TETRA PAK INDIA PRIVATE LTD.,,PUNE vs. DY.CIT, CIR.7, PUNE, PUNE

आयकर अपीलीय अिधकरण “lh” �यायपीठ पुणे म� । IN THE INCOME TAX APPELLATE TRIBUNAL “C” BENCH, PUNE �ी डी. क�णाकरा राव, लेखा सद�य एवं �ी िवकास अव�थी, �याियक सद�य के सम� BEFORE SHRI D. KARUNAKARA RAO, AM AND SHRI VIKAS AWASTHY, JM आयकर अपील सं. / ITA No.111/PUN/2011 िनधा�रण वष� / Assessment Year : 2006-07 Tetra Pak India Private Ltd., Mayfair Towers, Wakdewadi, Shivajinagar, Pune-411005. .......अपीलाथ� / Appellant PAN : AAACT3467B बनाम / V/s. DCIT, Circle-7, ……��यथ� / Respondent Pune. Assessee by : Shri Nikhil Pathak Revenue by : Shri S. B. Prasad सुनवाई क� तारीख / Date of Hearing : 02.07.2019 घोषणा क� तारीख / Date of Pronouncement : 27.08.2019 आदेश / ORDER PER D. KARUNAKARA RAO, AM: This appeal is filed by the assessee against the orders of Assessing Officer/TPO/DRP for the Assessment Year 2006-07. 2. The grounds raised by the assessee are as under :- “Based on the facts and circumstances of the case, Tetra Pak India Private Limited (hereinafter referred to as ‘the Appellant’) respectfully craves leave to prefer an appeal under section 253(1)(d) of the Income- tax Act, 1961 (hereinafter referred to as ‘Act’), against the order dated 25 November 2010 passed by the Deputy Commissioner of Income Tax- Circle 7 (hereinafter referred to as ‘the Assessing Officer’) under section 143(3) read with section 144C(13) of the Act in pursuance of the directions dated 20 September 2010 issued by the Honorable Dispute Resolution Panel (hereinafter referred to as ‘the Honorable DRP’), on the following grounds: On the facts and in the circumstances of the case and in law, the Honorable DRP and consequentially the learned AO have: I Grounds of Objections in respect of transfer pricing adjustment

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similar rationale for accepting companies which were accepted as comparable for AY 2003-04, even by the erstwhile transfer pricing officer in his show cause notice for such earlier year (ie AY 2003- 04). 9. Companies engaged in non-comparable activities are identified as comparable Erred in accepting two companies (ie Bilcare Limited and Gayatrishakti Paper and Boards Limited), which are engaged in non-comparable activities, as comparable companies to the Appellant. 10. Treating costs relating to replacement of TBA/10 machines as an operating in nature Erred in treating expenditure of Rs 199,374,944 (incurred by the Appellant on account of replacement of TBA/10 machines given to customers) as operating in nature for the purpose of computing operating margin of the Appellant. 11. Not permitting economic adjustment on account of differential rates of depreciation Erred in not allowing an economic adjustment, on account of difference in the rates of depreciation charged by the Appellant and the comparable companies, while computing the operating margin of the Appellant. 12. Proposing the transfer pricing adjustment in connection with the international transactions of the Appellant based on the total operating income instead of adjustment attributable to the international transactions Erred in proposing the transfer pricing adjustment to the income of the Appellant in connection with the international transactions with the Associated Enterprises based on the total operating income of the Appellant instead of transfer pricing adjustment attributable to the international transactions with the AEs. 13. Applicability of +/-5% range Erred in computing the transfer pricing adjustment from the arm’s length price without giving the benefit of the option available to the Appellant under proviso to section 92C(2) of the Act of adopting as arm’s length price, a price which varies by not more than 5 per cent from the arm’s length price. II. Grounds of objections in respect of disallowances/ additions other than transfer pricing adjustment 14. Disallowance of Incremental provision for warranty of Rs.10,198,196/- : Erred in disallowing the incremental provision for warranty of Rs.10,198,196/- by not appreciating the fact that provision for warranty was properly ascertained and was not in the nature of contingent liability and not following the judgment of apex court delivered in the case of Rotork Controls Pvt. Ltd. Vs. CIT reported in 314 ITR 62.

