Suessen Asia Pvt. Ltd., merged with Rieter India P. Ltd., Satara V. Asst. Comm. of Income-tax, Pune

ITA 1629/PUN/2011

• Counselvise Citation: [2017] 126 COUNSELVISE.COM (IT) 7366 (ITAT-PUNE)
• Duration Of Justice: 5 year(s) 10 month(s) 5 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 20-10-2017
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: B
• Next Hearing Date: 05-10-2017
• Assessment Year: 2007-2008
• Appeal Filed On: 15-12-2011
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: NIRUPAMA KOTRU
• Keywords: Business income; Transfer pricing; International transaction; Additional evidence
• Section: 37(1); 37

Judgement Text

] IN THE INCOME TAX APPELLATE TRIBUNAL PUNE BENCH B, PUNE BEFORE SHRI ANIL CHATURVEDI, AM AND SHRI VIKAS AWASTHY, JM . / ITA NO.1629/PUN/2011 / ASSESSMENT YEAR : 2007-08 S UESSEN ASIA PRIVATE LIMITED ( MERGED WITH RIETER INDIA PRIVATE LIMITED W.E.F. APRIL 01, 2007), GAT NO.768/2, VILLAGE WING, SHINDEWADI BHOR ROD, TALUKA KHANDALA, DISTRICT SATARA 412801. PAN : AAECS1310G. . / APPELLANT V/S ASST.COMMISSIONER OF INCOME TAX, CIRCLE 6, PUNE. . / RESPONDENT ASSESSEE BY : SHRI M.P. LOHIA. REVENUE BY : MS. NIRUPAMA KOTRU. / ORDER PER ANIL CHATURVEDI, AM : 1. THIS APPEAL FILED BY THE ASSESSEE IS EMANATING OUT OF T HE ORDER OF DISPUTE RESOLUTION PANEL (DRP) PUNE DT.26.09.2011 FOR THE ASSESSMENT YEAR 2007-08. 2. THE RELEVANT FACTS AS CULLED OUT FROM THE MATERIAL ON R ECORD ARE AS UNDER :- 2.1 A SSESSEE IS A SUBSIDIARY OF SPINDELFABRIK SUESSEN, GMBH, GERMANY AND IS STATED TO BE ENGAGED IN MANUFACTURING O F TEXTILE / DATE OF HEARING : 05.10.2017 / DATE OF PRONOUNCEMENT: 20.10.2017 2 SPINNING MACHINES, PARTS, COMPONENTS AND POST-SALES SER VICE SUPPORT OF THESE PRODUCTS IN INDIA AND ABROAD. ASSESS EE ELECTRONICALLY FILED ITS RETURN OF INCOME FOR A.Y. 2007-08 ON 30.11.2007 DECLARING TOTAL INCOME AT RS.NIL AFTER SETTING OF BR OUGHT FORWARD LOSSES. THE CASE WAS TAKEN UP FOR SCRUTINY AND T HE FIRST NOTICE U/S 143(2) OF THE ACT WAS ISSUED AND SERVED ON A SSESSEE ON 23.09.2008. IN THIS CASE IT WAS OBSERVED THAT THE INTER NATIONAL TRANSACTIONS WITH ASSOCIATED ENGINEERS (A.E.S) WERE AT RS .55 CRORE (ROUNDED OFF) AND THEREFORE THE CASE WAS REFERRED TO TRAN SFER PRICING OFFICER (TPO) U/S 92CA(3) OF THE ACT. THE TPO PROPOSED UPW ARD ADJUSTMENT TO ARMS LENGTH PRICE (ALP) AT RS.21,52,03,376/ - ON ACCOUNT OF INTERNATIONAL TRANSACTIONS. THEREAFTER A DRAFT ASSESSMENT WAS PASSED WHEREIN THE ADJUSTMENTS AS INDIC ATED BY TPO WERE MADE. AGGRIEVED BY THE DRAFT ASSESSMENT ORDE R, ASSESSEE RAISED OBJECTIONS BEFORE DISPUTE RESOLUTION PANEL (DRP), WHO PASSED ORDER DT.26.09.2011 U/S 144C(5) OF THE ACT WHEREBY DRP DIRECTED THAT THE OPERATING MARGIN OF THE ASSESSEE TO BE CONSID ERED AT (23.18%) AS AGAINST 14.36% CONSIDERED BY TPO AND AS AGAINS T THE COMPUTATION OF (27.25%) WORKED OUT BY THE ASSESSEE). AGGR IEVED BY THE ORDER OF DRP, ASSESSEE IS NOW IN APPEAL BEFORE US AND HAS RAISED THE FOLLOWING GROUNDS : 1 . THE LD. DISPUTE RESOLUTION PANEL ('DRP')/ ASSESSING OFFICER ('AO'), ERRED IN MAKING A TRANSFER PRICING ADJUSTME NT OF RS. 18.99 CRORES, TO THE INCOME OF THE APPELLANT BY HOLDING T HAT THE INTERNATIONAL TRANSACTIONS OF THE APPELLANT DO NOT SATISFY THE ARM'S LENGTH PRINCIPLE ENVISAGED UNDER THE INCOME-T AX ACT, 1961 ('THE ACT'). ERRONEOUS REJECTION OF THE TRANSACTIONAL ANALYSIS SUBMITTED BY THE APPELLANT 2. THE LD. DRP/AP ERRED IN APPLYING THE TRANSACTION AL NET 3 MARGIN METHOD (TNMM) ON AN ENTITY LEVEL, WHICH IS CONTRARY TO THE PROVISION CONTAINED IN THE INDIAN TRANSFER PRIC ING REGULATIONS (ITPR). 3. THE LD. DRP J AO ERRED BY NOT TAKING COGNIZANCE OF THE AUDITED SEGMENTAL PROFITABILITY STATEMENT SUBMITTED BY THE APPELLANT WHEREIN THE APPELLANT HAS, IN ACCORDANCE WITH THE R ELEVANT PROVISIONS CONTAINED IN THE ITPR, COMPUTED THE PROF IT EARNED FROM RESPECTIVE INTERNATIONAL TRANSACTIONS SEPARATELY . 4. THE LD. DRP/AO ERRED BY NOT TAKING COGNIZANCE OF T E PRICE LEVEL COMPARABILITY ANALYSIS SUBMITTED BY THE APPEL LANT, PERTAINING TO IMPORT OF TEXTILE MACHINERY COMPONENT S AND PARTS FROM AES. ERRONEOUS COMPUTATION OF THE OPERATING PROFITS OF T HE APPELLANT 5. THE LD. DRP / AO ERRED IN EXCLUDING THE AMOUNTS/LIA BILITIES WRITTEN BACK OF RS. 37.84 CRORES TO COMPUTE THE OPE RATING INCOME OF THE APPELLANT OR THE APPLICATION OF THE TNMM. 6. THE LD. DRP / AO ERRED IN INCLUDING FOREIGN EXCHANG E LOSS AS AN OPERATING EXPENSE FOR COMPUTING THE OPERATING IN COME OF THE APPELLANT. ERRONEOUS INCLUSION/REJECTION OF COMPARABLES 7. THE LD. DRP / AO ERRED IN REJECTING THE APPELLANT'S PLEA THAT SCHLAFHORST ENGINEERING (INDIA) LIMITED ('SCHLAFHOR ST INDIA'), BASED ON THE SIMILARITY IN THE FUNCTIONAL PROFILE AND THE BUSINESS CIRCUMSTANCES, SHOULD BE CONSIDERED TO BE THE ONLY COMPARABLE FOR EVALUATION OF ARM'S LENGTH NATURE OF THE INTERNATIO NAL TRANSACTIONS OF THE APPELLANT. 8. THE LD. DRP / AO ERRED IN REJECTING SCHLAFHORST IN DIA AS A COMPARABLE MERELY ON THE GROUND THAT THE SAID COMPA NY HAS INCURRED A LOSS DURING THE YEAR UNDER CONSIDERATION . 