M/S LENOVO INDIA PRIVATE LIMITED ,BANGALORE vs. ASSISTANT COMMISSIONER OF INCOME TAX CIRCLE-4(1)(1), BANGALORE

ORDER

PER BEENA PILLAI, JUDICIAL MEMBER Present appeal arises out of the final assessment order dated 30.10.2017 passed by Ld.DCIT, Circle – 4(1)(1), Bangalore for Assessment Year 2013-14 on following grounds of appeal: “

2. Transfer pricing adjustment in the Manufacturing segment of INR 10,19177,372 The Hon’ble DRP and learned AO / TPO have erred in 2.1. law and on facts in making transfer pricing (“TP”) adjustment of INR 10,19,77,372 to the returned loss of the Appellant and in holding that the international transactions undertaken by the Appellant with its associated enterprises (“AEs”) in the manufacturing segment were not at arm’s length. 2.2. Rejection of internal comparable uncontrolled price selected as the most appropriate method by the Appellant 2.2.1. The Hon’ble DRP and learned AO / TPO have erred in law by rejecting the application of Internal Comparable Uncontrolled Price (“CUP”) method selected as the most appropriate method (“MAM”) by the Appellant for benchmarking the international transaction of import of raw materials in relation to manufacturing segment. 2.2.2. The Hon’ble DRP and learned AO / TPO have erred in upholding the learned TPO’s stand that average of the comparable uncontrolled transaction prices which are similar comparables to each other cannot be taken as the arm’s length price under the internal CUP method. 2.2.3. The Hon’ble DRP and learned AO / TPO have erred in law and on facts in concluding that the Appellant has adopted industry average rates and, on this basis, rejecting the CUP method, when only the average of the comparable uncontrolled transaction prices under internal CUP method were used by the Appellant. 2.2.4. The learned TPO erred in concluding that comparable data is not available for a substantial portion of the transactions, when he himself has acknowledged in the TP order that comparable uncontrolled transactions are available to the extent of 84 percent of the value of total purchases from the AEs. Further, no rational basis is provided with respect to the aforesaid percentage calculated by the learned TPO. 2.2.5. The Hon’ble DRP and learned AO / TPO have erred in rejecting the CUP method as the MAM when similar transactions of the Appellant for the preceding years AY 2007-08 and 2008- 09 has been benchmarked by the Appellant under the CUP method and reported as such in the Form 3CEBs filed for the relevant years and have been accepted to be at arm’s length in the TP Orders for those years. 2.2.6. The Hon’ble DRP and learned AO / TPO have failed to consider the principle upheld by the jurisdictional bench of the Page 3 of 37 IT(TP)A No. 2833/Bang/2017 Income Tax Appellate Tribunal (“ITAT”) in the Appellant’s own case for AY 2006-07, which had held in the context of benchmarking the Appellant’s import of raw materials transaction pertaining to the manufacturing segment that the CUP method, where consistently applied and accepted in the assessments of the subsequent years AY 2007-08 and 2008-09, should not be substituted with the transactional net margin method (“TNMM”). 2.2.7. The Hon’ble DRP and learned AO / TPO have erred in rejecting the CUP method as MAM when the jurisdictional bench of Hon’ble ITAT as well as the Hon’ble DRP in the Appellant’s own case for AY 2010-11, have upheld the adoption of Internal CUP as the MAM for determining the ALP of import of raw materials transaction pertaining to manufacturing segment. 2.2.8. The Hon’ble DRP and learned AO / TPO have erred in not following the settled principle based on the rulings of the Supreme Court that where a fundamental fact permeates through more than one year and is accepted by the Revenue authorities, it should not be arbitrarily rejected. 2.3. The Hon’ble DRP and learned AO / TPO have erred in law and on facts by adopting the TNMM as the MAM for benchmarking the international transaction of import of raw materials in the manufacturing segment. Fresh comparability analysis undertaken by the 2.4. learned TPO 2.4.1. The Hon’ble DRP and learned AO / TPO have erred in law by conducting a fresh search for comparable companies and by rejecting the benchmarking process carried out by the Appellant as per the provisions of the Act, without giving adequate reasons for the rejection. 2.4.2. The Hon’ble DRP and learned AO / TPO have erred in law in adopting the following filters for conducting TP analysis, without appreciating the TP documentation prepared by the Appellant:  Rejection of companies having different financial year ending (other than March 31, 2013) or data of the company does not fall within the 12 month-period of April 1, 2012 to March 31, 2013. 2.4.3. The Hon’ble DRP has erred in law and on facts in not providing detailed reasons for rejecting the contentions of the Appellant for exclusion of the TPO’s comparable companies even though detailed submissions were filed by the Appellant in this regard.

