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Income Tax Appellate Tribunal, “A’’BENCH: BANGALORE
Before: SHRI N.V. VASUDEVAN & SHRI B.R. BASKARAN
PER B.R. BASKARAN, ACCOUNTANT MEMBER:
The assessee has filed this appeal challenging the final assessment order dated 27.1.2017 passed by the A.O. u/s 143(3) r.w.s. 144C of the Income-tax Act,1961 ['the Act' for short] for assessment year 2012-13 in pursuance of directions given by Ld. Dispute Resolution Panel (“DRP”).
The assessee is engaged in the business of manufacture, import, marketing, distribution and export of information technology systems including input, output devices and network products, software and maintenance services. The A.O. completed the assessment u/s 143(3) r.w.s. 1
IT(TP)A No.452/Bang/2017 Lenovo (India) Pvt. Ltd., Bangalore 144C of the Act in pursuance of directions given by Ld. DRP. The assessee is aggrieved on the additions made by the A.O.
Ground No.1 is general in nature. Ground No.2 consisting of 2.1 to 2.8.4 relates to transfer pricing adjustment made in respect of manufacturing segment. The manufacturing segment consisted of manufacturing and distribution of desktops and note books. The assessee had benchmarked the international transactions in manufacturing segment under internal CUP method. The TPO adopted TNM method and accordingly made transfer pricing adjustment of Rs.22.62 crores. The Ld. DRP gave partial relief to the assessee and accordingly transfer pricing adjustment came to be reduced to Rs.9.79 crores.
3.1 The Ld. A.R. submitted that an identical issue has been examined by the coordinate bench in the assessee’s own case in IT(TP)A No.2444/Bang/2019 relating to assessment year 2015-16 and the tribunal, vide its order dated 6.3.2020, restored the matter to the file of the TPO with the direction to apply CUP method as most appropriate method and accordingly determined arm’s length price. The Ld A.R submitted that the co-ordinate bench had examined the Most Appropriate Method adopted for earlier years and accordingly gave the above said direction. The Ld. A.R. prayed that this issue may be restored to the file of the AO following the decision rendered by the coordinate bench in assessment year 2015-16.
3.2 We heard Ld. D.R. and perused the record. We notice that an identical issue has been considered by the coordinate bench in the assessee’s own case in assessment year 2015-16. The Tribunal noticed that the CUP method has been accepted in the earlier years and accordingly directed the TPO to adopt CUP method as most appropriate method. The decision rendered by the coordinate bench in assessment year 2015-16 on this issue is extracted below:-
IT(TP)A No.452/Bang/2017 Lenovo (India) Pvt. Ltd., Bangalore • “In AY 2006-07, the Tribunal has in its order dated 30.5.2016 in IT (TP)ANo.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 A.Y. 2010-11 the Tribunal in IT(TP)A No.580/Bang/2015 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.
• 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.11 does not require any adjudication.”
Following the above said decision, we set aside the order passed by the A.O. on this issue and restore the same to the file of TPO/AO with the direction to apply CUP method as most appropriate method and examine ALP accordingly, after providing adequate opportunity of being heard to the assessee.
The ground No.3 consisting of sub-grounds 3.1 to 3.2.16 relates to transfer pricing adjustment made in relation to “Advertising, marketing and promotion expenditure (AMP expenses). During the year under consideration, the assessee had incurred Rs.1138 crores on account of advertising, marketing and sales promotion. The case of the assessee was that it is not an international transaction, as it was incurred in India for distribution segment. The TPO did not accept the same and he applied bright line test and accordingly made transfer pricing adjustment of Rs.111.68 crores. The same was upheld by Ld. DRP and accordingly, the A.O. also made the addition.
