts/liabilities written back do actually pertain to the financial year under consideration as the same have accrued in that year i.e. FY 2006-07 and in any business situation, write back of a provision or a liability is normal and very much related to the business operations of the year in which these amounts/liabilities are written back. (emphasis supplied).
3.3 The above arguments of the appellant are not acceptable for following reasons:
a) The assessee, during the FY 2006-07, had received waiver letters from its creditors, on the basis of which the amounts/liabilities were written back. These amounts/liabilities written back are in connection with expenses accrued for the raw materials' procured, custom duty payable in earlier years and not for the raw materials procured, custom duty payable during the financial year under consideration.
b) The relevant question for determination of arm's length price (ALP) of the international transaction carried out by the appellant is that whether the amounts/liabilities written back had affected in any way the international transactions carried out by the appellant during the year under consideration; that whether the amounts/liabilities written back are relevant for determining the operating profit margin realized by the appellant during the year under consideration: that whether the amounts/liabilities written back have anything to do with the main operations of the appellant; that whether the amounts/liabilities written back are routine in nature. The answer to these questions is NO.
c) The international transactions carried out by the appellant during the year under consideration are Import of textile machinery components and parts, Export of textile machinery, textile machinery components and parts, Import of plant & machinery/tools, Services provided to AEs and Interest payment From these international transactions, it is clear that the amounts/liabilities written back have nothing to do with these transactions nor they determine the operating profit margin realized by the appellant during the year under consideration.
d) It is not disputed that the auditors had not classified the amounts/liabilities written back as prior period items and the amounts/liabilities written back had been offered to tax by the assessee. However, whatever is offered for taxation under the provisions of Income-tax Act does not necessarily form part of the operating income or expenses for determination of operating profit margin under TNMM. It is well settled law that the non-operating income or expenses have to be excluded while determining operating profit margin under TNMM, though such items are allowable/taxable under the provisions of Income-tax Act.
e) The contention of the appellant that if the TPO's logic is to be accepted, the comparables may also have numerous items which may not pertain to the year under consideration is theoretically acceptable 9 if these items are non-operating or extraordinary in nature or not of a routine nature. However, the appellant had not submitted any factual data in case of com parables accepted by the TPO.' Further though the assessee has cited decision of the Hon'ble ITAT Delhi in the case of Sony India(P) Ltd. Vs. DCIT, it is not known whether the department has accepted the findings of the Tribunal or has filed the appeal before hi her authorities.
In view of the above, objection raised by the assessee is rejected." Aggrieved by the order of DRP, assessee is now in appeal before us.
6. Before us, Ld.A.R. submitted that the TPO while coming to the conclusion that for computing the operating margin of the assessee held that the amounts / liabilities written back needs to be excluded for the reason that they do not pertain to the operations of the assessee. He submitted that the aforesaid conclusion of the TPO is not correct. He submitted that before DRP assessee had furnished additional evidences and made detailed presentation to prove that the amounts written back are part of the operations of the assessee and are therefore to be considered as operating margin. He submitted that during the Financial Year 2006-07 based on the waiver letters received from it's A.E.'s and the business associates had written back provisions / liabilities amounting to Rs.37.84 crores as the same were no longer payable. He pointed to the details of the liabilities written back which are placed at page 53 of the paper book and break-up of the amounts written back. He further submitted that TPO had failed to appreciate that in any business instances, write back of a provision or a liability is normal and very much related to the business operations of the year in which these amounts / liabilities were written back. He further submitted that business-men would normally provide for certain expenses and 10 liabilities in the books of accounts and in the event of the provision made or the liability written back is no longer payable or ceases to exist then the same need to be written back and treated as income in the year in which the same has ceased to be payable. He further submitted that the amount pertains to the Financial Year under consideration as the same accrued during the year and it was based on the waiver letters received during the year from the creditors on the basis of which the amounts/liabilities were written back. He further submitted that the auditors had no where classified the amounts/liabilities written back as prior period items. He pointed to the copies of waiver letters placed at page 273 and 274 of the paper book. He also pointed to the submissions made