Page 4 of 37 IT(TP)A No. 2833/Bang/2017 2.4.4. The learned AO / TPO, has erred in law and on facts, in considering the following companies as comparable without considering the detailed submissions of the Appellant  Simmtronics Semiconductors Limited;  B L G Electronics Limited;  Circuit Systems (India) Limited;  Fine-Line Circuits Limited;  VXL Instruments Limited;  Smart Card IT Solutions Limited;  Epitome Components Private Limited;  Sulakshana Circuits Limited; and  Micropack Private Limited 2.4.5. The learned AO / TPO and DRP have erred in law and on facts, in rejecting the following companies that were engaged in similar business as that of the companies that are considered in the final set of comparable companies by the learned AO/ TPO and DRP.  Ruttonsha International Rectifier Limited;  Centum Electronics Limited;  SPEL Semiconductor Limited;  Akasaka Electronics Limited; and  Titan Time Products Limited; 2.4.6. The learned AO / TPO / DRP have erred in not providing reasons or basis in the TP order for the filters applied by him and thereby arriving at the final set of comparable companies after application of such filters. 2.5. Without prejudice to the above, the learned AO / TPO have erred in law and on facts in not rectifying the arithmetical errors in computation of net profit margins of the comparable companies selected despite that fact the Hon’ble DRP has directed the AO / TPO to rectify the same.  Simmtronics Semiconductors Limited; and  Circuit Systems (India) Limited 2.6. Without prejudice to the above, the Hon’ble DRP and learned AO / TPO have erred in law by not granting appropriate favourable economic adjustments (including the working capital adjustment) from the arithmetic mean margin computed for benchmarking under the TNMM for the manufacturing segment. Other grounds 2.7. 2.7.1. The Hon’ble DRP and learned AO / TPO have failed to appreciate the Appellant’s commercial judgment about the application of arm’s length principle which is tied to the business realities.

Page 5 of 37 IT(TP)A No. 2833/Bang/2017 2.7.2. The learned AO / TPO have erred in law and on facts, in making several observations and findings which are based on incorrect interpretation of law and contrary to facts of the case. 2.7.3. The learned AO / TPO has erred by not carrying out the determination of arm’s length price as required under section 92C of the Act read with rule 10D of the Rules.

Page 6 of 37 IT(TP)A No. 2833/Bang/2017 3.1.7 The Hon’ble DRP and learned AO / TPO have erred in law and on facts in concluding that the “conduct of the Assessee clearly shows the presence of an arrangement for promotion of marketing intangibles”. 3.1.8 In this regard, the Hon’ble DRP and learned AO / TPO have failed to consider that the alleged AMP expenses were incurred exclusively in relation to the Appellant’s business, which is also evident from the fact that the expenditure has been accepted by the AO under section 37 of the Act. 3.1.9 The Hon’ble DRP and learned AO / TPO have erred in law and on facts by not appreciating that the Appellant is a distributor of products imported from its AEs and these transactions are carried out on a principal-to-principal basis and is solely responsible for improving its business market in India and increasing the sales of its products in India. The Appellant had incurred expenditure on AMP to cater to local market needs. AMP expenditure has been incurred in relation to local product advertisements and towards domestic independent third parties, thus the domestic unilateral expenditure incurred by the Appellant for the purpose of its business cannot be classified as a deemed international transaction under section 92B(2) of the Act. 3.1.10 The Hon’ble DRP and learned AO / TPO have failed to appreciate that the Appellant has been uninterruptedly using the said brand for the last several years and till date, thus, all benefits enured to the Appellant, for which the Appellant has not even been paying any royalty to its AE. Consequently, for all purposes the Appellant is the sole beneficiary of all the benefits of AMP expenditure incurred during financial year ending March 31, 2013. 3.1.11 The Hon’ble DRP and learned AO / TPO have erred in law and on facts, by holding that the Appellant by incurring excessive AMP expenditure has resulted in creation of marketing intangible in favor of the AE, for which it should be compensated by the AE. 3.1.12 The Hon’ble DRP and learned AO / TPO have erred in law and on facts by disregarding judicial pronouncements in undertaking TP adjustments in relation to AMP. 3.1.13 The Hon’ble DRP and learned AO / TPO have evaluated the reasonableness of such expenses, which should not be judged only on the subjective standards but from the point of view of commercial expediency. 3.1.14 The Hon’ble DRP and learned AO / TPO have erred in not carrying out the determination of ALP as required under section 92C of the Act read with rule 10D of the Income-tax Rules, 1962.

Page 7 of 37 IT(TP)A No. 2833/Bang/2017 3.2 Notwithstanding and without prejudice to the above grounds that the AMP expenditure incurred by the Appellant does not constitute an international transaction under Chapter X of the Act, the Appellant craves to raise following grounds of objections on merits. 3.2.1 The Hon’ble DRP and learned AO / TPO have erred in law and on facts in concluding that the distribution and AMP are two distinctive functions and requires to be remunerated separately. 3.2.2 The Hon’ble DRP and learned AO / TPO have erred in applying the Bright Line Test (“BLT”) as a methodology to quantify the brand promotion service alleged to have been rendered by the Appellant to its AE. 3.2.3 The Hon’ble DRP and learned AO / TPO have erred in stating that while the Appellant has used Resale Price Method (“RPM”) to benchmark its international transactions, the gross margins do not reflect the expenditure relating to the additional function carried out by the Appellant in the form of AMP function. In doing so, the learned TPO has erroneously disregarded the Appellant’s submission that even while the AMP expenditure is considered as a part of the gross margin (adjusted gross margin), the Appellant would still operate at arm’s length. 3.2.4 Without prejudice to the fact that the Appellant has adopted RPM as the MAM for benchmarking the distribution segment, Appellant prays that even if TNMM is applied as the MAM, the Appellant would still operate at arm’s length. 3.2.5 The Hon’ble DRP and learned AO / TPO have erred in disregarding the Appellant’s submission that even while AMP expenditure along with the alleged markup is considered as part of adjusted gross margin and adjusted net margin, the Appellant would still operate at arm’s length at gross and net levels when compared to the gross and net level margins of comparable companies for trading segment, as upheld by the Hon’ble DRP and learned AO / TPO. 3.2.6 The Hon’ble DRP and learned AO/ TPO have erred in not appreciating that if for the comparable trading companies selected by the Appellant and accepted by the learned TPO, an additional revenue (AMP expenditure incurred plus a mark-up as determined by the learned TPO) is imputed to the respective revenues of comparable companies on account of the alleged brand building activity the net margin earned by Appellant will still be within the tolerance band of the adjusted net margin of the comparable companies.