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The additional ground raised by the assessee is as under :- 3. “1] The assessee company submits that while determining the operating margins of the comparables companies for determining the Arm’s Length Price (ALP) of the international transactions entered into by the assessee company under Transactional Net Margin Method, the adjustment on account of working capital should be granted.” 4. Briefly stated the relevant facts include that the assessee is engaged in the business of manufacturing and selling of packaging material, packaging machines and systems. The assessee filed the return of income declaring the loss of income at Rs.7,18,80,004/-. The

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Assessing Officer made addition on account of the referral to the TPO for TP adjustments. Accordingly, the total income is determined at Rs.Nil. The TPO recommended the TP adjustment amounting to Rs.41,65,25,228/-. The details of addition to the business income made by the Assessing Officer are as under :- “5. Subject to the above remarks, the total income is computed as under: COMPUTATION UNDER NORMAL PROVISIONS A. Business Loss as per return of income filed Rs.(-)6,48,23,855/- Add: Disallowance as discussed above: i. Addition as a result of Rs.41,76,47,843/- Transfer Pricing Order u/s.92CA(3) ii. Capital expenditure Rs.10,35,850/- iii. Warranty provision Rs.1,01,98,196/- iv. Provision for leave Rs.31,99,327/- Rs.43,20,81,216/- encashment Business Income Rs.36,72,57,361/- Less: Set off Business loss A.Y. 2000-01 and 2001-02 Rs.28,69,04,753/- and unabsorbed depreciation Rs.8,03,52,608/- as per assessment order for A.Y. 2005-06. Unabsorbed depreciation of Rs.49,45,54,731/- for A.Y. 2000-01 and Rs.17,26,51,057/- for A.Y. 2001-02 is allowed to be carried forward.”

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of the benefit of working capital adjustment. The said additional ground is being admitted and adjudicated in the later paragraphs of this order. We shall now take up the TP issues raised in the grounds no.1 to 8. 13 (extracted above). 9. The main issue raised in the grounds no.1 to 13 relates to the following :- a. Applicability of turnover filter. b. Exclusion of Bilcare Ltd. and Gayatrishakti Papers and Boards Ltd. – as comparable entities. c. Exclusion of TBA 10 exit costs while computing operating margin of the assessee company. d. Adjustment on account of differential rates of depreciation. e. Working capital adjustment. 10. Regarding the above extracted five issues, ld. Counsel for the assessee filed a written note summarizing each of the issue in the following manner :- “1.5] Applicability of Turnover Filter – a. The learned TPO has applied a turnover filter of Rs.100 Crs. He has rejected all the companies whose turnover is less than Rs.100 Crs. b. The learned DRP has upheld the turnover filter of Rs.100 Crs. adopted by the learned TPO. c. The assessee submits that similar issue had come up in A.Y. 2005 - 06. In that year, the turnover of the assessee was Rs. 300.58 Crs. Hon'ble ITAT held that 10 times criteria should be applied and accordingly, company having turnover of more than Rs. 30 Crs. and upto Rs. 3000 Crs. have been directed to be included (refer para 42). The relevant para of Hon’ble ITAT is reproduced hereunder: 42. Thus the assessee’s proposition in matters of turnover filter for considering the turnover of Rs.30 crores and above should he considered appropriate subjected to the upper

