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Income Tax Appellate Tribunal, “B” BENCH : BANGALORE
Before: SHRI SUNIL KUMAR YADAV & SHRI INTURI RAMA RAO
O R D E R Per Sunil Kumar Yadav, Judicial Member These are cross appeals by the assessee as well as the revenue against the order of the CIT(Appeals) inter alia on the following grounds:-
IT(TP)A NO.1024/BANG/2014 (ASSESSEE’S APPEAL) “I. Transfer Pricing Adjustment The grounds hereinafter taken by the Appellant are without prejudice to one another. General Grounds 1. The learned Assessing Officer ("AO"), the learned Additional Commissioner of Income Tax (LTU), Bangalore ("Transfer Pricing officer" or "TPO") and the Honorable Commissioner of Income Tax (Appeals) ("Hon'ble CIT (A)") have erred in law and facts of the case in proposing a transfer pricing adjustment under section 92CA of the Income-tax Act, 1961 ("the Act") in relation to the Appellant's international transactions with Associated Enterprises ("AEs").
2. The learned AO, TPO and the Hon'ble CIT (A) erred in rejecting the Transfer Pricing (`TP') documentation maintained by the Appellant in accordance with provisions of the Income-tax Act, 1961 ("the Act") read with Income-tax Rules, 1962 ("the Rules").
3. The learned AO, TPO and the Hon'ble CIT (A) erred in rejecting the use of multiple year data by the Appellant in the Transfer Pricing documentation and insisting that only current year financial data (i.e. financial year ending 31St March 2005) should be used for conducting comparability analysis.
IT(TP)A Nos.1024 & 1029/Bang/2014 Page 3 of 10 Other Specific Grounds 4. The learned AO, TPO and the Hon'ble CIT (A) erred in not appreciating that the losses incurred by the Appellant were due to the initial stage of operations of the Appellant and that future projections can be considered to establish the arm's length price of the international transactions of the Appellant.
5. The learned AO, TPO and the Hon'ble CIT (A) have erred in not appreciating the internal comparable uncontrolled transaction analysis provided by the Appellant as a supplementary analysis to demonstrate the arm's length nature of the international transaction pertaining to payment of technical assistance fees and while doing so erred in: i. Disregarding the similar agreement for transactions between Toyota Motor Corporation and Kirloskar Systems Limited, when the aforesaid parties were unrelated parties; ii. Stating that the Appellant has not derived any economic benefits from obtaining the technical assistance services; and iii. Not appreciating that the payment of technical assistance fee has been concluded to be at arm's length based on the similar facts and evidences in the. Appellant's own case for other assessment years.
6. The learned AO, TPO and the Hon'ble CIT (A) erred in rejecting M/S Hang Cranskshafts Ltd. as a comparable company.
7. The learned AO, TPO and the Hon'ble CIT (A) ought to have computed the operating margin of the comparable companies based on the Annual Reports which are available in the public domain.
8. The learned AO, TPO and the Hon'ble CIT (A) erred in not appreciating that the technical knowledge is very essential to the products manufactured which is only available with the AE of the Appellant and therefore, the royalty payment provide access to the Technical Know-How and Patents owned by the AE, and thereby erred in concluding that the Appellant has not derived any economic benefits.
IT(TP)A Nos.1024 & 1029/Bang/2014 Page 4 of 10 II. Corporate Tax Disallowance of provision for warranty: 9. The learned AO and the Hon'ble CIT (A) erred in disallowing the provision made for warranty amounting to Rs 37,17,556/- on the ground that the same is in the nature of a contingent liability.
10. The learned AO and the Hon'ble CIT (A) ought to have appreciated that the Appellant has worked out the liability as per proper methodology, on account of free maintenance and replacement of parts during the warranty period and claimed the same as a revenue expenditure allowable under section 37 (1) of the Income Tax Act, 1961 (the Act).
The learned AO and the Hon'ble CIT (A) erred in concluding that the Appellant is providing for warranty on an adhoc basis and not on scientific method.
The learned AO and the Hon'ble CIT (A) erred in disallowing the warranty expenses without considering the details submission made by the Appellant with regard to computation of warranty provision, utilization of the provision and reversal of excess provision.
The learned AO and the Hon'ble CIT (A) has erred in not placing reliance on the decision of the Hon'ble Supreme Court in the case of Rotork Controls India (P) Ltd vs Commissioner of Income Tax (SC) [2009] (180 Taxmann 422.) Disallowance of allocation of overhead for work-in-progress valuation: 14. The learned AO and the Hon'ble CIT (A) erred in disallowing overhead expenses of Rs. 72,84,000/- 15. The learned AO and the Hon'ble CIT (A) ought to have appreciated that the treatment adopted by the Appellant is consistent and the impact of the overhead allocation to the closing work-in-progress vis-a-vis the opening work-in-progress would stand nullified over a period of tune resulting only in a timing difference.