Page 8 of 37 IT(TP)A No. 2833/Bang/2017 3.2.7 The Hon’ble DRP has erred in law in not considering the detailed submissions of the Appellant that even after performing an AMP expense intensity adjustment to the comparable companies, the adjusted net margin earned from the trading activity by the Appellant is at arm’s length. The AMP expense intensity adjustment was affirmed by the Delhi Bench of Hon’ble ITAT in case of Luxottica India Eyewear Pvt Ltd Vs. ACIT1 wherein the AMP intensity adjustment is performed on the profit levels of comparable companies so as to bring them to the level of the Appellant after factoring in the differences in the intensities of AMP expenditure of the comparable companies vis-à-vis the AMP expenditure incurred by The Appellant. 3.2.8 The Hon’ble DRP and learned AO / TPO have erred in law and on facts by characterizing the incurrence of AMP expense as a provision of services by the Appellant to its AE requiring a mark-up. 3.2.9 The Hon’ble DRP and learned AO / TPO have erred in law and on facts in not appreciating that the Appellant has not provided any value added / brand building services to its AE by incurring AMP expenses, and therefore, no mark-up could have been charged / levied on such expenses, even if the same was to be characterized as an ‘international transaction’. 3.2.10 Notwithstanding and without prejudice to the above ground, the Hon’ble DRP and learned AO / TPO have erred in recognizing that even if the mark-up is to be applied, the same could have been charged only on the value added expenses incurred by the Appellant for such alleged brand promotion service and not on the entire amount incurred / paid to third party vendors. 3.2.11 The Hon’ble DRP and learned AO / TPO have erred in not appreciating that in view of the Appellant being contractually assured of a margin after cost recovery, the entire AMP expenditure has in fact been recovered from the AE and hence adjustment could only be restricted to markup, that too if the operating margin of the company was not at ALP. That the Hon’ble DRP and learned AO/TPO have erred in not appreciating that the cost is recovered is evident from its contract, and the extract from the inter-company distribution agreements is reproduced below for your Honours’ ready reference: “The parties intend to set the prices for sale of Products by Supplier to Distributor at levels that will results in Distributor earning annual operating income, determined under local generally accepted accounting principles, with respect to the Page 9 of 37 IT(TP)A No. 2833/Bang/2017 Products (after taking into account all expenses and reimbursements attributable to the Products)” 3.2.12 The Hon’ble DRP and learned AO / TPO have erred in carrying out a search for comparable companies in order to determine the mark-up that the Appellant should have recovered from the AE in relation to the alleged AMP expenses considered to be in the nature of brand promotion service. 3.2.13 The Hon’ble DRP and learned AO / TPO have erred in not sharing the basis or the search process adopted in the fresh search / filters undertaken by the learned AO / TPO in undertaking the search. 3.2.14 The Hon’ble DRP and learned AO / TPO have erred in determining the mark-up for the alleged international transaction of brand promotion services at 7.59 percent by selecting companies which are not comparable to the Appellant due to reasons including functional dissimilarity. Specifically, the following companies considered by the learned TPO are functionally dissimilar:  Scarecrow Communications Limited;  Asian Business Exhibition & Conference Limited;  Compare Infobase Private Limited;  Percept Advertising Limited; and  Franchise India Brands Limited. 3.2.15 The Hon’ble DRP and learned AO / TPO have erred in law and on facts by not granting the benefit of quantitative adjustments while computing the TP adjustment for the alleged excessive AMP expenditure incurred by the Appellant. 3.2.16 The Hon’ble DRP and learned AO / TPO have erred in not granting appropriate favourable economic adjustments (including the working capital adjustment) when assessing the arm’s length nature of alleged international transaction of the Appellant. 3.2.17 The Hon’ble DRP and learned AO / TPO have erred in law and on facts, in making several observations and findings which are based on incorrect interpretation of law and contrary to facts of the case.

4. Disallowance of provision for warranty 4.1 The Honorable DRP and the learned AO have erred in law in arbitrarily disallowing the provision for warranty amounting to INR 13,40,69,800 claimed as a deduction by the Appellant. 4.2 The Honorable DRP and the learned AO have erred in law by not following the order of the Honourable ITAT in the Appellant’s own case for the AY 2006-07, AY 2007-08, AY 2010-11 and AY 2011-12, wherein it was held that the Page 10 of 37 IT(TP)A No. 2833/Bang/2017 provision for warranty has been created on a scientific basis and that the same should be allowed as a deduction. 4.3 The Honorable DRP and the learned AO have not appreciated the fact that the Appellant maintains its books on a mercantile basis of accounting and that the said warranty provision has been created on a scientific manner followed consistently over the years, having due regard to the nature of activity, its global warranty accrual processes and the industry requirement in which the Appellant operates. 4.4 The Honorable DRP and the learned AO have erred on facts in failing to consider that the Appellant has provided for warranty on a scientific and consistent manner every year applying the principles laid out by the Honorable Supreme Court in the case of Rotork Controls India Private Limited2 and therefore such expenditure is an allowable deduction under section 37 of the Act. 4.5 The Honorable DRP and the learned AO have erred in not appreciating the fact that warranty provision created for AY 2008-09 and AY 2009-10 was accepted to be created on a scientific basis by the learned AO after examining the same and was allowed as a deduction under section 37 of the Act.