9. THE LD. DRP /AO ERRED IN CONSIDERING LAKSHMI MACHIN E WORKS LTD AS A COMPARABLE DESPITE EVIDENCES SUBMITTED TO THE CONTRARY, WHICH DEMONSTRATED THE DIFFERENCES IN ECONOMIES OF SCALE, MARKET POSITIONING, TURNOVER LEVELS, ETC. OTHERS GROUNDS 10. THE LD. DRP/AO ERRED IN REJECTING THE APPELLANT'S P LEA FOR GRANTING THE BENEFIT OF PROVISO TO SECTION 92C(2) O F THE ACT, FOR COMPUTATION OF THE ARM'S LENGTH PRICE. 11. THE LD. DRP / AO ERRED IN REJECTING THE APPELLANT'S PLEA THAT THE TRANSFER PRICING ADJUSTMENT, IF ANY, SHOULD BE COMPUTED ON A 4 PROPORTIONATE BASIS BY FOLLOWING THE PRINCIPLE LAID DOWN IN THE RULING MADE BY THE HONOURABLE DELHI TRIBUNAL IN THE CASE OF II JIN ELECTRONICS (I) (P) LTD VS. ACIT (36 SOT 227). 12. THE LD. DRP/AO ERRED IN DISALLOWING WARRANTY CO STS AMOUNTING TO RS. 52.19 LAKHS. 3. ASSESSEE THEREAFTER HAS RAISED ADDITIONAL GROUND WHICH READS AS UNDER : GROUND NO.13 INCORRECT COMPUTATION OF OPERATING PRO FIT MARGINS OF THE APPELLANT AND COMPARABLE COMPANIES. ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN L AW, THE HONBLE DRP, LEARNED AO AND LEARNED TPO HAVE ERRED WHILE CO MPUTING OPERATING PROFIT MARGINS OF THE APPELLANT AND COMPA RABLE COMPANIES. GROUND NO.14 : NOT GRANTING APPROPRIATE ECONOMIC ADJUSTMENTS WHILE DETERMINING THE ARMS LENGTH PRIC E OF THE INTERNATIONAL TRANSACTIONS OF THE APPELLANT. ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN L AW, THE HONBLE DRP, LEARNED AO AND LEARNED TPO HAVE ERRED BY NOT G RANTING APPROPRIATE ECONOMIC ADJUSTMENTS WHILE DETERMINING THE ARMS LENGTH PRICE OF THE INTERNATIONAL TRANSACTIONS OF THE APPE LLANT. 4. BEFORE US, AT THE OUTSET, LD.A.R. SUBMITTED THAT THE VA RIOUS GROUNDS RAISED BY THE ASSESSEE CAN BE DIVIDED INTO TWO PARTS I.E., RELATING TO TRANSFER PRICING (TP) MATTERS I.E., TP MATTERS A ND NON-TP MATTERS. HE FURTHER SUBMITTED THAT EXCEPT FOR GROUND N O.12 WHICH IS WITH RESPECT TO DISALLOWING THE WARRANTY COST, ALL THE O THER GROUNDS ARE WITH RESPECT TO TP MATTER. HE FURTHER SUB MITTED THAT IF GROUND NO.5 RAISED BY THE ASSESSEE IS DECIDED IN FAVOUR OF THE ASSESSEE THEN ALL THE OTHER REMAINING GROUNDS RAISED BY THE ASSESS EE WITH RESPECT TO TP MATTERS WOULD BE RENDERED ACADEMIC AND THEREFORE WOULD REQUIRE NO ADJUDICATION. THE AFORESAID SUB MISSIONS OF LD.A.R. WAS NOT OBJECTED BY LD.D.R. WE THEREFORE FIRS T PROCEED TO DECIDE GROUND NO.5, WHICH IS WITH RESPECT TO EXCLUDING THE 5 AMOUNTS / LIABILITIES WRITTEN BACK OF RS.37.84 CRORES TO COM PUTE THE OPERATING INCOME OF THE ASSESSEE. 5. DURING THE COURSE OF ASSESSMENT PROCEEDINGS, ON PER USING THE TRANSFER PRICING STUDY REPORT, TPO HAD OBSERVED TH AT ASSESSEE HAD UNDERTAKEN VARIOUS INTERNATIONAL TRANSACTIONS AGGREG ATING TO RS.55.04 CRORE WITH ITS A.E.S. HE ALSO NOTICED THAT ALL THE INTERNATIONAL TRANSACTIONS WERE AGGREGATED AND TRANSACT IONAL NET MARGIN METHOD (TNMM) WAS APPLIED ON THE AGGREGATE LEVEL CONSIDERING THE DATA OF THE ENTIRE COMPANY AS A WHOLE. SEVEN COMPANIES WERE IDENTIFIED AS COMPARABLE COMPANIES BY THE ASSESSEE. THE PROFIT LEVEL INDICATOR (PLI) ADOPTED BY ASS ESSEE WAS THAT OF PROFIT BEFORE TAX (PBT) / TURNOVER (THE COMPARAB LE COMPANIES IDENTIFIED BY THE ASSESSEE ARE REPRODUCED AT P AGE 4 OF THE TPO ORDER). OUT OF THE SEVEN COMPANIES CONSIDERED AS CO MPARABLE COMPANIES, TPO REJECTED THREE COMPANIES AND CONSIDERED THE REMAINING COMPANIES (LISTED AT PAGE 5 OF THE ORDER) AS COM PARABLES. HE ALSO NOTICED THAT AN AMOUNT OF RS.37,84,26,000/- (BEING T HE AMOUNT WRITTEN BACK OF DEFERRED CREDIT AND IMPORT PAYMEN TS PURSUANT TO WAIVER RECEIVED FROM RESPECTIVE COMPANIES) W ERE CREDITED BY THE ASSESSEE AND WERE CONSIDERED AS PART OF OPERATING INCOME. TPO WAS OF THE VIEW THAT THE AFORESAID AMOUNT O F WRITE BACK WAS ONLY AN ACCOUNTING ENTRY AND HAD NO RELATION WITH THE OPERATION OF THE COMPANY FOR THE YEAR UNDER CONSIDERATIO N. HE THEREAFTER EXCLUDED IT FOR WORKING OUT THE MARGIN OF THE ASSESSEE AND AFTER CONSIDERING THE MARGINS OF THE COMPARABLES, WORK ED OUT THE OPERATING MARGIN OF THE ASSESSEE AT 14.36%. HE ALSO NOTICED THAT THE TRANSFER PRICING REPORT SUBMITTED BY THE ASSES SEE WAS 6 INCOMPLETE AND THE REQUIRED DETAILS WERE MISSING FOR THE ESTABLISHMENT OF A.L.P. FOR INTERNATIONAL TRANSACTIONS. HE THE REFORE DETERMINED THE ALP OF INTERNATIONAL TRANSACTIONS BY ADOPT ING THE APPROACH FOLLOWED IN THE IMMEDIATE PRECEDING YEAR WHICH WA S ALSO UPHELD BY THE DRP. HE THEREAFTER CONSIDERING THE OPER ATING MARGIN OF THE ASSESSEE AT 14.36% AS WORKED OUT BY HIM, DETERMIN ED THE ADJUSTMENT TO THE INCOME AT RS.21,52,03,376/-. AGGRIEVE D BY THE ORDER OF TPO, ASSESSEE CARRIED THE MATTER BEFORE DRP, WH O AFTER CONSIDERING THE SUBMISSIONS OF THE ASSESSEE DIRECTED THE EXCLUSION OF SCHLAFHORST ENGINEERING (INDIA) LIMITED FROM THE LIST OF COMPARABLE COMPANIES FOR COMPUTING THE ARITHMETIC MEAN O F PROFIT MARGIN FOR BENCHMARKING OF THE INTERNATIONAL TRANSACTIONS A ND DIRECTED THE OPERATING MARGIN OF THE ASSESSEE TO BE CO NSIDERED AT (23.18%) BY OBSERVING AS UNDER :- 11 .4 ERRONEOUS COMPUTATION OF THE ASSESSEES OPERATIN G MARGIN BY THE TPO IT WAS SUBMITTED BY THE ASSESSEE THAT ON A WITHOUT