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limits mentioned in the para above. Accordingly, the TPO’s proposition of Rs.100 crores turnover or the CIT(A) proposition in favour of Rs. 10 crores stands altered pro tanto. We also proceeded to recommend and direct the Assessing Officer to consider the upper limit for the comparables qua the turnover of Rs-3000 crores as indicated by the Bangalore Bench of the Tribunal in the case of M/s. McAfee Software (India) Pvt. Ltd. (supra). Accordingly, the ground no. 3 of the Revenue and ground no. 4 of the assessee stand partly allowed d. Accordingly, applying the said decision of Hon'ble ITAT for A.Y. 2005 - 06, the assessee submits that companies having turnover 10 times below and 10 times above should be taken as comparable. Exclusion of companies selected by the Id. TPO : Bilcare Ltd. 1.6] a. The said entity was considered as comparable by the learned TPO. The DRP has confirmed the stand. This company was also selected as a comparable in A.Y. 2005 - 06. Hon'ble ITAT has directed to exclude the same on the ground that it is functionally not comparable with the assessee company. (Refer para 44 of the order of Hon’ble ITAT). Accordingly, Bilcare Ltd. should be excluded from the final list of comparables. The relevant para of the order of Hon’ble ITAT is reproduced as under : 44. Bilcare Ltd. : This comparable is considered good one by the TPO in his TP study. As per the assessee, the Bilcare Ltd. is engaged in packaging of perishable products as against the assessee’s function of engaged in packaging of material for food and drink industries based on the aseptic technology. It is the case of the assessee that packaging material required for perishable products is entirely different from that of the assessee. Bringing our attention to page 4 to 45 of the Paper Book, Id. AR demonstrated the above facts. It is the case of the assessee that such a company cannot be a functional comparable to that of the assessee for benchmarking. The absence of segmental data for the Bilcare Ltd. is also another aspect which is brought to our notice. Mentioning the differences in packaging material for various industries products, ld. Counsel for the assessee submitted that the products manufactured by the assessee are paper based product while those of the Bilcare Ltd. are primarily include the “wraps”. Considering the above facts as discussed in para 21 of this order, we are of the opinion Bilcare Ltd. cannot be considered as a good comparable for benchmarking of the assessee, who engaged in the drinks industries with aseptic technology. Therefore, we direct the TPO to exclude the same from the list of comparables in respect of the fulfilling of turnover criteria. Exclusion of companies selected by the Id. TPO : 1.7] Gayatrishakti Papers and Boards Ltd. - a. This company has been selected as a comparable by the learned TPO. The Id. DRP has confirmed the said view taken by the ld TPO. It is submitted that the said entity is engaged in manufacturing paper. The balance sheet of the said entity is given on pages 7.79 to 7.108. Thus, since the said company is engaged in manufacturing paper and not engaged in manufacturing packaging material, the

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same cannot be compared with the assessee. For A.Y. 2005- 06, the learned CIT(A) has accepted the claim of the assessee and has held that Gayatrishakti is not comparable with the assessee. Accordingly, he has held that the said entity is to be excluded from the final list of comparables. Exclusion of TBA 10 exit costs 1.8] a. The assessee has further claimed that the cost incurred on TBA 10 exit cost should be considered as a non operating / exceptional expenditure while computing its operating margin. After excluding this costs, the assessee has worked out the operating margin at 4.98%. The learned TPO did not accept the contention of the assessee and he has held that the said expenditure should be included while working out the operating margin of the assessee. The learned TPO in para 7.9 to 7.9.7 has discussed the issue. The learned DRP has confirmed the stand of the TPO on page 9, the learned DRP has discussed the issue. b. The assessee submits that Tetra lavel group world-wide had discontinued the production of TBA-10 filing machines and its spare parts due to technological obsolence. In the past, assessee had sold/leased TBA-10 filing machines to its customers in India and was making significant sales of packaging material to those customers. As the supply of the spares and technical support for machines and upkeep of the existing of TBA-10 would not be available in the future and had the assessee not replaced the machines, there was a possibility that the assessee would have lost out on the sale of packaging material used by those customers on the TBA-10 filing machines. The assessee, therefore took decision to withdraw the said TBA-10 filing machines from the customers at some pre-determined value and replaced it with latest technology filing machines with higher production capacities by offering special discounts on the value of those on the new machines. This business decision was taken so that the assessee could continue to sell packaging material to those customers because only the packaging material sold by the assessee could be used on those machines. It was further submitted that if the assessee had not subsidized the cost of the latest technology filing machines, there was a risk of assessee losing out its packaging business from the customers as the customers would have shifted to alternative mediums of packaging provided by other suppliers and that in the long run it would have been detrimental to the business of the assessee. c. It is submitted that in A.Y. 2005 - 06, similar expenditure was incurred. For that year, the learned TPO had accepted the claim of the assessee and had considered the said expenditure as a non operating expenditure. Thereafter, the learned CIT passed an order u/s 263 and held that the said expenditure was part of operating expenditure. The matter travelled before Hon'ble ITAT and Hon'ble ITAT has held in para 18 that the said expenditure is an exceptional expenditure and the same should be excluded while working out operating margins of the assessee. The relevant part of para 18 of the order of Hon’ble ITAT is reproduced as under : “On the merits of the case of excluding "Exit cost" while computing the operational margin, being of an extra-ordinary and exceptional in nature, we find force in the argument of the learned A.R. for its