Page 12 of 37 IT(TP)A No. 2833/Bang/2017 2. Brief facts of the case are as under: Lenovo (India) Private Limited ("Appellant") is a company incorporated under the Companies Act, 1956 with its registered office in Bangalore. Assessee is primarily engaged in the business of manufacture and sale of desktops, laptops and smartphones. The Company has a manufacturing unit at Pondicherry. For the year under consideration, the assessee filed its return of income on 27.11.2013 declaring loss of Rs 56,28,18,000. The return of income was picked up for scrutiny and statutory notices u/s. 143(2) and 142(1) were issued to assessee. On receipt of statutory notices, authorized representative of assessee filed requisite details as called for. 2.1 The Ld.AO observed that assessee entered into international transactions with its AE exceeding ₹ 15 crores and accordingly reference u/s. 92CA was made to the transfer pricing officer. Upon receipt, of reference, the Ld.TPO called upon assessee to file the economic details of international transactions undertaken by assessee in Form 3CEB. 2.2 The Ld.TPO observed that During the AY 2013-2014, the assessee imported certain parts and components from its Associated enterprises ("AEs") for purpose of manufacturing of Personal Computers (PCs). 2.3 The Ld.TPO observed that the assessee also imported parts and components from third parties. The assessee chose Comparable Uncontrolled Price (CUP) as the Most Appropriate Method (MAM) for determining ALP. Assessee compared the price paid for import of parts and components from unrelated persons with the price paid for import of parts and components to the AE.

Page 13 of 37 IT(TP)A No. 2833/Bang/2017 In its Transfer Pricing Analysis, the assessee considered itself as assuming most of the risks including market risk, inventory risk, credit and collection risk, forex risk, warranty and idle capacity risk. Based on the functions and risks performed, the assessee characterized itself as a "full- fledged manufacturer" for its manufacturing activity. 2.4 The Ld.TPO did not accept the TP analysis by assessee for the reasons given in the show cause notice dated 20.09.2016. He rejected the CUP method adopted by the assessee to its Manufacturing Segment and applied the TNMM as the MAM and determined ALP which resulted in an adjustment of Rs.10,19,77,372/-. 2.5 The Ld.TPO observed that assessee is engaged in the business of manufacturing and distribution of desktop, laptop, servers and smartphones. During the relevant previous year, the assessee incurred expenditure in connection with campaigning, depicting features of new products, providing information to the public about details of product, its specification etc. 2.5.1 In the TP study assessee considered the expenditure so incurred to improve its sale and not to promote the brand of foreign AE. The Ld.TPO called upon assessee to provide various details in support of assessee’s claim that the expenditure so incurred was to improve its sales and not to promote the brand of foreign AE in India. The Ld.TPO rejected the submissions of assessee and held that assessee did not confine itself to distribution of trading goods but has performed additional functions in the form of advertisement and marketing promotion to promote the brand of Page 14 of 37 IT(TP)A No. 2833/Bang/2017 foreign AE and therefore the assessee needs to be adequately compensated for such additional function. The Ld.TPO thus chose 9 comparable companies and arrived at the AMP to sales of those companies and compared the same with that of the assessee. The Ld.TPO came to the conclusion that the assessee was incurring much higher AMP expenditure than the industry average and that incurring of excessive AMP expenses constituted an international transaction of promotion of AE’s brand. 2.5.2 The Ld.TPO thus concluded that the assessee performed additional functions which promoted the marketing intangibles of the AE and that the assessee should have been reimbursed by the AE the additional expenses along with mark-up. The Ld.TPO adopted the Brightline Test in making addition towards AMP expenditure. The Ld.TPO thus proposed adjustment towards AMP spent at Rs.82,05,25,509/-. 2.6 On receipt of order passed by the Ld.TPO, the Ld.AO passed the draft assessment order by making following addition over and above the proposed T.P addition:- 3. The assessee filed objections before the DRP. The DRP agreed with the contentions of the Ld.TPO on both the adjustments proposed. Against the draft assessment order, assessee filed its objections before the DRP.

Page 15 of 37 IT(TP)A No. 2833/Bang/2017 The Ld.AR submitted that Ground nos. 2.2 to 2.6 is on the issue of rejection of internal CUP selected by assessee as most appropriate method by the revenue authorities. The Ld.AR submitted that assessee during the year under consideration the assessee imported certain parts and components from its Associated enterprises ("AEs") for purpose of manufacturing of Personal Computers (PCs). The transaction of import of parts and components was an international transaction and therefore income from such international transaction was to be determined having regard to Arm's Length Price (ALP) as laid down in Section 92 of the Act. The Appellant also imported parts and components from third parties. The methodology adopted by the Appellant for benchmarking the price paid to the AE for import and components was as follows: Nature of MAM Value as per ALP as Remarks international books of determined transaction by the accounts(Rs.) Appellant(Rs.) Import of raw CUP 60,51,95,623 59,56,75,480 suo-moto material adjustment of Rs.95,20,143/- in the return of Income.