PREJUDICE BASIS, EVEN IF THE APPROACH ADOPTED BY THE TPO, WHE REIN HE HAS CONSIDERED THE AMOUNTS WRITTEN BACK AS NON-OPERATIN G, WERE TO BE GIVEN ANY CREDENCE, THE ASSESSEE HUMBLY SUBMITS THA T THEN IT WOULD ALSO BE ESSENTIAL TO EXCLUDE THE FOLLOWING ITEMS OF EXPENDITURE AS NON- OPERATING IN NATURE: LOSS ON REVALUATION OF ASSETS AND PROVISION MADE FO R IMPAIRMENT LOSS IN THIS CONTEXT, IT IS OUR CONTENTION THAT LOSS ON REVALUATION OF FIXED ASSETS AND PROVISION FOR IMPAIRMENT LOSS C ANNOT BE CONSIDERED AS OPERATING EXPENSES, BASED ON THE SAME REASONS AS PROVIDED BY THE TPO FOR EXCLUDING THE AM OUNTS WRITTEN BACK. AMOUNTS WRITTEN OFF DURING THE FY 2006-07, THE ASSESSEE HAS WRITTEN OFF ADVANCES AMOUNTING TO RS. 0.53 CRORES AS THE SAME A RE NO LONGER RECEIVABLE. TAKING INTO CONSIDERATION THE LO GIC APPLIED BY THE TPO THAT THE AMOUNTS/LIABILITY WRITT EN BACK REPRESENTS AN ACCOUNTING ENTRY ONLY AND HAS NO RELA TION 7 WITH THE OPERATIONS OF THE COMPANY FOR THE YEAR UND ER CONSIDERATION, AND THUS CANNOT FORM A PART OF THE O PERATING INCOME. THE AMOUNTS WRITTEN OFF BY THE ASSESSEE TOO SHOULD BE EXCLUDED BY APPLICATION OF THE SAME LOGIC AS THI S AMOUNT TOO REPRESENTS AN ACCOUNTING ENTRY ONLY AND HAS NO RELATION WITH THE OPERATIONS OF THE COMPANY FOR THE YEAR UND ER CONSIDERATION. BASED ON OUR ABOVE CONTENTIONS, THE OPERATING MARGI N OF THE ASSESSEE WOULD WORK OUT TO: PARTICULARS REFERE NCE AMOUNT (RS.IN CRORES) TOTAL INCOME AS PER P&L ACCOUNT 77.99 LESS : NON-OPERATING INCOME INTEREST INCOME (0.60) MISC. RECEIPTS (0.68) AMOUNTS WRITTEN- BACK (37.84) OPERATING INCOME [A] 38.87 TOTAL EXPENSES AS PER P&L ACCOUNT 56.62 LESS : NON-OPERATING EXPENSES INTEREST EXPENSES (3.20) LOSS ON REVALUATION OF FIXED ASSETS (1.60) PROVISION FOR IMPAIRMENT LOSS (0.69) AMOUNTS WRITTEN OFF (0.53) OPERATING EXPENSES [B] 50.60 OPERATING PROFIT [C=A-B] (11.73) OPERATING PROFIT/OPERATING EXPENSES [D=C/B] (23.18)% ON THE BASIS OF FACTS AND SUBMISSION OF THE ASSESSE E WE FOUND THAT THERE IS A MERIT IN THE ARGUMENT OF THE ASSESSEE. ACCORDINGLY, OBJECTION RAISED BY THE ASSESSEE IS AC CEPTED. WE DIRECT THAT OPERATING MARGIN OF THE ASSESSEE SHALL BE CONSIDERED AS (23.18%). WITH RESPECT TO THE EXCLUSION OF AMOUNTS / LIABILITIES WRITTEN BACK FOR COMPUTING THE OPERATING MARGIN OF THE ASSESSEE, DRP AFTE R CONSIDERING THE SUBMISSIONS OF THE ASSESSEE, REMAND REPO RT OF THE TPO AND COMMENTS OF THE ASSESSEE ON THE REMAND REPOR T, UPHELD THE ORDER OF AO BY OBSERVING AS UNDER :- 11.. HOWEVER CONTENTION OF THE ASSESSEE IS NOT ACCEPTED. TPO VIDE LETTER DATED 29/07/2011 HAS SEND HIS COMMENTS ON TH E STAND TAKEN BY THE ASSESSEE. RELEVANT PORTION OF THE SAME IS REPRODUCED AS UNDER- 8 3.2 THE MAIN ARGUMENT OF THE APPELLANT ON THIS ISS UE IS THAT THE AMOUNTS/LIABILITIES WRITTEN BACK DO ACTUALLY PERTAI N TO THE FINANCIAL YEAR UNDER CONSIDERATION AS THE SAME HAVE ACCRUED IN THAT YEAR I.E. FY 2006-07 AND IN ANY BUSINESS SITUATION, WRITE BACK OF A PROVISION OR A LIABILITY IS NORMAL AND VE RY MUCH RELATED TO THE BUSINESS OPERATIONS OF THE YEAR IN WHICH THESE AMOUNTS/LIABILITIES ARE WRITTEN BACK. (EMPHASIS SUP PLIED). 3.3 THE ABOVE ARGUMENTS OF THE APPELLANT ARE NOT AC CEPTABLE FOR FOLLOWING REASONS: A) THE ASSESSEE, DURING THE FY 2006-07, HAD RECEIVED W AIVER LETTERS FROM ITS CREDITORS, ON THE BASIS OF WHICH THE AMOUNTS/LIABILITIES WERE WRITTEN BACK. THESE AMOUNTS/LIABILITIES WRITTEN BAC K ARE IN CONNECTION WITH EXPENSES ACCRUED FOR THE RAW MATERI ALS' PROCURED, CUSTOM DUTY PAYABLE IN EARLIER YEARS AND NOT FOR TH E RAW MATERIALS PROCURED, CUSTOM DUTY PAYABLE DURING THE FINANCIAL YEAR UNDER CONSIDERATION. B) THE RELEVANT QUESTION FOR DETERMINATION OF ARM'S LE NGTH PRICE (ALP) OF THE INTERNATIONAL TRANSACTION CARRIED OUT BY TH E APPELLANT IS THAT WHETHER THE AMOUNTS/LIABILITIES WRITTEN BACK HAD AF FECTED IN ANY WAY THE INTERNATIONAL TRANSACTIONS CARRIED OUT BY THE A PPELLANT DURING THE YEAR UNDER CONSIDERATION; THAT WHETHER THE AMOUNTS/ LIABILITIES WRITTEN BACK ARE RELEVANT FOR DETERMINING THE OPERA TING PROFIT MARGIN REALIZED BY THE APPELLANT DURING THE YEAR UNDER CON SIDERATION: THAT WHETHER THE AMOUNTS/LIABILITIES WRITTEN BACK HAVE A NYTHING TO DO WITH THE MAIN OPERATIONS OF THE APPELLANT; THAT WHE THER THE AMOUNTS/LIABILITIES WRITTEN BACK ARE ROUTINE IN NAT URE. THE ANSWER TO THESE QUESTIONS IS NO. C) THE INTERNATIONAL TRANSACTIONS CARRIED OUT BY THE A PPELLANT DURING THE YEAR UNDER CONSIDERATION ARE IMPORT OF TEXTILE MACHINERY COMPONENTS AND PARTS, EXPORT OF TEXTILE MACHINERY, TEXTILE MACHINERY COMPONENTS AND PARTS, IMPORT OF PLANT & MACHINERY/TOOLS, SERVICES PROVIDED TO AES AND INTEREST PAYMENT FROM THESE INT ERNATIONAL TRANSACTIONS, IT IS CLEAR THAT THE AMOUNTS/LIABILIT IES WRITTEN BACK HAVE NOTHING TO DO WITH THESE TRANSACTIONS NOR THEY DETE RMINE THE OPERATING PROFIT MARGIN REALIZED BY THE APPELLANT DURING THE YEAR UNDER CONSIDERATION. D) IT IS NOT DISPUTED THAT THE AUDITORS HAD NOT CLASSI FIED THE AMOUNTS/LIABILITIES WRITTEN BACK AS PRIOR PERIOD IT EMS AND THE AMOUNTS/LIABILITIES WRITTEN BACK HAD BEEN OFFERED T O