M/s. Lenovo (India) Private Limited, Bangalore V. Income Tax Officer, Ward- 4(1)(1), Bangalore

ITA 2444/BANG/2019

• Counselvise Citation: [2020] 111 COUNSELVISE.COM (IT) 3429 (ITAT-BANGALORE)
• Duration Of Justice: 3 month(s) 6 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 06-03-2020
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: C
• Assessment Year: 2015-2016
• Appeal Filed On: 29-11-2019
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Assessee Lawyers: PADAMCHAND KHINCHA
• Keywords: Business income; Transfer pricing; Opportunity of being heard; Principle of natural justice; International transaction; TDS; Set aside
• Section: 37; 271(1)(c); 154; 92C; 143(3); 92B; 234B; 115JB; 64; 48; 13; 22; 92CA; 101; 20

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL C BENCH : BANGALORE BEFORE SHRI N.V. VASUDEVAN, VICE PRESIDENT AND SHRI PRADIP KUMAR KEDIA, ACCOUNTANT MEMBER IT(TP)A NOS. 2444/BANG/2019 ASSESSMENT YEAR: 2015-16 M/S LENOVO INDIA PVT. LTD. FERNS ICON, LEVEL 2 DODDENAKUNDI VILLAGE, MARATHALLI OUTER RING ROAD, MARATHALLI POST, KR PURAM HOBLI, BANGALORE 560 037. PAN: AA BC I 02300E VS. THE INCOME TAX OFFICER, WARD - 4(1)(1) BANGALORE. APPELLANT RESPONDENT APPELLANT BY : SHRI PADAMCHAND KHINCHA, CA RESPONDENT BY : SHRI PRADEEP KUMAR, CIT(DR)(ITAT), BENGALURU. DATE OF HEARING : 0 3 .03 .2020 DATE OF PRONOUNCEMENT : 06 .0 3 .2020 O R D E R PER N V VASUDEVAN, VICE PRESIDENT THIS IS AN APPEAL BY THE ASSESSEE AGAINST THE FIN AL ORDER OF ASSESSMENT DATED 30.10.2019 OF INCOME TAX OFFICER, WARD-4(1)(1), BANGALORE, PASSED U/S.143(3) READ WITH SEC.144C OF THE INCOME TAX ACT, 1961 (THE ACT) RELATING TO ASSESSMENT YEAR 2015-16. 2. THE GROUNDS OF APPEAL RAISED BY THE ASSESSEE IN THIS APPEAL READS AS FOLLOWS:- I. GENERAL GROUND: 1. THE FINAL ASSESSMENT ORDER DATED 30 OCTOBER 2019 (R ECEIVED ON 4 NOVEMBER 2019), PASSED BY THE LEARNED INCOME T AX OFFICER, WARD 4(1)(1), BANGALORE ('AO') UNDER SECTI ON 143(3) IT(TP)A NO. 2444/BANG/2019 PAGE 2 OF 36 READ WITH SECTION 144C(13) OF THE INCOME-TAX ACT, 1 961 ('THE ACT'), THE DIRECTIONS ISSUED BY THE HONOURABLE DISP UTE RESOLUTION PANEL ('DRP') UNDER SECTION 144C(5) AND THE ORDER PASSED BY THE LEARNED TRANSFER PRICING OFFICE R ('TPO') UNDER SECTION 92CA OF THE ACT ARE NOT IN ACCORDANCE WITH THE LAW AND MADE IN VIOLATION OF THE PRINCIPLES OF EQUI TY AND NATURAL JUSTICE AND ARE CONTRARY TO THE FACTS AND C IRCUMSTANCES OF THE PRESENT CASE. II. TP ADJUSTMENT OF INR 7,96,04,375 IN RELATION TO MANUFACTURING SEGMENT: 2. THE HONOURABLE DRP AND THE LEARNED AO / TPO HAVE ER RED IN LAW AND ON FACTS IN MAKING TRANSFER PRICING ('TP') ADJUSTMENT OF INR 7,96,04,375 TO THE RETURNED INCOME OF THE AP PELLANT AND IN HOLDING THAT THE INTERNATIONAL TRANSACTIONS UNDERTAKEN BY THE APPELLANT WITH ITS ASSOCIATED ENTERPRISES (' AES') IN THE MANUFACTURING SEGMENT WERE NOT AT ARM'S LENGTH. REJECTION OF INTERNAL COMPARABLE UNCONTROLLED PRICE METHOD ADOPTED AS THE MOST APPROPRIATE METHOD BY THE ASSES SEE: 3. THE HONOURABLE DRP AND THE LEARNED AO / TPO HAVE ER RED IN LAW BY REJECTING THE APPLICATION OF INTERNAL COMPAR ABLE UNCONTROLLED PRICE ('INTERNAL CUP') METHOD SELECTED AS THE MOST APPROPRIATE METHOD ('MAM') BY THE APPELLANT FO R BENCHMARKING THE INTERNATIONAL TRANSACTION OF IMPOR T OF RAW MATERIALS IN RELATION TO MANUFACTURING SEGMENT, WIT HOUT GIVING ANY COGENT AND VALID REASONS FOR SUCH REJECT ION. 4. THE HONOURABLE DRP AND THE LEARNED AO / TPO HA VE ERRED IN REJECTING THE INTERNAL CUP METHOD AS MAM W HEN THE SAME HAS BEEN UPHELD IN APPELLANT'S OWN CASE IN PRECEDING YEARS AS BELOW: A. UPHELD BY THE JURISDICTIONAL BENCH OF HONOURABLE ITAT FOR AY 2006-07 (1' AND 2ND ROUND), AY 2009-10 AND A Y 2010-11; B. UPHELD BY THE HONOURABLE DRP FOR AY 2006-07 (2ND ROUND) AND AY 2010-11; AND IT(TP)A NO. 2444/BANG/2019 PAGE 3 OF 36 C. ACCEPTED BY THE LEARNED TPO FOR AY 2007-08 AND AY 2008-09. 5. THE HONOURABLE DRP AND THE LEARNED AO / TPO HA VE ERRED IN NOT FOLLOWING THE SETTLED PRINCIPLE BASED ON THE RULINGS OF THE HONOURABLE SUPREME COURT ('SC') THAT WHERE A FU NDAMENTAL FACT PERMEATES THROUGH MORE THAN ONE YEAR AND IS AC CEPTED BY THE REVENUE AUTHORITIES, IT SHOULD NOT BE ARBITRARILY R EJECTED. 6. THE HONOURABLE DRP AND THE LEARNED AO / TPO HAVE ERRED IN REJECTING INTERNAL CUP AS MAM BY PROVIDING FOLLOWING REASONS WHICH ARE INCORRECT AND CONTRARY TO FACTS O F THE PRESENT CASE: A. THIS METHOD IS APPLIED BY USING INDUSTRY AVERAGE RATES; AND B. THERE IS NO PUBLICLY AVAILABLE INFORMATION ON PR ICES CHARGED IN INDEPENDENT TRANSACTIONS OF SIMILAR OR I DENTICAL NATURE, SO EXTERNAL CUP CANNOT BE APPLIED. NOTWITHSTANDING AND WITHOUT PREJUDICE TO THE ABOVE GROUNDS THAT THE INTERNAL CUP IS THE MAM, 7. THE HONOURABLE DRP AND THE LEARNED AO / TPO HAVE ERRED IN LAW AND ON FACTS BY ADOPTING THE TRANSACTI ONAL NET MARGIN METHOD ('TNMM') AS THE MAM FOR BENCHMARKING THE INTERNATIONAL TRANSACTION OF IMPORT OF RAW MATERIAL S IN RELATION TO MANUFACTURING SEGMENT. 8. THE HONOURABLE DRP AND THE LEARNED AO / TPO HAV E ERRED IN LAW IN ADOPTING THE FOLLOWING FILTERS FOR CONDUCTING TP ANALYSIS: A. REJECTION OF COMPARABLE COMPANIES HAVING DIFFERE NT FINANCIAL YEAR ENDING (OTHER THAN 31 MARCH 2015); 9. THE LEARNED AO / TPO HAS ERRED IN LAW AND ON FA CTS IN NOT REJECTING THE FOLLOWING COMPANIES WHICH ARE NOT COM PARABLE TO THE ASSESSEE DUE TO REASONS INCLUDING FUNCTIONAL DI SSIMILARITY, PRESENCE OF SIGNIFICANT R&D ETC.:- A. APOLLO MICRO SYSTEMS LIMITED IT(TP)A NO. 2444/BANG/2019 PAGE 4 OF 36 B. ZEN TECHNOLOGIES LIMITED 10. THE LEARNED AO / TPO HAS ERRED IN LAW AND ON FA CTS IN NOT ACCEPTING THE FOLLOWING COMPANIES WHICH ARE COMPARA BLE TO THE ASSESSEE AND THEREBY NOT CONSIDERING THE DETAILED S UBMISSIONS OF THE ASSESSEE: A. VXL INSTRUMENTS LIMITED B. CCS INFOTECH LIMITED 11. THE HONOURABLE DRP AND THE LEARNED AO / TPO H AVE ERRED IN LAW BY NOT GRANTING APPROPRIATE FAVOURABLE ECONOMIC ADJUSTMENTS (INCLUDING THE WORKING CAPITAL ADJUSTME NT) WHILE CALCULATING THE ARM'S LENGTH MARGIN FOR FINAL SET O F COMPARABLE COMPANIES UNDER THE TNMM FOR THE MANUFACTURING SEGM ENT. III. TP ADJUSTMENT OF INR 1,18,60,27,058 ON ACCOUNT OF ALLEGED EXCESS AMP EXPENDITURE PERTAINING TO TRADING SEGMEN T: 12. THE HONOURABLE DRP AND THE LEARNED AO / TPO HAV E ERRED IN LAW AND ON FACTS, IN MAKING TP ADJUSTMENT OF INR 1,18,60,27,058 TO THE RETURNED INCOME OF THE APPELL ANT BY ASSUMING THE EXISTENCE OF AN ALLEGED INTERNATIONAL TRANSACTION OF BRAND PROMOTION SERVICES TO AE AND ALLEGING THE SAM E TO BE NOT AT ARM'S LENGTH IN TERMS OF THE PROVISIONS OF SECTI ONS 92C(1) AND 92C(2) OF THE ACT READ WITH RULE 10D OF THE INCOME TAX RULES, 1962 ('THE RULES'). AMP EXPENDITURE NOT AN INTERNATIONAL TRANSACTION, 13. THE HONOURABLE DRP AND THE LEARNED AO / TPO HAV E ERRED IN LAW AND ON FACTS BY ALLEGING THAT THE UNIL ATERAL ADVERTISING, MARKETING AND PROMOTION ('AMP') EXPEND ITURE, BEING PAYMENTS MADE TO THIRD PARTIES, IS AN 'INTERN ATIONAL TRANSACTION' AS PER THE PROVISIONS OF SECTION 92B O F THE ACT, WITHOUT APPRECIATING THAT THEY HAD NOT INCURRED ANY EXPENDITURE ON THE DIRECTIONS OF THE AE. 14. THE LEARNED TPO ERRED IN SUO-MOTO BENCHMARKING THE ALLEGED INTERNATIONAL TRANSACTION RELATED TO THE AM P EXPENSES IT(TP)A NO. 2444/BANG/2019 PAGE 5 OF 36 WITHOUT THERE BEING ANY ORDER OR REFERENCE FROM THE AO IN RELATION THERETO. 15. THE HONOURABLE DRP AND THE LEARNED AO / TPO H AVE ERRED IN UNILATERALLY RE-CHARACTERIZING THE AMP EXP ENSES BEING PAYMENTS MADE BY THE APPELLANT TO INDEPENDENT THIRD PARTIES AS AN 'INTERNATIONAL TRANSACTION' UNDER CHAPTER X OF T HE ACT, AND PARTICULARLY WHEN THE JURISDICTION OF THE TPO IS ON LY TO COMPUTE ARM'S LENGTH MARGIN OF THE INTERNATIONAL TRANSACTIO N. 16. THE HONOURABLE DRP AND THE LEARNED AO / TPO HA VE ERRED IN LAW AND ON FACTS BY NOT APPRECIATING THAT NO SUCH TP ADJUSTMENT CAN BE MADE IN RESPECT OF AMP EXPENSES ( BEING LEGITIMATE, BONA FIDE AND DEDUCTIBLE BUSINESS EXPEN DITURE) INCURRED BY THE APPELLANT TOWARDS PAYMENTS TO INDEP ENDENT PARTIES, THE BENEFIT OF WHICH ACCRUES TO THE APPELL ANT ALONE. 