The Ld.AR submitted that the assessee during the year under consideration, imported 408 different varieties of products from its AEs which can be identified on the basis of a distinctive code. Out of 408 products, 180 products were purchased from its AEs Page 16 of 37 IT(TP)A No. 2833/Bang/2017 exclusively while the rest 228 were purchased from AEs as well as from unrelated third-party vendors. With respect to the imports from AEs as well as from unrelated third-party vendors, the Ld.AR submitted that the assessee conducted a search (based on product code) to identify similar products, imported from unrelated vendors for the financial year 2012-13 and the weighted average price per unit for these products. This process resulted in the identification of potential internal comparables for 228 of the products imported. In relation to transactions involving import by the assessee of similar products from its AEs as well as third party vendors (i.e. unrelated parties), the Ld.AR submitted that product-wise costs were compared with those charged by unrelated parties and 162 products were found to be at arm’s length. And with respect to the remaining 66 products, which did not fall within the Arm’s length price, the assessee made suo moto adjustment of Rs.95,20,143/- in its return of income. In relation to transactions involving import of products by the assessee only from its AEs (i.e., The Appellant does not import these products directly from unrelated vendors), it was submitted that the price paid by the assessee to its AEs is based on the price paid by AEs to third parties and thus the transaction was considered to be at arm’s length. The Ld.TPO did not accept the analysis carried out by the assessee for following reasons and rejecting CUP method as MAM:

Page 17 of 37 IT(TP)A No. 2833/Bang/2017 a) Non-availability of reliable data in order to compare the degree of comparability between the international transaction and uncontrolled transactions; b) Weighted average rate is not an uncontrolled transaction that can be compared with the purchases made from AEs / Non-AEs since the level of obsolesce in the computer hardware industry is very high; c) Industry average billing rate cannot be considered in this method by relying on the decision of the coordinate bench of this Tribunal in the case of Aztec Software & Technology Services vs ACIT; and d) There is no publicly available information on prices charged in independent transactions of similar or identical nature, so external CUP cannot be applied. The Ld.TPO thus applied the TNMM as the MAM and determined ALP which resulted in adjustment of Rs.10,19,77,372/- to the Manufacturing Segment. The assessee filed objection before the DRP agains the proposed adjustment. However the DRP upheld the order of Ld.TPO by observing that in CUP method, strict comparability is required and such comparability is not possible in the case of the assessee. The DRP also upheld application of TNMM as MAM and methodology adopted to determine ALP under the TNMM by the TPO. On receipt of the DRP order the Ld.AO passed the final assessment order making the adition in the hands of the assessee.

Page 18 of 37 IT(TP)A No. 2833/Bang/2017 Against the final assessment order, the assessee raised the issue before this Tribunal. At the outset the Ld.AR submitted that this issue has been considered by Coordinate Bench of this Tribunal in assessee’s own case in following assessment years.  IT(TP)A No. 582/Bang/2015 for A.Y. 2006-07 by order dated 30.05.2016  IT(TP)A Nos. 74 & 88/Bang/2014 for A.Y. 2009-10 by order dated 06.07.2018  IT(TP)A Nos. 511, 580 & 581/Bang/2015 & 1307/Bang/2011 for A.Ys. 2007-08 & 2010-11 by order dated 31.03.2017  IT(TP)A No. 373/Bang/2016 for A.Y. 2011-12 by order dated 21.10.2016  IT(TP)A No. 2444/Bang/2019 for A.Y. 2015-16 by order dated 06.03.2020 We refer to the order passed by this Tribunal for A.Y. 2015-16 which is the recent most order wherein this Tribunal decided this issue on identical facts in assessee’s own case by observing 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 given by the Assessee as to why the reasons assigned by the TPO are unsustainable.

Page 19 of 37 IT(TP)A No. 2833/Bang/2017 10. 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.

Page 20 of 37 IT(TP)A No. 2833/Bang/2017 Ground no.3 relates to the treatment of AMP expenses pertaining to trading segment as an international transaction and determining the ALP in respect of the same. The submission of the Ld.AR is that CUP should be accepted as the MAM. He has tabulated the objections to each of the reasons put forth by the Ld.TPO/DRP for the rejection of CUP as the MAM as under: Reasons for Sl rejection of Assessees contention No CUP as the MAM Non-availability of reliable data The Assessee imports raw materials from both in order to AEs as well as unrelated vendors for the compare the manufacture of PCs. The revenue did not degree of consider the fact that the parts, being comparability components have a unique identity and bear 1. between the serial numbers or codes by which they are international known. The Assessee documented the analyses transaction in respect of the comparison of the prices for all and the products that have been imported from its uncontrolled AE. Hence the reasons provided in the rejection transactions of CUP is not based on any material on record.

 Weighted T he Assessee procured material throughout average rate is the year. This indicates that the components not an are not obsolete and are actively used in the uncontrolled production process. transaction  As that can be the transactions are large in number, it compared with would not be practically possible to compare 2. the purchases each and every import transaction.  F made from AEs urther, it needs to be appreciated that the / Non-AEs price of parts used in the manufacture are since the level dependent on the quantity imported. of obsolesce in Therefore it would be prudent to compare the computer the weighted average prices rather than the hardware transaction price.