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exclusion in the light of the ratio of the decision of Hon'ble Delhi High Court in the case of Marubeni India (P.) Ltd.'s case (supra), wherein the Hon'ble Delhi High Court has upheld the exclusion of payment of compensation for closure of Indian units by the associated enterprise by considering it to be an abnormal item of expenses and excluding it while computing operating profits. We are of the view that the ratio of the aforesaid decision is squarely applicable to the present case. ” d. Considering the said decision of Hon'ble ITAT, it is submitted that the said expenditure be treated as non operating expenditure and the same shall be excluded while working out the operating margin of the assessee. Adjustment on account of differential rates of depreciation : 1.9] a. The assessee has also claimed adjustment on account of differential rates of depreciation. It is submitted that the depreciation rates provided by the assessee are much higher than the depreciation rates provided by the comparable entities. The learned TPO has not granted any adjustment on account of differential rates of depreciation. The learned DRP has confirmed the stand of the A.O. on page 11 of the order. The assessee submits that for A.Y. 2004- 05, the learned TPO had granted the adjustment. For A.Y. 2005- 06, the learned CIT(A) had also directed such adjustments may granted. The assessee submits that this adjustment should be granted. 1.10] Working capital adjustment: a. The assessee in the additional ground of appeal has raised an issue regarding allowance of working capital adjustment. It is submitted that similar issue had come up in the assessee’s own case for A.Y. 2005 - 06 and Hon’ble ITAT has held that the adjustment is to be granted and the matter has been set aside to the file of the learned A.O. for examining the relevant working. In para 50, Hon’ble ITAT has allowed the additional ground of appeal raised by the assessee. The relevant para is reproduced as under : 50. Considering the cover nature of this issue, we are of the opinion the additional grounds should not only be admitted but also the Assessing Officer should be directed to grant working capital adjustments. For this purposes, the above tables inserted in the preceding paragraphs of this order should be remanded to the file of the TPO/Assessing Officer for incorporating the above direction and benchmarking the transactions discussed above. The Assessing Officer should be granted reasonable opportunity of being heard to the assessee while examining the data and granting working capital adjustments as per the set principles of natural justice. Hence, relevant grounds stand allowed for statistical purposes.”

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AR demonstrated the above facts. It is the case of the assessee that such a company cannot be a functional comparable to that of the assessee for benchmarking. The absence of segmental data for the Bilcare Ltd. is also another aspect which is brought to our notice. Mentioning the differences in packaging material for various industries products, ld. Counsel for the assessee submitted that the products manufactured by the assessee are paper based product while those of the Bilcare Ltd. are primarily include the “wraps”. Considering the above facts as discussed in para 21 of this order, we are of the opinion Bilcare Ltd. cannot be considered as a good comparable for benchmarking of the assessee, who engaged in the drinks industries with aseptic technology. Therefore, we direct the TPO to exclude the same from the list of comparables in respect of the fulfilling of turnover criteria.” 18. Considering the above, we are of the opinion, the relevant grounds raised by the assessee on this issue should be allowed in favour of the assessee. Accordingly, the relevant grounds on this issue are allowed. (C) Exclusion of Gayatrishakti Papers and Boards Ltd. 19. The ld. Counsel for the assessee submitted that this is the case where the said company is included by the TPO as a comparable and the same is approved by the DRP. The assessee now wants to exclude the same in line with the order of the DRP for the earlier assessment year 2005-06. It is the submission of the assessee that the said company is not a good comparable for the reason that the same is engaged in manufacturing paper and not engaged in manufacturing packaging material. 20. On hearing both the sides and considering the earlier decision of the Tribunal in assessee’s own case for the assessment year 2005-06 (supra), we are of the opinion that, the argument of the ld. Counsel for the assessee on this issue to include the said entity from the final list of

