CONTINENTAL AUTOMOTIVE COMPONENTS (INDIA) PRIVATE LIMITED,BANGALORE vs. ASST.C.I.T., BANGALORE

The assessee is engaged in the business of manufacture and sale of dashboard instruments, sensors and other allied components relating to automobile industry. It is subsidiary of Continental Automative Gmbh, Germany.

The ground numbers 1 to 16 in the appeal of the assessee and the Ground no.3 to 12 in the appeal of the revenue relate to the addition made on account of Transfer pricing adjustment. The Ld A.R submitted that the assessee has provided Engineering services in the form of application/specific contract R & D services to its Associated Enterprises (AE). However, the TPO has re- characterised the same as “ITES” and accordingly made the Transfer pricing adjustment. The Ld A.R submitted that the TPO had made similar kind of T.P adjustment in the immediately preceding year, i.e., AY 2009-10 also by re-characterising the services as ITES. Hence the co-ordinate bench of Tribunal has restored the matter to the file of the TPO for examining the issue

The Ld D.R did not object to the factual aspects presented by Ld A.R. We have gone through the order passed by the co-ordinate bench in the hands of the assessee in AY 2009-10 in IT(TP)A No. 165/Bang/2014 dated 28-09-2017 and notice the co-ordinate bench has restored entire T.P issue to the file of TPO. Since the facts prevailing in the current year are identical and since the assessee is objecting to the re-characterisation of the services rendered by it to its AE, following the decision rendered by the co- ordinate bench, we set aside the order passed by the AO on this issue and restore entire Transfer pricing issue to the file of AO/TPO for examining it, afresh after providing adequate opportunity of being heard to the assessee. The assessee is also directed to provide all the details in support of its contentions and also that may be called for by the AO/TPO.

The next issue contested by the assessee in Ground Nos. 17 to 24 relates to the disallowance of Research and Development expenditure. The assessee claimed a sum of Rs.1151.74 lakhs as expenditure incurred towards Research and Development activities. Since the assessee did not obtain any approval from Government authorities and since the assessee did not furnish any evidence supporting the R & D activity, the AO disallowed the claim of the assessee.

The Ld A.R submitted that the assessee had made identical claim in AY 2009-10 also and the Tribunal has restored the matter to the file of the AO for examining this issue afresh. Accordingly, he submitted that this issue may be restored to the file of the AO.

We heard the ld DR and perused the record. We noticed that the coordinate bench has considered an identical issue in asst. year 2009-10 (referred Supra) and the matter has been restored to the file of AO for examining it afresh after considering the complete details and evidence supporting the claim of research and development activity. Accordingly, following the said decision, we set aside the order passed by the AO on this issue and restore the same to the file of the AO for examining it afresh. We also direct the assessee to furnish all details and evidences put to the satisfaction to the AO in support of its claim.

In the appeal of the Revenue, the decision of ld DRP in allowing deduction of provision for warranty is being contested. During the year under consideration the assessee has claimed sum of Rs. 87.37 lakhs under the head “Provision for warranty”. In the draft asst. order the AO proposed to disallow the above said claim on the reasoning that the provision is created on estimation basis and further the assessee has also debited profit and loss account with the actual warranty claims. The ld DRP, however held that the provision made by the assessee is reasonable and accordingly directed the AO not to make the addition. The Revenue is aggrieved.

We heard the parties on this issue in this regard and perused the record. In asst. of 2009-10 an identical issue was considered by the coordinate bench and the matter has been restored to the file of the AO for examining it afresh.

The ld AR submitted that the Hon’ble Supreme Court, in the case of Rotork Controls India Pvt. Ltd., Vs. CIT 314 ITR 62, has held that if the estimation of the liability on account of warranty is reliable, then it should be allowed. Adverting our attention to pages 1073 to 1078 of the paper book, the ld AR submitted that the assessee has furnished the details and manner of determining the amount towards “Provision for warranty”, the methodology adopted for estimation etc. to the AO. The ld AR further submitted that the assessee is estimating the warranty provision on a scientific basis and the same methodology has been followed year after year. Accordingly he submitted that, as per the decision of the Hon’ble Supreme Court referred above, the claim of the assessee should be allowed. The ld DR, on the contrary, submitted that the case of the AO is that the assessee is claiming deduction of both “provision for warranty” and actual warranty expenses. He submitted that , if the claim of provision for warranty is allowed then the assessee may be entitled for deduction of actual warranty expenses to the extent it is more than the provision amount. He further submitted that the provision for warranty already allowed should be offered to tax, if the actual warranty expense is less than the provision amount. He

Having heard the rival submissions on this issue, we are of the view that this issue requires fresh examining at the end of the AO. On a perusal of the details furnished by the assessee in page 1073 to 1078 of the paper book, we noticed that the assessee is following a scientific methodology for determining the provision of warranty. It was submitted that the very same method is followed year after year. However, as submitted by ld DR, it is not clear as to whether the actual warranty expenses claimed by the assessee by debiting to the Profit and Loss account is over and above the amount of provision created in earlier years. It is also not clear as to whether the assessee is reversing the excess provision, if any or adjusting the same against the future provision. We notice that the assessee has also not furnished Ledger account copy of “Provision for Warranty” and “Warranty expenses”, which may enable to ascertain these aspects. Accordingly we are of the view that this issue also requires fresh examination at the end of the AO. Accordingly we set aside the order passed by the AO on this issue and restore the same to his file for examining it afresh in the light of the discussions made (Supra).

In the cross objections the assessee has raised certain issues relating to transfer pricing and disallowance of provision for warranty. In view of the decision rendered on both issues in IT(TP)A Nos.473 & 500 /Bang/2015 CO No.132/Bang/2015 preceding paragraphs, the cross objections filed by the assessee shall become infructuous.

In the result, appeal filed by the assessee and Revenue are treated as allowed for statistical purposes and the cross-objections is dismissed as infructuous.