Page 21 of 37 IT(TP)A No. 2833/Bang/2017 Reasons for Sl rejection of Assessees contention No CUP as the MAM industry is very  T he Assessee therefore had compared the high average price of each product purchased from the AEs throughout the year with the average price of products purchased from unrelated parties. The Hon’ble Mumbai ITAT in the case of Gharda Chemicals Ltd reported in 2009 TIOL 790 upheld the use of average prices. The said principle has also been upheld in the case of Audco India Limited reported in 47 SOT 420 wherein the ITAT has held that: “In order to be fair, reasonable and judicious, shifting profits, consider comparison of aggregate (average) rather than of individual items when applying CUP (where there are high/low variations in prices), cherry picking of comparable companies” Reliance is placed on the case of Aztec Software and Technology Services Vs ACIT by the Ld.TPO, wherein the use of average hourly rate as the CUP was rejected, is misplaced as the facts of Industry the case are very different from that of The average billing rate cannot be Assessee’s case.  considered in The case relied upon by learned TPO this method by specifically pertains to a taxpayer in the relying on the software services industry which is decision of the materially different from the Assessee’s 3. Bangalore ITAT business, ie, the hardware segment; in the case of  In the Aztec case, the rates were Aztec Software dependent on the expertise and technical & Technology level of the person performing the Services vs function and measurement of such ACIT qualitative service can be subjective. However, in the instant case, the components have distinctive codes by which they are known in the industry and the measurement of the prices is not Page 22 of 37 IT(TP)A No. 2833/Bang/2017 Reasons for Sl rejection of Assessees contention No CUP as the MAM subjective;  The ruling of the ITAT was based on the fact that the taxpayer had received income from services rendered to its AE. In the present case, the Assessee’s transactions pertain to expenses that have been incurred; and  Lastly, in the case relied upon by learned TPO, the taxpayer relied upon external CUP whereas the Assessee has relied upon internal CUP in benchmarking its transaction. For the application of the CUP method, the primary condition to be satisfied is that there should exist a transaction for an identical product between two unrelated parties. In a wholesale business scenario, for obvious reasons, the transaction prices of products are not publicly available since such prices are There is no negotiated closely between the parties and publicly would be binding only on the parties. available However, where the transaction involves the information on Assessee himself the information would be prices charged available and would constitute the comparable in independent price for the transaction. 4. transactions of In the instant case, the Assessee has transacted similar or for identical products and conditions with identical unrelated vendors and therefore prices of such nature, so uncontrolled transactions are considered as external CUP ‘internal CUP’. cannot be Similarly, where the Assessee had not directly applied. transacted for such products, the price of the uncontrolled transaction by the Assessee’s AE with a third party is considered as the internal CUP. Considering that these are internal CUPs there is no requirement of using publicly available information for the analyses under the internal Page 23 of 37 IT(TP)A No. 2833/Bang/2017 Reasons for Sl rejection of Assessees contention No CUP as the MAM CUP method. It is submitted that this Tribunal for A.Y. 2015-16 (supra) remanded the issue on AMP back to the Ld.TPO to verify the net operating margin earned by assessee with respect to the trading segment. The Ld.AR submitted that Hon’ble Delhi High Court in case of Sony Ericsson Mobile Communications P. Ltd. v. CIT reported in 374 ITR 118 (Del) on an identical issue has observed as under: “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 interlinked transaction. This would be also in consonance with Rule 10B(1), which mandates only arriving at the net profit margin by comparing the profits and loss account of the tested party with the comparable. The 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.” (Emphasis supplied) 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 Page 24 of 37 IT(TP)A No. 2833/Bang/2017 accept the comparables and determine or accept the transfer price and still segregate AMP expenses as an international transaction…” (Emphasis supplied) Based on the above observations in assessee’s own case for A.Y. 2015-16 (supra), this Tribunal 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 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.” Emphasis Supplied It is observed that the Coordinate Bench of this Tribunal has remanded the issue to verify the net profit margin were at arm’s length. The Tribunal also observed that in the event they are at arm’s length, no separate addition needs to be made. For the year under consideration, the Ld.TPO in para 4.1 has given a categorical finding in the transfer pricing order that, the operating margin earned by the assessee in the trading segment is at arm’s length and no adverse inference is to be drawn with respect to the Arm’s length price of the Distribution segment. The relevant para form the order of the Ld.TPO is reproduced herewith as under: 4.1………………………. The TPO has made an independent analysis of the international transactions of the trading segment by comparing the Net margins under TNMM. The mean margin of the comparables shows a PLI, Page 25 of 37 IT(TP)A No. 2833/Bang/2017 OP/OR of 1.49% and profit on Gross sales is at 11.27%. The taxpayer's margin is at the net level in the trading segment is 2.32% which more than the TPO's Comparables margin. Hence, no adverse inference is drawn with respect to the Arm's length Price of the Distribution segment. Under such circumstances, we do not deem it necessary to remand this issue back to the Ld.AO/TPO. Respectfully following the above we uphod CPM to be the MAM in computing the ALP of the trading segment. Further, based on the categorical observation by the Ld.TPO regarding the trading segment to be at arm’s length, we direct the Ld.AO/TPO to delete the adjustment proposed, in respect of the AMP expenses as it cannot be treated as international transactions in the present facts of the case. Accordingly, this Ground no.3.1 to 3.2.12 raised by assessee stands allowed. As we have decided on the above grounds in favor of assessee, the remaining sub grounds become infructuous. Ground NO.4 DISALLOWANCE OF PROVISION FOR WARRANTY During the assessment proceedings, the Ld.AO observed that assessee created provision of warranty. The assessee was called upon by the Ld.AO to explain as to why the provision should not be disallowed. In response, vide submission dated 6/12/2016 and 7/12/2016, the assessee submitted that, the provision for warranty of Rs.13,40,69,800/- was created based on the total number of warranty obligations outstanding as of 31/03/2013. It was also submitted that, the methodology of arriving at provision and the computation of provision for warranty based on such methodology and as per the principles laid down by the Page 26 of 37 IT(TP)A No. 2833/Bang/2017 Hon’ble Supreme Court in the case of Rotork Controls India Pvt. Ltd. vs. CIT, reported in [2009] 180 Taxman 422/314 ITR 62 (SC) was also submitted. Assessee also relied on the decision of coordinate bench of this Tribunal in assessee’s own case for AY 2006-07 and AY 2011-12, wherein it was held that the assessee has followed a scientific methodology for creation of provision for warranty was also submitted. The Ld.AO however rejected the submissions of assessee and denied the claim by observing that the provision for warranty has been disclosed as a contingent liability under AS 29, by assessee. Aggrieved by the order of the Ld.AO, appeal filed objection before the DRP. DRP upheld the order of AO. Against the final assessment order, the assessee raised the issue before this Tribunal. We have perused the submissions advanced by both sides in light of records placed before us. Admittedly, the assessee is engaged in manufacturing and trading of computer system and components thereof. In line with the practice followed by almost all companies in this industry, the cost of providing warranty services is factored into the selling price of the product. It is the submissions of Ld.AR that, there are a number of factors affecting the