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comparables should be approved. Therefore, we direct the Assessing Officer to include the same from the final list of the comparables. Accordingly, the relevant grounds raised by the assessee on this issue are allowed. (D) Exclusion of TBA 10 exist costs 21. Regarding the exclusion of TBA 10 exist costs, the ld. Counsel for the assessee filed a written note, which is already reproduced in the foregoing paragraphs and submitted that identical issue came up before the Tribunal in assessee’s own case vide ITA No.733/PUN/2011 for the assessment year 2005-06 dated 18.11.2016; where, the Tribunal held that the said expenditure is an exceptional expenditure and the same should be excluded while working out operating margins of the assessee. The contents of para 8 to 19 of the said order of the Tribunal (supra) are relevant in this regard.

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inquiries and examining the facts and evidences that were submitted by the Assessee, TPO had passed the order under Sec.92CA(3) of the Act wherein he directed the increase in income to the extent of Rs.27,75,44,805/- be made on account of adjustment to ALP. Ld. A.R. thus submitted that TPO while making an upward adjustment to the income, had examined all the issues related to it. He therefore submitted that once the issue has been examined by the TPO, then no revision is possible u/s 263 of the Act. On the merits of the issue of allowability of “Exist cost” while computing the Operating Profit he submitted that Tetra level group world-wide had discontinued the production of TBA-10 filing machines and its spare parts due to technological obsolence. In the past, assessee had sold/leased TBA-10 filing machines to its customers in India and was making significant sales of packaging material to those customers. As the supply of the spares and technical support for machines and upkeep of the existing of TBA-10 would not be available in the future and had the assessee not replaced the machines, there was a possibility that the assessee would have lost out on the sale of packaging material used by those customers on the TBA-10 filing machines. The assessee, therefore took decision to withdraw the said TBA-10 filing machines from the customers at some pre-determined value and replaced it with latest technology TBA-10 filing machines with higher production capacities by offering special discounts on the value of those on the new machines. This business decision was taken so that the assessee could continue to sell packaging material to those customers because only the packaging material sold by the assessee could be used on those machines. It was further submitted that if the assessee had not subsidized the cost of the latest technology filing machines, there was a risk of assessee losing out its packaging business from the customers as the customers would have shifted to alternative mediums of packaging provided by other suppliers and that in the long run it would have been detrimental to the business of the assessee. The cost for withdrawing the filling machines that were sold and the replacement cost of new suitable machines amounting to Rs.12,66,65,008/- was basically the discounts given to customers on the new machines and write off the machines on lease that were withdrawn in consonance with the agreements of the customers. He submitted that this expenditure was disclosed as an “exceptional item” in the Profit and Loss account and since it has not been incurred on a regular basis and it being of an extra ordinary nature, it was rightly excluded while computing the operating profits. He submitted that the aforesaid explanations were given to TPO during the course of proceedings before him and the explanation was found acceptable to the TPO because no adjustment was made by him on this account while making an upward adjustment meaning thereby that TPO had taken a conscious decision to exclude it. In support of the submission that the required details were furnished before TPO, he pointed to the relevant submissions and explanations made before TPO and which are placed in the paper book. Further in support of his contention that the extraordinary items were rightly excluded while calculating operating margins, he relied on the following decisions. 1. Transwitch India Pvt. Ltd V DCIT (2013) 151 TTJ 0177 (Delhi Tribunal). 2. Marubeni India Pvt. Ltd V Director of Income Tax (2013) 354 ITR 0638 (Delhi).