17. IN THIS REGARD, THE HONOURABLE DRP AND THE LE ARNED AO / TPO HAVE FAILED TO CONSIDER THAT THE ALLEGED AMP EX PENSES WERE INCURRED EXCLUSIVELY IN RELATION TO THE APPELLANT'S BUSINESS, WHICH IS ALSO EVIDENT FROM THE FACT THAT THE EXPENDITURE HAS BEEN ACCEPTED BY THE AO UNDER SECTION 37 OF THE ACT. 18. THE HONOURABLE DRP AND THE LEARNED AO / TPO HAV E ERRED IN LAW AND ON FACTS IN CONCLUDING THAT THE 'C ONDUCT OF THE APPELLANT CLEARLY SHOWS THE PRESENCE OF AN ARRANGEM ENT FOR PROMOTION OF MARKETING INTANGIBLES'. 19. THE HONOURABLE DRP AND THE LEARNED AO / TPO H AVE ERRED IN LAW AND ON FACTS BY NOT APPRECIATING THAT THE APPELLANT IS A DISTRIBUTOR OF PRODUCTS IMPORTED FROM ITS AES AND THESE TRANSACTIONS ARE CARRIED OUT ON A PRINCIPAL-TO-PRIN CIPAL BASIS, AND IS SOLELY RESPONSIBLE FOR IMPROVING ITS BUSINESS MA RKET IN INDIA AND INCREASING THE SALES OF ITS PRODUCTS IN INDIA. THE APPELLANT HAD INCURRED EXPENDITURE ON AMP TO CATER TO LOCAL M ARKET NEEDS. AMP EXPENDITURE HAS BEEN INCURRED IN RELATION TO LO CAL PRODUCT ADVERTISEMENTS AND TOWARDS DOMESTIC INDEPENDENT THI RD PARTIES, THUS THE DOMESTIC UNILATERAL EXPENDITURE INCURRED B Y THE APPELLANT FOR THE PURPOSE OF ITS BUSINESS CANNOT AS A DEEMED INTERNATIONAL TRANSACTION UNDER SECTION 92B(2) OF T HE ACT. IT(TP)A NO. 2444/BANG/2019 PAGE 6 OF 36 20. THE HONOURABLE DRP AND THE LEARNED AO / TPO H AVE FAILED TO APPRECIATE THAT THE APPELLANT HAS BEEN UN INTERRUPTEDLY USING THE SAID BRAND FOR THE LAST SEVERAL YEARS AND TILL DATE, THUS, ALL BENEFITS ENDURED TO THE APPELLANT, FOR WHICH TH E APPELLANT HAS NOT EVEN BEEN PAYING ANY ROYALTY TO ITS AE. CONSEQU ENTLY, FOR ALL PURPOSES THE APPELLANT IS THE SOLE BENEFICIARY OF A LL THE BENEFITS OF AMP EXPENDITURE INCURRED DURING FINANCIAL YEAR E NDING 31 MARCH 2015. 21. THE HONOURABLE DRP AND THE LEARNED AO / TPO HA VE ERRED IN LAW AND ON FACTS, BY HOLDING THAT THE APPE LLANT BY INCURRING EXCESSIVE AMP EXPENDITURE HAS RESULTED IN CREATION OF MARKETING INTANGIBLE IN FAVOR OF THE AE, FOR WHICH IT SHOULD BE COMPENSATED BY THE AE. 22. THE HONOURABLE DRP AND THE LEARNED AO / TPO HA VE ERRED IN LAW AND ON FACTS BY DISREGARDING JUDICIAL PRONOUNCEMENTS IN UNDERTAKING TP ADJUSTMENTS IN REL ATION TO AMP. NOTWITHSTANDING AND WITHOUT PREJUDICE TO THE ABOVE GROUNDS THAT THE AMP EXPENDITURE INCURRED BY THE APPELLANT DOES NOT CONSTITUTE AN INTERNATIONAL TRANSACTION UNDER CHAPT ER X OF THE ACT, THE APPELLANT CRAVES TO RAISE FOLLOWING GROUND S OF OBJECTIONS ON MERITS. 23. THE HONOURABLE DRP AND THE LEARNED AO / TPO HA VE ERRED IN DISREGARDING THE APPELLANT'S SUBMISSION TH AT THE APPELLANT WOULD OPERATE AT ARM'S LENGTH UNDER FOLLO WING SCENARIOS USING RPM AND TNMM FOR TRADING SEGMENT AN D HENCE NO ADJUSTMENT IS WARRANTED IN THIS REGARD: A. SCENARIO 1 - ADJUSTED GROSS MARGIN APPROACH: THE ADJUSTED GROSS PROFIT MARGIN OF THE APPELLANT AFTER CONSIDERING AMP EXPENDITURE IS COMPARED WITH THE AD JUSTED GROSS PROFIT MARGIN OF THE COMPARABLE COMPANIES. B. SCENARIO 2 - ADJUSTED MARKED-UP GROSS MARGIN APP ROACH: THE ADJUSTED GROSS PROFIT MARGIN OF THE APPELLANT A FTER CONSIDERING AMP EXPENDITURE ALONG WITH MARK-UP IS COMPARED WITH THE ADJUSTED GROSS PROFIT MARGIN OF T HE COMPARABLE COMPANIES. IT(TP)A NO. 2444/BANG/2019 PAGE 7 OF 36 C. SCENARIO 3 - NET PROFIT MARGIN APPROACH: THE NET PROFIT MARGIN OF THE APPELLANT IS COMPARED WITH THE NET PR OFIT MARGIN OF THE COMPARABLE COMPANIES. D. SCENARIO 4 - ADJUSTED MARKED-UP NET MARGIN APPRO ACH: THE NET PROFIT MARGIN OF THE APPELLANT AFTER CONSID ERING AMP EXPENDITURE ALONG WITH MARK-UP IS COMPARED WITH THE NET PROFIT MARGIN OF THE COMPARABLE COMPANIES. 24. THE HONOURABLE DRP AND LEARNED AO / TPO HAVE ER RED IN LAW IN NOT CONSIDERING THE DETAILED SUBMISSIONS OF THE APPELLANT THAT EVEN AFTER PERFORMING AN AMP EXPENSE INTENSITY ADJUSTMENT TO THE COMPARABLE COMPANIES, THE ADJUSTED NET MARGI N EARNED FROM THE TRADING ACTIVITY BY THE APPELLANT IS AT AR M'S LENGTH. THE AMP EXPENSE INTENSITY ADJUSTMENT WAS AFFIRMED BY TH E HONOURABLE ITAT IN CASES OF LUXOTTICA INDIA EYEWEAR PVT LTD VS. ACTT' AND BMW INDIA PRIVATE LIMITED VS. DCIT2 W HEREIN THE AMP INTENSITY ADJUSTMENT IS PERFORMED ON THE PR OFIT LEVELS OF COMPARABLE COMPANIES SO AS TO BRING THEM TO THE LEV EL OF THE APPELLANT AFTER FACTORING IN THE DIFFERENCES IN THE INTENSITIES OF AMP EXPENDITURE OF THE COMPARABLE COMPANIES VIS-A-V IS THE AMP EXPENDITURE INCURRED BY APPELLANT. 25. THE HONOURABLE DRP AND THE LEARNED AO / TPO HAV E ERRED IN APPLYING THE BRIGHT LINE TEST AS A METHODOLOGY TO Q UANTIFY THE BRAND PROMOTION SERVICE ALLEGED TO HAVE BEEN RENDER ED BY THE APPELLANT TO ITS AE. 26. FURTHER, THE HONOURABLE DRP AND THE LEARNED AO / TPO HAVE ERRED IN SELECTING COMPANIES THAT ARE NOT COMP ARABLE TO THE INTENSITY OF AMP FUNCTIONS OF THE APPELLANT FOR COM PUTING THE AMP/SALES RATIO AND THEREBY CONSIDERED COMPANIES TH AT HAVE VERY LOW AMP/SALES RATIO. 27. THE HONOURABLE DRP AND THE LEARNED AO / TPO HAV E ERRED IN LAW AND ON FACTS IN CONCLUDING THAT THE DI STRIBUTION AND AMP ARE TWO DISTINCTIVE FUNCTIONS AND REQUIRES TO B E REMUNERATED SEPARATELY. 28. THE HONOURABLE DRP AND THE LEARNED AO / TPO HAV E ERRED IN LAW AND ON FACTS BY CHARACTERIZING THE INC URRENCE OF IT(TP)A NO. 2444/BANG/2019 PAGE 8 OF 36 AMP EXPENSE AS A PROVISION OF BRAND PROMOTION SERVI CES BY THE APPELLANT TO ITS AE REQUIRING A MARK-UP. 29. THE HONOURABLE DRP AND THE LEARNED AO / TPO HAV E ERRED IN LAW AND ON FACTS IN NOT APPRECIATING THAT THE APPELLANT HAS NOT PROVIDED ANY VALUE ADDED / BRAND BUILDING S ERVICES TO ITS AE BY INCURRING AMP EXPENSES, AND THEREFORE, NO MAR K-UP COULD HAVE BEEN CHARGED / LEVIED ON SUCH EXPENSES, EVEN I F THE SAME WAS TO BE CHARACTERIZED AS AN 'INTERNATIONAL TRANSA CTION'. 30. THE HONOURABLE DRP AND THE LEARNED AO / TPO HAV E ERRED IN NOT APPRECIATING THAT IN VIEW OF THE APPELLANT BEIN G CONTRACTUALLY ASSURED OF A MARGIN AFTER COST RECOVERY, THE ENTIRE AMP EXPENDITURE HAS IN FACT BEEN RECOVERED FROM THE AE AND HENCE ADJUSTMENT COULD ONLY BE RESTRICTED TO MARKUP, THAT TOO IF THE OPERATING MARGIN OF THE COMPANY WAS NOT AT ARM'S LE NGTH. THAT THE HONOURABLE DRP AND THE LEARNED AO / TPO HA VE ERRED IN NOT APPRECIATING THAT THE COST IS RECOVERED IS E VIDENT FROM ITS CONTRACT, AND THE EXTRACT FROM THE INTER-COMPANY DI STRIBUTION AGREEMENTS IS REPRODUCED BELOW FOR YOUR HONOURS REA DY REFERENCE: 'THE PARTIES INTEND TO SET THE PRICES FOR SALE OF P RODUCTS BY SUPPLIER TO DISTRIBUTOR AT LEVELS THAT WILL RESULTS IN DISTRIBUTOR EARNING ANNUAL OPERATING INCOME, DETERM INED UNDER LOCAL GENERALLY ACCEPTED ACCOUNTING PRINCIPLE S, WITH RESPECT TO THE PRODUCTS (AFTER TAKING INTO ACCOUNT ALL EXPENSES AND REIMBURSEMENTS ATTRIBUTABLE TO THE PRODUCTS)' BENCHMARKING ANALYSIS UNDERTAKEN IN DETERMINING THE MARK-UP TO BE CHARGED ON THE ALLEGED BRAND PROMOTION SERVICES, 31. THE HONOURABLE DRP AND THE LEARNED AO / TPO HAV E ERRED IN CARRYING OUT A SEARCH FOR COMPARABLE COMPA NIES IN ORDER TO DETERMINE THE MARK-UP THAT THE APPELLANT SHOULD HAVE RECOVERED FROM THE AE IN RELATION TO THE ALLEGED AM P EXPENSES CONSIDERED TO BE IN THE NATURE OF BRAND PROMOTION S ERVICE. 32. THE HONOURABLE DRP AND THE LEARNED AO / TPO HAV E ERRED IN DETERMINING THE MARK-UP FOR THE ALLEGED IN TERNATIONAL TRANSACTION OF BRAND PROMOTION SERVICES BY SELECTIN G FOLLOWING IT(TP)A NO. 2444/BANG/2019 PAGE 9 OF 36 COMPANIES WHICH ARE NOT COMPARABLE TO THE APPELLANT DUE TO REASONS INCLUDING FUNCTIONAL DISSIMILARITY, FAILING QUANTITATIVE FILTERS, ETC. A. IRUNWAY INDIA PRIVATE LIMITED B. JUST DIAL LIMITED 33. FURTHER, THE LEARNED AO / TPO HAS ERRED IN LAW AND ON FACTS IN NOT ACCEPTING THE FOLLOWING COMPANIES WHIC H ARE COMPARABLE AND THEREBY NOT CONSIDERING THE DETAILED SUBMISSIONS OF THE ASSESSEE: A. MCI MANAGEMENT INDIA PRIVATE LIMITED B. SUPERNOVA ADVERTISING LIMITED C. CONCEPT COMMUNICATION LIMITED D. QUADRANT COMMUNICATIONS LIMITED 34. THE HONOURABLE DRP AND THE LEARNED AO / TPO HAV E ERRED IN NOT GRANTING APPROPRIATE FAVORABLE ECONOMI C ADJUSTMENTS (INCLUDING THE WORKING CAPITAL ADJUSTMENT) WHEN COM PUTING THE ARM'S LENGTH NATURE OF ALLEGED INTERNATIONAL TRANSA CTION. IV. TRANSFER PRICING ADJUSTMENT OF INR 8,69,03,763 IN RELATION TO THE SALES FACILITATION SERVICES SEGMENT AND INR 6, 30,82,889 IN RELATION TO ADMINISTRATIVE AND BUSINESS SUPPORT SER VICES SEGMENT 35. THE HONOURABLE DRP AND THE LEARNED AO / TPO HAV E ERRED IN LAW AND ON FACTS IN MAKING TP ADJUSTMENT OF INR 14, 99,86,652 TO THE RETURNED INCOME OF THE ASSESSEE AND IN HOLDI NG THAT THE INTERNATIONAL TRANSACTIONS UNDERTAKEN BY THE ASSESS EE WITH ITS AES IN THE SALES FACILITATION SERVICE SEGMENT AND A DMINISTRATIVE AND BUSINESS SUPPORT SERVICES SEGMENT WERE NOT AT A RM'S LENGTH. 