IT(TP)A Nos.1024 & 1029/Bang/2014 Page 5 of 10
16. The learned AO and the Hon'ble CIT (A) ought to have considered the consequential impact of the said disallowance in the subsequent years. The Appellant craves leave to add, alter and modify the above grounds during the course of the appeal. For the above and any other grounds which may be raised at the time of hearing, it is prayed that necessary relief may be provided.” IT(TP)A NO.1029/BANG/2014 (REVENUE’S APPEAL) “1. The order of Ld CIT(A) is opposed to law and facts of the case. 2. The Ld. CIT(A) has erred in allowing the assessee appeal treating expenditure on license fee paid for purchase of MS Windows and Oracle Internet Developer Suite as revenue in nature. 3. The Ld. CIT(A) has erred in directing the TPO to restrict the TP adjustments to only international transactions. The entire sales made by the tax payer is to unrelated parties and the international transactions to be bench marked for sitting in the cost. The TPO therefore calculated the adjusted cost to unrelated parties and arrived at the Arms Length Price of the International transactions. To arrive at the TP adjustments the TPO has aggregated alit he transactions for the purpose of determining 4. For these and such other grounds that may be urged at the time of hearing.”
During the course of hearing, the ld. Counsel for the assessee has contended that with regard to the grounds raised on transfer pricing income adjustment of RS.12,48,82,887, the assessee has received a MAP resolution for the AY 2005-06 between the Indian competent authority and the Japanese competent authority under Article 25 of the Indo-Japan Double Taxation Avoidance Convention r.w.s. 90 of the Indian Income Tax
IT(TP)A Nos.1024 & 1029/Bang/2014 Page 6 of 10 Act, 1961. In the light of the acceptance of MAP resolution vide letter 30.09.2015, the assessee intends to withdraw the appeal in relation to Transfer Pricing grounds. This factual aspect was not disputed by the revenue. Accordingly, ground Nos. 1 to 8 relating to the Transfer Pricing issues in the assessee’s appeal are dismissed being infructuous.
Similar is the position in the revenue’s appeal with regard to ground No.3 relating to the TP issues. Accordingly, ground No.3 of the revenue’s appeal is also dismissed being not pressed.
On the corporate issues, two grounds were raised by the assessee in its appeal. One is with regard to disallowance of provision for warranty and the other is with regard to disallowance of allocation of overhead for work-in-progress (WIP) valuation. With regard to ground Nos. 9 to 13 relating to disallowance of provision for warranty, it was contended on behalf of the assessee that this ground is covered by the order of the Tribunal in assessee’s own case for the AYs 2003-04 to 2006-07. Copy of the order is placed on record. On a careful perusal of the order of the Tribunal, we find that this issue was examined by the Tribunal and was decided against the assessee. The relevant observations of the Tribunal are extracted hereunder for the sake of reference:-
“ 9. Regarding ground no.2b in respect of disallowance of provision for warranty, we find that it is noted by the AO on page-4 of the assessment order that the assessee is making provisions for warranty on ad hoc basis. As per the details regarding provision for warranty available on page-77 of the paper book, it is seen that during the present year i.e. assessment year 2003-04, the assessee has made provision for Rs.30,65,924 and opening balance was Rs.69,15,441/- and the amount utilized in present year was only Rs.30,65,924/- and in the next year, the assessee has reversed provision of Rs.69,15,440/- although, the assessee made further provision in that year of Rs.69,15,440/- and thereafter in assessment year 2005-06, the assessee again
IT(TP)A Nos.1024 & 1029/Bang/2014 Page 7 of 10 reversed the provision of Rs.47,75,036/- although made further provision of Rs.84,92,591/- in that year. In assessment year 2006- 07, there is opening balance of Rs.1,09,40,410/- and the assessee made further provision of Rs.1,80,26,928/- but utilization in that year was also very small amount of Rs.15,83,971/- leading to closing balance of 2,73,83,367/-. The assessee had not indicated any scientific basis for making the provision for warranty expenses. In the notes on arguments, the assessee says that the assessee creating provision of 0.5% of the sales made during the year which is based on past experience but in view of the facts noted above from page-77 of the paper book, we find that the track report of actual warranty expenses is very small as against the provision made by the assessee. During the assessment year 2001-02 to 2006-07, the actual expenses was of Rs.36,49,795/- in AY: 2002-03, Rs.32,99,225/- in AY: 2003-04, Rs. 30,65,924/- in AY: 2006-07 and even after reversal of Rs.7,96,311/- in AY: 2003-04, Rs. 69,15,440/- in AY: 2004-05, in AY: 2005-06, there is closing balance on Rs.2,73,83,367/- on 31-03-2006. In view of these facts, this is apparent that the provision for warranty made by the assessee is arbitrary and the same is akin to creating of contingent liability only and therefore, this claim is not allowable in view of the facts of the present case. Regarding various judgments on which reliance has been placed by the ld. AR of the assessee, the assessee does not get any help from these judgments. In the case of M/s Lenovo (Ind.)Pvt. Ltd. Vs ACIT 140 ITD 127(B’lore), it was held by the Tribunal that if the assessee has made provision on scientific basis, it has to be allowed as deduction but since in the present case, the provision is not made on scientific basis, the same is not allowable.
