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Income Tax Appellate Tribunal, “B” BENCH : BANGALORE
Before: SHRI. GEORGE GEORGE K & MS. PADMAVATHY S
IN THE INCOME TAX APPELLATE TRIBUNAL “B” BENCH : BANGALORE BEFORE SHRI. GEORGE GEORGE K, JUDICIAL MEMBER AND MS. PADMAVATHY S, ACCOUNTANT MEMBER
IT(TP)A No.35/Bang/2019 Assessment Year : 2014-15 M/s. Lenovo (India) Private Limited, Vs. The Income Tax Officer, Ferns Icon, Level 2, Ward 4(1)(1), Doddenakundi Village, Bengaluru. Marathahalli Outer Ring Road, Marathahalli Post, K R Puram Hobli, Bengaluru – 560 037. PAN : AABCI 3372 H APPELLANT RESPONDENT
Assessee by : Shri Padamchand Khincha, CA Revenue by : Dr. Manjunath Karkihalli, CIT(DR)(ITAT), Bengaluru.
Date of hearing : 01.06.2022 Date of Pronouncement : 13.06.2022
O R D E R Per Padmavathy S, Accountant Member
This appeal is against the final Assessment Order passed by the Income Tax Officer, Ward – 4(1)(1) (the ‘AO’), Bengaluru under section 143(3) r.w.s. 144(13) of the Income Tax Act, 1961 (the ‘Act’), dated 29.10.2018 for the Assessment Year 2014-15.
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The assessee is a company incorporated under the Companies Act, 1956 on March 8, 2005 with its registered office in Bangalore. It is primarily engaged in the business of manufacture and sale of desktops, laptops and smartphones. Assessee has a manufacturing facility at Pondicherry, India and sells its products in India. For the relevant year, assessee filed its return of income on 29.11.2014 admitting a total loss of INR 24,92,08,416. The return of income was picked up for scrutiny. During the course of the assessment, the AO made a reference of international transactions entered into by the Assessee to the Transfer Pricing Officer ("the TPO") for determining the Arm's Length Price ("ALP") of such transactions under section 92CA of the Income-tax Act, 1961 ("the Act"). The assessee filed submissions on the information / details called for. On conclusion of the Transfer Pricing ("TP") proceedings, the TPO passed an order dated 23.10.2017 u/s. 92CA of the Act proposing the following adjustments:
Amount (In INR) Particulars Adjustment to the manufacturing segment 13,52,88,149
123,25,95,287 Adjustment on account of excess AMP expenditure Assessed Income 136,78,83,436
The AO, taking note of the above, concluded the assessment proceedings as per the provisions of section 143(3) r.w. section 92CA of the Act and forwarded a Draft Assessment Order ("DAO") to Assessee determining the revised total income at INR 113,97,14,831 without setting off brought forward losses and unabsorbed depreciation, as against the returned loss of INR 24,92,08,416. Further, the AO made the following disallowances in addition to the TP adjustments:-
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(i) Disallowance of provision for warranty (ii) Disallowance under section 37(1) of advertisement and business promotion expenses. 3. Aggrieved, the assessee filed the objections before the DRP. The DRP upheld the TP methodology adopted by TPO, but gave partial relief to the assessee by modifying the Profit Level Indicator (PLI) of certain comparables. The AO passed the final Assessment Order giving effect to DRP directions.
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.
