The Bangalore bench of Income Tax Appellate Tribunal ( ITAT ) has directed to use Comparable Uncontrolled Price (CUP) as most appropriate method and held that, warranty expenditure is allowable.
The appellant, Lenovo (India) Private Limited 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.
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.
The AO observed that assessee entered into international transactions with its Associate Enterprise (AE) exceeding ₹ 15 crores and accordingly reference u/s. 92CA was made to the transfer pricing officer (TPO). Upon receipt, of reference, the TPO called upon assessee to file the economic details of international transactions undertaken by assessee in Form 3CEB.
The TPO observed that During the AY 2013-2014, the assessee imported certain parts and components from its AE’s for purpose of manufacturing of Personal Computers (PCs). The TPO observed that the assessee also imported parts and components from third parties. The assessee chooses 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.
The TPO did not accept the Transfer Pricing (TP) analysis by assessee and 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/-.
During the assessment proceedings, the AO observed that assessee created provision of warranty. The assessee was called upon to explain as to why the provision should not be disallowed. In response 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 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).
The 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.
The assessee filed objection before the DRP against the proposed adjustment and imposition of contingent liability. However the DRP upheld the order of 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. Against the final assessment order, the assessee raised the issue before the Tribunal and submitted that this issue has already been considered by Coordinate Bench of the same Tribunal in assessee’s own case as follows.
“In AY 2006-07, the Tribunal has upheld theDRP’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 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 the Tribunal upheld order of the DRP accepting CUP as MAM. In AY 2010-11 the Tribunal 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”.
The appellant further submitted that coordinate bench of this Tribunal in appellant’s own case for assessment years 2006-07, AY 2007-08, AY 2010-11 and AY 2011-12 upheld that provision for warranty has been created on a scientific basis and hence allowable as expenditure under section 37 under the Act. The Honorable Karnataka High Court in assessee’s own case for assessment year AY 2007-08 and AY 2011-12 have dealt with identical issue where in the Honorable Court held against the revenue.
“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.”
The Coram of Sri. Chandra Poojari, Accountant Member and Smt. Beena Pillai, Judicial Member has held that “as the submissions advanced are on identical facts that has already been considered by this Tribunal, for preceding assessment years as well as assessment year 2015-16, respectfully following the above view, we direct the TPO to replace the TNMM with CUP as most appropriate method”. Further held by the Tribunal that “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”.
Subscribe Taxscan Premium to view the JudgmentSupport our journalism by subscribing to Taxscan AdFree. Follow us on Telegram for quick updates.
