Kohler India Corporation Private Limited, Bangalore V. DCIT, Bangalore

ITA 1660/BANG/2012

• Counselvise Citation: [2016] 133 COUNSELVISE.COM (IT) 8629 (ITAT-BANGALORE)
• Duration Of Justice: 3 year(s) 1 month(s) 29 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 19-02-2016
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: B
• Next Hearing Date: 29-10-2015
• Assessment Year: 2008-2009
• Appeal Filed On: 21-12-2012
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Assessee Lawyers: K R VASUDEVAN
• Keywords: Depreciation; Transfer pricing; International transaction; Cost of acquisition; Initiation of penalty proceedings
• Section: 37; 6

Judgement Text

IT(TP)A.1660/BANG/2012 PAGE - 1 IN THE INCOME TAX APPELLATE TRIBUNAL BANGALORE BENCH 'B', BANGALORE BEFORE SHRI. ABRAHAM P. GEORGE, ACCOUNTANT MEMBER AND SHRI. VIJAYPAL RAO, JUDICIAL MEMBER I.T(TP).A NO.1660/BANG/2012 (ASSESSMENT YEAR : 2008-09) M/S. KOHLER INDIA CORP. P. LTD, NO.138/6, 1 ST FLOOR, 6 A CROSS, RAJ MAHAL VILAS EXTENSION, SADASHIVANAGAR, BANGALORE 560 060 .. APPELLANT PAN : AABCK2145E V. DEPUTY COMMISSIONER OF INCOME-TAX, CIRCLE -11(5), BANGALORE .. RESPONDENT ASSESSEE BY : SHRI. K. R. VASUDEVAN, ADVOCATE REVENUE BY : MS. NEERA MALHOTRA, CIT HEARD ON : 01.02.2016 PRONOUNCED ON : 19.02.2016 O R D E R PER ABRAHAM P. GEORGE, ACCOUNTANT MEMBER : IN THIS APPEAL FILED BY ASSESSEE DIRECTED AGAINST AN ASSESSMENT MADE ON 23.10.2012, PURSUANT TO DIRECTIONS OF DISPUTE RE SOLUTION PANEL (DRP IN SHORT), U/S.144C(5) OF THE INCOME-TAX ACT, 1961 (THE ACT IN SHORT), IT IT(TP)A.1660/BANG/2012 PAGE - 2 HAS ALTOGETHER RAISED SIX GROUNDS, OF WHICH, GROUN DS 1 AND 2 ARE GENERAL IN NATURE NEEDING NO SPECIFIC ADJUDICATION. GROUND 6 IS CONSEQUENTIAL IN NATURE ASSAILING INITIATION OF PENALTY PROCEEDINGS U/S.271(1)(C) OF THE ACT. 02. GROUND.3 OF THE ASSESSEE IS REPRODUCED HERE UND ER: 3. THAT ON FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW, THE LD. AO/ LD. TPO/LD. DRP ERRED WHILE MAKING AN ADDIT ION OF RS. 19,61,28,232 TO THE VALUE OF INTERNATIONAL TRANSACTIONS BY: (I) REJECTING RESALE PRICE METHOD ('RPM') AND SELEC TING TRANSACTIONAL NET MARGIN METHOD ('TNMM') AS MOST APPROPRIATE METHOD FOR DISTRIBUTION SEGMENT OF THE APPELLANT; (II) WRONGLY COMPUTING THE RELEVANT COST BASE OF THE DISTRIBUTION SEGMENT WHILE APPLYING THE TNMM FOR DI STRIBUTION SEGMENT; (III) NOT PROVIDING THE COMPUTATION OF OPERATING PROFIT MARGIN ON SALES OF THE COMPARABLE COMPANY AT 17.72% UNDER TNMM; (IV) WRONGLY COMPUTING THE OPERATING PROFIT MARGIN ON SALES OF THE COMPARABLE COMPANY AT 17.72% AS AGA INST 11.96% UNDER TNMM AND THEREBY ERRONEOUSLY INCREASIN G THE TRANSFER PRICING ADJUSTMENT BY RS. 2,20,43,542; (V) WRONGLY INCLUDING THE PROVISION FOR WARRANTY OF RS. 50,78,903 AND FEES OF RS. 81,90,00 PAID TO THE REGI STRAR OF COMPANIES IN THE COST BASE FOR ARRIVING AT THE OPER ATING PROFIT MARGIN OF THE APPELLANT UNDER TNMM EVEN WHEN THE AF ORESAID PROVISION AND FEE WERE DISALLOWED AS ALLOWABLE EXPE NDITURE U/S 37 BY THE LD. AO; IT(TP)A.1660/BANG/2012 PAGE - 3 (VI) NOT CONDUCTING A FRESH BENCHMARKING ANALYSIS WHILE APPLYING THE TNMM AS MOST APPROPRIATE METHOD FOR DI STRIBUTION SEGMENT; AND (VII) WRONGLY CONSIDERING THE VALUE OF PURCHASE OF GOODS AT RS. 19,61,28,232 INSTEAD OF RS. 1 7,71,37, 313/-. 