36. THE HONOURABLE DRP AND THE LEARNED AO / TPO HAV E ERRED IN LAW AND ON FACTS IN UNDERTAKING A COMPOSIT E BENCHMARKING FOR BOTH THE SEGMENTS AND THEREBY FAIL ING TO IT(TP)A NO. 2444/BANG/2019 PAGE 10 OF 36 APPRECIATE THAT THE SERVICES RENDERED BY THE APPELL ANT TO ITS AES IN EACH OF THESE SEGMENTS ARE SEPARATE AND DISTINCT AND ACCORDINGLY NEEDS TO BE BENCHMARKED SEPARATELY. 37. THE HONOURABLE DRP AND THE LEARNED AO / TPO HAV E ERRED IN LAW IN REJECTING THE TP DOCUMENTATION OF THE APPELL ANT AS 'NOT RELIABLE OR CORRECT', UNDER SECTION 92C(3) OF THE A CT, MERELY BECAUSE THE LEARNED TPO DID NOT AGREE WITH THE POSI TIONS AND FILTERS ADOPTED BY THE ASSESSEE IN ITS TP DOCUMENTA TION, AND ADOPTED CERTAIN ADDITIONAL FILTERS / MODIFIED FILTE RS IN SELECTING THE COMPARABLE COMPANIES BY USING NON CONTEMPORANEOUS D ATA OF THE SAID COMPANIES. 38. THE HONOURABLE DRP AND THE LEARNED AO / TPO HAV E ERRED IN LAW IN ADOPTING THE BELOW FILTER FOR CONDUCTING TP ANALYSIS: A. REJECTION OF COMPARABLE COMPANIES HAVING DIFFERE NT FINANCIAL YEAR ENDING (OTHER THAN 31 MARCH 2015) 39. THE HONOURABLE DRP AND THE LEARNED AO / TPO HAV E ERRED IN NOT REJECTING THE FOLLOWING COMPANIES DESPITE THE S AME NOT BEING COMPARABLE TO THAT OF THE ASSESSEE DUE TO VARIOUS F ACTORS SUCH AS FUNCTIONAL DISSIMILARITY, PRODUCT / INTANGIBLE LED REVENUES, FAILING LEARNED TPO'S OWN FILTERS, USE OF UNRELIABLE SEGMEN T FINANCIALS ETC. A. IRCLASS SYSTEMS AND SOLUTIONS LIMITED B. UGAM SOLUTIONS PRIVATE LIMITED C. AXIENCE CONSULTING PRIVATE LIMITED D. AXIS INTEGRATED SYSTEMS LIMITED E. INDIA TRADE PROMOTION ORGN. 40. FURTHER, THE HONOURABLE DRP AND THE LEARNED AO / TPO HAVE ERRED IN LAW AND ON FACTS IN NOT ACCEPTING THE FOLLOWING COMPANIES WHICH ARE COMPARABLE AND THEREBY NOT CONS IDERING THE DETAILED SUBMISSIONS OF THE APPELLANT: A. MCI MANAGEMENT (INDIA) LIMITED IT(TP)A NO. 2444/BANG/2019 PAGE 11 OF 36 B. CRAYON ADVERTISING LIMITED C. SUPERNOVA ADVERTISING LIMITED 41. THE HONOURABLE DRP AND THE LEARNED AO / TPO HAV E ERRED IN LAW BY NOT GRANTING APPROPRIATE FAVOURABLE ECONOMIC ADJUSTMENTS (INCLUDING THE WORKING CAPITAL ADJUSTMENT) WHILE CA LCULATING THE ARM'S LENGTH MARGIN FOR FINAL SET OF COMPARABLE COM PANIES FOR THESE SEGMENTS. V. OTHER TP RELATED GROUNDS 42. THE HONOURABLE DRP AND THE LEARNED AO / TPO HAV E ERRED BY NOT CARRYING OUT THE DETERMINATION OF ARM' S LENGTH PRICE AS REQUIRED UNDER SECTION 92C OF THE ACT READ WITH RULE 10D OF THE RULES. 43. THE HONOURABLE DRP AND THE LEARNED AO / TPO HAV E FAILED TO APPRECIATE THE APPELLANT'S COMMERCIAL JUD GMENT ABOUT THE APPLICATION OF ARM'S LENGTH PRINCIPLE WHICH IS TIED TO THE BUSINESS REALITIES. 44. THE HONOURABLE DRP AND THE LEARNED AO / TPO HAV E ERRED IN LAW AND ON FACTS, IN MAKING SEVERAL OBSERV ATIONS AND FINDINGS, WHICH ARE BASED ON INCORRECT INTERPRETATI ON OF LAW AND CONTRARY TO FACTS OF THE CASE. VI. DISALLOWANCE OF PROVISION FOR WARRANTY 45. THE HONOURABLE DRP AND THE LEARNED AO HAVE ERRE D IN LAW IN ARBITRARILY DISALLOWING THE PROVISION FOR WARRAN TY AMOUNTING TO INR 73,93,02,026 CLAIMED AS A DEDUCTION BY THE APPE LLANT. 46. THE HONOURABLE DRP AND THE LEARNED AO HAVE ERR ED IN LAW BY NOT FOLLOWING THE ORDER OF THE HONOURABLE IT AT IN THE APPELLANT'S OWN CASE FOR THE AY 2006-07, AY 2007-08 , AY 2010-11 AND AY 2011-12, WHEREIN IT WAS HELD THAT TH E PROVISION FOR WARRANTY HAS BEEN CREATED ON A SCIENTIFIC BASIS AND THAT THE SAME SHOULD BE ALLOWED AS A DEDUCTION. 47. THE HONOURABLE DRP AND THE LEARNED AO HAVE NOT APPRECIATED THE FACT THAT THE APPELLANT MAINTAINS I TS BOOKS ON A MERCANTILE BASIS OF ACCOUNTING AND THAT THE SAID WA RRANTY IT(TP)A NO. 2444/BANG/2019 PAGE 12 OF 36 PROVISION HAS BEEN CREATED ON A SCIENTIFIC MANNER F OLLOWED CONSISTENTLY OVER THE YEARS, HAVING DUE REGARD TO T HE NATURE OF ACTIVITY, ITS GLOBAL WARRANTY ACCRUAL PROCESSES AND THE INDUSTRY REQUIREMENT IN WHICH THE APPELLANT OPERATES. 48. THE HONOURABLE DRP AND THE LEARNED AO HAVE ERRE D ON FACTS IN FAILING TO CONSIDER THAT THE APPELLANT HAS PROVIDED FOR WARRANTY ON A SCIENTIFIC AND CONSISTENT MANNER EVER Y YEAR APPLYING THE PRINCIPLES LAID OUT BY THE HONOURABLE SUPREME COURT ('SC') IN THE CASE OF ROTORK CONTROLS INDIA P RIVAT AND THEREFORE SUCH EXPENDITURE IS AN ALLOWABLE DEDUCTIO N UNDER SECTION 37 OF THE ACT. 49. THE HONOURABLE DRP AND THE LEARNED AO HAVE ERRE D IN APPRECIATING THAT THE APPELLANT PROVIDES WARRANTY F OR A PERIOD FROM ONE YEAR TO FOUR YEARS ON ITS PRODUCTS AND ACC ORDINGLY, THE ENTIRE PROVISION COULD NOT BE UTILIZED IN ONE YEAR AND HAS TO BE SPREAD OVER MULTIPLE YEARS. VII. ADDITION OF PROVISION FOR WARRANTY TO THE BOO K PROFITS 50. THE LEARNED AO HAS ERRED IN ADDING BACK THE WAR RANTY PROVISION CREATED DURING THE RELEVANT AY AMOUNTING TO INR 73,93,02,026 TO THE BOOK PROFIT OF THE APPELLANT. 51. THE HONOURABLE DRP AND THE LEARNED AO HAVE ERRE D IN LAW AND ON FACTS IN HOLDING THAT THE WARRANTY PROVISION OF INR 73,93,02,026 IS AN UNASCERTAINED LIABILITY AND THER EFORE, NOT APPRECIATING THAT THE WARRANTY PROVISION IS CREATED ON A SCIENTIFIC BASIS AFTER CONSIDERING TECHNICAL ESTIMATES WHICH I S CONSISTENTLY FOLLOWED BY THE APPELLANT YEAR ON YEAR. 52. THE HONOURABLE DRP AND THE LEARNED AO HAVE ERRE D IN LAW BY NOT FOLLOWING THE ORDER OF THE HONOURABLE IT AT IN THE APPELLANT'S OWN CASE FOR THE AY 2006-07, AY 2007-08 , AY 2010-11 AND AY 2011-12, WHEREIN IT WAS HELD THAT TH E PROVISION FOR WARRANTY HAS BEEN CREATED BY THE APPELLANT ON A SCIENTIFIC BASIS AND THAT THE SAME SHOULD NOT BE TREATED AS AN UNASCERTAINED LIABILITY AND THEREFORE, PROVISION FOR WARRANTY SHO ULD NOT BE IT(TP)A NO. 2444/BANG/2019 PAGE 13 OF 36 ADDED BACK WHILE RE-COMPUTING BOOK PROFITS UNDER SE CTION 115JB OF THE ACT. VIII. OTHER GROUNDS 53. THE LEARNED AO HAS ERRED IN LAW AND ON FACTS BY NOT GRANTING APPROPRIATE CREDIT OF THE TAX DEDUCTION AT SOURCE ( 'TDS'), AS CLAIMED BY THE APPELLANT IN THE RETURN OF INCOME. 54. THE LEARNED AO HAS ERRED IN LAW AND ON FACTS IN COMPUTING INTEREST UNDER SECTION 234B OF THE ACT AN D SECTION 234C OF THE ACT. 55. THE LEARNED AO HAS ERRED IN LAW AND ON FACTS IN INITIATING PENALTY PROCEEDINGS UNDER SECTION 271(1)(C) OF THE ACT WITHOUT CONCLUDING ON WHETHER THE APPELLANT HAS CONCEALED A NY PARTICULARS OF INCOME OR HAS FURNISHED INACCURATE P ARTICULARS OF INCOME OR HAS NOT ACTED IN GOOD FAITH AND HAS NOT E XERCISED DUE DILIGENCE. THE APPELLANT CRAVES LEAVE TO ADD, ALTER, VARY, OMI T, SUBSTITUTE OR AMEND THE ABOVE GROUNDS, AT ANY TIME BEFORE OR AT T HE TIME OF HEARING OF THE APPEAL. EACH OF THE ABOVE OBJECTIONS IS INDEPENDENT AND WITHOUT PREJUDICE TO THE OTHER GROU NDS PREFERRED BY THE APPELLANT. 3. GROUND I RAISED BY THE ASSESSEE IS GENERAL AND R EQUIRES NO SPECIFIC ADJUDICATION. 4. GROUND NO.II RAISED BY THE REVENUE IS IN RELATIO N TO DETERMINATION OF ARMS LENGTH PRICE IN RESPECT OF AN INTERNATIONAL T RANSACTION OF IMPORT OF PARTS AND COMPONENTS FROM ITS ASSOCIATED ENTERPRISE (AE). THE ASSESSEE IS A COMPANY INCORPORATED IN INDIA. IT IS ENGAGED IN THE BUSINESS OF TRADING, MANUFACTURE AND SALE OF DESKTOPS, LAPTOPS, SERVERS AND SMARTPHONES. IT HAS A MANUFACTURING FACILITY IN PON DICHERRY, INDIA. 