DCIT, BANGALORE vs. M/S STANLEY BLACK & DECKER INDIA LTD.,, BANGALORE

The brief facts of the case are as under. The respondent-assessee is a company incorporated under the provisions of the Companies Act, 1956. It is engaged in the business of trading of power tool products like drills, grinders, saws, hammers etc. Return for the A.Y. 2010-11 was filed on 15.10.2010 disclosing income of Rs.1,59,19,880. Against said return of income, assessment was completed after issuing scrutiny notice u/s. 143(2).

During the course of assessment proceedings, the Assessing Officer noticed that the assessee company entered into international transactions with its AE towards purchase of traded goods to the extent of Rs.34,83,16,086 and therefore referred the matter to the ld. TPO for determination of arm’s length price (ALP) in respect of the above international transaction. However, the TPO found from the audited financials of the assessee company that it incurred huge expenses in the nature of Advertisement and Market Promotion (AMP) as under:

After analyzing the AMP expenditure incurred by the comparables chosen by the tax payer, the TPO found that the average expenditure incurred by 3 comparables under AMP is only 2.44% of sales, whereas the taxpayer has incurred AMP expenditure of 9.81% of sales. Therefore, the TPO suggested to treat the excess expenditure 7.37% of sales (i.e., 9.81% – 2.41%) as expenditure incurred by the taxpayer for development of intangibles owned by the AE. He has further suggested TP adjustment of Rs.6,36,08,748. The TPO also suggested adjustment on account of mark- up of AMP expenditure @ 24.8%.

Pursuant to the TPO’s order, the draft assessment order was passed by the Assessing Officer vide order dated 17.3.2014. Against the draft assessment order objections were filed before the Hon’ble DRP, wherein it was contended inter alia that assessee had not incurred AMP expenditure on behalf of its AE and also contended that selling expenses such as trade discount, sales discount, warranty expenses and packing expenses cannot be treated as Advertising and Marketing Promotion expenditure. The assessee company also contested the addition on account of provision for warranty as the same was allowable in view of the law laid down by the Hon’ble Apex Court in the case of Rotork Controls Pvt. Ltd. V. CIT, 314 ITR 62 (SC).

The Hon’ble DRP while passing the order u/s. 144C of the Act has stated that the contention of the assessee company that the selling expenses cannot be included in the AMP expenditure cannot be accepted as the assessee had failed to furnish specific information or details in respect of the claim and therefore rejected the objections.

Subsequently the assessee moved a petition u/s.154 dated 12.1.2015 before the Hon’ble DRP for rectifying the direction issued u/s. 144C of the Act praying that the assessee had placed on record the full details relating to nature of expenditure of AMP before the TPO as well as before the DRP vide its letter dated 15.4.2014 and 4.12.2014 respectively. The Hon’ble DRP pursuant to the application made, passed an order u/s. 154 r.w.s. 144C of the Act dated 12.1.2015 whereby the Hon’ble DRP held that the assessee had filed full details relating to AMP expenditure which includes trade discount sales discount, warranty expenditure & packing expenditure and directed the Assessing Officer to exclude those expenditure from the AMP expenditure as they cannot form part of Advertising and Marketing Promotion expenditure in view of the law laid down by the Special Bench in the case of M/s.L.G.Electronics India Private Limited v. ACIT [140 ITR 41(SB)]. Being aggrieved by this order of the DRP, the Revenue is in appeal before us.

The Revenue raised the following grounds:-

The directions of the Dispute Resolution Panel are opposed to law and facts of the case.

The ld. Sr. DR vehemently contested that the Hon’ble DRP ought not to have exercised jurisdiction u/s. 154 as it is only error of judgment and accordingly he prayed the order passed u/s. 154 may be quashed.

On the other hand, the ld. Counsel for the assessee submitted that it is a case of mistake apparent from record as the Hon’ble DRP failed to consider the material on record and therefore no interference was called for.

We have heard the rival submissions and perused the material on record. The only issue that arises for consideration in the present appeal is, whether the DRP was justified in assuming jurisdiction u/s. 154 in the given facts and circumstances of the case. It is an undisputed fact that the assessee company filed full details which are considered as AMP expenditure by the TPO. These include sales discount, selling expenditure, warranty expenditure. These details were not considered by the DRP at the time of passing the original directions u/s. 144C of the Act. When this fact was brought to the notice of DRP, the DRP modified its directions to exclude those items from the AMP expenditure, following the law laid down by the Special Bench in the case of M/s. L.G.Electronics India Private Limited (supra). Therefore, it is a case of non-consideration of material on record which would constitute a mistake apparent from record, as laid down by the Hon’ble Madhya Pradesh High Court in CIT vs. Mithalal Ashok Kumar (158 ITR 755)(MP). Therefore, the DRP was justified in assuming jurisdiction u/s. 154 of the Act. Hence, the grounds of appeal filed by the Revenue are rejected and the appeal is dismissed.

The ld. Sr. DR vehemently contended that provision for warranty is only in the nature of contingent liability and therefore cannot be allowed as deduction and provision was not based on any reliable estimate. Therefore he prayed that the directions of the Hon’ble DRP may be quashed.

On the other hand, the ld. Counsel for the assessee has explained the method of accounting followed by the assessee company for warranty expenditure and that the provision is based on the past history and submitted that law laid down in Rotork Controls Pvt. Ltd. V. CIT, 314 ITR 62 (SC) is squarely applicable to the facts of the case.

We have heard the rival submissions and perused the material on record. During the course of hearing of the appeal, a chart showing the provisions created and actual claims for the FYs 2008-09 to 2012-13 was placed before us which read as under:-

A perusal of the above chart reveals that provision was based in terms of percentage of sales and the actual claims made during the year were also shown. The provision was made at a percentage of sales and percentage of sales varies from year to year depending upon the past trend. Assuming that the claims for warranty are made in the next year, the actual claims are almost near to the provision created in the immediately preceding year. E.g., in the FY 2009-10, actual claims made were Rs.51,38,524 as against provision created of Rs.66,24,970. Similarly, in FY 2011-12, actual claims of Rs.1,21,09,422 was made as against provision of Rs.1,29,27,237 and so on. This only goes to show that the provision made is not far in excess of the actual claims made in the succeeding year. Therefore, it can be safely presumed that the provision for warranty was crated on a reliable estimate basis and based on historical trend and the ratio of the Hon’ble Supreme Court in the case of Rotork Controls Pvt. Ltd. (supra) is squarely applicable to the facts of the present case. Therefore, we are of the opinion that the DRP was right in directing the AO to delete the addition on account of provision for warranty expenditure. Hence the grounds of appeal filed by the Revenue are rejected and the appeal is dismissed.

In the result, both the appeals by the Revenue are dismissed.