03. FACTS APROPOS ARE THAT ASSESSEE TRADING IN GENE RATOR PARTS AND SERVICING OF GENERATORS HAD FILED ITS RETURN OF INC OME FOR THE IMPUGNED ASSESSMENT YEAR DECLARING NIL INCOME. ASSESSEE HAD DURING THE RELEVANT PREVIOUS YEAR ENTERED INTO INTERNATIONAL TRANSACTIO NS WITH ITS ASSOCIATED ENTERPRISE (AE IN SHORT) MAINLY CONSISTING OF PU RCHASE OF FINISHED GOODS. ASSESSEE HAD TWO SEGMENTS OF OPERATION, NAMELY, DIS TRIBUTION AND POWER. AE FROM WHICH ASSESSEE BOUGHT THE FINISHED GOODS FO R SALE IN INDIA WAS ITS PRINCIPAL, NAMELY, KOHLER COMPANY USA. FINISHED GO ODS WERE BATH FITTINGS AND SANITARYWARE PRODUCTS. INTERNATIONAL TRANSACTIONS UNDERTAKEN BY THE ASSESSEE DURING THE RELEVANT PREVIOUS YEAR W ITH ITS AE WERE AS UNDER: IT(TP)A.1660/BANG/2012 PAGE - 4 04. SINCE THE PLI OF INTERNATIONAL TRANSACTIONS PER TAINING TO POWER SEGMENT WAS CONSIDERED BY THE TPO TO BE AT ARMS LEN GTH, THERE WAS NO RECOMMENDATION ON THIS SEGMENT BY THE TPO WHEN THE ISSUE OF PRICING OF THE INTERNATIONAL TRANSACTIONS WERE REFERRED TO HIM BY THE AO. HOWEVER, WITH REGARD TO THE DISTRIBUTION SEGMENT, TPO DID NO T ACCEPT THE TP DOCUMENTATION FILED BY THE ASSESSEE. ASSESSEE HAD FOLLOWED RESALE PRICE METHOD (RPM IN SHORT) FOR JUSTIFYING THE ALP OF THE PURCHASE COST OF GOODS FROM ITS AE ABROAD. AS PER THE ASSESSEE IT W AS SELLING THE PRODUCTS IMPORTED FROM ITS AE IN INDIA AS SUCH AND THERE WAS NO VALUE ADDITION. KITCHEN, BATH AND SANITARY WARE PRODUCTS, SIMILAR T O THE ONES DEALT WITH BY THE ASSESSEE, WERE IMPORTED AND SOLD BY OTHER INDIA N COMPARABLE COMPANIES AND AS PER THE ASSESSEE DATA WITH REGARD TO SUCH COMPANIES WERE AVAILABLE IN PUBLIC DOMAIN. CONTENTION OF THE ASSE SSEE BEFORE THE TPO WAS IT(TP)A.1660/BANG/2012 PAGE - 5 THAT DATA ON PURCHASE AND SALE OF KITCHEN AND BATH FITTINGS OF OTHER COMPANIES WITH VARIOUS BRAND NAMES WERE AVAILABLE. AS PER THE ASSESSEE, IT WAS ONLY DOING TRADING ACTIVITY OF FINISHED GOOD S IMPORTED FROM ITS AE ABROAD AND HAD SOLD THE FINISHED GOODS RECEIVED BY IT AS SUCH IN THE DOMESTIC MARKET. AS PER THE ASSESSEE, THOUGH IT WA S HAVING EXCLUSIVE RIGHT TO SELL KOHLER KITCHEN AND BATH FITTINGS IN INDIA, THIS DID NOT RESULT IN A MONOPOLY SITUATION SINCE THERE WERE SIMILAR PRODUCT S OF VARIOUS BRANDS LIKE PARRYWARE, HINDWARE AND JAQUAR, SOLD BY OTHER COMPE TING, INDEPENDENT COMPANIES. IN OTHER WORDS AS PER THE ASSESSEE WHEN ITEMS SIMILAR TO THAT WHICH WERE SOLD BY IT WERE ALSO SOLD BY UNRELATED P ARTIES IN INDEPENDENT TRANSACTIONS, RPM WAS THE BEST METHOD WHICH COULD B E ADOPTED FOR TESTING ITS INTERNATIONAL TRANSACTIONS. 05. HOWEVER, TPO WAS NOT IMPRESSED BY THE ABOVE CON TENTIONS OF THE ASSESSEE. ACCORDING TO HIM, FOR APPLICATION OF RPM , RULE 10B(1)(B) OF IT RULES, REQUIRED ADJUSTMENTS TO BE MADE FOR DIFFEREN CES IN THE INTERNATIONAL TRANSACTIONS OF THE COMPARABLE UNCONTROLLED TRANSAC TIONS WHICH HAD A MATERIAL EFFECT ON THE GROSS PROFIT. AS PER THE TP O, IT WAS NOT POSSIBLE TO ASCERTAIN THE MATERIAL DIFFERENCES THAT MIGHT BE TH ERE, CONSIDERING THE MANNER IN WHICH ASSESSEE HAD CARRIED ON ITS BUSINES S AND THE MANNER IN WHICH INDEPENDENT ENTERPRISES CHOSEN BY THE ASSESSE E HAD CARRIED ON THEIR IT(TP)A.1660/BANG/2012 PAGE - 6 BUSINESS. HENCE, ACCORDING TO HIM ADJUSTMENT AS RE QUIRED UNDER THE ABOVE MENTIONED RULE WAS NOT POSSIBLE. AS PER THE TPO, A SSESSEE WAS NOT A MERE RESELLER WHICH PERFORMED SIMPLE SERVICES LIKE THAT OF A FORWARDING