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“The Commissioner may call for and examine the records of any proceedings under this Act and if he considers that any order passed therein by the ITO is erroneous in so far as it is prejudicial to the interests of the Revenue, he may, after giving the assessee an opportunity of being heard and after making pr causing to be made such inquiry as he deems necessary, pass such order thereon as the circumstances of the case justify, including an order enhancing or modifying the assessment or canceling the assessment and directing fresh assessment” 15. The reading of the above provisions makes it very clear that the power of suo motu revision u/s 263(1) is in the nature of supervisory jurisdiction and the same can be exercised only if the circumstances specified therein exist. Two circumstances must exist to enable the Commissioner to exercise power u/s 263 namely (i) the order is erroneous (ii) by virtue of being erroneous, prejudice has been caused to the interest of the Revenue. 16. In the present case, it is seen that the provisions of Sec.263 has been invoked by learned CIT mainly for the reason that “exist cost” of TBA-10 machines which was considered by Assessee as an extraordinary item and therefore not considered as part of operating profit, was allowed without any discussion. The other reason for invoking provisions of Sec.263 of the Act was that the assessee’s claim in respect of depreciation, amortization and impairment, loss of sale on assets etc. needs verification and addition, if any. 17. In the present case, we find that the assessee had followed TNMM method and the Profit Level Indicator (PLI) was computed as operating profit to operating revenue at 1.82 %. TPO had show caused the Assessee and asked to justify its working. After considering the material before him and after taking into considerations the submissions of the Assessee, TPO reworked operating profit margin of 1.51% and thereafter determined the upward adjustment to the ALP of the international transactions at Rs 27,75,44,805/- in the order passed u/s 92CA(3). A.O. after considering the order passed by TPO u/sec.92CA(3) made addition of the amount that was directed by the TPO. Thus, on perusing the order of TPO and the submission made by the assessee before TPO, it is seen that the submission of Assessee with respect to “exist cost” was found acceptable to the TPO as no addition/adjustment on that account was made by TPO. At this moment we would like to refer the decision of the Hon’ble Apex Court in the case of Malabar Industrial Company Ltd., (2000) 243 ITR (SC) wherein the Hon’ble Apex Court has held that CIT has to be satisfied of twin conditions namely i) the order of the A.O. sought to be revised is erroneous ii) by virtue of being erroneous prejudice has been caused to the interests of the Revenue for invoking the provisions of Sec.263. If one of them is absent – if the order of ITO is erroneous but is not prejudicial to the interest of Revenue or if it is not erroneous but is prejudicial to the interest of Revenue - recourse cannot be had to Sec.263(1). It has further held that the provision cannot be invoked to correct each and every type of mistake or error committed by the A.O. When ITO adopted one of the courses permissible in law and it has resulted in loss of revenue; or where two views are possible and the ITO had taken one view with which the CIT does not agree, it cannot be treated as an erroneous order prejudicial to the interests of the Revenue unless the view taken by the ITO is unsustainable in law. We also find that Hon’ble Bombay High Court in the case of CIT Vs, Gabriel India Ltd. (1993) 203 ITR 108 (Bom) has observed that the Section does not visualize a case of

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substitution of the judgment of the Commissioner for that of the ITO who passed the order unless the decision is held to be erroneous. 18. In the present case, the AO had passed order u/s 143(3) and with respect to the adjustments to the international transactions, addition was made as per the order of TPO’s order that was passed u/s 92CA(3) of the Act. As per the provisions of Sec.94CA(4) the order passed by TPO is binding on A.O. In the present case, thus it is seen that A.O. has followed the adjustments directed by TPO in the order dt.30.09.2008 passed under Sec.92CA(3) of the Act. There is nothing on record which points out that the order of TPO dt.30.09.08 has been revised or the order was not in existence when AO passed the order u/s 143(3) of the Act. Therefore in the present case, since the A.O. has followed the order of TPO passed u/s 92CA(4), it cannot be said that there is any error in the order dt.10.12.2008 passed by the A.O., u/s143(3) of the Act. We further find that co-ordinate Bench of the Tribunal in the case of Tata Communications Limited Vs. DCIT (supra) after following the decisions of the co-ordinate bench in the case of Essar Steels Limited Vs. DCIT said (supra), has held that Commissioner cannot exercise the revisionary jurisdiction under Sec.263 on the order passed under Sec.92CA(3) by the TPO. It further held that once the Commissioner cannot exercise jurisdiction, then the order passed by the A.O., cannot be set aside as the order of the TPO under Sec.92CA(4) is binding on the A.O. On the merits of the case of excluding “Exist cost” while computing the operational margin, being of an extra- ordinary and exceptional in nature, we find force in the argument of the learned A.R. for its exclusion in the light of the ratio of the decision of Hon’ble Delhi High Court in the case of Marubeni India Pvt. Ltd Vs DIT reported in (2013) 354 ITR 638 (Del), wherein the Hon’ble Delhi High Court has upheld the exclusion of payment of compensation for closure of Indian units by the associated enterprise by considering it to be an abnormal item of expenses and excluding it while computing operating profits. We are of the view that the ratio of the aforesaid decision is squarely applicable to the present case. 19. Before us, the Revenue has not placed any contrary binding decision nor has brought any material on record to demonstrate that the view taken by the A.O. was contrary to law or was an impermissible view or was upon application of wrong legal principles and therefore required initiating the exercise of revisionary powers under Sec.263. In view of the aforesaid facts, we are of the view that in the present case the CIT was not justified in resorting to the revisionary powers under Sec.263 of the Act. We, therefore, set aside the order of the CIT canceling the order dt.10.12.2008 passed under Sec.143(3) of the Act. Thus, the grounds of the assessee are allowed.”