5. DURING THE FY 2014-15, THE ASSESSEE IMPORTED CER TAIN PARTS AND COMPONENTS FROM ITS ASSOCIATED ENTERPRISES ('AES') FOR PURPOSE OF IT(TP)A NO. 2444/BANG/2019 PAGE 14 OF 36 MANUFACTURING OF PERSONAL COMPUTERS (PCS). THE TRAN SACTION OF IMPORT OF PARTS AND COMPONENTS WAS AN INTERNATIONAL TRANSACTI ON AND THEREFORE INCOME FROM SUCH INTERNATIONAL TRANSACTION HAS TO B E DETERMINED HAVE REGARD TO ARMS LENGTH PRICE (ALP) AS LAID DOWN IN SEC.92 OF THE INCOME TAX ACT, 1961 (ACT). THE ASSESSEE ALSO IMPORTED PA RTS AND COMPONENTS FROM THIRD PARTIES. THE METHODOLOGY ADOPTED BY THE ASSESSEE FOR BENCHMARKING THE PRICE PAID TO THE AE FOR IMPORT AN D COMPONENTS WAS AS FOLLOWS: NATURE OF INTERNATIONAL TRANSACTION MA M VALUE AS PER BOOKS OF ACCOUNTS ALP AS DETERMINED BY ASSESSEE REMARKS IMPORT OF PARTS AND COMPONENTS FOR MANUFACTURE OF PCS CUP 1,484,262,448 1,462,645,707 SUO - MOTO ADJUSTMENT OF INR 21,616,741 IS MADE IN THE RETURN OF INCOME FOR PRICES NOT AT ALPS IT CAN BE SEEN FROM THE AFORESAID CHART THAT THE AS SESSEE CHOSE COMPARABLE UNCONTROLLED PRICE (CUP) AS THE MOST APP ROPRIATE METHOD (MAM) FOR DETERMINING ALP I.E., IT COMPARED THE PRICE IT PAID FOR IMPORT OF PARTS AND COMPONENTS FROM UNRELA TED PERSONS (CUP) WITH THE PRICE PAID FOR IMPORT OF PARTS AND C OMPONENTS TO THE AE. IN ITS TRANSFER PRICING ANALYSIS (TP ANALY SIS), THE ASSESSEE CONSIDERED ITSELF AS ASSUMING MOST OF THE RISKS INCLUDING MARKET RISK, INVENTORY RISK, CREDIT AND C OLLECTION RISK, FOREX RISK, WARRANTY AND IDLE CAPACITY RISK. BASED ON THE FUNCTIONS AND RISKS PERFORMED, THE ASSESSEE CHARACTERIZED ITS ELF AS A 'FULL- FLEDGED MANUFACTURER' FOR ITS MANUFACTURING ACTIVIT Y. THE BASIS OF BENCHMARKING THE AFORESAID TRANSACTION WAS PROVIDED BELOW. DURING THE FY 2014-15, THE ASSESSEE IMPORTED 416 DI FFERENT VARIETIES OF PRODUCTS FROM ITS AES WHICH CAN BE IDE NTIFIED ON THE BASIS OF A DISTINCTIVE CODE. OUT OF 416 PRODUCTS, 2 99 PRODUCTS WERE PURCHASED FROM ITS AES EXCLUSIVELY WHILE THE R EST 177 WERE PURCHASED FROM AES AS WELL AS FROM UNRELATED THIRD PARTY VENDORS. IT(TP)A NO. 2444/BANG/2019 PAGE 15 OF 36 PRODUCTS IMPORTED FROM AES ONLY (299 PRODUCTS) WITH RESPECT TO THE IMPORTS FROM AES ONLY, THE PRIC ES PAID BY AES TO ITS THIRD PARTY VENDORS WERE CONSIDERED AS C UP. IN THIS REGARD: OUT OF THE 299 PRODUCTS, 95 PRODUCTS WERE SOLD BY T HE AES ON A COST TO COST BASIS. ACCORDINGLY, THE SAME HAS BEEN CONSIDERED TO BE AT ALP. ON THE BALANCE 204 PRODUCTS, THE AES HAVE SOLD THE PRODUCTS TO LENOVO INDIA AT A PRICE AT COST PLUS 0.10 PERCENT M ARGIN. HOWEVER, THE SAME WAS CONSIDERED TO WITHIN THE RANG E OF + /3 PERCENT AS PERMITTED UNDER THE SECOND PROVISO TO SE C.92CA(2) OF THE ACT. HENCE, THE SAME WAS CONSIDERED TO BE AT AL P. PRODUCTS IMPORTED FROM AES AS WELL AS THIRD PARTY V ENDORS (117 PRODUCTS) WITH RESPECT TO THE IMPORTS FROM AES AS WELL AS THI RD PARTIES, THE PRICES PAID BY THE ASSESSEE TO THIRD PARTY VENDORS WERE CONSIDERED AS CUP: OUT OF 117 PRODUCTS IMPORTED FROM AES AND THIRD PAR TIES, 52 PRODUCTS IMPORTED BY THE ASSESSEE WERE AT A PRICE L OWER THAN THE PRICE AT WHICH ASSESSEE PURCHASED FROM UNRELATED PA RTIES. ACCORDINGLY, THE PRICES PAID FOR THESE IMPORTS HAVE BEEN CONSIDERED TO BE AT ALP. WITH RESPECT TO REMAINING 65 PRODUCTS THAT DID NOT FALL WITHIN THE ARM'S LENGTH PRICE, IT WAS THE CASE OF THE ASSESSEE THAT THE DIFFERENCE FROM THE ALP IS NOT MATERIAL AND THE ASS ESSEE DID NOT UNDERTAKE ANY FURTHER ANALYSIS FOR SUCH DIFFERENCES . HOWEVER, SUO-MOTO ADJUSTMENT OF INR 21,616,741 WAS MADE IN T HE RETURN OF INCOME. 6. THE TRANSFER PRICING OFFICER (TPO) TO WHOM THE QUESTION OF DETERMINATION OF ALP WAS REFERRED TO BY THE ASSESSI NG OFFICER (AO) U/S.92CA OF THE ACT, DID NOT ACCEPT THE AFORESAID T P ANALYSIS FOR THE REASONS GIVEN IN HIS SHOW CAUSE NOTICE(SCN) TO THE AO DATED 26.9.2018. IN THE SAID SCN, THE TPO FIRSTLY, EXPRESSED HIS OPI NION THAT FOR APPLYING IT(TP)A NO. 2444/BANG/2019 PAGE 16 OF 36 CUP METHOD, RELIABLE DATA IS REQUIRED FOR COMPARING CONTROLLED TRANSACTION WITH AN UNCONTROLLED TRANSACTION AND SUCH RELIABLE DATA WAS NOT AVAILABLE. THE REPLY OF THE ASSESSEE IN THIS REGARD WAS THAT E ACH OF THE COMPONENT/PARTS WERE IDENTIFIED WITH A UNIQUE IDENT IFICATION NUMBER AND THE DETAILS WERE CAPTURED IN THE TP ANALYSIS. THE SECOND OBJECTION OF THE TPO WAS THAT THE ASSESSEE USED WEIGHTED AVERAGE OF PRICE OF COMPONENTS/PARTS IMPORTED THROUGHOUT THE YEAR AND T HEREFORE IT CANNOT BE SAID THAT THE METHOD ADOPTED BY THE ASSESSEE WAS CU P AS WEIGHTED AVERAGE PRICE IS NOT THE ACTUAL PRICE IN THE CONTRO LLED AND UNCONTROLLED TRANSACTION. THE ASSESSEES REPLY IN THIS REGARD W AS THAT THE COMPONENTS/PARTS WERE IMPORTED THROUGHOUT THE YEAR AND WERE LARGE IN NUMBER. IT WAS PRACTICALLY IMPOSSIBLE TO COMPARE E ACH AND EVERY IMPORT TRANSACTION. IT WAS THE PLEA OF THE ASSESSEE THAT THE PRICE WOULD DEPEND ON QUANTITY IMPORTED AND USED IN THE MANUFACTURE OF COMPUTERS AND HENCE WEIGHTED AVERAGE WOULD BE THE MOST APPROPRIATE PRIC E THAT SHOULD BE CHOSEN FOR COMPARISON. IN SUPPORT OF ITS CONTENTIO N THAT WEIGHTED AVERAGE PRICE IS MORE APPROPRIATE THE ASSESSEE RELIED ON DE CISION OF ITAT MUMBAI BENCH IN THE CASE OF GHARDA CHEMICALS LTD. 2009 TIOL 790 (MUMBAI- ITAT) AND AUDCO INDIA LTD. 47 SOT 420 . THE THIRD REASON GIVEN BY THE TPO WAS THAT INDUSTRY AVERAGE BILLING WILL NOT BE R EFLECTED IN CUP METHOD. THE TPO PLACED RELIANCE ON DECISION OF SPECIAL BENC H ITAT BANGALORE IN THE CASE OF AZTEC SOFTWARE & TECHNOLOGY VS. ACIT. THE ASSESSEES REPLY TO THIS OBJECTION WAS THAT THE SAID CASE RELATED TO A SOFTWARE INDUSTRY WHICH WAS DIFFERENT FROM IMPORT OF COMPONENTS/PARTS AND T HAT THE METHOD USED IN THAT CASE OF EXTERNAL CUP AND NOT INTERNAL CUP AS I N ASSESSEES CASE. THE LAST OBJECTION OF THE TPO WAS THAT THERE WAS NO PUBLICLY AVAILABLE INFORMATION ON PRICES CHARGED IN INDEPENDENT TRANSA CTIONS OF SIMILAR OR IDENTICAL NATURE, SO EXTERNAL CUP CANNOT BE APPLIED . THE REPLY OF THE ASSESSEE ON THIS OBJECTION WAS THAT WHEN INTERNAL C UP IS USED THERE IS NO IT(TP)A NO. 2444/BANG/2019 PAGE 17 OF 36 NEED TO LOOK AT PUBLICLY AVAILABLE INFORMATION AND DOING SO WILL BE AGAINST THE BASIC FEATURE OF CUP METHOD OF DETERMINATION OF ALP. 7. THE ASSESSEE ALSO SUBMITTED THAT FOR THE PRIOR A YS (I.E. AY 2006-07 TO 2015-16), THE ASSESSEE HAD ADOPTED CUP AS MAM TO BENCHMARK ITS INTERNATIONAL TRANSACTION OF IMPORT OF PARTS AND CO MPONENTS FOR MANUFACTURE OF PCS PERTAINING TO ITS MANUFACTURING SEGMENT. THE ASSESSEE SUBMITTED THAT THE FUNCTIONS PERFORMED FOR UNDERTAKING ITS MA NUFACTURING ACTIVITY FOR ALL THE YEARS I.E. AY 2006-07 TO AY 2015-16 HAVE REMAIN ED THE SAME AND ACCORDINGLY, CUP WAS CONSIDERED AS THE MAM FOR THE SUBJECT AY AS WELL. IT WAS ALSO SUBMITTED THAT THE HON'BLE ITAT OF BANG ALORE IN ASSESSEE'S OWN CASE HAS UPHELD THE APPLICATION OF CUP METHOD A DOPTED BY THE ASSESSEE FOR BENCHMARKING THE SUBJECT TRANSACTION I N AY 2006-07 TO AY 2009-10 AND AY 2010-11. COPIES OF ITAT ORDERS WITH CLEAR FINDINGS FOR THESE YEARS WAS ALSO FILED BEFORE THE TPO. 8. THE TPO HOWEVER APPLIED THE TRANSACTION NET MARG IN METHOD (TNMM) AS THE MAM AND DETERMINED ALP WHICH RESULTED IN AN ADDITION OF RS.67,09,25,862 TO THE TOTAL INCOME OF THE ASSESSEE IN THE DRAFT ASSESSMENT OF THE AO. THE ASSESSEE FILED OBJECTION TO THE PROPOSED ADDITION BEFORE THE DISPUTE RESOLUTION PANEL (DRP) BUT THE DRP UPHELD THE ORDER OF THE TPO. THE DRP UPHELD THE ORDER OF THE TPO BY OBSERVING THAT IN CUP METHOD STRICT COMPARABILITY IS REQUIRED AND SUCH COMPARABILITY IS NOT POSSIBLE IN THE CASE OF THE ASSESSEE. THE D RP ALSO UPHELD APPLICATION OF TNMM AS MAM AND METHODOLOGY ADOPTED TO DETERMINE ALP UNDER THE TNMM BY THE TPO. 9. AGGRIEVED BY THE ORDER OF THE DRP, THE ASSESSEE HAS RAISED GRD.NO.II BEFORE THE TRIBUNAL. WE SHALL FIRST TAKE UP GR.NO. II SUB GROUNDS 2 TO 6 WHICH GROUNDS RELATE TO THE CONTENTION OF TH E ASSESSEE THAT CUP SHOULD HAVE BEEN ACCEPTED AS THE MAM. WE HAVE HEAR D THE RIVAL SUBMISSIONS. AS FAR AS THE ISSUE OF MAM IN THE CAS E OF THE ASSESSEE IN IT(TP)A NO. 2444/BANG/2019 PAGE 18 OF 36 THE TRANSACTION OF IMPORT OF COMPONENTS IS CONCERNE D, WE HAVE ALREADY EXTRACTED THE REASONS ASSIGNED BY THE TPO FOR REJEC TING CUP AS MAM AND THE REASONS GIVEN BY THE ASSESSEE AS TO WHY THE REA SONS ASSIGNED BY THE TPO ARE UNSUSTAINABLE. 10. IN AY 2006-07, THE TRIBUNAL HAS IN ITS ORDER DA TED 30.5.2016 IN IT (TP) A.NO.582/BANG/2015 UPHELD THE DRPS 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 FI LE ANY APPEAL AGAINST THAT ORDER OF DRP BEFORE THE TRIBUNAL. IN AY 2008-09 THE TPO VIDE HIS ORDER DATED 31.10.2011 ACCEPT ASSESSEES ADOPTI ON OF CUP AS MAM AND ALSO ACCEPTED THAT PRICE PAID IN THE INTERNATIO NAL TRANSACTION TO THE AE IS AT ARMS LENGTH. IN AY 2009-10 IN ITA(TP)A.NO.7 4/BANG/2014 ORDER DATED 6.7.2018 THE TRIBUNAL UPHELD ORDER OF THE DRP ACCEPTING CUP AS MAM. IN AY 2010-11 THE TRIBUNAL IN IT(TP)A NO.580/ BANG/2015 ORDER DATED 31.3.2017 UPHELD THE ORDER OF THE DRP UPHOLDI NG 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. 