AGENT. ASSESSEE HAD A GOOD MARKETING NET WORK AND HAD ALSO SPENT SUBSTANTIAL MONEY FOR ADVERTISEMENT AND SELLING EXPENDITURE. T PO NOTED THAT ACCOUNTING TREATMENT OF THE ASSESSEE AND THE COMPAR ABLE COMPANIES SELECTED BY IT, WITH RESPECT TO DIRECT EXPENDITURE WAS NOT AVAILABLE IN PUBLIC DOMAIN. HE THUS HELD THAT THE RPM ADOPTED B Y THE ASSESSEE COULD NOT BE CONSIDERED AS THE MOST APPROPRIATE METHOD ( MAM IN SHORT). HE SUBSTITUTED SUCH METHOD WITH TNMM AND PROCEEDED WIT H THE COMPUTATION OF ALP. FOR THIS, HE TOOK EURO MERCHANDISE (INDIA) LTD, WHICH WAS ONE OF THE COMPARABLE SELECTED BY ASSESSEE ITSELF IN ITS R PM BASED TP STUDY. AS PER THE TPO, THE SAID EURO MERCHANDISE (INDIA) LTD WAS HAVING A PLI OF 17.72%. APPLYING 17.72% AS ARMS LENGTH TP MARGIN, TPO RECOMMENDED AN UPWARD ADJUSTMENT OF RS.19,61,28,232/-, U/S.92CA OF THE ACT ON THE INTERNATIONAL TRANSACTIONS OF THE ASSESSEE. 06. WHEN A DRAFT ASSESSMENT ORDER ON THE LINES MENT IONED ABOVE WAS PROPOSED, ASSESSEE CHOSE TO MOVE THE DRP. PRIMARY OBJECTION OF THE ASSESSEE BEFORE THE DRP WAS ON THE REJECTION OF RPM AS THE MAM AND IT(TP)A.1660/BANG/2012 PAGE - 7 ADOPTING TNMM IN ITS PLACE. RELYING ON RULE 10C(1) AND (2) OF THE RULES, ASSESSEE ARGUED BEFORE THE DRP THAT THE METH OD WHICH WAS BEST SUITED TO THE FACTS AND CIRCUMSTANCES OF EACH PARTI CULAR INTERNATIONAL TRANSACTION AND WHICH PROVIDED MOST RELIABLE RESULT FOR AN ALP ANALYSIS WAS REQUIRED TO BE ADOPTED. AS PER THE ASSESSEE, I F THE UPWARD ADJUSTMENT RECOMMENDED BY THE TPO, APPLYING TNNM WAS SUSTAINED , IT WOULD MEAN THAT ASSESSEE HAD INCURRED NIL COST FOR THE GOODS RESOLD BY IT. AS PER THE ASSESSEE, IT HAD INCURRED A LOSS ON THE INTERNATION AL TRANSACTIONS IN THE DISTRIBUTION SEGMENT DUE TO EXPENDITURE OF RS.9,73, 20,890/- FOR ESTABLISHING SHOW-ROOM, ADVERTISEMENT AND BUSINESS PROMOTION. F URTHER AS PER THE ASSESSEE, EXPENDITURE INCURRED BY IT WAS OF A NATUR E WHICH EFFECTED THE NET PROFIT AND HENCE APPLICATION OF TNNM WOULD NOT GIVE FAIR RESULTS. CONTENTION OF THE ASSESSEE WAS THAT SELLING PRICES WERE NOT RELATED TO THE COST INCURRED BY IT, BUT WAS DETERMINED BY MARKET F ORCES. OR OTHER WORDS, BY PRICES OF SIMILAR PRODUCTS SOLD BY COMPETITORS. ASSESSEE ALSO SUBMITTED THAT IT WAS ONLY IN ITS SECOND YEAR OF OPERATION AN D THE BENEFITS OF EXPENDITURE ON SALES PROMOTION AND ADVERTISEMENT WE RE EXPECTED DOWN THE LINE. IT(TP)A.1660/BANG/2012 PAGE - 8 07. HOWEVER, DRP WAS NOT IMPRESSED BY THE ABOVE ARG UMENTS. AS PER THE DRP ASSESSEE WAS PERFORMING VALUE ADDED SERVICE S AND WAS NOT A DISTRIBUTOR SIMPLICITOR. ASSESSEE HAD IN THE LATER YEARS STARTED MANUFACTURING OF THE VERY SAME ITEMS. DRP THUS HEL D THAT TPO WAS JUSTIFIED IN ADOPTING TNMM IN PLACE OF RPM CONSIDER ED BY THE ASSESSEE. 08. NOW BEFORE US, LD. AR STRONGLY ASSAILING THE OR DERS OF AUTHORITIES BELOW SUBMITTED THAT IN THE FIRST YEAR OF ITS OPERA TION ALSO ASSESSEE HAD FOLLOWED RPM IN ITS TP STUDY FOR INTERNATIONAL TRAN SACTIONS IN THE POWER AND DISTRIBUTION SEGMENT. AS PER THE LD. AR, ASSE SSEE WAS SELLING KITCHEN, SANITARY AND BATH FITTINGS IN INDIA, DIRECTLY IMPO RTING IT FROM ITS AE ABROAD. ASSESSEE WAS NOT DOING ANY PROCESSING OF THESE ITEM S. SIMILAR ITEMS WERE SOLD BY ITS COMPETITORS IN INDIA LIKE, PARRYWARE, H INDWARE ETC., AS PER THE LD. AR, LOWER AUTHORITIES TOOK A WRONG PRESUMPTION THAT ADVERTISEMENT AND