before DRP in connection with the write back of the amount but according to him, the same were ignored by the DRP. He further submitted that before DRP, assessee had placed reliance on the decision of Hon'ble Delhi Tribunal in the case of Sony India (P) Limited Vs. DCIT reported in 315 ITR 50. He submitted that the learned DRP by a cryptic order upheld the order of TPO and ignored the decision of Delhi ITAT in the case of Sony India (supra) only for the reason that it was not known as to whether the Department had accepted the findings of the Tribunal or against the order of Tribunal, Revenue had filed any appeal before the higher authorities and pointed to the observation of the DRP to that effect at page 15 of the order. He further submitted that identical issue arose in the case of Sony India (P) Limited before the Delhi Tribunal. The Delhi Tribunal had decided the issue in favour of the assessee. He pointed to the relevant findings of the Delhi Tribunal. He further submitted that against the 11 order of the Delhi Tribunal, Revenue carried the matter before the Hon'ble Delhi High Court but however the issue of the exclusion of write back of the liabilities was not raised by the Revenue before the Hon'ble Delhi High Court meaning thereby that the Revenue has accepted the order of Tribunal, wherein the Hon'ble Delhi Tribunal has held it to be part of operating income. He further submitted that in the case of ACIT Vs. Gillete Diversified Operations Pvt. Limited in ITA No.400/DEL/2013 dt.01.04.2016, similar issue of liabilities no longer written back was arose, wherein it was held that the provision should be considered as operating income. He submitted that the Hon'ble Tribunal has further held that if the liabilities originally created were on account of capital amounts and then their write back cannot be considered as normal instances of the business and has to be excluded as operating income. He submitted that against the aforesaid order of Tribunal, the matter was carried by Revenue before Hon'ble Delhi High Court and the issue of exclusion of write back for computation of operating income was also not agitated by the Revenue. He therefore submitted that the issue of including the write back as part of operating income is now well settled by the decisions of Hon'ble Delhi Tribunal and Hon'ble Delhi High Court. He further fairly admitted that out of the amount of Rs.37.84 crore that has been written back, Rs.0.35 crore written back represents liability in connection with purchase of capital goods made during the earlier years and since it was on purchase of capital goods, the same needs to be excluded. He therefore submitted that following the decision of Hon'ble Delhi Tribunal, the TPO be directed to include the balance amount of Rs.37.49 crore written back as part of 12 operating income. He further submitted that if the write back amount of Rs.37.49 crores is considered as operating income, then the correct operating margin of the assessee would work out to 42.94% as against the operating margin of 14.36% of the comparable companies selected by the TPO and therefore the international transactions would be at Arm's Length and no addition as proposed by the TPO would be required. He pointed to the computation of the working after including write back amounts as part of operating income at page 257 of the paper book. He therefore submitted that the order of DRP be set aside. Ld.D.R. on the other hand supported the order of TPO and DRP.
7. We have heard the rival submissions and perused the material on record. The issue in the present case is with respect to the exclusion of amounts written back for computing the operating margin of the assessee. It is an undisputed fact that assessee has credited Rs.37,84,26,000/- being amounts written back as part of operating income. Out of the aforesaid amount Rs.37.49 crores represents the write back in connection with raw-materials/ components procured in earlier years, provision made towards custom duty, interest of custom duty, warehousing charges and operating expenses and Rs.0.35 crore represents the liability written back in connection with purchase of capital goods made during earlier years.
8. Before us, it is assessee's submission that the amount has been written back in the ordinary course of business on the basis of waiver letters received during the year consideration. The only 13 reason for disallowing the same by the Revenue is that the Revenue is of the view that the amounts written back cannot be considered as operating income as according to it the amount written back is a mere book entry and is not connected with business operations of the assessee. On the issue of the amounts written back as being operating income, we find that identical issue arose before the Co- ordinate Bench of the Tribunal, Delhi in the case of Sony India (P) Limited (supra) and the Co-ordinate Bench of the Tribunal of Delhi decided the issue in favour of the assessee by observing as under :
"106.1 The first of these items is, provision written back amounting to Rs.57,02,000. For exclusion of above item and for balances written back interest received from customers and other miscellaneous revenue receipts, the learned CIT(A) gave the following consolidated reasons :
"(A) I find that interest received is a financial income and as such cannot be considered as operational receipts.
(B) The items which have been written back as mentioned in sub-paras (i) and (ii) of this para, are nothing but merely accounting entries and are not connected to the operations of the appellant.
............