11. WE ARE THEREFORE THE VIEW THAT CUP SHOULD BE AD OPTED AS THE MAM. WE DIRECT THE TPO TO APPLY CUP AS THE MAM AND DETER MINE ALP AFTER DUE OPPORTUNITY OF BEING AFFORDED TO THE ASSESSEE. GRO UND II SUB-GROUNDS 2 TO 6 ARE ALLOWED. IN VIEW OF THE ABOVE CONCLUSIONS TH E OTHER SUB-GROUNDS 7 TO 11 RAISED IN GROUND NO.II DOES NOT REQUIRE ANY ADJU DICATION. 12. GROUND NO. III (12) TO (34) RELATES TO THE TREA TMENT OF ALLEGED EXCESS AMP EXPENDITURE PERTAINING TO TRADING SEGMENT AS AN INTERNATIONAL TRANSACTION AND DETERMINING THE ALP AND MAKING THE CONSEQUENT ADDITION TO THE TOTAL INCOME OF THE ASSESSEE. AS FAR AS THE AFORESAID GROUNDS ARE CONCERNED, WE WILL TAKE UP THE ISSUE RAISED IN GROU ND III (13) TO (22) THAT THE AMP EXPENDITURE INCURRED CANNOT BE CONSIDERED AS AN INTERNATIONAL IT(TP)A NO. 2444/BANG/2019 PAGE 19 OF 36 TRANSACTION AT ALL. THE FACTS WHICH ARE NECESSARY TO BE CONSIDERED WITH REFERENCE TO THE AFORESAID GROUND ARE AS FOLLOWS. 13. AS WE HAVE ALREADY SEEN THE ASSESSEE COMPANY I S ENGAGED IN THE BUSINESS OF MANUFACTURING AND DISTRIBUTION OF DESKT OP, LAPTOP, SERVERS AND SMARTPHONES. DURING THE RELEVANT PREVIOUS YEAR, TH E ASSESSEE INCURRED EXPENDITURE IN CONNECTION WITH CAMPAIGNING, DEPICTI NG FEATURES OF NEW PRODUCTS, PROVIDING INFORMATION TO THE PUBLIC ABOUT DETAILS OF PRODUCT, ITS SPECIFICATION ETC. ACCORDING TO ASSESSEE, THE AFOR ESAID ADVERTISEMENT AND BUSINESS PROMOTION ACTIVITIES UNDERTAKEN BY THE ASS ESSEE ARE SPECIFIC TO THE PRODUCTS SOLD IN INDIA. IT WAS THE CONTENTION OF ASSESSEE THAT IN THE TRADING SEGMENT OF DESKTOP, LAPTOPS ETC., IT DECIDE S ON ADVERTISEMENT, TRAINING ETC. ACCORDING TO THE ASSESSEE THE EXPEND ITURE SO INCURRED WAS TO IMPROVE ITS SALE AND IT CANNOT BE SAID THAT BY INCU RRING SUCH EXPENSES, THE ASSESSEE PROMOTED THE BRAND OF ITS FOREIGN AE. IT WAS THE CASE OF REVENUE THAT ASSESSEE DID NOT CONFINE ITSELF TO DISTRIBUTIO N OF TRADING GOODS, BUT HAS PERFORMED ADDITIONAL FUNCTIONS IN THE FORM OF ADVE RTISEMENT AND MARKETING PROMOTION TO PROMOTE THE BRAND OF FOREIGN AE AND TH EREFORE THE ASSESSEE NEEDS TO BE ADEQUATELY COMPENSATED FOR SUCH ADDITIO NAL FUNCTION. THE TPO ADOPTED RESALE PRICE METHOD (RPM) AS THE MOST A PPROPRIATE METHOD. THE TPO CHOSE 9 COMPARABLE COMPANIES AND ARRIVED AT THE AMP TO SALES OF THOSE COMPANIES AND COMPARED THE SAME WITH THAT OF THE ASSESSEE. BY SUCH COMPARISON, THE TPO CAME TO THE CONCLUSION THA T ASSESSEE WAS INCURRING MUCH HIGHER AMP EXPENDITURE THAN THE INDU STRY AVERAGE AND INCURRING OF EXCESSIVE AMP EXPENSES CONSTITUTES AN INTERNATIONAL TRANSACTION OF PROMOTION OF AES BRAND. THE TPO CO NCLUDED THAT ASSESSEE PERFORMED ADDITIONAL FUNCTIONS WHICH PROMOTED THE M ARKETING INTANGIBLES OF THE AE AND THAT THE ASSESSEE SHOULD HAVE BEEN REIMB URSED BY THE AE THE ADDITIONAL EXPENSES ALONG WITH MARK-UP. IN OTHER W ORDS, THE TPO ADOPTED IT(TP)A NO. 2444/BANG/2019 PAGE 20 OF 36 THE BRIGHTLINE TEST IN MAKING THE AFORESAID ADDITIO N. THE DRP UPHELD THE ORDER OF THE TPO. 14. THE LD. COUNSEL FOR THE ASSESSEE SUBMITTED BEFO RE US THAT INCURRING OF AMP EXPENSES DOES NOT CONSTITUTE AN INTERNATIONA L TRANSACTION AND IN THIS REGARD FILED BEFORE US A COPY OF THE DECISION OF THE HONBLE DELHI HIGH COURT IN THE CASE OF SONY ERICSSON MOBILE COMMUNICATIONS INDIA P. LTD. V . CIT, 374 ITR 118 (DEL) . OUR ATTENTION WAS DRAWN TO PARA 101 OF THE AFORESAID DECISION IN WHICH THE HONBLE DELHI HIGH COURT HELD THAT ONCE THE TPO ACCEPTS AND ADOPTS TNM METHOD AND THEN CHOOSES TO TREAT A PARTICULAR EXPENDITURE LIKE AMP AS A SEPARATE INTER NATIONAL TRANSACTION WITHOUT BIFURCATION AND SEGREGATION, IT WOULD LEAD TO AN UNUSUAL AND INCONGRUOUS RESULTS AS AMP IS THE COST OR EXPENSE A ND IS NOT DIVERSE. IT IS FACTORED IN THE NET PROFIT OF THE INTERLINKED TRANS ACTION. THIS WOULD BE ALSO IN CONSONANCE WITH RULE 10B(1)(E), WHICH MANDATES ONLY ARRIVING AT THE NET PROFIT MARGIN BY COMPARING THE PROFITS AND LOSS ACC OUNT OF THE TESTED PARTY WITH THE COMPARABLE. THE TNM METHOD PROCEEDS ON TH E ASSUMPTION THAT FUNCTIONS, ASSETS AND RISK BEING BROADLY SIMILAR AN D ONCE SUITABLE ADJUSTMENTS HAVE BEEN MADE, ALL THINGS GET TAKEN IN TO ACCOUNT AND STAND RECONCILED WHEN COMPUTING THE NET PROFIT MARGIN. O NCE THE COMPARABLES PASS THE FUNCTIONAL ANALYSIS TEST AND ADJUSTMENTS H AVE BEEN MADE, THEN THE PROFIT MARGIN AS DECLARED WHEN MATCHES WITH THE COMPARABLES WOULD RESULT IN AFFIRMATION OF THE TRANSFER PRICE AS THE ARMS LENGTH PRICE. THEN TO MAKE A COMPARISON OF A HORIZONTAL ITEM WITHOUT SEGR EGATION WOULD BE IMPERMISSIBLE. 15. THE LD. COUNSEL FOR THE ASSESSEE POINTED OUT TH AT IN THE PRESENT CASE, THE TPO ACCEPTED THE INTERNATIONAL TRANSACTIO N OF TRADING OF AES PRODUCT AS AT ARMS LENGTH AND IN THIS REGARD DREW OUR ATTENTION TO PARA 6 OF THE TPOS LETTER DATED 26.9.2018, A COPY OF WHICH I S AT PAGES 934 TO 972 OF ASSESSEES PB. THE RELEVANT PARA 6 IS AT PAGE 946 IN WHICH THE TPO IT(TP)A NO. 2444/BANG/2019 PAGE 21 OF 36 ACCEPTED THAT THE PLI OF 9 COMPARABLES CHOSEN BY TH E ASSESSEE WAS 4.23% AND THAT TAXPAYERS PLI WAS 13.08%. IN THE T P ORDER, THE TPO DID NOT MAKE ANY ADJUSTMENT IN THE TRADING SEGMENT AND THEREFORE IT IS PRESUMED THAT HE HAS ACCEPTED THE TRANSACTION OF TR ADING WITH THE AE AS AT ARMS LENGTH. THE LD. COUNSEL FOR THE ASSESSEE SUB MITTED THAT FOLLOWING THE DECISION OF THE HONBLE DELHI HIGH COURT IN THE CAS E OF SONY ERICSSON MOBILE COMMUNICATIONS INDIA P. LTD. (SUPRA), INCURRING OF AMP EXPENSES CANNOT BE REGARDED AS AN INTERNATIONAL TRANSACTION AT ALL. 16. THE BENCH QUERIED THAT IN THE CASE DECIDED BY T HE HONBLE DELHI HIGH COURT, TNM METHOD WAS ADOPTED WHEREAS IN THE C ASE OF ASSESSEE IN THE TRADING SEGMENT RPM HAS BEEN ADOPTED AND THAT W OULD MAKE A DIFFERENCE. THE LD. COUNSEL FOR THE ASSESSEE FIRST LY POINTED OUT THAT THE AMP ADDITION ON ACCOUNT OF DETERMINATION OF AMP EXP ENSES HAS BEEN MADE ONLY IN THE TRADING SEGMENT AND IN THIS REGARD DREW OUR ATTENTION TO AN ORDER DATED 14.11.2018 PASSED BY THE TPO U/S. 15 4 OF THE ACT WHEREIN THE FACT THAT AMP EXPENDITURE IS IN RELATION TO TRA DING SEGMENT ONLY HAS BEEN ACCEPTED BY THE TPO. HIS NEXT SUBMISSION WAS THAT THE ASSESSEE HAS ALSO DEMONSTRATED IN ITS TP STUDY WITH REGARD T O THE TRADING SEGMENT THAT THE NET MARGINS EARNED BY IT WERE AT ARMS LEN GTH. IN THIS REGARD, THE LD. COUNSEL FOR THE ASSESSEE BROUGHT TO OUR NOTICE THAT EVEN BEFORE THE TPO, THE ASSESSEE HAD GIVEN THE NET MARGINS BY WAY OF ALTERNATIVE SUBMISSION AND THOSE DETAILS ARE AT PAGES 1392 AND THE COMPUTATION IS AT PAGE 1540. OUR ATTENTION WAS DRAWN TO THE FACT THA T SCENARIO-3 WAS PROJECTED BY THE ASSESSEE IN WHICH THE NET MARGIN O F THE COMPARABLE COMPANIES WAS ARRIVED AT 2.62% AND THE ASSESSEES N ET PROFIT MARGIN WAS 1.45% WHICH WAS WITHIN THE +/- RANGE PERMITTED UNDE R PROVISO TO SECTION 92CA(2) OF THE ACT. 17. WE HAVE CONSIDERED HIS SUBMISSION AND ARE OF TH E VIEW THAT IT WOULD BE JUST AND APPROPRIATE TO SET ASIDE THE ISSUE OF D ETERMINATION OF NET IT(TP)A NO. 2444/BANG/2019 PAGE 22 OF 36 MARGIN OF THE ASSESSEE AND IN THE TRADING SEGMENT, AS CLAIMED BY THE ASSESSEE IN SCENARIO-3 BEFORE THE TPO. IF THE MARG INS ARE ACCEPTED AS AT ARMS LENGTH AND THEN APPLYING THE PRINCIPLES LAID DOWN BY THE HONBLE DELHI HIGH COURT IN THE CASE OF SONY ERICSSON MOBILE COMMUNICATIONS INDIA P. LTD. (SUPRA) , INCURRING OF AMP EXPENSES CANNOT BE TREATED AS INTERNATIONAL TRANSACTION AND CONSEQUENTLY DETERMIN ATION OF ALP WOULD NOT ARISE FOR CONSIDERATION AT ALL. WE THEREFORE SET A SIDE THE ORDER OF THE AO AND REMAND THE ISSUE TO THE TPO FOR CONSIDERATION O F ALP OF THE TRADING SEGMENT APPLYING THE NET PROFIT MARGIN METHOD AND I F BY SUCH METHOD THE PRICE RECEIVED IN THE INTERNATIONAL TRANSACTION IS CONSIDERED AS AT ARMS LENGTH, THEN NO SEPARATE ADDITION NEEDS TO BE MADE. IN VIEW OF THE ABOVE CONCLUSION, WE ARE OF THE VIEW THAT SUB-GROUNDS (23 ) TO (34) IN GROUND III DOES NOT REQUIRE ADJUDICATION AT THIS STAGE. 