SELLING EXPENDITURE RESULTED IN A VALUE ADDITION TO THE GOODS SOLD. GOODS SOLD WERE NOT SUBJECTED TO ANY VALUE ADDITION BY TH E ASSESSEE. LD. AR SUBMITTED THAT IN A SIMILAR SITUATION THIS TRIBUNAL IN THE CASE OF DCIT V. M/S. SANYO INDIA P. LTD V. ACIT [(2015) 45 CCH 0098 BANG-TRIB], HELD THAT RPM WAS THE BEST ONE FOR TESTING THE INTERNATI ONAL TRANSACTIONS RELATING TO SALE OF GOODS PURCHASED FROM AE, AS SUCH. RELI ANCE WAS ALSO PLACED ON IT(TP)A.1660/BANG/2012 PAGE - 9 THE JUDGMENT OF BOMBAY HIGH COURT IN THE CASE OF CI T V. LOREAL INDIA P. LTD [(2015) 117 DTR 0460]. ACCORDING TO THE LD. A R, SUBSTANTIAL EXPENDITURE WERE INCURRED ON ADVERTISEMENT AND MAR KETING SINCE THIS WAS THE SECOND YEAR OF ITS OPERATION IN INDIA, BUT THIS DID NOT MAKE ANY VALUE ADDITION TO THE PRODUCTS WHICH WERE SOLD, IN THE S AME STATE IN WHICH IT WAS IMPORTED. 09. PER CONTRA, LD. DR STRONGLY SUPPORTING THE ORDE RS OF THE AUTHORITIES BELOW, SUBMITTED THAT ASSESSEE COULD NOT SHOW HOW T NMM WAS NOT THE APPROPRIATE METHOD WHEN THE COMPARABLE COMPANY CON SIDERED BOTH BY THE ASSESSEE AS WELL AS BY THE TPO WAS THE VERY SAME, N AMELY, EURO MERCHANDISE (INDIA) LTD. RELYING ON THE JUDGMENT OF HONBLE DE LHI HIGH COURT IN THE CASE OF SONY ERICSON MOBILE COMMUNICATIONS INDIA (PVT) L TD V. CIT [(2015) 374 ITR 118], LD. DR SUBMITTED THAT IN THE SAID CASE T PO HAD USED BOTH RPM AND TNMM AND THIS WAS ACCEPTED. AS PER THE LD. DR THOU GH THE JUDGMENT OF HONBLE DELHI HIGH COURT WAS IN RELATION TO THE AMP EXPENDITURE, ANALYSIS DONE BY THE TPO IN THE SAID CASE USED BOTH RPM AND TNMM. AS PER THE LD. DR, WHEN ADJUSTMENTS WHICH WOULD BRING THE PRICES C HARGED BY THE TESTED PARTY ON THE SAME FOOTING AS THE PRICES CHARGED BY THE C OMPARABLES, COULD NOT BE CARRIED OUT WITH REASONABLE ACCURACY, RPM COULD NO T BE ACCEPTED. AS PER THE IT(TP)A.1660/BANG/2012 PAGE - 10 LD. DR, IN SUCH A SITUATION TNMM WAS MORE APPROPRI ATE. THUS AS PER THE LD. DR LOWER AUTHORITIES WERE JUSTIFIED IN ADOPTING TNM M IN PLACE OF RPM CONSIDERED BY THE ASSESSEE. 10. WE HAVE PERUSED THE ORDERS AND HEARD THE RIVAL CONTENTIONS. ADJUSTMENT RECOMMENDED BY THE TPO WAS CONFINED TO F INISHED GOODS PURCHASED BY THE ASSESSEE FROM ITS AE ABROAD UNDER THE DISTRIBUTION SEGMENT AND SOLD HERE AS SUCH. ITEMS INVOLVED WERE KITCHEN AND BATH FITTINGS. ASSESSEE HAD NOT DONE ANY FURTHER MANUFACTURING OR PROCESSIN G OF THESE GOODS, BUT HAD SOLD IT AS SUCH. ASSESSEE HAD ADOPTED RPM FOR JUST IFYING THE COST OF PURCHASE FROM ITS AE ABROAD. THERE IS NO DOUBT THAT ASSESSE E HAD INCURRED SUBSTANTIAL MARKETING AND ADMINISTRATIVE EXPENDITURE COMING TO RS.9,73,20,890/-. THIS RESULTED IN A LOSS TO THE ASSESSEE IN ITS DISTRIBUT ION SEGMENT DURING THE RELEVANT YEAR. FOR JUSTIFYING THE PRICING OF ITS INTERNATIO NAL TRANSACTIONS UNDER THIS SEGMENT ASSESSEE HAD SELECTED AS COMPARABLE EURO ME RCHANDISE (INDIA) LTD, UNDER THE RPM. TPO THOUGH HE REJECTED THE RPM AND ADOPTED TNMM AS MAM, HAD ALSO CONSIDERED THE VERY SAME COMPARABLE. NEVERTHELESS, TPO IN OUR OPINION, OUGHT HAVE MADE A CLOSE ANALYSIS OF TH E ITEMS WHICH WERE BOUGHT BY THE ASSESSEE FROM ITS AE ABROAD AND SOLD AS SUCH IN INDIA, TO VERIFY WHETHER SUCH ITEMS WERE COMPARABLE WITH THE ITEMS SOLD BY E URO MERCHANDISE (INDIA) LTD, OR ANY OTHER COMPANIES LIKE HINDWARE, PARRYWAR E ETC. WHERE AN ASSESSEE IT(TP)A.1660/BANG/2012 PAGE - 11 SUGGESTS