IT(TP)A No.452/Bang/2017 Lenovo (India) Pvt. Ltd., Bangalore 4.1 The Ld. A.R. submitted that the assessee has incurred AMP expenses to boost its market share and the same was not incurred at the instance of overseas A.E. He further submitted that there was no mutual agreement or understanding or arrangement with the A.E. towards reimbursement of expenses incurred by the assessee for AMP. Accordingly, by placing reliance on the decision rendered by Hon’ble Delhi High Court in the case of Maruti Suzuki Ltd. (ITA No.110/2014 & ITA 710/2015), the Ld. A.R. submitted that the AMP expenses will not fall under the purview of international transaction as defined u/s 92 of the Act and hence, the transfer pricing adjustment made by the AO is liable to be deleted.
4.2 We heard Ld. D.R. on this issue. According to the Ld. A.R., the decision rendered by Hon’ble Delhi High Court in the case of Maruti Suzuki Ltd. squarely applies to the facts of the present case. We also notice that the coordinate bench in the assessee’s own case for A.Y. 2015-16 has restored an identical issue to the file of the A.O. with the following observations:- “17. We have considered his submission and are of the view that it would be just and appropriate to set aside the issue of determination of net margin of the assessee and in the trading 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 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.”
We notice that the co-ordinate bench has directed the TPO to examine the ALP of trading segment applying net margin method and further directed that no separate adjustment is called for, when the price received in the international transaction is considered as at arm's length.
IT(TP)A No.452/Bang/2017 Lenovo (India) Pvt. Ltd., Bangalore 4.3 However, the Ld A.R has contended before us that the AMP expenses, in the facts and circumstances of the case, cannot be considered as an international transaction. In support of this contention, he brought out certain facts and also placed reliance on the decision rendered by Hon'ble Delhi High court in the case of Maruti Suzuki Ltd (supra). We notice that the facts surrounding the AMP expenses have to be examined by AO/TPO vis-a-vis the decision rendered by Hon'ble Delhi High court in the above said case. Further, we notice that the co-ordinate bench has restored an identical issue to the file of AO/TPO in AY 2015-16, we prefer to restore this issue to the file of AO/TPO in this year also. We also direct AO/TPO to first examine the applicability of decision rendered by Hon’ble Delhi High court in the case of Maruti Suzuki India Ltd. (supra) to the facts of the present case and accordingly first determine the question as to whether the AMP expenses would fall under the category of international transaction. If it is held to be not an international transaction, then the question of making any transfer pricing adjustment will not arise. After hearing the assessee and examining the facts afresh, the AO/TPO may take appropriate decision in accordance with law.
Ground No.4 consisting of 4.1 to 4.6 relate to disallowance of provision for warranty. During the year under consideration, the assessee had provided for “provision for warranty” to the tune of Rs.103.75 crores and claimed the same as deduction. The A.O. took the view that the provision for warranty is a contingent liability. Accordingly, he held that the same is not allowable as deduction. However, the A.O. allowed actual expenditure incurred during the year on meeting the warranty claims, which was Rs.100.25 crores. Accordingly, the AO made net disallowance of Rs.3,49,28,600/-.
5.1 The Ld. A.R. submitted that this is a recurring issue and the Tribunal in A.Y. 2015-16 allowed the claim of the assessee, following the decision rendered in assessment year 2006-07. He submitted that an identical issue was decided in the assessee’s own case in favour of the assessee in IT(TP)A No.452/Bang/2017 Lenovo (India) Pvt. Ltd., Bangalore assessment year 2011-12 by the Hon’ble High Court of Karnataka in of 2017 dated 6.2.2021.
5.2 We heard Ld. D.R. on this issue and perused the record. We notice that the Tribunal, in assessment year 2015-16 (supra), has decided this issue in favour of the assessee by following the decision rendered in the assessee’s own case in assessment year 2006-07 in IT(TP)A No.582/Bang/2015 dated 30.5.2016. The decision rendered by the Tribunal in assessment year 2015-16 are extracted below:- “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.”
5.3 We also notice that an identical disallowance made by the AO in assessment year 2011-12 has since been allowed by Hon’ble High Court of Karnataka in the assessee’s own case following the decision rendered by Hon’ble Supreme Court in the case of Bharat Earth Movers Vs. CIT 245 ITR 278 by holding that no substantial question of law has arisen on this issue. Accordingly, following the decision rendered by the coordinate bench as well as Hon’ble jurisdictional High Court, we direct the A.O. to delete the disallowance of Rs.3,49,28,600/- relating to provision for warranty.