On merit we see no good reason to exclude provisions written back as not forming part of computing operating profit of the taxpayer. In our considered, exclusion of above provision is based upon misconception of real nature of the entry generating Income. It is not practically possible for a businessman to actually disburse all expenses incurred by it in the financial year and, therefore, a large number of business liabilities (manufacturing included) are provided in the accounts of a given year. It is elementary that there is no difference between actual disbursement of an expenditure or provision thereof. However, recovery of liability provided may become barred by limitation or for some other reasons, liability gets unenforceable or is reduced or ceases to exist with the passage of time. Therefore, it may be necessary to write back such a liability. But, it cannot follow that the liability was not expenditure of business or operating expense. Cessation of a liability is a taxable income under Sec.41 of the IT Act. The underlying principle behind above provision is that Revenue takes back a benefit which it granted earlier, but which, due to subsequent events or changed circumstances should be charged to tax as "income". Statutory provision overrides general understanding that mere creation of a benefit to a taxpayer by admission or cessation of a debt or a liability should not result in an income. Thus, creation of unpaid liability and 14 its write back is a normal incident of a business operation which is carried everywhere in accounts to have true picture of profits of the relevant period. If a liability has ceased to exist and is required to be accounted for and shown as income by the taxpayer and, in case it is not so shown the taxpayer can be subjected to a penal action under Indian regulations. In this connection, we can refer to decision of the Supreme Court in the case of CIT vs. S. Teja Singh (1959) 35 ITR 408 (SC). Having regard to statutory provisions, it cannot be said that provision or writing back of liability is not part of operating profit or would not be taken into consideration for computing the same. The aspect of liabilities written off was ignored without considering nature and character of such liabilities. It would have been different if a finding was recorded that provision written back did not relate to business operations of the taxpayer. There is no suggestion on the above lines. Further, it is not the case of the Revenue that liabilities written back were wrongly provided for. It is a settled and well accepted proposition that adjustment can be made only on account of differences. It is not possible to believe that other comparable entities taken into consideration are not making and writing back provision of liabilities no more required. There is no material nor there any finding to support action of the Revenue authorities. We can therefore make a general observation that all business enterprises are making and writing back liabilities as a normal incident of operating business. The expenses for which provisions were originally made were considered operating in nature and allowed in assessment. These provisions no longer required by the taxpayer during the year under review were reversed in the books of account as per mercantile system of accounting and shown as income. Therefore, on facts we do not see any justification for excluding provisions written back in the P & L a/c as not forming part of the operating profit of the taxpayer. Accordingly, claim of the taxpayer is accepted."
9. We further find that against the order of the Tribunal, the matter was carried by the Revenue before Hon'ble Delhi High Court but no ground with respect to the treatment of liabilities written back as being operating or non-operating income was raised by Revenue before Hon'ble Delhi High Court meaning thereby that the decision of Delhi Tribunal was accepted by the Revenue. We further find that in the case of Gillete Diversified Operations Pvt. Limited (supra), the Co-ordinate Bench of the Tribunal, Delhi had decided the issue in favour of the assessee and held that if the reversal of provision / write back is on account of revenue in nature, it should be included as part of operating income and if the liabilities originally created were on account of capital items then their write 15 back cannot be considered to be a normal instances of business and hence to be excluded as operating income. The aforesaid order of the Tribunal has also been accepted by the Revenue as no appeal on the issue that whether write back is to be excluded for working out the operating profits has been preferred by the Revenue before the Hon'ble Delhi High Court meaning hereby that the issue of write back is to be considered as part of operating income has attained finality. Before us, Revenue has also not placed any contrary binding decision in its support. We therefore by placing reliance on the aforesaid decisions of the Co-ordinate Bench of the Tribunal, Delhi in the case of Sony India (P) Ltd (supra) hold that the amount of write back of Rs.37.49 crores which is on account of amounts written back of expenses / liabilities is to be considered as part of operating income. Before us, assessee also submitted that if the write back amount of Rs.37.49 crores is included as operating income, the operating margin would works out to 42.94% as against the operating margin of 14.36% of the comparable companies and therefore the transactions of the assessee with it's A.E's would be at arms length requiring no adjustment to the income. We find that on this issue there is no finding of TPO. We therefore for the limited purpose of verifying the aforesaid contention of assessee remit the issue to the file of TPO. If the contention of the assessee that the operating margin is comparable with that of comparable companies is found correct, no adjustment to ALP transaction is required. Since this ground has been decided in favour of the assessee and in view of the Ld.A.R.'s submission, the other grounds of the assessee on TP issues are rendered academic and therefore require no 16 adjudication. Thus, the ground of the assessee is allowed for statistical purposes.