RPM AS THE MAM IT IS IMPERATIVE THAT THE P RODUCTS SOLD BY THE TESTED INDIAN ENTITY IS SUBJECTED TO A CLOSE COMPARISON WI TH THOSE WHICH ARE SOLD BY THE COMPARABLES. UNLESS AND UNTIL THIS IS DONE IT MAY NOT BE POSSIBLE TO COME TO A CONCLUSION WHETHER RPM CAN BE APPLIED OR NOT. RP M DEPENDS ON A MECHANISM OF VERIFICATION OF MARGINS AT GROSS LEVEL S AND NOT AT NET LEVELS. THIS IS OBVIOUS FROM RULE 10B(1)(B) OF THE ACT, WHICH IS REPRODUCED HEREUNDER : 10B. DETERMINATION OF ARMS LENGTH PRICE UNDER SECT ION 92C. (1) FOR THE PURPOSES OF SUB-SECTION (2) OF SECTION 92C, THE ARMS LENGTH PRICE IN RELATION TO AN INTERNATIONAL TRANSACTION S HALL BE DETERMINED BY ANY OF THE FOLLOWING METHODS, BEING THE MOST APPROPRIAT E METHOD, IN THE FOLLOWING MANNER, NAMELY: (A) ..... (B) RESALE PRICE METHOD, BY WHICH (I) THE PRICE AT WHICH PROPERTY PURCHASED OR SERVIC ES OBTAINED BY THE ENTERPRISE FROM AN ASSOCIATED ENTERPRISE IS RESOLD OR ARE PROVIDED TO AN UNRELATED ENTERPRISE, IS IDENTIFIED ; (II) SUCH RESALE PRICE IS REDUCED BY THE AMOUNT OF A NORMAL GROSS PROFIT MARGIN ACCRUING TO THE ENTERPRISE OR TO AN UNRELATE D ENTERPRISE FROM THE PURCHASE AND RESALE OF THE SAME OR SIMILAR PROPERTY OR FROM OBTAINING AND PROVIDING THE SAME OR SIMILAR SERVICES, IN A COMPAR ABLE UNCONTROLLED TRANSACTION, OR A NUMBER OF SUCH TRANSACTIONS ; (III) THE PRICE SO ARRIVED AT IS FURTHER REDUCED BY THE EXPENSES INCURRED BY THE ENTERPRISE IN CONNECTION WITH THE PURCHASE OF P ROPERTY OR OBTAINING OF SERVICES ; IT(TP)A.1660/BANG/2012 PAGE - 12 (IV) THE PRICE SO ARRIVED AT IS ADJUSTED TO TAKE IN TO ACCOUNT THE FUNCTIONAL AND OTHER DIFFERENCES, INCLUDING DIFFERE NCES IN ACCOUNTING PRACTICES, IF ANY, BETWEEN THE INTERNATIONAL TRANSA CTION AND THE COMPARABLE UNCONTROLLED TRANSACTIONS, OR BETWEEN TH E ENTERPRISES ENTERING INTO SUCH TRANSACTIONS, WHICH COULD MATERI ALLY AFFECT THE AMOUNT OF GROSS PROFIT MARGIN IN THE OPEN MARKET ; (V) THE ADJUSTED PRICE ARRIVED AT UNDER SUB-CLAUSE (IV) IS TAKEN TO BE AN ARMS LENGTH PRICE IN RESPECT OF THE PURCHASE OF TH E PROPERTY OR OBTAINING OF THE SERVICES BY THE ENTERPRISE FROM TH E ASSOCIATED ENTERPRISE ; 11. BEFORE REJECTING THE RPM, TPO SHOULD HAVE MADE AN ANALYSIS TO SEE WHETHER THE REQUIRED DATA REGARDING THE SET OF COMP ARABLES DEALING IN SIMILAR PRODUCTS COULD BE OBTAINED FROM PUBLIC DATA BASES. ONLY IF IT CAN BE SHOWN THAT THE ADJUSTMENT SPECIFIED IN THE ABOVE RULE WAS NOT POSSIBLE, RPM CAN BE REJECTED AS MAM. NO DOUBT LD. AR PLACED RELIANCE ON THE DECISION OF COORDINATE BENCH IN THE CASE OF M/S. SANYO INDIA P. LTD (SUPRA). HOWEVER, GOODS SOLD BY M/S. SANYO INDIA P. LTD, WERE SIMILAR TO GOODS SOLD BY THE CHOSEN COMPARABLE S VIZ., TELEVISIONS, PROJECTORS, REFRIGERATORS ETC., ASSESSEE IN THE SA ID CASE, HAD WHILE ADOPTING THE RPM AS THE MAM FOUND FIVE COMPARABLE C OMPANIES FOR TESTING THE VALUE OF ITS INTERNATIONAL TRANSACTIONS WITH ITS AE. IT WAS ON ACCOUNT OF THIS REASON, THIS TRIBUNAL HELD THAT THE RPM WAS MAM IN THE SAID CASE. AS AGAINST THIS HERE ASSESSEE WAS SELLI NG KITCHEN AND BATH FITTINGS, AND WHETHER THERE WERE OTHER COMPARABLES IN SIMILAR BUSINESS IT(TP)A.1660/BANG/2012 PAGE - 13 SUFFICIENT ENOUGH TO MAKE A REPRESENTATIVE SAMPLE H AS NOT BEEN VERIFIED BY ANY OF THE LOWER AUTHORITIES. THE QUESTION WHETHER RPM IS THE MAP DEPENDS ON SUCH AN ANALYSIS. WE ARE THEREFORE OF T HE