determination of warranty provision to be set aside by the company at the time of sale, which also includes fixed or standing charges for which payments are accrued and payments have been made during the year. He submitted that the amount that is set-aside for meeting the warranty obligations Page 27 of 37 IT(TP)A No. 2833/Bang/2017 of assessee is computed based on a scientific and technical estimate of the costs to be incurred in meeting these obligations over the period of the warranty. On the contrary, the Ld.DR relied on orders passed by authorities below. We note that Hon'ble Karnataka High Court in assessee’s own case for assessment year AY 2007-08 and AY 2011-12, in of 2017 by order dated 06.02.2021, has dealt with identical issue where in the Hon’ble Court held against the revenue and in favour of the assessee. The relevant extract of the orders passed by the Hon’ble Court is as under: “The Tribunal has rightly relied on the decision rendered by the Supreme Court in ROTORK CONTROLS INDIA PVT.LTD. (supra). Similar view has been taken by a division bench of this court in IBM LTD. Supra. Therefore, the first and second substantial questions of law are answered against the revenue and in favour of the assessee.” It also noted that coordinate bench of this Tribunal in assessee’s own case for assessment years 2006-07, AY 2007-08, AY 2010- 11 and AY 2011-12(supra) upheld that provision for warranty has been created on a scientific basis and hence allowable as expenditure under section 37 under the Act. The relevant extract of the orders passed by coordinate bench of this Tribunal in assessee’s own case for assessment years 2006-07, AY 2007-08, AY 2010-11 and AY 2011-12, are reproduced as under: AY 2006-07(supra) “16- 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 Page 28 of 37 IT(TP)A No. 2833/Bang/2017 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.” AY 2007-08(supra) Placing the reliance on the assessee’s own case for the AY 2011- 12 the coordinate bench of this Tribunal concluded as under: “5. Thus the Tribunal has taken a consistent view on this issue. The Id. Senior Counsel has also relied upon the decision dt. 10.4.2013 of Hon’ble jurisdictional High court in the case of CIT Vs. IBM India Limited for the Assessment Year 1998-99 wherein the Hon’ble Supreme Court has held that the conditions as stipulated by the Hon’ble Supreme Court in the decision in the case of Rotork Controls India Pvt. Ltd . Vs. CIT (supra) were found to be fulfilled and no case of interference with the finding of the Tribunal is made out. It is pertinent to note that in this case the assessee has acquired this business from IBM and for the Assessment Year 2006-07, the claim of the assessee for the provision of warranty was based on historical data of IBM. Thus in view of the above facts and circumstances of the case as well as by following the decision of Tribunal in assessee’s own case, we decide the issue in the favour of the assessee and allow the claim of the assessee on the account of provision for warranty which was found to be based on scientific basis and method.” AY 2010-11(supra) “We have heard the Id Senior Counsel as well as Id. CIT,DR and considered relevant material on record. This issue is identical as involved in the assessee’s own case for the Assessment Year 2007- 08, in view of our finding on the this issue for the Assessment Year 2007-08, this ground stands allowed. AY 2011-12(supra) “10. It is worth mentioning that the co-ordinate bench has considered the historical data pertaining to financial year 2005-06 to 2010-11 and came to conclusion that the provision was made based on historical data and following scientific method. Therefore, we do not find any reason to interfere with the conclusion reached by the co-ordinate bench. Accordingly, we hold that provision for warranty expenditure is allowable. The coordinate bench of this Tribunal relied on the decision of the Hon’ble Supreme Court in the case of Rotork Controls India Pvt.Ltd Page 29 of 37 IT(TP)A No. 2833/Bang/2017 (supra), while upholding assessee’s claim for deduction of provision for warranty as an allowable expenditure. Based on the above consistent view taken by coordinate bench of this Tribunal in assessee’s own case for preceding and subsequent assessment years relying of the decision of the Hon’ble Supreme Court in the case of Rotork Controls India Pvt.Ltd (supra), we hold that provision for warranty expenditure is allowable. Accordingly Ground No4 raised by assessee stands allowed. Ground NO.5 DISALLOWANCE OF PROVISION FOR LEAVE ENCASHMENT During the course of the assessment proceedings, the Ld.AO observed the policy of provision for leave encashment followed by the assessee. The assessee was called upon to explain the same. In response, vide its submission dated 1/12/2016, assessee submitted that the as per the leave encashment policy, every employee is entitled to a fixed number of leaves every year and the employees are entitled to en-cash the available balance of leaves, subject to certain conditions, at the time of resignation/ retirement. It was submitted that in order to provide for such leave encashment expenses, the assessee creates provision for leave encashment every year based on the salary earned by the employees and their unutilized leave balance. In such manner, it was submitted that the net provision for leave encashment created during the year amounted to Rs.8,61,790/-. It was submitted that the provision for has been created as per the Page 30 of 37 IT(TP)A No. 2833/Bang/2017 provisions of AS 15, which is required to be followed by the Company as per section 133 of the Companies Act, 2013. The Ld.AO rejected the submission of assessee and held that provision for leave encashment is being unascertained liability was liable to be disallowed under section 43B of the Act. Aggrieved by the order of the Ld.AO, appeal was filed objection before the DRP who upheld the view of the Ld.AO. The Ld.AO disallowed the entire provision while passeing the final assessment order. Against the final assessment order, the assessee raised the issue before this Tribunal. We have perused the submissions advanced by both sides in light of records placed before us. It is submitted by the Ld.AR that the revenue authorities, erred in disallowing the sum of Rs.8,61,790/-, without considering the fact that sum of Rs.8,22,159/- was actually paid by the Assessee prior to the due date of filing the return under section 139(1) of the Act which can be verified from Appendix V to the Form 3CD for the relevant assessment year. He further submitted that the Ld.AO has erred in law by disregarding the fact that an amount of Rs 4,35,384, was suo-moto disallowed by the Assessee in the computation of income, as per the provisions of section 43B(f) of the Act. As per the provisions laid down in section 43 of the Act, “Notwithstanding anything contained in any other provision of this Act, a deduction otherwise allowable under this Act in respect of— …. (f) any sum payable by the assessee as an employer in lieu of any leave at the credit of his employee, Page 31 of 37 IT(TP)A No. 2833/Bang/2017 shall be allowed (irrespective of the previous year in which the liability to pay such sum was incurred by the assessee according to the method of accounting regularly employed by him) only in computing the income referred to in section 28 of that previous year in which such sum is actually paid by him : Provided that nothing contained in this section shall apply in relation to any sum ] which is actually paid by the assessee on or before the due date applicable in his case for furnishing the return of income under sub-section (1) of section 139 in respect of the previous year in which the liability to pay such sum was incurred as aforesaid and the evidence of such payment is furnished by the assessee along with such return.” The Ld.AR submitted that in light of the conditions stipulated under the section, it can be said that provision for leave encashment would be allowed, if the payment is made on or before filing the return of income. He submitted that the assessee suo mote disallowed the provision for leave encashment not paid on or before filing the return of income. On the contrary, the Ld.DR relied on orders passed by authorities below. We note that coordinate bench of this Tribunal in assessee’s own case for AY 2011-12(supra) has held that leave encashment is not a contingent liability, and that, the same ought not to be disallowed while computing income under normal provisions of the Act. The relevant extract of the order is as below:

Page 32 of 37 IT(TP)A No. 2833/Bang/2017 AY 2011-12(supra)

Page 33 of 37 IT(TP)A No. 2833/Bang/2017 Page 34 of 37 IT(TP)A No. 2833/Bang/2017 Page 35 of 37 IT(TP)A No. 2833/Bang/2017 The Ld.AR drew our attention to the reconciliation of workings with respect to provision for leave encashment placed in the paper book at page 804 in Volume II. We are therefore of the opinion that the issue needs to be verified in the light of the reconciliation placed in the paper book by the Ld.AO having regards to the observation by the coordinate bench of this Tribunal in assessee’s own case for AY 2011-12(supra). Accordingly Ground no.5 stands allowed for statistical purposes. Ground NO. 6 – ADJUSTMENTS TO BOOK PROFIT UNDER SECTION 115JB OF THE ACT Page 36 of 37 IT(TP)A No. 2833/Bang/2017 The Ld.AO treated the provision for warranty and provision for leave encashment as an 'unascertained liability' and added the same to book profits under section 115JB of the Act. The DRP has agreed with the contention of the AO and rejected the objections. In the preceding paras, following the ration laid down by Hon’ble Supreme Court in case of Rotork Control(supra) we have held that the provision for warranty cannot be treated as unascertained liability. In respect of provision of leave encashment, this Tribunal in assessee’s own case for AY 2011-12(supra) has observed as under: “Respectfully following the above decision, we hold that provision for leave encashment need not to be added back to book profits for the purpose of determining tax liability u/s 115JB of the Act.” Under such circumstances we do not find any merit in the manner in which the book profits for purposes of section 115JB has been computed. Accordingly we direct the Ld.AO to exclude the two items from the book profits for purpose of computing tax liability under section 115JB of the Act. Accordingly Ground no.6 raised by assessee stands allowed. In the result, the appeal filed by assessee stands allowed. Order pronounced in the open court on 21st March, 2022.