18. GROUND NO.IV IS IN RELATION TO DETERMINATION OF ALP IN RESPECT OF PRICE RECEIVED BY THE ASSESSEE FROM ITS AE FOR PROV IDING SALES FACILITATION SERVICES AND FOR PROVIDING ADMINISTRATIVE AND BUSIN ESS SUPPORT SERVICES. AS FAR AS THOSE GROUNDS ARE CONCERNED, THE FIRST AS PECT WHICH WAS BROUGHT TO OUR NOTICE IS THAT THE TPO AGGREGATED THE SALES FACILITATION SERVICES SEGMENT AND ADMINISTRATIVE & BUSINESS SUPPORT SERVI CES SEGMENT AND DETERMINED THE ALP. THE OBJECTION OF THE ASSESSEE TO THE AFORESAID APPROACH OF TPO IN AGGREGATING THE AFORESAID TRANSA CTION WAS HIGHLIGHTED BY THE ASSESSEE BEFORE THE DRP, SPECIFICALLY IN OBJ ECTION NO.7.2. IN THIS REGARD, THE ASSESSEE ALSO POINTED OUT THAT IT HAD C ARRIED OUT SEPARATE TP ANALYSIS IN RESPECT OF SALES FACILITATION SERVICES AT PAGE 169 OF THE PB AND THAT WITH REGARD TO SALES SUPPORT SERVICES IS AT PA GE 174 OF PB. IT WAS THE PLEA OF ASSESSEE THAT THE FAR ANALYSIS OF BOTH THES E SEGMENTS WERE DIFFERENT AND CANNOT BE AGGREGATED AS ONE TRANSACTI ON. THE DRP, HOWEVER, DID NOT DEAL WITH THE AFORESAID OBJECTION AT ALL. IT(TP)A NO. 2444/BANG/2019 PAGE 23 OF 36 19. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS. AS PER THE INDIAN INCOME-TAX ACT, IDEALLY, THE TRANSFER PRICING IS TO BE MADE ON A TRANSACTION BY TRANSACTION BASIS. HOWEVER, RULE 10A(D) PROVIDES THAT THE TERM TRANSACTION INCLUDES A NUMBER OF CLOSELY LINKED T RANSACTIONS. THUS, IN CASES WHERE SEPARATE TRANSACTIONS ARE SO CLOSELY LI NKED OR ARE CLOSELY INTER-RELATED OR CONTINUOUS AND WHERE APPLICATION O F THE ARMS LENGTH PRINCIPLE ON A TRANSACTION BY TRANSACTION BASIS BEC OMES CUMBERSOME FOR ALL INVOLVED AND WOULD NOT LEAD TO AN ACCURATE RESULT, RECOURSE IS OFTEN HAD TO EVALUATE TRANSACTIONS FOLLOWING AN AGGREGATION PR INCIPLE. DUE TO INCREASING PRESENCE OF COMPOSITE CONTRACTS AND PACKAGE DEALS IN AN MNE GROUP, THE AGGREGATION OF TRANSACTIONS BECOME NECESSARY AS A C OMPOSITE CONTRACT MAY CONTAIN A NUMBER OF ELEMENTS INCLUDING ROYALTIE S, LEASES, SALE AND LICENSES ALL PACKAGED INTO ONE DEAL. ONE WOULD USUA LLY WANT TO CONSIDER THE DEAL IN ITS TOTALITY TO UNDERSTAND HOW VARIOUS ELEMENTS RELATE TO EACH OTHER, BUT THE COMPONENTS OF THE COMPOSITE PACKAGE DEAL MAY OR MAY NOT, DEPENDING ON THE FACTS AND CIRCUMSTANCES OF EACH CA SE, NEED TO BE EVALUATED SEPARATELY TO ARRIVE AT THE APPROPRIATE T RANSFER PRICE. AGGREGATION ISSUE MAY ALSO ARISE WHEN LOOKING AT UNCONTROLLED C OMPARABLES. THIS IS BECAUSE THIRD PARTY INFORMATION IS NOT OFTEN AVAILA BLE AT THE TRANSACTION LEVEL. IN SUCH CIRCUMSTANCES, ENTITY LEVEL INFORMAT ION IS THE ONLY RECOURSE AVAILABLE. THEREFORE, WHETHER ALP-PRINCIPLE IS TO B E APPLIED ON A TRANSACTION BY TRANSACTION BASIS OR ON AN AGGREGATI ON BASIS DEPENDS ON THE FACTS OF EACH CASE AND IS NOT UNIVERSALLY OR GENERA LLY APPLIED IN ALL COMPOSITE CONTRACTS INVOLVING MULTIPLE TRANSACTIONS . 20. SINCE THIS SPECIFIC OBJECTION OF ASSESSEE HAS N OT BEEN MET BY THE TPO/DRP, WE DEEM IT FIT AND PROPER TO SET ASIDE THE ORDER OF AO IN THIS REGARD AND REMAND THE MATTER TO THE TPO FOR FRESH C ONSIDERATION OF THE QUESTION, WHETHER INTERNATIONAL TRANSACTIONS CAN BE AGGREGATED IN THE GIVEN FACTS AND CIRCUMSTANCES. IF AGGREGATION IS NOT POS SIBLE, THEN THE ALP OF THE IT(TP)A NO. 2444/BANG/2019 PAGE 24 OF 36 SALES FACILITATION SERVICES SEGMENT AND ADMINISTRAT IVE & BUSINESS SUPPORT SERVICES SEGMENT SHOULD BE DETERMINED SEPARATELY. THE ASSESSEE WILL BE AFFORDED OPPORTUNITY OF BEING HEARD IN THIS MATTER. IN VIEW OF THE ABOVE, THE OTHER GROUNDS RELATED TO MANNER OF DETERMINATION OF ALP BY AGGREGATING THE ABOVE TWO TRANSACTIONS DOES NOT REQUIRE CONSIDE RATION AT THIS STAGE. 21. GROUND NO.V AND SUB-GROUNDS (42) TO (44) OF GRO UND IV ARE GENERAL IN NATURE AND CALL FOR NO SPECIFIC ADJUDICATION. 22. GROUND NO.VI COMPRISING OF SUB-GROUNDS 45 TO 49 DEAL WITH THE GRIEVANCE OF THE ASSESSEE AGAINST THE ORDERS OF THE REVENUE AUTHORITIES DISALLOWING PROVISION FOR WARRANTY AMOUNTING TO RS. 73,93,02,026/-. THE ASSESSEE SELLS PRODUCTS AND AS PER THE TERMS OF SAL E, THE ASSESSEE PROVIDES WARRANTY FOR PERFORMANCE, REPLACEMENT ETC. BASED ON THE PAST EXPERIENCE I.E., HISTORICAL DATA, LIABILITY ON ACCO UNT OF PROBABLE WARRANTY CLAIMS IS PROVIDED IN THE BOOKS OF ACCOUNTS OF THE ASSESSEE. DURING THE RELEVANT PREVIOUS YEAR, THE ASSESSEE DEBITED AN EXP ENDITURE OF RS.259,83,13,924/- UNDER THE HEAD 'WARRANTY EXPENSE S. THE PROVISION FOR WARRANTY ACCOUNT OF THE ASSESSEE AS ON 31.3.2015 ST OOD AS FOLLOWS: PROVISION FOR WARRANTY AMOUNT ( IN I) OPENING BALANCE 154,82,86,076 PROVISION MADE DURING THE YEAR 259,83,13,924 UTILISATION 147,92 55,949 CLOSING BALANCE 266,73,44,051 23. AS CAN BE SEEN FROM THE AFORESAID TABLE, THE AC TUAL LIABILITY INCURRED ON ACCOUNT OF WARRANTY LIABILITY DURING THE YEAR WA S RS.147,92,55,949/-. THE WARRANTY PERIOD IS ONE TO FOUR YEARS AND THE WA RRANTIES ARE AGAINST MANUFACTURED AND OTHER DEFECTS AS PER THE TERMS OF CONTRACTS(S) WITH THE CUSTOMER. THE WARRANTY IS DISCLOSED AS A CONTINGENT LIABILITY IN THE BALANCE SHEET AS REQUIRED BY ACCOUNTING STANDARD-29 (AS-29) ISSUED BY THE IT(TP)A NO. 2444/BANG/2019 PAGE 25 OF 36 INSTITUTE OF CHARTERED ACCOUNTANTS OF INDIA (ICAI). THE ASSESSEE VIDE LETTER DATED 20/11/2018 SUBMITTED THAT THE WARRANTY PROVIS ION HAS BEEN CREATED AS PER ACCOUNTING STANDARD 29 AND IS BASED ON THE S CIENTIFIC FORMULA AS EXPLAINED BELOW:- MACHINE MONTHS X REPAIR RATE X COST PER CLAIM WHERE: MACHINE MONTHS IS THE FACTOR OF THE UNEXPIRED WARRA NTY PERIOD IN MONTHS AND THE NUMBER OF PCS WHICH ARE UNDER WARRAN TY AT THE END OF THE YEAR; REPAIR RATE IS THE PERCENTAGE OF CLAIMS OUT OF THE TOTAL SALES MADE ON THE HISTORICAL DATA FOR THE REGION; AND COST PER CLAIM IS THE AVERAGE EXPECTED REPAIR COST PER PC ON HISTORICAL DATA FOR THE REGION. THE PROVISION FOR WARRANTY LIABILITY CREATED IN THE BOOKS AND THE ACTUAL LIABILITY ON ACCOUNT OF WARRANTY LIABILITY I NCURRED IN EACH OF THE FINANCIAL YEARS FROM 2005-06 IS AS FOLLOWS: FINANCIAL YEAR OPENING BALANCE ADDITION DURING THE YEAR UTILIZED/REVE RSED DURING THE YEAR CLOSING BALANCE 2005-06 - 34,94,49,249 7,66,52,762 27,27,96,487 2006-07 27,27,96,487 55,18,39,359 40,27,12,947 42,19,22,899 2007-08 42,19,22,899 61,21,80,442 51,91,74,867 51,49,28,474 2008-09 51,49,28,474 108,79,40,662 103,94,28,778 56,34,40,358 2009-10 56,34,40,358 97,20,25,066 68,32,51,088 85,22,14,336 131,26,00,807 2010-11 85,22,14,336 147,74,52,660 101,70,66,189 2011-12 131,26,00,807 103,75,04,656 100,25,76,056 134,75,29,407 2012-13 134,75,29,407 148,76,96,121 135,36,26,321 148,15,99,208 2013-14 148,15,99,208 197,19,70,205 190,52,83,337 154,82,86,076 2014-15 154.82,86,076 259,83,13,924 147,92 55,949 266,73,44,051 24. GENERALLY CONTINGENT LIABILITY IS NOT ALLOWED AS DEDUCTION WHILE COMPUTING INCOME EVEN UNDER THE MERCANTILE SYSTEM O F ACCOUNTING. IF EXPENDITURE IS TO BE DEDUCTIBLE FOR THE INCOME TAX PURPOSES, IT SHOULD BE TOWARDS A LIABILITY ACTUALLY EXISTING AT THE TIME B UT SETTING APART MONEY WHICH MIGHT BECOME EXPENDITURE ON THE HAPPENING OF AN EVENT IS NOT IT(TP)A NO. 2444/BANG/2019 PAGE 26 OF 36 EXPENDITURE. HOWEVER IN RESPECT OF PROVISION FOR W ARRANTY, THE HONBLE SUPREME COURT IN THE CASE OF ROTORK CONTROLS INDIA PVT LTD VS. CIT (2009) 314 ITR 62 HELD THAT PROVISION FOR WARRANTY LIABILI TY CANNOT ALWAYS BE REGARDED AS CONTINGENT LIABILITY AND LAID DOWN THE FOLLOWING PRINCIPLES IN COMING TO THE CONCLUSION WHETHER THE LIABILITY CAN BE SAID TO BE CONTINGENT OR ACTUAL LIABILITY:- (1) A PROVISION IS A LIABILITY WHICH CAN BE MEASURE D ONLY BY USING A SUBSTANTIAL DEGREE OF ESTIMATION. A PROVISION IS RE COGNIZED WHEN: (A) AN ENTERPRISE HAS A PRESENT OBLIGATION AS A RESULT OF A PAST EVENT; (B) IT IS PROBABLE THAT AN OUTFLOW OF RESOURCES WILL BE REQUI RED TO SETTLE THE OBLIGATION; AND (C) A RELIABLE ESTIMATE CAN BE MADE OF THE AMOUNT OF THE OBLIGATION. IF THESE CONDITIONS ARE NOT MET, NO PRO VISION CAN BE RECOGNIZED; (2) A LIABILITY IS DEFINED AS A PRESENT OBLIGATION ARISING FROM PAST EVENTS, THE SETTLEMENT OF WHICH IS EXPECTED TO RESULT IN AN OUTFLOW FROM THE ENTERPRISE OF RESOURCES EMBODYING ECONOMIC BENEFITS ; (3) A PAST EVENT THAT LEADS TO A PRESENT OBLIGATIO N IS CALLED AS AN OBLIGATING EVENT. THE OBLIGATING EVENT IS AN EVENT THAT CREATES AN OBLIGATION WHICH RESULTS IN AN OUTFLOW OF RESOURCES . IT IS ONLY THOSE OBLIGATIONS ARISING FROM PAST EVENTS EXISTING INDEP ENDENTLY OF THE FUTURE CONDUCT OF THE BUSINESS OF THE ENTERPRISE THAT IS R ECOGNIZED AS PROVISION. FOR A LIABILITY TO QUALIFY FOR RECOGNITION THERE MU ST BE NOT ONLY PRESENT OBLIGATION BUT ALSO THE PROBABILITY OF AN OUTFLOW OF RESOURCES TO SETTLE THAT OBLIGATION. WHERE THERE AR E A NUMBER OF OBLIGATIONS (E.G. PRODUCT WARRANTIES OR SIMILAR CON TRACTS) THE PROBABILITY THAT AN OUTFLOW WILL BE REQUIRED IN SET TLEMENT, IS DETERMINED BY CONSIDERING THE SAID OBLIGATIONS AS A WHOLE ; (4) IN THE CASE OF A MANUFACTURE AND SALE OF ONE SINGLE ITEM THE PROVISION FOR WARRANTY COULD CONSTITUTE A CONTINGEN T LIABILITY NOT ENTITLED TO DEDUCTION U/S 37 OF THE SAID ACT. HOWEV ER, WHEN THERE IT(TP)A NO. 2444/BANG/2019 PAGE 27 OF 36 IS MANUFACTURE AND SALE OF AN ARMY OF ITEMS RUNNING INTO THOUSANDS OF UNITS OF SOPHISTICATED GOODS, THE PAST EVENT OF DEFECTS BEING DETECTED IN SOME OF SUCH ITEMS LEADS TO A PRESENT OBLIGATION WHICH RESULTS IN AN ENTERPRISE HAVING NO ALTERNATIVE TO SETTLING THAT OBLIGATION . 