OPINION THAT THE MATTER AS TO THE SELECTION OF MAM AND ALSO THE PRIC ING OF INTERNATIONAL TRANSACTIONS OF THE ASSESSEE WITH REGARD TO ITS DIS TRIBUTION SEGMENT REQUIRES A FRESH LOOK BY THE TPO / AO. WE SET ASIDE THE ORD ERS OF AUTHORITIES BELOW AND REMIT THE ISSUE BACK TO THE FILE OF TPO / AO FO R CONSIDERATION AFRESH. IN THE CIRCUMSTANCES, WE KEEP THE ISSUES RAISED BY THE ASSESSEE IN ITS GROUNDS 3(II) TO 3(VI) OPEN. AO SHALL ALSO CONSID ER THE CORRECT VALUE OF THE PURCHASE WHILE COMPUTING ASSESSEES ALP, WHATEV ER MAY BE THE MAM FINALLY SELECTED BY HIM. GROUND 3 OF THE ASSESSEE IS TREATED AS PARTLY ALLOWED FOR STATISTICAL PURPOSE. 12. VIDE ITS GROUND 4, ASSESSEE IS AGGRIEVED THAT P ROVISION OF WARRANTY OF RS.50,78,903/- WAS DISALLOWED. FACTS APROPOS ARE T HAT ASSESSEE WAS REQUIRED TO PROVIDE DETAILS OF THE PROVISIONING MAD E ON WARRANTY DURING THE COURSE OF ASSESSMENT PROCEEDINGS. REPLY OF THE ASS ESSEE WAS THAT FAUCETS SOLD BY IT AND USED FOR RESIDENTIAL PURPOSE HAD A W ARRANTY OF SEVEN YEARS AND THOSE FOR COMMERCIAL PURPOSE HAD A WARRANTY OF FIVE YEARS. FOR KITCHEN AND BATH FITTINGS THERE WAS A WARRANTY OF O NE TO TEN YEARS. AO IT(TP)A.1660/BANG/2012 PAGE - 14 REFUSED TO CONSIDER THE CLAIM OF THE ASSESSEE. IN THE DRAFT ASSESSMENT ORDER HE WAS OF THE OPINION THAT THE CLAIM OF WARRANTY PR OVISION WAS IN THE NATURE OF CONTINGENT LIABILITY. HOWEVER WHEN THE MATTER R EACHED THE DRP IT DIRECTED THE AO TO HAVE A RELOOK AT THE PROVISIONIN G FOR WARRANTY CONSIDERING THE JUDGMENT OF HONBLE APEX COURT IN T HE CASE OF ROTORK CONTROLS INDIA (PVT) LTD VS CIT [(2009) 314 ITR 62] . 13. ASSESSEE PURSUANT TO THE DIRECTIONS OF THE DRP GAVE DETAILS OF THE WARRANTY PERIOD WITH REFERENCE TO VARIOUS TYPES OF PRODUCTS SOLD BY IT. AS PER THE ASSESSEE IT WAS MAKING A WARRANTY PROVISION OF 1% OF NET SALES AND THE SUBSEQUENT TRENDS SHOW THAT THE PROVISIONING WA S CORRECTLY DONE. HOWEVER, AO DID NOT ACCEPT THE ABOVE CONTENTION. A CCORDING TO THE AO THE TEST LAID DOWN BY THE HONBLE APEX COURT IN THE CASE OF ROTORK CONTROLS INDIA (PVT) LTD (SUPRA), REQUIRED THE ASSE SSEE TO MAKE AN ESTIMATE OF ITS PRESENT OBLIGATION RESULTING FROM THE PAST E VENTS. AS PER THE AO, COMMERCIAL WARRANTY FOR ALL ITS PRODUCTS WAS ONLY T WO YEARS. FOR SALE IN RESIDENTIAL AREAS, MAXIMUM WARRANTY WAS FOR THREE Y EARS EXCEPT FOR TWO OUT OF NINE PRODUCTS. THUS ACCORDING TO THE AO ASSESSE ES CLAIM THAT ITS WARRANTY CRYSTALISED IN FOURTH OR FIFTH YEAR OF SAL E WAS NOT ACCEPTABLE. FURTHER AS PER THE AO, ASSESSEE HAD NOT WRITTEN BAC K THE EXCESS IT(TP)A.1660/BANG/2012 PAGE - 15 PROVISIONING MADE BY IT IN THE SUBSEQUENT YEARS. H E THUS HELD THAT THE CONDITIONS LAID DOWN BY THE HONBLE APEX COURT IN T HE CASE OF ROTORK CONTROLS INDIA (PVT) LTD (SUPRA), WAS NOT SATISFIED . HE DISALLOWED THE PROVISION FOR WARRANTY. 14. BEFORE US, LD. AR SUBMITTED THAT PROVISIONING F OR WARRANTY WAS MADE ON A SCIENTIFIC BASIS. SINCE IT WAS IN THE SE COND YEAR OF OPERATION, IT WAS NOT POSSIBLE FOR IT TO GO BY HISTORICAL DATA. NEVERTHELESS CONSIDERING THE PERIOD OF WARRANTY GIVEN TO EACH OF THE PRODUCT S SOLD BY IT, ASSESSEE HAD MADE A CONSERVATIVE ESTIMATE OF 1% OF THE SALE VALU E OF PROVISIONING. AS PER THE LD. AR, CONDITIONS SET OUT BY THE HONBLE A PEX COURT WAS SATISFIED. RELIANCE WAS ALSO PLACED ON THE JUDGMEN T OF HONBLE JURISDICTIONAL HIGH COURT IN THE CASE OF CIT V. DEN SO KIRLOSKAR [(2013) 34 TAXMAN.COMM 238]. 