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(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 relating to manufacturing segment : 4. In the manufacturing segment, the tax payer applied internal CUP method as the Most Appropriate Method (MAM) for import of parts for manufacture of personal computers. The relevant portion of the TP document is reproduced below:-
"During the financial year 2013-14, Lenovo India has imported different varieties of products from its associated enterprises which can be identified on the basis of a distinctive code. Out of these products some products were purchased from associated enterprises exclusively while the rest were purchased from associated enterprises as well as from unrelated third party vendors. To identify internal CUPs, Lenovo India has prepared a list of the products imported from its associated enterprises for the financial year 2013-14. This list provides for the weighted average of the prices paid during the year for the products imported from associated enterprises. Each of these parts is identified based on a distinctive product code. The taxpayer has imported 581 different varieties of products from its AEs which can be identified from distinctive codes. Out of the 581 products, 348 products were purchased from the AEs exclusively whereas the rest 223 were purchased from the AEs as well as the third party vendors. With respect to the imports from
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associated enterprises, the Company conducted a search (based on product code) to identify similar products, imported from unrelated vendors for the financial year 2013-14 and the weighted average price per unit for these products. This process resulted in the identification of potential internal comparables for 233 of the products imported. A detailed analysis is as follow: Products imported from associated enterprises only With respect to the imports made only from associated enterprises, the prices paid by associated enterprises to its vendors were considered. • Out of the 348 products, 76 products were sold by the AEs on a cost to cost basis. Hence the same were considered to be at ALP. • On the balance 272 products, the AEs have sold the products to Lenovo India at a price at which it is sourced from independent third party plus a 0.10% margin. However, the same was considered to within the range of +/ -3% as permitted under the Indian Transfer Pricing regulations). Hence the same was considered to be at ALP.” 5. The financials of the manufacturing segment as computed by the assessee is as under:-
FINANCIALS OF THE SEGMENT (INR) Mar-14 Particulars 12 months Income Sales and Services (Gross) 9,60,62,07,525 Less: Excise duty (95,11,76,798) 8,65,50,30,727 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
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Operating and Other Expenses 39,13,08,152 Depreciation 62,48,357 Interest 7,41,66,801 Less: non- operating Expenses Allocation of common cost 30,94,14,904 Interest 7,41,66,801 Total Expenditure 9,38,62,75,318 Total Operating expenses 9,31,21,08,517 Net Operating Profit (65,70,77,791) Net operating profit margin based on sales (%) -7.59% 6. The TPO rejected the CUP method and proceeded to apply TNMM as MAM. The TPO made fresh search of comparables and arrived at OP/OR of 4.83%. The TPO did not consider the submission of the assessee that the assessee has made a suo motu disallowance of Rs.3,28,51,891 to align purchase price for products procured and that the ITAT, Bengaluru Bench has upheld CUP as the MAM in assessee’s own case for AY 2006-07. The TPO made the TP adjustment revising the original adjustment where the operating cost was wrongly taken as Rs.9,38,62,75,318/- instead of Rs.9,31,21,08,517 as follows_-
Amount Particulars 86,55,030,727 Operating Revenue ( A ) Arm's length margin determined 4.83% Total Arm's length Cost at 95.17 % 82,36,992,743 A*(100% - B4.83%) = (B ) 93 12 108 517 Operating Cost of Lenovo India (C) ... , , 5 Difference (D=C-B) 10,75,115,775 Cost involved in international 13,73,456,156 transaction with AEs only (E) P r o p o r t i o n o f A E 14.75% t r a n s a c t i o n t o t o t a l ( F = E / C * 1 0 0 ) Proportionate adjustment to 15,85,79,577 ALP (G=F*D) Less: Suo-moto adjustment made by 3,28,51,891 Lenovo India (H) Transfer Pricing adjustment in 12,57,27,686 relation to manufacturing segment (GI-1)
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The assessee raised objections before the DRP. The DRP gave partial relief to the extent of revision in the PLI’s of comparable companies considered 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..
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.
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 Assessee has raised Grd.No.II before the Tribunal. We shall first take up Gr.No. II sub grounds 2 to 6 which grounds relate to the contention of the Assessee that CUP should have been accepted as the MAM. We have heard the rival submissions. As far as the issue of MAM in the case of the Assessee in the transaction of import of components is concerned, we have already extracted the reasons assigned by the TPO for rejecting CUP as MAM and the reasons
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given by the Assessee as to why the reasons assigned by the TPO are unsustainable.
In AY 2006-07, the Tribunal has in its order dated 30.5.2016 in IT (TP) A.No.582/Bang/2015 upheld the DRP’s direction that CUP is the MAM to be applied in the case of the Assessee. In AY 2007-08, the DRP upheld CUP as the MAM and the department did not file any appeal against that order of DRP before the Tribunal. In AY 2008-09 the TPO vide his order dated 31.10.2011 accept Assessee’s adoption of CUP as MAM and also accepted that price paid in the international transaction to the AE is at Arm’s Length. In AY 2009-10 in ITA(TP)A.No.74/Bang/2014 order dated 6.7.2018 the Tribunal upheld order of the DRP accepting CUP as MAM. In AY 2010- 11 the Tribunal in IT(TP)A No.580/Bang/2015 order dated 31.3.2017 upheld the order of the DRP upholding CUP as MAM. There are no changes in the facts and circumstances in the present AY and hence the decision of the Tribunal rendered in the past will apply to the present AY 2015-16 also. 11. We are therefore the view that CUP should be adopted as the MAM. We direct the TPO to apply CUP as the MAM and determine ALP after due opportunity of being afforded to the Assessee. Ground II sub-grounds 2 to 6 are allowed. In view of the above conclusions the other sub-grounds 7 to 11 raised in Ground No.II does not require any adjudication.” 11. Respectfully following the above decision of this Tribunal, we direct the TPO to apply CUP as the MAM and recompute the ALP after giving the assessee a reasonable opportunity of being heard. Ground Nos. 2 to 6 are allowed. In view of the above conclusion, the other grounds 7 do not require any adjudication.