25. THE AO EXAMINED THE CLAIM OF THE ASSESSEE FOR DEDUCTION ON ACCOUNT OF PROVISION FOR WARRANTY EXPENSES IN THE L IGHT OF THE PRINCIPLES LAID DOWN BY THE HONBLE SUPREME COURT. ACCORDING TO HI M, IT WAS REQUIRED TO VERIFY THE REASONABILITY AND THE RELIABILITY OF THE ASSESSEE'S ESTIMATION OF PROVISION FOR WARRANTY BASED ON HISTORICAL TREND. T HE AO ANALYZED THE HISTORICAL TREND OF PROVISION FOR WARRANTY CREATED, UTILIZED AND THE PERCENTAGE OF THE UTILIZATION / REVERSAL TO THE PRO VISION CREATED OVER THE YEARS WHICH IS TABULATED BELOW: FINANCIAL YEAR OPENING BALANCE ADDITION DURING THE YEAR UTILIZED /REVERSED DURING THE YEAR CLOSING BALANCE %AGE UTILISATION / REVERSAL OVER CREATION 2005-06 34,94,49,249 7,66,52,762 27,27,96,487 22 % 2006-07 27,27,96,487 55,18,39,359 40,27,12,947 42,19,22,899 48 % 2007-08 42,19,22,899 61,21,80,442 51,91,74,867 51,49,28,474 50 % 2008-09 51,49,28,474 108,79,40,662 103,94,28,778 56,34,40,358 64 % 2009-10 56,34,40,358 97,20,25,066 68,32,51,088 85,22,14,336 45 % 2010-11 85,22,14,336 147,74,52,660 101,70,66,189 131,26,00,807 69 % 2011-12 131,26,00,807 103,75,04,656 100,25,76,056 134,75,29,407 42% 2012-13 134,75,29,407 148,76,96,121 135,36,26,321 148,15,99,208 48% 2013-14 148,15,99,208 197,19,70,205 190,52,83,337 154,82,86,076 55% 2014-15 154,82,86,076 259,83,13,924 147,92,55,949 266,73,44,051 35% IT(TP)A NO. 2444/BANG/2019 PAGE 28 OF 36 26. ACCORDING TO THE AO, THE ABOVE ANALYSIS WOULD S HOW THAT THE ASSESSEE HAS USED AROUND 35% OF THE TOTAL PROVISION FOR WARRANTY DURING THE CURRENT FINANCIAL YEAR AND THAT THERE WAS A GRE AT MISMATCH BETWEEN THE ACTUAL EXPENDITURE AND THE PROVISION CREATED, WHICH SHOWS THAT THE ESTIMATE MADE IS UNRELIABLE. HE ALSO ANALYZED THE REASONABILITY OF THE CREATION OF PROVISION BY COMPARING THE PROVISIONS W ITH THE ACTUAL EXPENDITURE AS RATIO OF UTILIZATION TO THE PROVISIO N CREATED. ACCORDING TO HIM PROVISION BEING AN ESTIMATION, SHOULD ALWAYS BE AT A HIGHER SIDE SO THAT THE ACTUAL EXPENDITURE WOULD NOT LEND THE BUSINESS MAN AT A FIX OR CORNER. THEREFORE, A PRUDENT BUSINESSMAN WOULD ALWAYS KEEP SOMETHING AGAINST THE RAINY-DAY BUT SUCH SAVING SHOULD NOT BE SO BIG AND HIGH THAT ALLEGATION OF UNJUST ENRICHMENT COULD BE LEVELED AGAINST SUCH BUSINESSMAN. IN OTHER WORDS, EXTREMES SHOULD BE AVOIDED. THEREFORE, A RAT IO OF 70 % OR ROUND FIGURE 70:100 BETWEEN THE ACTUAL EXPENDITURE AND TH E PROVISION. REVERSELY, THE RATIO 140:100. IN OTHER WORDS, THE TOTAL PROVIS ION INCLUDING THE OPENING BALANCE SHOULD BE AROUND 140% OF THE ACTUAL EXPENDI TURE. HE THEREAFTER TABULATED THE RATIO BETWEEN THE ACTUAL EXPENDITURE AND THE PROVISION AND FOUND THAT THE RATIO IN THE CASE OF THE ASSESSEE WA S AROUND 279:100 WHICH ACCORDING TO HIM WAS HIGHLY DISPROPORTIONATE. HE OB SERVED THAT THE AVERAGE RATIO IS ALSO WORKED OUT FOR THE EARLIER YE ARS AND IT HAS ALWAYS BEEN AROUND 238:100 OR MORE. HE THEREFORE CONCLUDED THAT THE WARRANTY PROVISION CREATED BY THE ASSESSEE WAS UNSCIENTIFIC AND THEREFORE UNASCERTAINABLE. THE AO ALSO CO-RELATED YEAR-WISE SALES TURNOVER WITH THAT OF WARRANTY PROVISION CREATED AND UTILIZED AND CAM E TO THE CONCLUSION THAT SALES/TURNOVER INCREASED FROM RS.1044.24 CRORES IN FY.2005-06 TO RS.1805.40 CRORES IN FY.2007-08. SUBSEQUENTLY, THER E WAS DROP IN TURNOVER TO RS.1286.92 CRORES IN FY.2008-09 WITH A MARGINAL INCREASE TO RS.1329.58 CRORES IN FY.2009-10. HOWEVER, IN TERMS OF PROVISION FOR WARRANTY LIABILITY THERE WAS DRASTIC INCREASE IN WA RRANTY PROVISION CREATED FROM RS.61.21 CRORES IN FY.2007-08 TO AS HIGH AS RS .108.79 CRORES IN IT(TP)A NO. 2444/BANG/2019 PAGE 29 OF 36 FY.2008-09, THOUGH THERE WAS FALL IN TURNOVER FROM RS.1805.40 CRORES IN FY.2007-08 TO RS.1286.92 CRORES IN FY.2008-09. THUS , PROVISION CREATED HAS INCREASED FROM 3.34% OF TURNOVER TO 8.40% OF TU RNOVER IN FY.2008-09. THE AO ALSO FOUND A REVERSE SITUATION WHERE THERE W AS PROVISION CREATED HAD FALLEN FROM RS.108.79 CRORES IN FY.2008-09 TO R S.97.20 CRORES IN FY.2009-10, INSPITE OF INCREASE IN TURNOVER FROM RS .1286.92 CRORES IN FY.2008-09 TO RS.1329.58 CRORES IN FY.2009-10. HERE , PROVISION CREATED HAS FALLEN FROM 8.40% TO 7.31% IN FY.2009-10. ACCOR DING TO THE AO, EVEN IF IT IS PRESUMED THAT THE REASON FOR INCREASE IN P ROVISION CREATED WAS DUE TO INCREASE IN SERVICE COST INCLUDING LABOR, TRAVEL LING EXPENSES, ETC., THE SAME DOES NOT JUSTIFY THE FALL IN PROVISION CREATED IN THE VERY NEXT YEAR THOUGH THERE IS INCREASE IN TURNOVER. 27. ACCORDING TO THE AO, THE WARRANTY PROVISION UTI LIZED OVER THE YEARS HAS ALWAYS BEEN LESS THAN THE PROVISION CREATED. NE VER EVER THE PROVISION UTILIZED HAS CROSSED THE WATER MARK OF PROVISION CR EATED. CONSEQUENTLY, THE CLOSING BALANCE OF THE PROVISION CREATED HAS INCREA SED OVER THE YEARS, WHICH HAS REACHED AS HIGH AS RS.259.83 CRORES IN FY 2014-15 WHEN COMPARED TO RS.27.27 CRORES IN FY.2005-06. THIS ACC ORDING TO THE AO SHOWS THAT SUCH A HUGE AMOUNT OF RS.259.83 CRORES H AS BEEN CLAIMED AS EXPENSE OVER THE YEARS WITHOUT ACTUALLY INCURRING T HE SAME AND THE CLAIM OF THE PROVISION FOR WARRANTY THOUGH INCREASING YEAR A FTER YEAR HAS NOT BEEN CHARGED TO TAX. THE AO THEREFORE CONCLUDED THAT TH E ASSESSEE DOES NOT HAVE A REASONABLE, SCIENTIFIC AND RELIABLE BASIS FO R THE CALCULATION OF THE PROVISION FOR WARRANTY. ACCORDINGLY, PROVISION FOR WARRANTY OF RS.259,83,13,924/- CREATED BY THE ASSESSEE WAS TREA TED AS CONTINGENT AND UNASCERTAINABLE IN NATURE AND HENCE NOT ALLOWED AS A REVENUE EXPENSE U/S.37 OF THE I.T. ACT. HOWEVER, THE AO WAS OF THE VIEW THAT ACTUAL EXPENDITURE INCURRED OF RS.147,92,55,949 SHOULD BE ALLOWED. HENCE, AN AMOUNT OF RS.111,90,57,975/- BEING DIFFERENCE OF PR OVISIONAL WARRANTY IT(TP)A NO. 2444/BANG/2019 PAGE 30 OF 36 CREATED AND ACTUAL EXPENDITURE INCURRED (RS. 259,83 ,13,924 - 147,92,55,949) WAS DISALLOWED AND ADDED TO THE INCO ME. 28. BEFORE DRP APART FROM POINTING OUT THAT IN THE EARLIER AYS THE TRIBUNAL HAS ALLOWED SIMILAR CLAIM OF THE ASSESSEE, THE ASSESSEE POINTED OUT THE FOLLOWING FACTUAL DETAILS REGARDING THE AO HAVING CONSIDERED INCORRECT AMOUNT OF PROVISION FOR WARRANTY CREATED DURING THE YEAR AMOUNTING TO INR 259,83,13,924. HOWEVER, THE AMOUNT DEBITED TO THE STATEMENT OF PROFIT AND LOSS TOWARDS WARRANTY EXPEN SES FOR THE FY 2014-15 IS ONLY INR 221,85,57,975, AS APPEARING IN NOTE 25 OF THE AUDITED FINANCIAL STATEMENTS (RELEVANT PAGE OF THE FINANCIAL STATEMEN T ATTACHED AS ANNEXURE -21). THE ASSESSEE ALSO SUBMITTED THAT THE PROVISI ON FOR WARRANTY CREATED DURING THE YEAR OF INR 259,83,13,924, AS APPEARING IN THE BALANCE SHEET OF LENOVO INDIA AS ON MARCH 31, 2015, INCLUDES AN AMOU NT OF INR 37,97,55,949, WHICH PERTAINS TO PROVISION FOR WARRA NTY ON ACQUISITION OF BUSINESS FROM IBM INDIA PRIVATE LIMITED AS A GOING CONCERN, AS MENTIONED IN NOTE 26 AND NOTE 45 OF THE AUDITED FINANCIAL STA TEMENTS (RELEVANT PAGE OF THE FINANCIAL STATEMENT ATTACHED AS ANNEXURE 22) . THE ASSESSEE THUS POINTED OUT THAT AN AMOUNT OF INR 37,97,55,949 HAS NOT BEEN DEBITED TO THE STATEMENT OF PROFIT AND LOSS FOR THE YEAR ENDED MARCH 31, 2015 AND THAT THE SAME HAS BEEN INCLUDED IN THE CLOSING PROVISION FOR WARRANTY AS APPEARING IN THE BALANCE SHEET AS ON MARCH 31, 2015 , AS A RESULT OF ACQUISITION. SINCE, THE ASSESSEE HAS NOT DEBITED SU CH AMOUNT TO THE STATEMENT OF PROFIT AND LOSS, THE SAME HAS NOT BEEN DEDUCTED IN COMPUTING THE TAXABLE INCOME. IT WAS THUS SUBMITTED THAT THE LEARNED AO HAS ERRED IN FACTS BY DISALLOWING AN AMOUNT OF INR 259,83,13,924 INSTEAD OF INR 221,85,57,975 TOWARDS PROVISION FOR WARRANTY CREATE D DURING THE YEAR. THEREFORE, AT BEST THE LEARNED AO COULD HAVE DISALL OWED INR 73,93,02,026 ON ACCOUNT OF PROVISION FOR WARRANTY I.E., AFTER AL LOWING THE ACTUAL EXPENDITURE INCURRED DURING THE YEAR. THE ABOVE ARG UMENT WAS WITHOUT IT(TP)A NO. 2444/BANG/2019 PAGE 31 OF 36 PREJUDICE TO THE ASSESSEES ARGUMENT THAT THE ENTIR E PROVISION FOR WARRANTY LIABILITY SHOULD BE ALLOWED AS DEDUCTION. 