15. PER CONTRA, LD. DR SUPPORTED THE ORDER OF THE L OWER AUTHORITIES. 16. WE HAVE PERUSED THE ORDERS AND HEARD THE RIVAL CONTENTIONS. IT IS AN ADMITTED POSITION THAT ASSESSEE WAS MAKING WARRANTY PROVISION AT 1% OF THE GROSS SALES. IT MIGHT BE TRUE THAT ASSESSEE MIGHT NOT BE HAVING HISTORICAL DATA FOR MAKING AN EXACT WORKING OF THE WARRANTY PR OVISION WHICH WAS IT(TP)A.1660/BANG/2012 PAGE - 16 REQUIRED. HOWEVER, ADMITTEDLY ASSESSEES PARENT CO MPANY ABROAD WAS IN THE BUSINESS OF SELLING KOHLER BATH AND SANITARY FI TTINGS SINCE THE LAST VERY MANY YEARS. THEREFORE, IT IS NOT A CASE WHERE ASSE SSEE COULD NOT HAVE COMPILED SUFFICIENT DATA IN SUPPORT OF ITS WARRANTY PROVISION. AO HAS GIVEN A CLEAR FINDING THAT EXCEPT FOR TWO ITEMS, ASSESSEE S WARRANTY PERIOD NEVER EXCEEDED THREE YEARS. CONDITIONS SET OUT BY HONBL E APEX COURT IN THE CASE OF ROTORK CONTROLS INDIA (PVT) LTD (SUPRA), FO R ALLOWING A CLAIM OF WARRANTY AS UNDER : A) AN ENTERPRISE HAS A PRESENT OBLIGATION AS A RESU LT OF A PAST EVENT. B) IT IS PROBABLE THAT AN OUTFLOW OF RESOURCES WIL L BE REQUIRED TO SETTLE THE OBLIGATION. C) A RELIABLE ESTIMATE CAN BE MADE OF THE AMOUNT O F OBLIGATION. 17. WHILE IT IS TRUE THAT ASSESSEE HAD A PRESENT OB LIGATION ON ACCOUNT OF WARRANTY RESULTING OUT OF ITS SALES AND IT WAS ALSO PROBABLE THAT THERE COULD BE AN OUTFLOW OF RESOURCES FOR SETTLING SUCH OBLIGA TION, THE THIRD CONDITION, VIZ., MAKING OF A RELIABLE ESTIMATE HAS NOT BEEN DO NE BY THE ASSESSEE. IN OUR OPINION, UNLESS AND UNTIL SCIENTIFIC DATA IS PR ODUCED BY AN ASSESSEE IN SUPPORT OF THE ESTIMATE OF WARRANTY PROVISIONING, A N ESTIMATE CANNOT BE IT(TP)A.1660/BANG/2012 PAGE - 17 PRESUMED AS A RELIABLE ONE. ASSESSEE HAVING FAILED TO DO SO, DISALLOWANCE WAS RIGHTLY DONE BY THE LOWER AUTHORITIES. WE DO N OT FIND ANY REASON TO INTERFERE. GROUND 4 OF THE ASSESSEE STANDS DISMISS ED. 18. VIDE ITS GROUND 5, ASSESSEE IS AGGRIEVED THAT E XPENDITURE OF RS.81,90,000/- PAID TO THE REGISTRAR OF COMPANIES F OR INCREASING AUTHORISED CAPITAL WAS DISALLOWED. 19. LD. COUNSEL FOR THE ASSESSEE SUBMITTED THAT EVE N IF IT WAS CONSIDERED AS A CAPITAL OUT GO ASSESSEE WOULD BE ELIGIBLE FOR CLAIMING AMORTISATION OF SUCH EXPENDITURE U/S.35D OF THE ACT. LD. AR SUBMIT TED THAT SUCH ALTERNATIVE CONTENTION WAS PLACED BY THE ASSESSEE B EFORE DRP. AS PER THE LD. AR, DRP HAS HELD THAT ASSESSEE TO BE ELIGIBLE F OR SUCH CLAIM. HOWEVER, AO HAD NOT ALLOWED THE AMORTISATION AVAILA BLE TO IT U/S.35D OF THE ACT. 20. PER CONTRA, LD. DR SUPPORTED THE ORDER OF AO. 21. WE HAVE PERUSED THE ORDERS AND HEARD THE RIVAL CONTENTIONS. SECTION 35D OF THE ACT IS REPRODUCED HEREUNDER : IT(TP)A.1660/BANG/2012 PAGE - 18 AMORTISATION OF CERTAIN PRELIMINARY EXPENSES. (1) WHERE AN ASSESSEE, BEING AN INDIAN COMPANY OR A PERSON (OTHER THAN A COMPANY) WHO IS RESIDENT IN INDIA, IN CURS, AFTER THE 31ST DAY OF MARCH, 1970, ANY EXPENDITURE SPECIFIED IN SUB-SECTION (2), (I) BEFORE THE COMMENCEMENT OF HIS BUSINESS, OR (II) AFTER THE COMMENCEMENT OF HIS BUSINESS IN CONN ECTION WITH THE EXTENSION OF HIS UNDERTAKING OR IN CONNECTION WITH HIS SETTING UP A NEW UNIT, THE ASSESSEE SHALL, IN ACCORDANCE WITH AND SUBJECT TO THE PROVISIONS OF THIS SECTION, BE ALLOWED A DEDUCTION OF AN AMOUNT EQUAL TO ONE-TENTH OF SUCH EXPENDITURE FOR EACH OF THE TEN SUCCESSIVE