TAX BY THE ASSESSEE. HOWEVER, WHATEVER IS OFFERED FOR TAXATION UNDER THE PROVISIONS OF INCOME-TAX ACT DOES NOT NECESSARILY F ORM PART OF THE OPERATING INCOME OR EXPENSES FOR DETERMINATION OF O PERATING PROFIT MARGIN UNDER TNMM. IT IS WELL SETTLED LAW THAT THE NON-OPERATING INCOME OR EXPENSES HAVE TO BE EXCLUDED WHILE DETERM INING OPERATING PROFIT MARGIN UNDER TNMM, THOUGH SUCH ITEMS ARE ALL OWABLE/TAXABLE UNDER THE PROVISIONS OF INCOME-TAX ACT. E) THE CONTENTION OF THE APPELLANT THAT IF THE TPO'S L OGIC IS TO BE ACCEPTED, THE COMPARABLES MAY ALSO HAVE NUMEROUS IT EMS WHICH MAY NOT PERTAIN TO THE YEAR UNDER CONSIDERATION IS THEORETICALLY ACCEPTABLE 9 IF THESE ITEMS ARE NON-OPERATING OR EXTRAORDINARY I N NATURE OR NOT OF A ROUTINE NATURE. HOWEVER, THE APPELLANT HAD NOT SUBM ITTED ANY FACTUAL DATA IN CASE OF COM PARABLES ACCEPTED BY THE TPO.' FURTHER THOUGH THE ASSESSEE HAS CITED DECISION OF T HE HON'BLE ITAT DELHI IN THE CASE OF SONY INDIA(P) LTD. VS. DCIT, IT IS NOT KNOWN WHETHER THE DEPARTMENT HAS ACCEPTED THE FINDINGS OF THE TRIBUNA L OR HAS FILED THE APPEAL BEFORE HI HER AUTHORITIES. IN VIEW OF THE ABOVE, OBJECTION RAISED BY THE ASSES SEE IS REJECTED. AGGRIEVED BY THE ORDER OF DRP, ASSESSEE IS NOW IN APPEAL BEFORE US. 6. BEFORE US, LD.A.R. SUBMITTED THAT THE TPO WHILE COMING T O THE CONCLUSION THAT FOR COMPUTING THE OPERATING MARGIN O F THE ASSESSEE HELD THAT THE AMOUNTS / LIABILITIES WRITTEN BACK NEEDS TO BE EXCLUDED FOR THE REASON THAT THEY DO NOT PERTAIN TO TH E OPERATIONS OF THE ASSESSEE. HE SUBMITTED THAT THE AFORESAID CONCLUSION OF THE TPO IS NOT CORRECT. HE SUBMITTED THAT BEFORE DRP ASSE SSEE HAD FURNISHED ADDITIONAL EVIDENCES AND MADE DETAILED PRESENTATIO N TO PROVE THAT THE AMOUNTS WRITTEN BACK ARE PART OF THE OP ERATIONS OF THE ASSESSEE AND ARE THEREFORE TO BE CONSIDERED AS OPERAT ING MARGIN. HE SUBMITTED THAT DURING THE FINANCIAL YEAR 2006-07 BASED O N THE WAIVER LETTERS RECEIVED FROM ITS A.E.S AND THE BUSINESS ASSOCIATES HAD WRITTEN BACK PROVISIONS / LIABILITIES AMOUNTING TO RS.37.84 CRORES AS THE SAME WERE NO LONGER PAYABLE. HE POINTED TO THE DETAILS OF THE LIABILITIES WRITTEN BACK WHICH ARE PLACED AT PAGE 53 OF THE PAPER BOOK AND BREAK-UP OF THE AMOUNTS WRITTEN BACK. HE FURTHER SUBMITTED THAT TPO HAD FAILED TO APPRECIATE THAT IN ANY B USINESS INSTANCES, WRITE BACK OF A PROVISION OR A LIABILITY IS NORMAL A ND VERY MUCH RELATED TO THE BUSINESS OPERATIONS OF THE YEAR IN W HICH THESE AMOUNTS / LIABILITIES WERE WRITTEN BACK. HE FURTHER SUBMITTE D THAT BUSINESS-MEN WOULD NORMALLY PROVIDE FOR CERTAIN EXPENSES AND 10 LIABILITIES IN THE BOOKS OF ACCOUNTS AND IN THE EVENT OF THE PROVISION MADE OR THE LIABILITY WRITTEN BACK IS NO LONGER PAYABLE OR CEASES TO EXIST THEN THE SAME NEED TO BE WRITTEN BACK AND TREA TED AS INCOME IN THE YEAR IN WHICH THE SAME HAS CEASED TO BE PAYABLE. HE FURTHER SUBMITTED THAT THE AMOUNT PERTAINS TO THE FINANCIAL YEAR UNDER CONSIDERATION AS THE SAME ACCRUED DURING THE YEAR AND IT WAS BASED ON THE WAIVER LETTERS RECEIVED DURING THE YEAR FROM THE CREDITORS ON THE BASIS OF WHICH THE AMOUNTS/LIABILITIES WERE WRITTEN BACK. HE FURTHER SUBMITTED THAT THE AUDITORS HAD NO WHERE CLASSI FIED THE AMOUNTS/LIABILITIES WRITTEN BACK AS PRIOR PERIOD ITEMS. HE PO INTED TO THE COPIES OF WAIVER LETTERS PLACED AT PAGE 273 AND 274 OF THE PAPER BOOK. HE ALSO POINTED TO THE SUBMISSIONS MADE BEFORE DR P IN CONNECTION WITH THE WRITE BACK OF THE AMOUNT BUT ACCORD ING TO HIM, THE SAME WERE IGNORED BY THE DRP. HE FURTHER SUBMITTE D THAT BEFORE DRP, ASSESSEE HAD PLACED RELIANCE ON THE DECISION OF HONB LE DELHI TRIBUNAL IN THE CASE OF SONY INDIA (P) LIMITED VS. DCIT REPOR TED IN 315 ITR 50. HE SUBMITTED THAT THE LEARNED DRP BY A CR YPTIC ORDER UPHELD THE ORDER OF TPO AND IGNORED THE DECISION OF DELHI ITAT IN THE CASE OF SONY INDIA (SUPRA) ONLY FOR THE REASON THAT IT WAS NOT KNOWN AS TO WHETHER THE DEPARTMENT HAD ACCEPTED THE FINDINGS OF THE TRIBUNAL OR AGAINST THE ORDER OF TRIBUNAL, REVENUE HA D FILED ANY APPEAL BEFORE THE HIGHER AUTHORITIES AND POINTED TO THE O BSERVATION OF THE DRP TO THAT EFFECT AT PAGE 15 OF THE ORDER. HE FU RTHER SUBMITTED THAT IDENTICAL ISSUE AROSE IN THE CASE OF SONY I NDIA (P) LIMITED BEFORE THE DELHI TRIBUNAL. THE DELHI TRIBUNAL HAD DECID ED THE ISSUE IN FAVOUR OF THE ASSESSEE. HE POINTED TO THE R ELEVANT FINDINGS OF THE DELHI TRIBUNAL. HE FURTHER SUBMITTED THAT AGAINST THE 11 ORDER OF THE DELHI TRIBUNAL, REVENUE CARRIED THE MATTER BE FORE THE HONBLE DELHI HIGH COURT BUT HOWEVER THE ISSUE OF THE EXC LUSION OF WRITE BACK OF THE LIABILITIES WAS NOT RAISED BY THE REVENUE BEFORE THE HONBLE DELHI HIGH COURT MEANING THEREBY THAT THE REVENU E HAS ACCEPTED THE ORDER OF TRIBUNAL, WHEREIN THE HONBLE DELHI TRIBUNAL HAS HELD IT TO BE PART OF OPERATING INCOME. HE FURTHER SUBMITTED THAT IN THE CASE OF ACIT VS. GILLETE DIVERSIFIED OPERATIONS PVT. LI MITED IN ITA NO.400/DEL/2013 DT.01.04.2016, SIMILAR ISSUE OF LIABILITIES NO LONGER WRITTEN BACK WAS AROSE, WHEREIN IT WAS HELD THAT T HE PROVISION SHOULD BE CONSIDERED AS OPERATING INCOME. HE SUBMITTED T