TP adjustment of AMP expenditure pertaining to trading segment – Grounds 11 to 33. 12. The assessee through these grounds is contending the treatment of alleged excess AMP expenditure pertaining to trading segment as a
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separate international 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.
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 sales of those comparables and took the average of the % of AMP expenses to sales which came to 1.34% and compared the same with the assessee’s AMP cost to conclude that assessee is incurring much more than the comparables. For the purpose of computation of non-routine AMP expenditure, the TPO took the average of the % of AMP expenses to sales which came to 1.34% and compared the same with the assessee’s AMP cost to conclude that assessee is incurring much more than the comparables. For the purpose of computation of non-routine AMP expenditure, the TPO took 6 comparables. The average OP/OC worked out to 10.78 and based on the same, the TPO computed the TP adjustment of Rs.1,23,25,95,287 which was later rectified to Rs.86,78,76,509.
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The assessee filed objections before the DRP. The DRP confirmed the TP adjustment.
The learned AR submitted that the use of brand ‘Lenovo’ in the AMP activities incurred by the assessee results in the entire benefit accruing to the assessee itself and not its AEs. The AMP expenses incurred was primarily for its own benefit. As the assessee receives the benefit, the in line with cost-benefit principle, it should also pay for the costs which cannot be expected to be remunerated from its AEs. This demonstrates that primarily assessee gets benefitted from the Amp activities undertaken by it and any benefit accruing to the AEs is incidental in nature. An advertisement, or promotion or marketing of a product cannot be carried out without the name of the manufacturer. Thus, assessee has to use the brand name primarily with the intention of providing identity to the products sold by the assessee. He relied on the decision of Hon’ble Delhi High Court in the case of Sony Erricson Mobile Communications (P) Ltd.(supra), Vs. CIT [374 ITR 118 (Del.)] where the court has held as under while dealing with identical issue:- 101. However, once the Assessing Officer/TPO accepts and adopts TNM Method, but then chooses to treat a particular expenditure like AMP as a separate international transaction without bifurcation/segregation, it would as noticed above, lead to unusual and incongruous results as AMP expenses is the cost or expense and is not diverse. It is factored in the net profit of the inter-linked transaction. This would be also in consonance with Rule 10B(1)(e), which mandates only arriving at the net profit margin by comparing the profits and loss account of the tested party with the comparable. The
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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 tested parties and the comparables match, with or without adjustments, AMP expenses are duly accounted for. It would be incongruous to accept the comparables and determine or accept the transfer price and still segregate AMP expenses as an international transaction…” 16. 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 (supra) has recorded a finding as under:-
“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 segment, as claimed by the assessee in Scenario-3 before the TPO. If the margins are accepted as at arm’s length and then applying the principles laid down by the Hon’ble Delhi High Court in the case of Sony Ericsson Mobile Communications India P. Ltd. (supra), incurring of AMP expenses cannot be treated as international transaction and consequently determination of ALP
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would not arise for consideration at all. We therefore set aside the order of the AO and remand the issue to the TPO for consideration of ALP of the trading segment applying the net profit margin method and if by such method the price received in the international transaction is considered as at arm’s length, then no separate addition needs to be made. In view of the above conclusion, we are of the view that sub-grounds (23) to (34) in ground III does not require adjudication at this stage.” 17. During the course of the hearing, the learned AR submitted that the Co-ordinate Bench in assessee’s own case for AY 2013-14 has deleted the addition made towards AMP expenditure and therefore prayed that similar directions may be given for the year under consideration also.