PREVIOUS YEARS BEGINNING WITH THE PREVIO US YEAR IN WHICH THE BUSINESS COMMENCES OR, AS THE CASE MAY BE , THE PREVIOUS YEAR IN WHICH THE EXTENSION OF THE UNDERTA KING IS COMPLETED OR THE NEW UNIT COMMENCES PRODUCTION OR O PERATION : PROVIDED THAT WHERE AN ASSESSEE INCURS AFTER THE 31 ST DAY OF MARCH, 1998, ANY EXPENDITURE SPECIFIED IN SUB-SECTI ON (2), THE PROVISIONS OF THIS SUB-SECTION SHALL HAVE EFFECT AS IF FOR THE WORDS 'AN AMOUNT EQUAL TO ONE-TENTH OF SUCH EXPENDITURE F OR EACH OF THE TEN SUCCESSIVE PREVIOUS YEARS', THE WORDS 'AN AMOUN T EQUAL TO ONE-FIFTH OF SUCH EXPENDITURE FOR EACH OF THE FIVE SUCCESSIVE PREVIOUS YEARS' HAD BEEN SUBSTITUTED.] (2) THE EXPENDITURE REFERRED TO IN SUB-SECTION (1) SHALL BE THE EXPENDITURE SPECIFIED IN ANY ONE OR MORE OF THE FOL LOWING CLAUSES, NAMELY : (A) EXPENDITURE IN CONNECTION WITH (I) PREPARATION OF FEASIBILITY REPORT; (II) PREPARATION OF PROJECT REPORT; IT(TP)A.1660/BANG/2012 PAGE - 19 (III) CONDUCTING MARKET SURVEY OR ANY OTHER SURVEY NECESSARY FOR THE BUSINESS OF THE ASSESSEE; (IV) ENGINEERING SERVICES RELATING TO THE BUSINESS OF THE ASSESSEE: PROVIDED THAT THE WORK IN CONNECTION WITH THE PREPA RATION OF THE FEASIBILITY REPORT OR THE PROJECT REPORT OR THE CON DUCTING OF MARKET SURVEY OR OF ANY OTHER SURVEY OR THE ENGINEERING SE RVICES REFERRED TO IN THIS CLAUSE IS CARRIED OUT BY THE ASSESSEE HI MSELF OR BY A CONCERN WHICH IS FOR THE TIME BEING APPROVED IN THI S BEHALF BY THE BOARD; (B) LEGAL CHARGES FOR DRAFTING ANY AGREEMENT BETWEE N THE ASSESSEE AND ANY OTHER PERSON FOR ANY PURPOSE RELATING TO TH E SETTING UP OR CONDUCT OF THE BUSINESS OF THE ASSESSEE; (C) WHERE THE ASSESSEE IS A COMPANY, ALSO EXPENDITU RE- (I) BY WAY OF LEGAL CHARGES FOR DRAFTING, THE MEMOR ANDUM AND ARTICLES OF ASSOCIATION OF THE COMPANY; (II) ON PRINTING OF THE MEMORANDUM AND ARTICLES OF ASSOCIATION; (III) BY WAY OF FEES FOR REGISTERING THE COMPANY UN DER THE PROVISIONS OF THE COMPANIES ACT, 1956 (1 OF 1956); (IV) IN CONNECTION WITH THE ISSUE, FOR PUBLIC SUBSC RIPTION, OF SHARES IN OR DEBENTURES OF THE COMPANY, BEING UNDERWRITING COMMISSION, BROKERAGE AND CHARGES FOR DRAFTING, TYPING, PRINTIN G AND ADVERTISEMENT OF THE PROSPECTUS; (D) SUCH OTHER ITEMS OF EXPENDITURE (NOT BEING EXPE NDITURE ELIGIBLE FOR ANY ALLOWANCE OR DEDUCTION UNDER ANY OTHER PROV ISION OF THIS ACT) AS MAY BE PRESCRIBED. 19. IT IS CLEAR THAT ONCE THE TYPE OF EXPENDITURE M ENTIONED UNDER SUB- SECTION (2) IS INCURRED BY AN ASSESSEE, IT SHALL BE ALLOWED A DEDUCTION AS PER IT(TP)A.1660/BANG/2012 PAGE - 20 SUB-SECTION (1) IN THE MANNER SPECIFIED THEREIN. T HUS IT IS CLEAR THAT AO WHEN HE HAD MADE DISALLOWANCE OF THE SHARE ISSUE EX PENDITURE IN THE NATURE OF FEES PAID TO REGISTRAR OF COMPANIES FOR INCREASI NG AUTHORISED CAPITAL, HE OUGHT TO HAVE ALLOWED THE AMORTISATION OF SUCH EXPE NDITURE U/S.35D(1) OF THE ACT. DRP HAD ACCEPTED THIS CLAIM OF THE ASSESS EE AT PARA 10.2 OF ITS ORDER. WE THEREFORE DIRECT THE AO TO GRANT AMORTIS ATION OF SUCH EXPENDITURE TO THE ASSESSEE AS SPECIFIED U/S.35D OF THE ACT. GROUND 5 OF THE ASSESSEE STANDS PARTLY ALLOWED. 20. IN THE RESULT, APPEAL OF THE ASSESSEE IS PARTLY ALLOWED FOR STATISTICAL PURPOSE. ORDER PRONOUNCED IN THE OPEN COURT ON 19TH DAY OF F EBRUARY, 2016. SD/- SD/- (VIJAY PAL RAO) (ABRA HAM P GEORGE) JUDICIAL MEMBER ACCOUNTANT MEMBER ASSISTANT REGISTRAR