HAT THE HONBLE TRIBUNAL HAS FURTHER HELD THAT IF THE LIABILITIES ORIGINALL Y CREATED WERE ON ACCOUNT OF CAPITAL AMOUNTS AND THEN TH EIR WRITE BACK CANNOT BE CONSIDERED AS NORMAL INSTANCES OF THE BU SINESS AND HAS TO BE EXCLUDED AS OPERATING INCOME. HE SUBMITTED THA T AGAINST THE AFORESAID ORDER OF TRIBUNAL, THE MATTER WAS CARRIED BY REVENUE BEFORE HONBLE DELHI HIGH COURT AND THE ISSUE OF EXCLUSION O F WRITE BACK FOR COMPUTATION OF OPERATING INCOME WAS ALSO NOT AGI TATED BY THE REVENUE. HE THEREFORE SUBMITTED THAT THE ISSUE OF IN CLUDING THE WRITE BACK AS PART OF OPERATING INCOME IS NOW WELL SETTLED BY THE DECISIONS OF HONBLE DELHI TRIBUNAL AND HONBLE DELHI HIGH COUR T. HE FURTHER FAIRLY ADMITTED THAT OUT OF THE AMOUNT OF RS.3 7.84 CRORE THAT HAS BEEN WRITTEN BACK, RS.0.35 CRORE WRITTEN BACK REPRESENTS LIABILITY IN CONNECTION WITH PURCHASE OF CAPITAL GOODS MADE DU RING THE EARLIER YEARS AND SINCE IT WAS ON PURCHASE OF CAPITA L GOODS, THE SAME NEEDS TO BE EXCLUDED. HE THEREFORE SUBMITTED THA T FOLLOWING THE DECISION OF HONBLE DELHI TRIBUNAL, THE TPO BE DIRECTED T O INCLUDE THE BALANCE AMOUNT OF RS.37.49 CRORE WRITTEN BACK AS PAR T OF 12 OPERATING INCOME. HE FURTHER SUBMITTED THAT IF THE WRITE BACK AMOUNT OF RS.37.49 CRORES IS CONSIDERED AS OPERATING INCOM E, THEN THE CORRECT OPERATING MARGIN OF THE ASSESSEE WOULD WORK OUT TO 42.94% AS AGAINST THE OPERATING MARGIN OF 14.36% OF THE COMPARABLE COMPANIES SELECTED BY THE TPO AND THEREFORE THE INTERNATIONAL TRANSACTIONS WOULD BE AT ARMS LENGTH AND NO ADDITION AS PROPOSED BY THE TPO WOULD BE REQUIRED. HE POINTED T O THE COMPUTATION OF THE WORKING AFTER INCLUDING WRITE BACK AMOUN TS AS PART OF OPERATING INCOME AT PAGE 257 OF THE PAPER BOOK . HE THEREFORE SUBMITTED THAT THE ORDER OF DRP BE SET ASIDE . LD.D.R. ON THE OTHER HAND SUPPORTED THE ORDER OF TPO AND DRP. 7. WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSED THE MATERIAL ON RECORD. THE ISSUE IN THE PRESENT CASE IS WITH RESPEC T TO THE EXCLUSION OF AMOUNTS WRITTEN BACK FOR COMPUTING THE OPER ATING MARGIN OF THE ASSESSEE. IT IS AN UNDISPUTED FACT THAT A SSESSEE HAS CREDITED RS.37,84,26,000/- BEING AMOUNTS WRITTEN BACK AS P ART OF OPERATING INCOME. OUT OF THE AFORESAID AMOUNT RS.37.49 CR ORES REPRESENTS THE WRITE BACK IN CONNECTION WITH RAW-MATERIA LS/ COMPONENTS PROCURED IN EARLIER YEARS, PROVISION MADE TOWA RDS CUSTOM DUTY, INTEREST OF CUSTOM DUTY, WAREHOUSING CHARG ES AND OPERATING EXPENSES AND RS.0.35 CRORE REPRESENTS THE LIA BILITY WRITTEN BACK IN CONNECTION WITH PURCHASE OF CAPITAL GOODS MADE DU RING EARLIER YEARS. 8. BEFORE US, IT IS ASSESSEES SUBMISSION THAT THE AMOUNT HAS BEEN WRITTEN BACK IN THE ORDINARY COURSE OF BUSINESS ON THE BASIS OF WAIVER LETTERS RECEIVED DURING THE YEAR CONSIDERATION. T HE ONLY 13 REASON FOR DISALLOWING THE SAME BY THE REVENUE IS THAT TH E REVENUE IS OF THE VIEW THAT THE AMOUNTS WRITTEN BACK CANNOT BE CONSIDERED AS OPERATING INCOME AS ACCORDING TO IT THE AMOUNT WRITTE N BACK IS A MERE BOOK ENTRY AND IS NOT CONNECTED WITH BUSINESS OPE RATIONS OF THE ASSESSEE. ON THE ISSUE OF THE AMOUNTS WRITTEN BAC K AS BEING OPERATING INCOME, WE FIND THAT IDENTICAL ISSUE AROSE BEFORE THE CO- ORDINATE BENCH OF THE TRIBUNAL, DELHI IN THE CASE OF SONY INDIA (P) LIMITED (SUPRA) AND THE CO-ORDINATE BENCH OF THE TRIBUNA L OF DELHI DECIDED THE ISSUE IN FAVOUR OF THE ASSESSEE BY OBSERVING AS UNDER : 106.1 THE FIRST OF THESE ITEMS IS, PROVISION WRIT TEN BACK AMOUNTING TO RS.57,02,000. FOR EXCLUSION OF ABOVE ITEM AND FOR BALANCES WRITTEN BACK INTEREST RECEIVED FROM CUSTOM ERS AND OTHER MISCELLANEOUS REVENUE RECEIPTS, THE LEARNED C IT(A) GAVE THE FOLLOWING CONSOLIDATED REASONS : (A) I FIND THAT INTEREST RECEIVED IS A FINANCIAL I NCOME AND AS SUCH CANNOT BE CONSIDERED AS OPERATIONAL RECEIPTS. (B) THE ITEMS WHICH HAVE BEEN WRITTEN BACK AS MENTI ONED IN SUB-PARAS (I) AND (II) OF THIS PARA, ARE NOTHING BU T MERELY ACCOUNTING ENTRIES AND ARE NOT CONNECTED TO THE OPE RATIONS OF THE APPELLANT. ON MERIT WE SEE NO GOOD REASON TO EXCLUDE PROVISIONS WRITTEN BACK AS NOT FORMING PART OF COMPUTING OPERATING PROFIT OF THE TAXPAYER. IN OUR CONSIDERED, EXCLUSION OF ABOVE PRO VISION IS BASED UPON MISCONCEPTION OF REAL NATURE OF THE ENTRY GENE RATING INCOME. IT IS NOT PRACTICALLY POSSIBLE FOR A BUSINESSMAN TO ACTUA LLY DISBURSE ALL EXPENSES INCURRED BY IT IN THE FINANCIAL YEAR AND, THEREFORE, A LARGE NUMBER OF BUSINESS LIABILITIES (MANUFACTURING INCLU DED) ARE PROVIDED IN THE ACCOUNTS OF A GIVEN YEAR. IT IS ELEMENTARY T HAT THERE IS NO DIFFERENCE BETWEEN ACTUAL DISBURSEMENT OF AN EXPEND ITURE OR PROVISION THEREOF. HOWEVER, RECOVERY OF LIABILITY PROVIDED MAY BECOME BARRED BY LIMITATION OR FOR SOME OTHER REASONS, LIAB ILITY GETS UNENFORCEABLE OR IS REDUCED OR CEASES TO EXIST WITH THE PASSAGE OF TIME. THEREFORE, IT MAY BE NECESSARY TO WRITE BACK SUCH A LIABILITY. BUT, IT CANNOT FOLLOW THAT THE LIABILITY WAS NOT EXPENDITUR E OF BUSINESS OR OPERATING EXPENSE. CESSATION OF A LIABILITY IS A TAXABLE INCOME UNDER SEC. 41 OF THE IT ACT. THE UNDERLYING PRINCIPLE BEHIND ABOV E PROVISION