The second judgment cited in the judgments is of the Hon’ble Karnataka High Court rendered in the case of CIT Vs Denso Kirloskar (2013) 34 Taxman.com 238 (Kar.HC). In this case, the Hon’ble Karnataka High Court has restored back the matter to the file of the AO for fresh decision in the light of the judgment of the Hon’ble Apex Court rendered in the case of M/s Rotork Controls India (P)Ltd. Vs CIT as reported in 314 ITR 62(SC)(2009). In this case, it was held that if large number of sophisticated goods were being manufactured and defects existed in some of the items manufactured and sold, then provision made by the assessee for warranty claim on the basis of past
IT(TP)A Nos.1024 & 1029/Bang/2014 Page 8 of 10 experience is allowable as deduction u/s 37(1) of the Act, 1961. Hence, as per ratio of this judgment, if the provision for warranty is on the basis of past experience then it is allowable. In the present case, the facts do not suggest so. In AY: 2001-02, provision was made of Rs.36,49,795/- and as against this, in AY: 2002-03 the amount of Rs.33,579/- only was used and further provision was made in AY: 2002-03 of Rs.32,99,225/-. In the present year, amount utilized is Rs.34,910/- and further provision is made of Rs.30,65,924/- and amount reversed is Rs.7,96,311/-. In AY: 200-405, there is no utilization. Hence, it is seen that in the present year, the past and future experience does not support the claim of assessee regarding creating of provision of Rs.30,65,924/- out of which the assessee reversed an amount of Rs.7,96,311/- and claimed deduction of the difference in these two amounts of Rs.23.23 lakhs. Hence, none of the judgments cited by the ld. AR of the assessee is of any help to the assessee in this case and therefore, we are not inclined to interfere with the order of the ld. CIT(A) on this issue. Hence, ground no.2b is rejected.”
Since the Tribunal has taken a particular view in a similar set of facts, we find no justification to take a contrary view in this appeal. Accordingly, following the same, we decide the issue against the assessee.
So far as ground Nos.14 to 16 relating to disallowance of allocation of overhead for WIP valuation is concerned, this ground was also adjudicated by the Tribunal in same order. This ground was not pressed by the assessee in those assessment years in view of the MAP resolution and accordingly the Tribunal has rejected this ground. The relevant observations of the Tribunal are extracted hereunder for the sake of reference:-
“ 14. Regarding ground no.1 to 6 in respect of disallowance of allocation of work in progress, he submitted that there is no merit in this issue but the AO should follow the same practice in succeeding years also.
IT(TP)A Nos.1024 & 1029/Bang/2014 Page 9 of 10
The ld. DR of the revenue supported the orders of the authorities below.
We have considered the rival submissions. Ground no.1 and additional grounds are rejected as not pressed, in view of MAP resolution and submissions of the ld. AR of the assessee. 17. Ground no.7 is rejected as not pressed.”
Since the assessee has not pressed this ground in the earlier years, it was decided against the assessee. We find no merit in this ground. Accordingly, we dismiss this ground of the assessee.
So far as ground No.2 in the revenue’s appeal is concerned, the ld. Counsel for the assessee has candidly admitted that he has no objection if the software expenses are to be treated as capital expenditure and depreciation is allowed thereon. In the light of this argument of the assessee, we set aside the order of the CIT(Appeals) and restore the order of the AO in this regard.
In the result, the assessee’s appeal is dismissed, while the revenue’s appeal is partly allowed.
Pronounced in the open court on this 22nd day of December, 2017.