We notice that the Co-ordinate Bench in assessee’s own case for AY 2013-14 relied on the decision of the Tribunal for AY 2015-16, but instead of remitting the case back to the TPO, the Tribunal had deleted the addition specifically on the basis of the fact that the TPO has in his order (para 4.1) has specifically recorded that the assessee’s margin in trading segment is within arm’s length. The Tribunal had therefore held that there was no necessity to remit the issue back to the TPO.
In the present case, the TPO has not recorded specifically that he is satisfied about the 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.
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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:-
Provision for warranty Amount Opening balance 148,15,99,208 197,19,70,205 Provision made during the year Utilisation 190,52,83,337 Closing balance 154,82,86,076
The assessee submitted before the AO vide letter dated 21.09.2017 that the assessee is following a scientific method for provision for warranty as explained below:-
4.3 The assessee's authorized representatives furnished the details and justification vide letters dated 21/09/2017 and 16/10/2017 along with a soft copy of the provision for warranty workings maintained by Lenovo India for the FY 2013-14 submitting that the warranty obligation outstanding as on 31/03/2014 is a number of desktops, laptops and smart phones that carried a valid warranty as on that date. The assessee vide Para.No. 3 G vide letter dated 21/09/2017 submitted that the warranty provision has been created as per Accounting Standard 29 and is based on the scientific formula as explained below:- Machine months X Repair rate X Cost per claim
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Where: Machine months is the factor of the unexpired warranty period in months and the number of PCs which are under warranty at the end of the year; Repair rate is the percentage of claims out of the total sales made on the historical data for the region; and Cost per claim is the average expected repair cost per PC on historical data for the region. 4.4 The movement in the provision for warranty during the earlier year and the current year is: Financial Addition during Utilized/Reversed Opening Closing year the year during the year balance balance 2005-06 - 34,94,49,249 7,66,52,762 27,27,96,487 2006-07 27,27,96,487 55,18,39,359 40,27,12,947 42,19,22,899 2007-08 42,19,22,899 61,21,80,442 51,91,74,867 51,49,28,474 103,94,28,778 56,34,40,358 2008-09 51,49,28,474 108,79,40,662 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 7 103,75,04,656 100,25,76,056 134,75,29,40 7 7 2012-13 134,75,29,40 148,76,96,121 135,36,26,321 148,15,99,20 7 8 2013-14 148,15,99,20 197,19,70,205 190,52,83,337 154,82,86,07 8 6 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 expenditure and the provision created and concluded that provision created is not done scientifically and not reliable. He also made an analysis of the warranty provision with turnover for earlier years and concluded that the sales and the warranty provision are not proportionate i.e., there is higher movement of warranty in few years when the actual sales had come down. This was another reason to conclude that the method of provision for warranty is not reliable. The AO therefore disallowed the difference between the provision made during the year and
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actual utilization Rs.6,66,86,868 i.e., [Rs.1,97,19,70,205 – Rs.1,90,52,83,337]. The DRP confirmed the disallowance. Aggrieved the assessee is in appeal before the Tribunal.
23. We notice that the Co-ordinate Bench in assessee’s own case for Assessment Year 2015-16 has dealt with the same issue and held as under:-
“31. We have heard the rival submissions. The learned counsel for the Assessee submitted before us that the approach of the AO and the DRP is flawed because they have compared the provision made in AY 2015-16 with the actual liability incurred on account of performance of warranty claims of the same AY 2015-16. The proper approach should be to compare the current year provision with the actual of the succeeding year because the discharge of the warranty obligation will have only in the subsequent years and not in the year in which the products are sold. Our attention was drawn to the decision of the Hon’ble ITAT in AY 2006-07 in IT(TP) A.No.582/Bang/2015 dated 30.5.2016 wherein the Tribunal pointed out and explained how a similar approach of the revenue authorities are not correct. The following were the relevant observations of the Tribunal:- “16. We have perused the materials and heard the rival contentions. Question before us is whether assessee had made the provisioning for warranty in a scientific manner. It is not disputed that in the impugned assessment year it had started doing the business of sale of laptops and desktops. Obviously assessee had no historical data with it. It is also not disputed that assessee had taken over this business from IBM, who had substantial experience in such business. Hence if the assessee relied on the methodology followed by IBM for working out the warranty provision we cannot say that it was incorrect. There is no case for the Revenue that any provisioning 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
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warranty provisioning table of the assessee for the succeeding assessment years reveals the following:
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There is much strength in the argument of the Ld. AR that provision done for a year should be compared with the actual spending in the succeeding year. This is for the simple reason that expenditure incurred against warranty given on sales made in any given year would be reflected in the succeeding year, when the provisioning is done on the basis of machine months. Assessee had done the provisioning based on machine months. If by application of the formula of multiplying machine months with repair action rate and cost per claim, an excessive warranty provisioning had resulted, then definitely in the succeeding year the expenditure incurred on warranty would be much less. The table above would show that expenditure on warranty was higher in almost all succeeding years except financial year 2009-09. In such circumstances we cannot say that assessee had followed a method which was not scientific. We are of the opinion that the three conditions set out by the Hon'ble Apex Court in the case of Rotork Controls India (Pvt) Ltd have been satisfied by the assessee, viz., establishing that there is a present obligation on account of a past event, working out the probable estimate of the outflow of the resources required and substantiating the reliability of such estimate. Especially so since the assessee was mandatorily required to follow AS-I and principles of prudence stipulated in such AS-I required provisioning for all known liabilities even if it could not be determined with certainty, but was made based on available data. We therefore delete the addition made by the AO disallowing the provision for warranty. Ground 7 of the assessee stands allowed.” 32. The learned DR relied on the order of the AO/DRP.