Ground No.5.1 consisting of 5.1.2 to 5.1.3 relates to addition of “provision for warranty” to the net profits under Explanation 1 to sec.115JB
IT(TP)A No.452/Bang/2017 Lenovo (India) Pvt. Ltd., Bangalore for the purpose of computing book profits, holding the same as ‘contingent liability’. In the earlier paragraph, we have held that the provision for warranty is not contingent liability and accordingly allowed the deduction for computing total income under normal provisions of the Act. We also notice that the coordinate bench has also adjudicated this issue u/s 115JB in assessment year 2015-16 expressing the view that the provision for warranty need not be added to the net profit u/s 115JB, since it is not a contingent liability. The relevant observations made by the coordinate bench in AY 2015-16 are extracted below:- “35. As far Gr.No.VII raised by the assessee is concerned, the same relates to addition made to the book profits u/s 115JB of the Act on account of provision for warranty liability treating the same to be a liability of a contingent nature and hence liable to be added to the profit as per profit and loss account prepared in accordance with companies act to arrive at the book profit of the Assessee for the purpose of levy of tax on book profit under sec.115JB of the Act. We have already held that the provision for warranty expenses is not contingent and has to be allowed as deduction while computing income under the head “Income from Business & Profession”. As a consequence of such finding, the addition made to the book profits is to be deleted because the liability cannot be said to be contingent. We hold and direct accordingly.”
6.1 Following the same, we hold that there is no requirement of making addition of provision for warranty to the net profit for computing book profit u/s 115JB of the Act. Accordingly, the AO is directed to delete the same. The order passed by Ld CIT(A) on this issue stands set aside.
Ground No.5.2 consisting of 5.2.1 to 5.2.5 relates to the addition of “provision for compensated absence” (“Provision for leave encashment”) treating it as contingent liability while computing book profit u/s 115JB of the Act. We notice that an identical issue has been considered in the assessee’s own case in assessment year 2011-12 in IT(TP)A No.373/Bang/2016 dated 21.10.2016 and the Tribunal held that the provision for leave encashment need not be added back to book profits for the purpose of computing tax liability u/s 115JB of the Act. The relevant observations made by the Tribunal are extracted below:- “12. The only issue relates to addition of provision for leave encashment and the provision for warranty expenditure added to book profits while computing tax liability
IT(TP)A No.452/Bang/2017 Lenovo (India) Pvt. Ltd., Bangalore u/s 115JB of the Act. As regards provision for warranty expenditure, we had already held that it is not a contingent liability and hence is allowable as deduction. Therefore, the question of addition to book profits does not arise. As regards provision for leave encashment, following the decision of the Hon'ble Gujarat High Court in the case of DCIT vs. Inox Leisure Ltd. (351 ITR 314), the same is allowable as deduction. The Hon'ble Gujarat High Court, after considering the decision of the Hon'ble Apex Court in the case of Bharat Earth Movers (supra) held as follows:
"16. Coming to the question No. 2, we notice that the same arises out of the Tribunal's decision to uphold the CIT(A)'s view that the provision of Rs. 5,10,000/- made by the assessee towards its gratuity liability cannot be added back for the purpose of computation of the assessee's income under Section 115JB of the Act. Section 115JB of the Act as is well known pertains to special provision for payment of tax by certain companies. Sub-section (1) of Section 115JB of the Act provides that a minimum alternative tax to be paid by the companies as computed under the said provision. Sub-section (2) of Section 115 JB requires every company for the purposes of the said section to prepare its profit and loss account in accordance with the provisions of paras 2 and 3 of Schedule 6 of the Companies Act. Explanation 1 to said section provides that for the purposes of the said section, "book profit" means the net profit as shown in the profit and loss account for the relevant previous year prepared under sub- section (2), as increased by various items specified in Clauses (a) to (0 provided therein. Clause (c) thereof reads as thus: \ "(c) The amount or amounts set aside to provisions made for meeting liabilities, other than ascertained ' In other words, if an amount is specified for provision which is for meeting with the liabilities not ascertained such provision so made shall have to be added back to the book profit of the company. Put it differently, if such provision is made for ascertained liability, no such addition back shall be made. In this context, the Tribunal was called upon to decide whether the assessee having made provision of Rs. 5,10,000/- towards gratuity would be covered under Clause (c) to Explanation 1 to Section 115.18 of the Act. The-Tribunal relied on the decision of the Bombay High Court in case of CIT v. Echjay Forgings (P.) Lid. [20011 251 IT1? 15/116 Taxman 322 and confirmed the view of the CIT(A).