IS THAT REVENUE TAKES BACK A BENEFIT WHIC H IT GRANTED EARLIER, BUT WHICH, DUE TO SUBSEQUENT EVENTS OR CHA NGED CIRCUMSTANCES SHOULD BE CHARGED TO TAX AS 'INCOME'. STATUTORY PROVISION OVERRIDES GENERAL UNDERSTANDING THAT MERE CREATION OF A BENEFIT TO A TAXPAYER BY ADMISSION OR CESSATION OF A DEBT OR A LIABILITY SHOULD NOT RESULT IN AN INCOME. THUS, CREATION OF U NPAID LIABILITY AND 14 ITS WRITE BACK IS A NORMAL INCIDENT OF A BUSINESS O PERATION WHICH IS CARRIED EVERYWHERE IN ACCOUNTS TO HAVE TRUE PICTURE OF PROFITS OF THE RELEVANT PERIOD. IF A LIABILITY HAS CEASED TO EXIST AND IS REQUIRED TO BE ACCOUNTED FOR AND SHOWN AS INCOME BY THE TAXPAYER A ND, IN CASE IT IS NOT SO SHOWN THE TAXPAYER CAN BE SUBJECTED TO A PEN AL ACTION UNDER INDIAN REGULATIONS. IN THIS CONNECTION, WE CAN REFE R TO DECISION OF THE SUPREME COURT IN THE CASE OF CIT VS. S. TEJA SINGH (1959) 35 ITR 408 (SC). HAVING REGARD TO STATUTORY PROVISIONS, IT CAN NOT BE SAID THAT PROVISION OR WRITING BACK OF LIABILITY IS NOT PART OF OPERATING PROFIT OR WOULD NOT BE TAKEN INTO CONSIDERATION FOR COMPUTING THE SAME. THE ASPECT OF LIABILITIES WRITTEN OFF WAS IGNORED WITHO UT CONSIDERING NATURE AND CHARACTER OF SUCH LIABILITIES. IT WOULD HAVE BE EN DIFFERENT IF A FINDING WAS RECORDED THAT PROVISION WRITTEN BACK DI D NOT RELATE TO BUSINESS OPERATIONS OF THE TAXPAYER. THERE IS NO SU GGESTION ON THE ABOVE LINES. FURTHER, IT IS NOT THE CASE OF THE REV ENUE THAT LIABILITIES WRITTEN BACK WERE WRONGLY PROVIDED FOR. IT IS A SET TLED AND WELL ACCEPTED PROPOSITION THAT ADJUSTMENT CAN BE MADE ON LY ON ACCOUNT OF DIFFERENCES. IT IS NOT POSSIBLE TO BELIEVE THAT OTH ER COMPARABLE ENTITIES TAKEN INTO CONSIDERATION ARE NOT MAKING AND WRITING BACK PROVISION OF LIABILITIES NO MORE REQUIRED. THERE IS NO MATERIAL NOR THERE ANY FINDING TO SUPPORT ACTION OF THE REVENUE AUTHORITIES. WE CA N THEREFORE MAKE A GENERAL OBSERVATION THAT ALL BUSINESS ENTERPRISES A RE MAKING AND WRITING BACK LIABILITIES AS A NORMAL INCIDENT OF OP ERATING BUSINESS. THE EXPENSES FOR WHICH PROVISIONS WERE ORIGINALLY MADE WERE CONSIDERED OPERATING IN NATURE AND ALLOWED IN ASSESSMENT. THES E PROVISIONS NO LONGER REQUIRED BY THE TAXPAYER DURING THE YEAR UND ER REVIEW WERE REVERSED IN THE BOOKS OF ACCOUNT AS PER MERCANTILE SYSTEM OF ACCOUNTING AND SHOWN AS INCOME. THEREFORE, ON FACT S WE DO NOT SEE ANY JUSTIFICATION FOR EXCLUDING PROVISIONS WRITTEN BACK IN THE P & L A/C AS NOT FORMING PART OF THE OPERATING PROFIT OF THE TAXPAYER. ACCORDINGLY, CLAIM OF THE TAXPAYER IS ACCEPTED. 9. WE FURTHER FIND THAT AGAINST THE ORDER OF THE TRIBUNAL, THE MATTER WAS CARRIED BY THE REVENUE BEFORE HONBLE DELHI H IGH COURT BUT NO GROUND WITH RESPECT TO THE TREATMENT OF LIABILITIES WRITTEN BACK AS BEING OPERATING OR NON-OPERATING INCOME WAS RA ISED BY REVENUE BEFORE HONBLE DELHI HIGH COURT MEANING THEREBY T HAT THE DECISION OF DELHI TRIBUNAL WAS ACCEPTED BY THE REVENUE. WE FURTHER FIND THAT IN THE CASE OF GILLETE DIVERSIFIED OPERATIONS PVT. L IMITED (SUPRA), THE CO-ORDINATE BENCH OF THE TRIBUNAL, DELHI HAD DECIDED THE ISSUE IN FAVOUR OF THE ASSESSEE AND HELD THAT IF THE R EVERSAL OF PROVISION / WRITE BACK IS ON ACCOUNT OF REVENUE IN NATUR E, IT SHOULD BE INCLUDED AS PART OF OPERATING INCOME AND IF THE LIABILITIES ORIGINALLY CREATED WERE ON ACCOUNT OF CAPITAL ITEMS THEN T HEIR WRITE 15 BACK CANNOT BE CONSIDERED TO BE A NORMAL INSTANCES OF B USINESS AND HENCE TO BE EXCLUDED AS OPERATING INCOME. THE AFORESAID ORDER OF THE TRIBUNAL HAS ALSO BEEN ACCEPTED BY THE REVENUE AS NO APPEAL ON THE ISSUE THAT WHETHER WRITE BACK IS TO BE EXCLUDED FOR WORKING OUT THE OPERATING PROFITS HAS BEEN PREFERRED BY THE REVENUE BEFORE THE HONBLE DELHI HIGH COURT MEANING HEREBY THAT THE ISSUE OF WRITE BACK IS TO BE CONSIDERED AS PART OF OPERATING INCOME H AS ATTAINED FINALITY. BEFORE US, REVENUE HAS ALSO NOT PLACED ANY CONTRA RY BINDING DECISION IN ITS SUPPORT. WE THEREFORE BY PLACING RE LIANCE ON THE AFORESAID DECISIONS OF THE CO-ORDINATE BENCH OF THE TR IBUNAL, DELHI IN THE CASE OF SONY INDIA (P) LTD (SUPRA) HOLD THAT TH E AMOUNT OF WRITE BACK OF RS.37.49 CRORES WHICH IS ON ACCOUNT OF A MOUNTS WRITTEN BACK OF EXPENSES / LIABILITIES IS TO BE CONSIDERED AS PART OF OPERATING INCOME. BEFORE US, ASSESSEE ALSO SUBMITTED THA T IF THE WRITE BACK AMOUNT OF RS.37.49 CRORES IS INCLUDED AS OPERAT ING INCOME, THE OPERATING MARGIN WOULD WORKS OUT TO 42.94% AS AGAINST THE OPERATING MARGIN OF 14.36% OF THE COMPARABLE COMPAN IES AND THEREFORE THE TRANSACTIONS OF THE ASSESSEE WITH ITS A.E S WOULD BE AT ARMS LENGTH REQUIRING NO ADJUSTMENT TO THE INCOME. WE FIN D THAT ON THIS ISSUE THERE IS NO FINDING OF TPO. WE THEREFORE FOR THE LIM ITED PURPOSE OF VERIFYING THE AFORESAID CONTENTION OF ASSESSEE REMIT THE ISSUE TO THE FILE OF TPO. IF THE CONTENTION OF THE ASSESSE E THAT THE OPERATING MARGIN IS COMPARABLE WITH THAT OF COMPARABLE COM PANIES IS FOUND CORRECT, NO ADJUSTMENT TO ALP TRANSACTION IS RE QUIRED. SINCE THIS GROUND HAS BEEN DECIDED IN FAVOUR OF THE ASSESSEE A ND IN VIEW OF THE LD.A.R.S SUBMISSION, THE OTHER GROUNDS OF THE ASSESSEE ON TP ISSUES ARE RENDERED ACADEMIC AND THEREFORE REQUI RE NO 16 ADJUDICATION. THUS, THE GROUND OF THE ASSESSEE IS A LLOWED FOR STATISTICAL PURPOSES. 