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We have carefully considered the rival submissions. The basis for creating provision adopted by the Assessee is Machine months x repair rate x cost per claim Where: Machine Months = Factor of the unexpired warrant period in months and the number of PCs which are under warranty at the end of the year Repair Rate = Percentage of claims out of the total sales made on the historical data for the region. Cost per claim =Average expected repair cost per PC on historical data for the region. 34. The hypothetical computation by the revenue authorities of percentage of actual claim for the year and provision 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. We notice that the Tribunal has been consistently taking the similar view in assessee’s own case for Assessment Year 2006-07, 2007-08, 2010-11 to 2015-16 also. Therefore, we respectfully follow the decisions of the Co-ordinate Bench and hold that the provision for warranty is an allowable expenditure.
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Ground Nos. (43) to (45) on the issue of addition of provision for warranty to the book profits under section 115JB is incidental. In view of the decision on the allowability of provision for warranty, this ground which is incidental, does not warrant any separate adjudication and hence dismissed.
Disallowance of advertisement and business promotion expenditure under section 37 of the Act 26. During the assessment proceedings, the AO called for the party wise details viz., name, current postal address, PAN, TDS deducted and the nature of payment with respect to ‘other expenses’ debited to the P & L A/c. The assessee produced the details called from time to time for the purpose of further cross verification. The AO issued notice under section 133(6) of the Act to five parties selected on random basis. Out of these 5, one party namely Mudhrana Creations Ind. Pvt. Ltd., did not respond / reply to the AO. The AO therefore treated the payment made to the said party as not genuine and disallowed the same under section 37(1). The DRP confirmed the addition.
Before us, the learned AR submitted to substantiate the genuineness of expenditure and existence of the vendor, the following documents were filed during the assessment proceedings:-
Copy of Form 16AS evidencing the tax deducted by assessee on advertising services availed from Mudhranaa. 2. Copy of sample invoices issued by Mudhranaa. 3. Extracts from website of Mudhranaa evidencing its existence and its business of providing advertising and marketing related services. 4. Screenshot of the clientele of Mudhranaa which includes the assessee, Lenovo India.
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Extract of balance sheet of Mudhranaa (pg 965 to 1036 of PB). 28. Further, before the DRP the assessee submitted the bank statement for AY 2014-15 and payment ledger extract of Mudhranaa in the books of the assessee [pg. 1373 to 1385 of PB]. The ld. AR submitted that the Tribunal in the assessee’s own case for AYs 2006-07, 2007-08, 2010-11 & 2011-12 has held that provision for warranty is created on a scientific basis.
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 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.
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In the result, appeal of the assessee is partly allowed.
Pronounced in the open court on 13th day of June, 2022.
Sd/- Sd/- Sd/- Sd/- (GEORGE GEORGE K) (PADMAVATHY S) Judicial Member Accountant Member Bangalore, Dated, the 13th June, 2022.
/NS/* /Desai S Murthy /
Copy to: 1. Appellant 2. Respondent 3. CIT 4. CIT(A) 5. DR, ITAT, Bangalore.
By order
Assistant Registrar ITAT, Bangalore.