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(E) Adjustment on account of differential rates of depreciation 24. Regarding the adjustment on account of differential rates of depreciation, the ld. Counsel for the assessee submitted that the depreciation rates provided by the assessee are much higher than the depreciation rates provided by the comparable entities. The TPO has not granted any adjustment on account of differential rates of depreciation. The DRP confirmed the stand of the Assessing Officer. It is further submitted that, for the assessment year 2004-05, the TPO granted the adjustment on account of differential rates of depreciation. For assessment year 2005-06, the CIT(A) also granted such adjustments. The ld. Counsel for the assessee submitted that this adjustment should also be granted in this year. 25. On hearing both the sides, we find the said issue needs to re-visit by the lower authorities. Therefore, without going into the merits of the case, we remit back this issue for fresh adjudication. Accordingly, this ground is allowed for statistical purposes. (F) Working capital adjustment 26. This issue is raised by the assessee by way of additional ground. It is the submission of the assessee that identical issue came before the Tribunal in assessee’s own case for the assessment year 2005-06 (supra) and the Tribunal held that the adjustment is to be granted and the matter has been set aside to the file of the Assessing Officer for

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examining the relevant working. The contents of para 50 of the said order of the Tribunal (supra) are relevant in this regard. 27. On hearing both the sides and perusing the said order of the Tribunal for the assessment year 2005-06 (supra), we find an identical issue came up before the Tribunal in assessee’s own case (supra) and the Tribunal decided the said issue in favour of the assessee. The contents of para 50 of the Tribunal (supra) are relevant and the same are extracted hereunder :- “50. Considering the cover nature of this issue, we are of the opinion the additional grounds should not only be admitted but also the Assessing Officer should be directed to grant working capital adjustments. For this purposes, the above tables inserted in the preceding paragraphs of this order should be remanded to the file of the TPO/Assessing Officer for incorporating the above direction and benchmarking the transactions discussed above. The Assessing Officer should be granted reasonable opportunity of being heard to the assessee while examining the data and granting working capital adjustments as per the set principles of natural justice. Hence, relevant grounds stand allowed for statistical purposes.” 28. Considering the above, we are of the opinion, the relevant grounds raised by the assessee on this issue should be allowed in favour of the assessee. Accordingly, the relevant grounds on this issue are allowed. Now, we shall take up the Non-TP issues raised in the rest of 29. grounds i.e. grounds no.14 to 18 (extracted above). Ground no.14 relates to the disallowance of “warranty” cost. 30. 31. The ld. Counsel for the assessee on the said issue submitted that the similar disallowance was made in the earlier and other assessment