10. GROUND NO.12 IS WITH RESPECT TO THE WARRANTY EXPENS ES OF RS.52.19 LAKHS. 10.1 AO NOTICED THAT ASSESSEE HAD CLAIMED WARRANTY EXPE NSES OF RS.52,19,740/-. HE NOTICED THAT ASSESSEE HAD MADE PRO VISION FOR WARRANTY EXPENSES AT 1.15% OF THE TOTAL SALES TURNOVER UNIFORMLY ON ALL THE PRODUCTS. HE NOTICED THAT ASSESSEE HAD SOLD DIFFE RENT KINDS OF FINISHED PRODUCTS AND SOME OF THEM ARE PARTS OF MAC HINES AND SOME OF THEM ARE MACHINES THEMSELVES. AO WAS OF THE V IEW THAT IN VIEW OF THE DIFFERENCE IN THE PRODUCTS SOLD, THERE WAS NO JUSTIFICATION FOR PROVIDING THE SAME PERCENTAGE OF WARRANTY ON ALL THE PRODUCTS. HE ALSO NOTICED THAT ASSESSEE HAD NOT MAINTAINED A PROP ER ACCOUNTING SYSTEM FOR CAPTURING THE RELATIONSHIP BETWEEN NATURE OF SALES, THE WARRANTY PROVISIONS MADE AND THE ACTUAL EXPEN SES INCURRED SUBSEQUENTLY. HE ACCORDINGLY HELD THAT THE EXP ENSES CLAIMED BY ASSESSEE AS WARRANTY COST WAS MERELY AN UN ASCERTAINED LIABILITY AND NOT AN ACCRUED LIABILITY AND SINCE THE EXPENDITUR E WAS A CONTINGENT LIABILITY, IT DID NOT QUALIFY FOR DEDUCTION U/S 37(1) O F THE ACT. HE ACCORDINGLY DISALLOWED RS.52,19,740/-. AGGRIEVED BY THE ORDER OF TPO, ASSESSEE CARRIED THE MATTER BEFORE DRP, W HO UPHELD THE ORDER OF AO BY HOLDING AS UNDER : 10. WARRANTY PROVISION THE ASSESSEE DEALS IN THE PRODUCTS LIKE TOP ROLLERS , CONVERSION SPINDLES AND TEXTILES SPINNING MACHINE SPINDLES AND THE SAID PRODUCTS ARE SOLD WITH WARRANTY TO THE CUSTOMERS, F OR WHICH PROVISION IS REQUIRED TO BE MADE ON THE BASIS OF WARRANTY CLA IM THAT MAY AROUSE WITHIN WARRANTY PERIOD. THUS, THE PROVISION FOR WARRANTY CLAIM IS MADE TO MEET THE CLAIMS, WHICH MAY OCCUR IN FUTURE OR DURING THE TERM OF WAR RANTY GIVEN TO CUSTOMERS. THE CALCULATION IS DONE ON THE BASIS OF MANAGEMENT'S 17 EXPERIENCE IN PAST YEARS REGARDING AFTER SALE REJEC TIONS. MOREOVER, THE PROVISION IS MADE FOR THE PURPOSE AND CONSIDERI NG THE NATURE OF BUSINESS OF THE ASSESSEE CARRIED OUT DURING THE YEA R I.E. PROVISIONS FOR WARRANTY IS MADE DURING THE NORMAL COURSE OF BUSINESS. HOWEVER CONTENTION OF THE ASSESSEE IS NOT ACCEPTED. THE AO DURING THE COURSE OF PROCEEDINGS FOUND THAT THE ASSESSEE H AD NOT PROVIDED ANY CLAIMS RECEIVED IN PAST FROM CUSTOMERS. ALSO AS SESSEE HAD NOT MAINTAINED A PROPER ACCOUNTING SYSTEM FOR CAPTURING THE RELATIONSHIP BETWEEN NATURE OF SALES, THE WARRANTY PROVISIONS MA DE AND THE ACTUAL EXPENSES INCURRED AGAINST IT SUBSEQUENTLY. T HEREFORE THE AO ON THESE FINDINGS HAD CONCLUDED THAT THE EXPENSES C LAIMED BY THE ASSESSEE WAS MERELY AN ASCERTAINED LIABILITY AND NO T AN ACCRUED LIABILITY. WE FIND NO REASON TO DEVIATE FROM THE ST AND TAKEN BY THE AO AND HENCE THE SAID EXPENDITURE BEING A CONTINGENT L IABILITY WAS NOT ALLOWABLE AS DEDUCTION U/S. 37(1) OF THE IT ACT. AGGRIEVED BY THE ORDER OF DRP, ASSESSEE IS NOW IN APPEAL BEFORE US. 11. BEFORE US, AT THE OUTSET, LD.A.R. SUBMITTED THAT IDENTICA L ISSUE AROSE IN ASSESSEES OWN CASE IN A.Y. 2006-07 AND THE ISS UE WAS REMITTED BACK TO AO WITH NECESSARY DIRECTIONS. HE POIN TED TO THE RELEVANT FINDINGS OF TRIBUNAL AT PARAS 13 TO 15 OF THE ORD ER DT.12.05.2009. HE THEREFORE SUBMITTED THAT SIMILAR DIRECTIO N BE GIVEN IN THE PRESENT CASE. LD.D.R. DID NOT OBJECT TO THE SUBMISSIONS MADE BY LD.A.R. 12. WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSED THE MATERIAL ON RECORD. THE ISSUE IN THE PRESENT CASE IS WITH RESPE CT TO DISALLOWANCE OF WARRANTY EXPENSES. WE FIND THAT IDENTICAL IS SUE AROSE IN ASSESSEES OWN CASE IN EARLIER YEARS. THE AO W AS DIRECTED BY THE CO-ORDINATE BENCH OF TRIBUNAL TO DECIDE THE ISSUE AFTER EXAMINING THE NATURE OF BUSINESS, NATURE OF PRODUCTS MANU FACTURED, PAST HISTORY OF WARRANTY CLAIMS, METHODS ADOPTED BY THE ASSESSEE FOR ACQUIRING THE PROVISION AND DECIDE THE ISSUE KEEPING IN MIND THE DECISION OF HONBLE SUPREME COURT IN TH E CASE OF ROTORK CONTROLS INDIA (P) LIMITED VS. CIT REPORTED IN (2009 ) 18 314 ITR 62 (SC). THE RELEVANT OBSERVATIONS OF CO-ORDIN ATE BENCH ARE AS UNDER : 13. THE SECOND GROUND IN THE APPEAL IS WITH RESPEC T TO AN ADDITION OF RS.8,95,141/- MADE BY THE ASSESSING OFFICER WHICH R EPRESENTED ASSESSEES CLAIM FOR DEDUCTION ON ACCOUNT OF PRODUC T WARRANTY LIABILITY. THE CLAIM OF THE ASSESSEE WAS THAT THE P ROVISION FOR WARRANTY WAS CLAIMED AS A DEDUCTION IN VIEW OF THE DECISION OF THE HONBLE SUPREME COURT IN THE CASE OF ROTORK CONTROL S INDIA P. LTD. VS. CIT, (2009) 314 ITR 62 (SC). THE DRP DEALT WITH THE ISSUE IN THE FOLLOWING MANNER :- 6.5. WARRANTY PROVISION: THE OBJECTIONS RAISED IN THIS MATTER HAVE BEEN ALREADY NOTED. THE ASSESSING OFFICER HAS DISALLOWED THE ASSESSEE'S CLAIM ON ACCOUNT OF PROVI SION FOR WARRANTY MAINLY ON THE GROUND THAT THE SAID PROVISI ON WAS ONLY AN ARRANGEMENT FOR SETTING APART OF MONEY FOR A CONTINGENT LIABILITY AND TILL THAT LIABILITY BECAME REAL, THERE WAS NO EXPENDITURE. WE CANNOT CONFIRM THE STAND THUS TA KEN BY THE ASSESSING OFFICER, MORE SO WHEN HE HAS NOT