29. THE DRP UPHELD THE ORDER OF THE AO IN PRINCIPLE BUT HELD THAT THE DISALLOWANCE SHOULD BE A SUM OF RS.110,90,13,924/- WHICH IS THE DIFFERENCE BETWEEN THE PROVISION CREATED DURING THE RELEVANT P REVIOUS YEAR OF RS.259,83,13,924 AND THE WARRANTY LIABILITY THAT WA S ACTUALLY DISCHARGED VIZ., A SUM OF RS.147,93,00,000/-. 30. AGGRIEVED BY THE ORDER OF THE DRP WHICH WAS INC ORPORATED IN THE FINAL ORDER OF ASSESSMENT, THE ASSESSEE IS IN APPEA L BEFORE THE TRIBUNAL. 31. WE HAVE HEARD THE RIVAL SUBMISSIONS. THE LEARN ED COUNSEL FOR THE ASSESSEE SUBMITTED BEFORE US THAT THE APPROACH OF T HE AO AND THE DRP IS FLAWED BECAUSE THEY HAVE COMPARED THE PROVISION MAD E IN AY 2015-16 WITH THE ACTUAL LIABILITY INCURRED ON ACCOUNT OF PE RFORMANCE OF WARRANTY CLAIMS OF THE SAME AY 2015-16. THE PROPER APPROACH SHOULD BE TO COMPARE THE CURRENT YEAR PROVISION WITH THE ACTUAL OF THE SUCCEEDING YEAR BECAUSE THE DISCHARGE OF THE WARRANTY OBLIGATION WI LL HAVE ONLY IN THE SUBSEQUENT YEARS AND NOT IN THE YEAR IN WHICH THE P RODUCTS ARE SOLD. OUR ATTENTION WAS DRAWN TO THE DECISION OF THE HONBLE ITAT IN AY 2006-07 IN IT(TP) A.NO.582/BANG/2015 DATED 30.5.2016 WHEREIN T HE TRIBUNAL POINTED OUT AND EXPLAINED HOW A SIMILAR APPROACH OF THE REV ENUE AUTHORITIES ARE NOT CORRECT. THE FOLLOWING WERE THE RELEVANT OBSERVATI ONS OF THE TRIBUNAL:- 16. WE HAVE PERUSED THE MATERIALS AND HEARD THE RI VAL CONTENTIONS. QUESTION BEFORE US IS WHETHER ASSESSEE HAD MADE THE PROVISIONING FOR WARRANTY IN A SCIENTIFIC MANNER. IT IS NOT DISPUTED THAT IN THE IMPUGNED ASSESSMENT YEAR IT HAD STARTED DOING THE BUSINESS O F SALE OF LAPTOPS AND DESKTOPS. OBVIOUSLY ASSESSEE HAD NO HISTORICAL DATA WITH IT. IT IS ALSO NOT DISPUTED THAT ASSESSEE HAD TAKEN OVER THIS BUSINESS FROM IBM, WHO HAD SUBSTANTIAL EXPERIENCE IN SUCH BUSINESS. HENCE IF T HE ASSESSEE RELIED ON THE METHODOLOGY FOLLOWED BY IBM FOR WORKING OUT THE WARRANTY PROVISION WE CANNOT SAY THAT IT WAS INCORRECT. THER E IS NO CASE FOR THE REVENUE THAT ANY PROVISIONING MADE BY IBM IN RESPEC T OF SUCH BUSINESS IT(TP)A NO. 2444/BANG/2019 PAGE 32 OF 36 IN ANY EARLIER YEARS WERE DISALLOWED FOR A REASON T HAT IT WAS UNSCIENTIFIC. IT IS TRUE THAT ASSESSEE HAD ADOPTED TWO FACTORS NA MELY, REPAIR ACTION RATE AND COST PER CLAIM FROM IBM DATA AVAILABLE AT ASIA PACIFIC LEVEL. IT MIGHT ALSO BE TRUE THAT ASSESSEE HAD NOT PRODUCED R ECORDS RELATING TO IBM TO SHOW THAT THESE RATES WERE CORRECTLY WORKED OUT BY IBM. NEVERTHELESS A LOOK AT THE WARRANTY PROVISIONING TABLE OF THE AS SESSEE FOR THE SUCCEEDING ASSESSMENT YEARS REVEALS THE FOLLOWING : IT(TP)A NO. 2444/BANG/2019 PAGE 33 OF 36 THERE IS MUCH STRENGTH IN THE ARGUMENT OF THE LD. A R THAT PROVISION DONE FOR A YEAR SHOULD BE COMPARED WITH T HE ACTUAL SPENDING IN THE SUCCEEDING YEAR. THIS IS FOR THE SI MPLE REASON THAT EXPENDITURE INCURRED AGAINST WARRANTY GIVEN ON SALE S MADE IN ANY GIVEN YEAR WOULD BE REFLECTED IN THE SUCCEEDING YEA R, WHEN THE PROVISIONING IS DONE ON THE BASIS OF MACHINE MONTHS . ASSESSEE HAD DONE THE PROVISIONING BASED ON MACHINE MONTHS. IF BY APPLICATION OF THE FORMULA OF MULTIPLYING MACHINE M ONTHS WITH REPAIR ACTION RATE AND COST PER CLAIM, AN EXCESSIVE WARRANTY PROVISIONING HAD RESULTED, THEN DEFINITELY IN THE S UCCEEDING YEAR THE EXPENDITURE INCURRED ON WARRANTY WOULD BE MUCH LESS. THE TABLE ABOVE WOULD SHOW THAT EXPENDITURE ON WARRANTY WAS HIGHER IN ALMOST ALL SUCCEEDING YEARS EXCEPT FINANCIAL YEA R 2009-09. IN SUCH CIRCUMSTANCES WE CANNOT SAY THAT ASSESSEE HAD FOLLOWED A METHOD WHICH WAS NOT SCIENTIFIC. WE ARE OF THE OPIN ION THAT THE THREE CONDITIONS SET OUT BY THE HON'BLE APEX COURT IN THE CASE OF ROTORK CONTROLS INDIA (PVT) LTD HAVE BEEN SATISFIED BY THE ASSESSEE, VIZ., ESTABLISHING THAT THERE IS A PRESEN T OBLIGATION ON ACCOUNT OF A PAST EVENT, WORKING OUT THE PROBABLE E STIMATE OF THE OUTFLOW OF THE RESOURCES REQUIRED AND SUBSTANTIATIN G THE RELIABILITY OF SUCH ESTIMATE. ESPECIALLY SO SINCE THE ASSESSEE WAS MANDATORILY REQUIRED TO FOLLOW AS-I AND PRINCIPLES OF PRUDENCE STIPULATED IN SUCH AS-I REQUIRED PROVISIONING FOR A LL KNOWN LIABILITIES EVEN IF IT COULD NOT BE DETERMINED WITH CERTAINTY, BUT WAS MADE BASED ON AVAILABLE DATA. WE THEREFORE DELE TE THE ADDITION MADE BY THE AO DISALLOWING THE PROVISION F OR WARRANTY. GROUND 7 OF THE ASSESSEE STANDS ALLOWED. 32. THE LEARNED DR RELIED ON THE ORDER OF THE AO/DR P. IT(TP)A NO. 2444/BANG/2019 PAGE 34 OF 36 33. WE HAVE CAREFULLY CONSIDERED THE RIVAL SUBMISSI ONS. THE BASIS FOR CREATING PROVISION ADOPTED BY THE ASSESSEE IS MACHI NE MONTHS X REPAIR RATE X COST PER CLAIM WHERE: MACHINE MONTHS = FACTOR OF THE UNEXPIRED WARRANT P ERIOD IN MONTHS AND THE NUMBER OF PCS WHICH ARE UNDER WARRAN TY AT THE END OF THE YEAR REPAIR RATE = PERCENTAGE OF CLAIMS OUT OF TH E TOTAL SALES MADE ON THE HISTORICAL DATA FOR THE REGION. COST PER CLAIM =AVERAGE EXPECTED REPAIR COST PER PC ON HISTORICAL DATA FOR THE REGION. 34. THE HYPOTHETICAL COMPUTATION BY THE REVENUE AUT HORITIES OF PERCENTAGE OF ACTUAL CLAIM FOR THE YEAR AND PROVISI ON MADE FOR THE VERY SAME YEAR, CANNOT BE SUSTAINED BECAUSE THE BASIS OF PROVIDING WARRANTY IS MACHINE MONTHS X REPAIR RATE X COST PER CLAIM. THE TRIBUNAL HAS ALREADY POINTED OUT THE FLAW IN THE APPROACH OF THE REVENUE AUTHORITIES IN ITS ORDER FOR AY 2006-07 THAT THE BASIS SHOULD BE THE ACTUAL EXPENDITURE INCURRED ON DISCHARGE OF WARRANTY CLAIMS IN FUTURE WHICH IS MUC H MORE THAN THE PROVISION MADE IN AN EARLIER YEAR. THE WARRANTY O BLIGATION IS NOT JUST FOR ONE YEAR AND IT SPREADS OVER A PERIOD OF MORE THAN 1 YEAR AND THEREFORE THE COMPARISON AS DONE BY THE REVENUE AUTHORITIES IS UN SUSTAINABLE. THE METHOD FOLLOWED BY THE ASSESSEE FOR CREATING PROVIS ION FOR WARRANTY HAS BEEN HELD TO BE SCIENTIFIC AND BASED ON HISTORICAL DATA OF SALES AND REPAIR RATIO IN EVERY REGION IN WHICH THE PRODUCTS ARE SOL D. THE METHOD HAS BEEN ACCEPTED BY THE TRIBUNAL IN ITS ORDER FOR SEVERAL A YS. THE METHOD FOLLOWED HAS NOT BEEN SHOWN TO BE NOT SCIENTIFIC BY THE REVE NUE AUTHORITIES. IN SUCH CIRCUMSTANCES, WE ARE OF THE VIEW THAT THE METHOD F OLLOWED BY THE ASSESSEE SHOULD BE ACCEPTED AS PROPER AND THE DEDUC TION ALLOWED AS PER THE PROVISION CREATED BY THE ASSESSEE. WE HOLD AND DIRECT ACCORDINGLY. IT(TP)A NO. 2444/BANG/2019 PAGE 35 OF 36 35. AS FAR GR.NO.VII RAISED BY THE ASSESSEE IS CONC ERNED, THE SAME RELATES TO ADDITION MADE TO THE BOOK PROFITS U/S.11 5JB OF THE ACT ON ACCOUNT OF PROVISION FOR WARRANTY LIABILITY TREATING THE SA ME TO BE A LIABILITY OF A CONTINGENT NATURE AND HENCE LIABLE TO BE ADDED TO T HE PROFIT AS PER PROFIT AND LOSS ACCOUNT PREPARED IN ACCORDANCE WITH COMPAN IES ACT TO ARRIVE AT THE BOOK PROFIT OF THE ASSESSEE FOR THE PURPOSE OF LEVY OF TAX ON BOOK PROFIT UNDER SEC.115JB OF THE ACT. WE HAVE ALREADY HELD T HAT THE PROVISION FOR WARRANT EXPENSES IS NOT CONTINGENT AND HAS TO BE AL LOWED AS DEDUCTION WHILE COMPUTING INCOME UNDER THE HEAD INCOME FROM BUSINESS & PROFESSION. AS A CONSEQUENCE OF SUCH FINDING, THE ADDITION MADE TO THE BOOK PROFITS IS TO BE DELETED BECAUSE THE LIABILITY CANNOT BE SAID TO BE CONTINGENT. WE HOLD AND DIRECT ACCORDINGLY. 36. GROUND NO.VIII IS PURELY CONSEQUENTIAL AND THE AO IS DIRECTED TO GIVE CONSEQUENTIAL RELIEF. 37. IN THE RESULT, APPEAL BY THE ASSESSEE IS PARTLY ALLOWED PRONOUNCED IN THE OPEN COURT ON THIS 6 TH DAY OF MARCH, 2020. SD/- ( PRADIP KUMAR KEDIA ) SD/- ( N V VASUDEVAN ) ACCOUNTANT MEMBER VICE PRESI DENT BANGALORE, DATED, THE 6 TH MARCH, 2020. / DESAI S MURTHY / IT(TP)A NO. 2444/BANG/2019 PAGE 36 OF 36 COPY TO: 1. APPELLANT 2. RESPONDENT 3. CIT 4. CIT(A) 5. DR, ITAT, BANGALORE. 6. GUARD FILE BY ORDER ASSISTANT REGISTRAR ITAT, BANGALORE