10. Ground No.12 is with respect to the warranty expenses of Rs.52.19 lakhs.
10.1 AO noticed that assessee had claimed warranty expenses of Rs.52,19,740/-. He noticed that assessee had made provision for warranty expenses at 1.15% of the total sales turnover uniformly on all the products. He noticed that assessee had sold different kinds of finished products and some of them are parts of machines and some of them are machines themselves. AO was of the view that in view of the difference in the products sold, there was no justification for providing the same percentage of warranty on all the products. He also noticed that assessee had not maintained a proper accounting system for capturing the relationship between nature of sales, the warranty provisions made and the actual expenses incurred subsequently. He accordingly held that the expenses claimed by assessee as warranty cost was merely an unascertained liability and not an accrued liability and since the expenditure was a contingent liability, it did not qualify for deduction u/s 37(1) of the Act. He accordingly disallowed Rs.52,19,740/-. Aggrieved by the order of TPO, assessee carried the matter before DRP, who upheld the order of AO by holding as under :
"10. Warranty Provision The Assessee deals in the products like top rollers, conversion spindles and textiles spinning machine spindles and the said products are sold with warranty to the customers, for which provision is required to be made on the basis of warranty claim that may arouse within warranty period.
Thus, the provision for warranty claim is made to meet the claims, which may occur in future or during the term of warranty given to customers. The calculation is done on the basis of management's 17 experience in past years regarding after sale rejections. Moreover, the provision is made for the purpose and considering the nature of business of the Assessee carried out during the year i.e. provisions for warranty is made during the normal course of business.
However contention of the assessee is not accepted. The AO during the course of proceedings found that the assessee had not provided any claims received in past from customers. Also assessee had not maintained a proper accounting system for capturing the relationship between nature of sales, the warranty provisions made and the actual expenses incurred against it subsequently. Therefore the AO on these findings had concluded that the expenses claimed by the assessee was merely an ascertained liability and not an accrued liability. We find no reason to deviate from the stand taken by the AO and hence the said expenditure being a contingent liability was not allowable as deduction u/s. 37(1) of the IT Act."
Aggrieved by the order of DRP, assessee is now in appeal before us.
11. Before us, at the outset, Ld.A.R. submitted that identical issue arose in assessee's own case in A.Y. 2006-07 and the issue was remitted back to AO with necessary directions. He pointed to the relevant findings of Tribunal at paras 13 to 15 of the order dt.12.05.2009. He therefore submitted that similar direction be given in the present case. Ld.D.R. did not object to the submissions made by Ld.A.R.
12. We have heard the rival submissions and perused the material on record. The issue in the present case is with respect to disallowance of warranty expenses. We find that identical issue arose in assessee's own case in earlier years. The AO was directed by the Co-ordinate Bench of Tribunal to decide the issue after examining the nature of business, nature of products manufactured, past history of warranty claims, methods adopted by the assessee for acquiring the provision and decide the issue keeping in mind the decision of Hon'ble Supreme Court in the case of Rotork Controls India (P) Limited Vs. CIT reported in (2009) 18 314 ITR 62 (SC). The relevant observations of Co-ordinate Bench are as under :
"13. The second Ground in the appeal is with respect to an addition of Rs.8,95,141/- made by the Assessing Officer which represented assessee's claim for deduction on account of product warranty liability. The claim of the assessee was that the Provision for warranty was claimed as a deduction in view of the decision of the Hon'ble Supreme Court in the case of Rotork Controls India P. Ltd. vs. CIT, (2009) 314 ITR 62 (SC). The DRP dealt with the issue in the following manner :-
"6.5. Warranty Provision: The objections raised in this matter have been already noted. The Assessing Officer has disallowed the assessee's claim on account of provision for warranty mainly on the ground that the said provision was only an arrangement for setting apart of money for a contingent liability and till that liability became real, there was no expenditure. We cannot confirm the stand thus taken by the Assessing Officer, more so when he has not considered such relevant factors as (a) whether or not the warranty in terms of the contract as well as past results could be treated as an integral part of the sale price, (b) whether or not the assessee in view of the past experience / records could be said to have had a present obligation resulting in outflow of resources, (c) whether or not the present value of the future liability could be properly ascertained and discounted on an accrual basis so as to become deductible u/s. 37 etc. Without having such facts and without examining the nature of the business, the nature of sales and the nature of the product manufactured; past history of warranty claims made and met; method adopted for quantifying the provisions; a claim with regard to warranty provisions cannot be brushed aside in a routine manner as has been done by the Assessing Officer. In this connection, the Assessing Officer's attention is invited to the decision of the Hon'ble Supreme Court's decision in the case of Rotork Controls India P. Ltd. v. CIT, (2009) 314 ITR 62. The Assessing Officer shall apply the principle laid down by the Hon'ble apex court in the above-cited case to the facts of the assessee's case and decide the matter afresh, as per law. Needless to say, the assessee shall furnish all the relevant facts as may be required by the Assessing Officer in order to enable the latter to take a proper decision in this matter."