CONSIDER ED SUCH RELEVANT FACTORS AS (A) WHETHER OR NOT THE WARRANTY IN TERMS OF THE CONTRACT AS WELL AS PAST RESULTS COULD BE TREAT ED AS AN INTEGRAL PART OF THE SALE PRICE, (B) WHETHER OR NOT THE ASSESSEE IN VIEW OF THE PAST EXPERIENCE / RECORDS COULD BE S AID TO HAVE HAD A PRESENT OBLIGATION RESULTING IN OUTFLOW OF RE SOURCES, (C) WHETHER OR NOT THE PRESENT VALUE OF THE FUTURE LIAB ILITY COULD BE PROPERLY ASCERTAINED AND DISCOUNTED ON AN ACCRUAL B ASIS SO AS TO BECOME DEDUCTIBLE U/S. 37 ETC. WITHOUT HAVING SU CH FACTS AND WITHOUT EXAMINING THE NATURE OF THE BUSINESS, T HE NATURE OF SALES AND THE NATURE OF THE PRODUCT MANUFACTURED; PAST HISTORY OF WARRANTY CLAIMS MADE AND MET; METHOD ADOP TED FOR QUANTIFYING THE PROVISIONS; A CLAIM WITH REGARD TO WARRANTY PROVISIONS CANNOT BE BRUSHED ASIDE IN A ROUTINE MAN NER AS HAS BEEN DONE BY THE ASSESSING OFFICER. IN THIS CONNECT ION, THE ASSESSING OFFICER'S ATTENTION IS INVITED TO THE DEC ISION OF THE HONBLE SUPREME COURT'S DECISION IN THE CASE OF ROT ORK CONTROLS INDIA P. LTD. V. CIT, (2009) 314 ITR 62. T HE ASSESSING OFFICER SHALL APPLY THE PRINCIPLE LAID DOWN BY THE HONBLE APEX COURT IN THE ABOVE-CITED CASE TO THE FACTS OF THE A SSESSEE'S CASE AND DECIDE THE MATTER AFRESH, AS PER LAW. NEEDLESS TO SAY, THE ASSESSEE SHALL FURNISH ALL THE RELEVANT FACTS AS MA Y BE REQUIRED BY THE ASSESSING OFFICER IN ORDER TO ENABLE THE LATTER TO TAKE A PROPER DECISION IN THIS MATTER. 14. A PERUSAL OF THE AFORESAID DIRECTIONS OF THE DR P SHOW THAT THE ASSESSING OFFICER WAS DIRECTED TO CONSIDER SUCH REL EVANT FACTORS AS TO WHETHER OR NOT THE WARRANTY PROVIDED IN TERMS OF TH E SALE CONTRACTS AS WELL AS PAST RESULTS COULD BE TREATED AS AN INTEGRA L PART OF THE SALES PRICE REALIZED FROM CUSTOMERS. SECONDLY, THE ASSESS ING OFFICER WAS DIRECTED TO CONSIDER WHETHER OR NOT THE ASSESSEE IN VIEW OF THE PAST EXPERIENCE/RECORDS COULD BE SAID TO HAVE HAD A PRES ENT OBLIGATION RESULTING IN OUTFLOW OF RESOURCES ON ACCOUNT OF IMP UGNED PROVISION. THIRDLY, THE DRP REQUIRED THE ASSESSING OFFICER TO EXAMINE WHETHER OR NOT THE PRESENT VALUE OF THE FUTURE LIABILITY COULD BE PROPERLY ASCERTAINED AND DISCOUNTED ON AN ACCRUAL BASIS SO A S TO BECOME 19 DEDUCTIBLE U/S 37(1) OF THE ACT. FOR THE AFORESAID PURPOSE, THE ASSESSING OFFICER WAS REQUIRED TO EXAMINE THE NATUR E OF THE BUSINESS, THE NATURE OF SALES AND NATURE OF THE PRODUCT MANUF ACTURED; PAST HISTORY OF WARRANTY CLAIMS, METHOD ADOPTED BY THE A SSESSEE FOR QUANTIFYING THE PROVISION, ETC. AND TO DECIDE THE I SSUE THEREAFTER KEEPING IN MIND THE JUDGEMENT OF THE HONBLE SUPREM E COURT IN THE CASE OF ROTORK CONTROL INDIA P. LTD. (SUPRA). 15. HOWEVER, WE FIND THAT IN PARA 5 OF THE ASSESSME NT ORDER, THE ASSESSING OFFICER HAS SUMMARILY SUSTAINED THE DISAL LOWANCE OF RS.8,95,141/- ON ACCOUNT OF PROVISION OF WARRANTY E XISTENCE WITHOUT DETERMINATION THE ISSUES, WHICH THE DRP REQUIRED HI M TO ADDRESS. THEREFORE, WE ARE UNABLE TO UPHOLD THE ORDER OF THE ASSESSING OFFICER ON THIS ASPECT ALSO. AS A CONSEQUENCE, WE SET-ASIDE THE ASSESSMENT ORDER ON THIS ASPECT ALSO AND DIRECT THE ASSESSING OFFICER TO PASS A SPEAKING ORDER AFTER TAKING INTO CONSIDERATION EACH OF THE POINTS ENUMERATED BY THE DRP IN ITS ORDER DATED 30.08.2010 ON THIS ASPECT. NEEDLESS TO MENTION, THE ASSESSEE SHALL FURNISH REL EVANT MATERIAL AS WOULD BE REQUIRED BY THE ASSESSING OFFICER TO CARRY OUT THE DIRECTIONS OF THE DRP. THE ASSESSING OFFICER SHALL CONSIDER TH E MATERIAL AND SUBMISSIONS PUT-FORTH BY THE ASSESSEE AND THEREAFTE R PASS AN ORDER ON THIS ASPECT AFRESH IN ACCORDANCE WITH LAW. THUS, ON THIS GROUND ALSO ASSESSEE SUCCEEDS FOR STATISTICAL PURPOSES. BEFORE US, IT IS LD.A.R.S SUBMISSION THAT THE ISSUE IN THE YE AR IS SIMILAR TO THAT OF EARLIER YEARS. IN VIEW OF THE SUBMISSION O F LD.A.R. THAT THE ISSUE IS IDENTICAL TO THAT OF EARLIER YEARS OF ASSE SSEE AND SINCE IN EARLIER YEAR, THE ISSUE WAS REMITTED BACK TO AO, WE THEREFORE FOR SIMILAR REASONS RESTORE THE ISSUE BACK TO THE FILE OF AO TO DECIDE THE ISSUE AFRESH IN THE LIGHT OF THE DECISION OF HONBLE AP EX COURT IN THE CASE OF ROTORK CONTROLS (SUPRA) AND IN ACCORDANCE WITH THE LAW. NEEDLESS TO STATE THAT AO SHALL GRANT ADEQUATE OPPORTU NITY OF HEARING TO THE ASSESSEE. ASSESSEE IS ALSO DIRECTED TO C OOPERATE WITH AO BY PROMPTLY FURNISHING ALL THE REQUIRED DOCUMENTS AS CALLED FOR. IN CASE ASSESSEE FAILS TO FURNISH THE REQUIRED DOCUMENTS, AO SHALL BE FREE TO PROCEED ON THE BASIS OF MATERIAL AVAILABLE ON RECO RD. THUS THE GROUND OF THE ASSESSEE IS ALLOWED FOR STATISTIC AL PURPOSES. 20 13. IN THE RESULT, THE APPEAL OF THE ASSESSEE IS ALLOWE D FOR STATISTICAL PURPOSE. ORDER PRONOUNCED ON 20 TH DAY OF OCTOBER, 2017. SD/- SD/- ( VIKAS AWASTHY ) ( ANIL CHATURVEDI ) ! / JUDICIAL MEMBER '! / ACCOUNTANT MEMBER PUNE; DATED : 20 TH OCTOBER, 2017. YAMINI #$%&'('% / COPY OF THE ORDER FORWARDED TO : 1. / THE APPELLANT 2. / THE RESPONDENT 3. 4. 5. 6. CIT(A)- 13, PUNE. CIT(IT-TP), PUNE. '#$ %%&',) &', / DR, ITAT, B PUNE; $+,-/ GUARD FILE. / BY ORDER // TRUE COPY // ./0%1&2 / SR. PRIVATE SECRETARY ) &', / ITAT, PUNE.