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years and when the matter was reached before the Tribunal the claim of the assessee has been allowed in favour of the assessee. In this regard, the ld. Counsel for the assessee placed reliance on the decisions of the Tribunal in assessee’s own case for the assessment years 2008-09 & 2003-04 vide ITA Nos.786 & 1545/PN/2014 dated 23.12.2016 respectively and submitted that the similar issue came up before the Tribunal and the Tribunal decided the said issue in favour of the assessee. The contents of para 3 to 9 of the said order of the Tribunal (supra) are relevant in this regard. 32. On hearing both the sides and perusing the said decision of the Tribunal in assessee’s own case for the assessment years 2003-04 & 2008-09 (supra), we find identical issue came up before the Tribunal and the Tribunal, relying on the judgement of the Hon’ble Supreme Court in the case of Rotork Controls India P. Ltd. vs. CIT, 314 ITR 62, allowed the claim of the assessee on account of provision for warranty. The contents of para 9 of the said order of the Tribunal (supra) are relevant and the same are extracted hereunder :- “9. We have heard the rival contentions and perused the record. The issue arising in the present appeal is against the claim of deduction on account of provision made for warranty. The assessee was engaged in the manufacture and sale of processing equipments and filling machines for both dairy and bread processing industries. The machineries which were being manufactured by the assessee were heavy packaging machineries and for the supply of same, the assessee was entering into agreement with the prospective buyers. The copy of one such agreement is placed on record by the assessee at pages 70 to 79 of the Paper Book. As per warranty clause 7 of the agreement, it is provided that the equipment is sold subject to express warranty, wherein the seller warrants that the equipments shall be free from material defects in workmanship, materials and design for period of 12 months from the date of commencement of use or period or 18 months from the delivery, whichever is shorter. It was undertaken by the assessee to repair or replace free of charge to the purchaser any part of equipment which contains a defect or actual refund to the purchaser the portion of price attributable to the defective part. The replacement or repair price were also subject to some warranty for the

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remainder of original warranty period or six months from the date of repair or installation of replacement part, whichever is shorter. It was agreed that the purchaser had to bear the cost and risk of transport of defective part to the seller, who in turn, had to repair or replace the same on the same terms as the equipment was supplied. As per clause 7.4, the seller i.e. the assessee had no liability for any defect in the equipment because of ordinary wear and tear, misuse or abuse and other conditions. In view of undertaking given by the assessee by way of warranty on the equipment sold by it to the prospective purchasers, the assessee was maintaining a systematic method, wherein the provision was made on account of warranty. In case any part of the warranty was utilized, then the same was so debited or / and the balance on expiry of period of warranty was written back. This method was regularly and systematically followed by the assessee. The CIT(A) has referred to the factual aspects of the case and pointed out that the machinery sold by the assessee was in the range of Rs.4-6 crores and there were limited buyers of said machinery. In view of said facts and circumstances, where the assessee was engaged in the manufacture of specialized machinery for packaging and the assessee had warranty clause against supply of the said machinery, then the recognition of application of warranty by way of making the provision in the books of account is accepted accounting practice and such a liability recognized by the assessee is Contingent Liability. Following the ratio laid down by the Hon’ble Supreme Court in Rotork Controls India P. Ltd. Vs. CIT (supra), we hold that the value of Contingent Liability by way of recognizing the warranty liabilities, by making a provision and also following systematic method of its write back and / or utilization is an accepted accounting method adopted by the assessee and the provision made by the assessee is to be allowed as deduction in the hands of assessee. It may be clarified herein that the CIT(A) had rejected the claim of assessee in assessment year 2008-09 observing that the assessee had made provision to the extent of Rs.32.74 crores, whereas none of the provisions made in the earlier years were much utilized. The learned Authorized Representative for the assessee in this regard has clarified that inadvertently, the same was created at Rs.32.74 crores but Rs.31.07 crores was written back and the deduction by way of provision of warranty was claimed only at Rs.1.67 crores. The Assessing Officer had also disallowed sum of Rs.1.67 crores only. In view thereof, we find no merit in the observations of CIT(A) in denying the claim of assessee. Applying the ratio laid down by the Hon’ble Supreme Court in Rotork Controls India P. Ltd. Vs. CIT (supra), the assessee having fulfilled the conditions laid down by the Apex Court, we find merit in the claim of assessee and accordingly, we direct the Assessing Officer to allow the deduction on account of provision for warranty made at Rs.1.67 crores. The grounds of appeal raised by the assessee are thus, allowed.”

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