Having heard learned counsel for the parties and having perused documents on record, we notice that CIT(A) as well as the Tribunal both noted that such provision for payment of gratuity was made on the basis of actuarial valuation method to this aspect. The revenue has not been able to make any dispute. If we proceed on that basis, law to our mind, seems fairly well settled. Bombay High Court in case of Echjay Forgings (P.) Ltd (supra) in the context of similar provisions made in Section 115.IB of the Act examined whether the provision of gratuity liability of a company is required to added back to its book profit. In this context, it was held that the assessee had made the provision for gratuity on the basis of actuarial calculations. He, therefore, cannot be said that the provision for gratuity is not ascertained liability.
IT(TP)A No.452/Bang/2017 Lenovo (India) Pvt. Ltd., Bangalore 18. In case of Bharat Earth Movers v. CIT [2000] 245 ITR 428/112 Taxman 61 the Apex Court held that the amounts set apart by an assessee to meet its liability on account of leave encashment of employees is not a contingent liability. It was observed that what should be certain is the incurring of the liability which should also be estimated with reasonable certainty though the actual quantification may not be possible then. Its requirements are satisfied the liability is not a contingent one. The liability is in praesenti though it will be discharged at a future date.
Likewise in case of Metal Box Co. of India Ltd. v. Their Workmen [1969] 73 ITR 53 (SC), the Apex Court examined the question whether it is legitimate in such a scheme of gratuity, to estimate the liability on an actuarial valuation and deduct the same in profit and loss account while working out the net profit of a company and further whether such appropriation amounts to a reserve or provision. The Supreme Court held that an assessee can while working out its net profits, provide from its gross receipts his liability to pay a certain sum towards gratuity liabilities of the employees. If such liability is properly ascertainable and it is possible to arrive at proper discounted present value.
In case of Rotork Controls India (P.) Ltd. v. CIT [2009] 314 ITR 62/180 Taxman 422 (SC), the Supreme Court' in the context of an assessee making provision for estimated expenditure towards warranty observed that provision is a liability which can be measured only by using substantial degree of estimation. Such provision is recognized when an assessee had a present obligation as a result of past events, and it is possible that any outflow of resources will be required to settle the obligation and further a reliable estimate can be made of the amount of obligation.
Considering the above judicial pronouncements and the facts on hand, we have no hesitation in upholding the Tribunal's view that though actual payment of gratuity may be made at a later point of time upon periodical release of the employees from service, it is provision having been made on actuarial basis it cannot be stated to be an uncertained liability so as to add it back in terms of Clause (c) to Explanation 1 to Section 115JB. "
Respectfully following the above decision, we hold that provision for leave encashment need not be added back to book profits for the purpose of determining tax liability u/s 115JB of the Act.” 7.1 Following the above said decision, we hold that the provision for compensated leave (provision for leave encashment) need not be added to the net profit for the purpose of computing book profit u/s 115JB of the Act as the same is not contingent liability.
IT(TP)A No.452/Bang/2017 Lenovo (India) Pvt. Ltd., Bangalore 8. Other grounds urged by the assessee are premature or consequential in nature.
In the result, the appeal filed by the assessee is treated as allowed for statistical purposes.
Order pronounced in the open court on 5th May, 2022.