14. A perusal of the aforesaid directions of the DRP show that the Assessing Officer was directed to consider such relevant factors as to whether or not the warranty provided in terms of the sale contracts as well as past results could be treated as an integral part of the sales price realized from customers. Secondly, the Assessing Officer was directed to consider whether or not the assessee in view of the past experience/records could be said to have had a present obligation resulting in outflow of resources on account of impugned provision. Thirdly, the DRP required the Assessing Officer to examine whether or not the present value of the future liability could be properly ascertained and discounted on an accrual basis so as to become 19 deductible u/s 37(1) of the Act. For the aforesaid purpose, the Assessing Officer was required to examine the nature of the business, the nature of sales and nature of the product manufactured; past history of warranty claims, method adopted by the assessee for quantifying the provision, etc. and to decide the issue thereafter keeping in mind the judgement of the Hon'ble Supreme Court in the case of Rotork Control India P. Ltd. (supra).
15. However, we find that in para 5 of the assessment order, the Assessing Officer has summarily sustained the disallowance of Rs.8,95,141/- on account of provision of warranty existence without determination the issues, which the DRP required him to address. Therefore, we are unable to uphold the order of the Assessing Officer on this aspect also. As a consequence, we set-aside the assessment order on this aspect also and direct the Assessing Officer to pass a speaking order after taking into consideration each of the points enumerated by the DRP in its order dated 30.08.2010 on this aspect. Needless to mention, the assessee shall furnish relevant material as would be required by the Assessing Officer to carry out the directions of the DRP. The Assessing Officer shall consider the material and submissions put-forth by the assessee and thereafter pass an order on this aspect afresh in accordance with law. Thus, on this Ground also assessee succeeds for statistical purposes. Before us, it is Ld.A.R.'s submission that the issue in the year is similar to that of earlier years. In view of the submission of Ld.A.R. that the issue is identical to that of earlier years of assessee and since in earlier year, the issue was remitted back to AO, we therefore for similar reasons restore the issue back to the file of AO to decide the issue afresh in the light of the decision of Hon'ble Apex Court in the case of Rotork Controls (supra) and in accordance with the law. Needless to state that AO shall grant adequate opportunity of hearing to the assessee. Assessee is also directed to cooperate with AO by promptly furnishing all the required documents as called for. In case assessee fails to furnish the required documents, AO shall be free to proceed on the basis of material available on record. Thus the ground of the assessee is allowed for statistical purposes. 20
13. In the result, the appeal of the assessee is allowed for statistical purpose.
Order pronounced on 20th day of October, 2017.
Sd/- Sd/-
(VIKAS AWASTHY) (ANIL CHATURVEDI)
या यक सद!य / JUDICIAL MEMBER लेखा सद!य / ACCOUNTANT MEMBER
पण
ु े Pune; दनांक Dated : 20th October, 2017.
Yamini
आदे श क# $ त&ल'प अ(े'षत/Copy of the Order forwarded to :
1. अपीलाथ / The Appellant
2. यथ / The Respondent
3. CIT(A)- 13, Pune.
4. CIT(IT-TP), Pune.
5. "वभागीय %त%न&ध, आयकर अपील य अ&धकरण, "बी" / DR, ITAT, "B" Pune;
6. गाड, फाईल / Guard file.
आदे शानस ु ार/ BY ORDER // True Copy // व.र/ठ %नजी स&चव / Sr. Private Secretary आयकर अपील य अ&धकरण ,पण ु े / ITAT, Pune.