Lenovo (India) Private Limited, Bangalore V. DCIT, Bangalore

ITA 582/BANG/2015

• Counselvise Citation: [2016] 133 COUNSELVISE.COM (IT) 0365 (ITAT-BANGALORE)
• Duration Of Justice: 1 year(s) 1 month(s) 23 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 30-05-2016
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: A
• Next Hearing Date: 16-05-2016
• Assessment Year: 2006-2007
• Appeal Filed On: 06-04-2015
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Assessee Lawyers: PADAMCHAND KHINCHA
• Keywords: Business income; Transfer pricing; International transaction; Reason to believe
• Section: 144

Judgement Text

IT(TP)A.582/BANG/2015 PAGE - 1 IN THE INCOME TAX APPELLATE TRIBUNAL BANGALORE BENCH 'A', BANGALORE BEFORE SHRI. ABRAHAM P. GEORGE, ACCOUNTANT MEMBER AND SHRI. VIJAY PAL RAO, JUDICIAL MEMBER I.T(TP).A NO.582/BANG/2015 (ASSESSMENT YEAR : 2006-07) LENOVO (INDIA) P. LTD, FERNS ICON, LEVEL 2, DODDENAUNDI VILLAGE, MARATHAHALLI OUTER RING ROAD, K.R. PURAM HOBLI, BENGALURU 560 037 .. APPELLANT PAN : AABCI3372H V. DEPUTY COMMISSIONER OF INCOME-TAX, CIRCLE -4(1)(1), BENGALURU .. RESPONDENT ASSESSEE BY : SHRI. PADAMCHAND KHINCHA, CA REVENUE BY : SHRI. P. CHANDRASHEKAR, CIT HEARD ON : 19.05.2016 PRONOUNCED ON : 30.05.2016 O R D E R PER ABRAHAM P. GEORGE, ACCOUNTANT MEMBER : IN THIS APPEAL FILED BY THE ASSESSEE IT HAS ALTOGE THER TAKEN SEVEN GROUNDS OF WHICH GROUND 1 IS GENERAL IN NATURE, NEE DING NO SPECIFIC ADJUDICATION. IT(TP)A.582/BANG/2015 PAGE - 2 02. VIDE GROUNDS 2 TO 6 GRIEVANCE RAISED BY THE AS SESSEE IS ON A TP ADJUSTMENT RECOMMENDED BY THE TPO. LD. COUNSEL FOR THE ASSESSEE SUBMITTED THAT THIS WAS THE SECOND ROUND OF PROCEED INGS BEFORE THIS TRIBUNAL. AS PER THE LD. AR ISSUE REGARDING THE AD JUSTMENTS MADE ON THE PRICING OF THE INTERNATIONAL TRANSACTIONS OF THE AS SESSEE WITH ITS AES WAS A SUBJECT MATTER BEFORE THIS TRIBUNAL IN AN APPEAL F ILED BY THE ASSESSEE IN ITA NO.1457/BANG/2010. AS PER THE LD. AR, VIDE ITS ORDER DT.16.03.2012, TRIBUNAL HAD GIVEN CLEAR DIRECTIONS TO THE TPO TO V ERIFY WHETHER SIMILAR TRANSACTIONS ENTERED BY THE ASSESSEE WITH ITS AES F OR PREVIOUS YEARS RELEVANT TO A. YS. 2007-08 AND 2008-09, WERE ACCEPT ED BY THE TPO IN SUCH YEARS. AS PER THE LD. AR, TRIBUNAL HAD DIRECTED T HE AO TO ACCEPT THE PRICING OF THEE INTERNATIONAL TRANSACTION OF THE AS SESSEE FOR THE IMPUGNED YEAR TO BE AT ARMS LENGTH, IF SIMILAR TRANSACTIONS WITH AES WERE ACCEPTED BY THE TPO TO BE AT ARMS LENGTH FOR PREVIOUS YEARS REL EVANT TO A. YS. 2007-08 AND 2008-09. 03. CONTINUING HIS SUBMISSIONS, LD. AR POINTED OUT TO THE CONSEQUENTIAL ORDER PASSED BY THE TPO, ON 30.01.2014 WHEREIN TPO MENTIONED THAT TP ANALYSIS DONE BY THE ASSESSEE FOR A. Y.S.2007-08 AN D 2008-09, WERE NOT ACCEPTED. AS PER THE TPO IN SUCH EARLIER YEARS, AS SESSEE HAD APPLIED CUP IT(TP)A.582/BANG/2015 PAGE - 3 METHOD FOR ANALYSING THE PRICING OF THE INTERNATION AL TRANSACTIONS, WHEREAS TPO HAD GONE BY TNMM. ACCORDING TO THE LD. AR, BAS ED ON THIS ERRONEOUS PERSISTED WITH THE ORIGINAL RECOMMENDATIO NS MADE BY HIM. 04. LD. AR SUBMITTED THAT FURTHER TO THE TP ORDER M ENTIONED ABOVE, AND BASED ON A DRAFT ASSESSMENT PROPOSED BY THE AO, ASS ESSEE HAD ONCE AGAIN MOVED IN APPEAL BEFORE THE DRP. AS PER THE LD. AR, DRP VIDE ITS ORDER DT.29.12.2014 HAD ACCEPTED THE STAND OF THE ASSESSE E. HOWEVER, AS PER THE LD. AR, DESPITE DIRECTIONS OF THE DRP, TPO VIDE ORD ER PASSED ON 29.01.2015 PERSISTED WITH HIS EARLIER RECOMMENDATIO N AND PURSUANT TO SUCH TP ORDER ASSESSMENT WAS COMPLETED WITHOUT BYPASSING THE DRP ORDER. HENCE ACCORDING TO LD. AR, THE ADJUSTMENT RECOMMEND ED BY THE TPO / AO WAS TO BE SET ASIDE. 05. PER CONTRA, LD. DR SUBMITTED THAT THE AO WAS BO UND BY THE ORDER PASSED BY THE TPO U/S.92CA(4) OF THE ACT, AND HENCE AO COULD NOT BE FAULTED FOR FOLLOWING THE DIRECTIONS OF THE TPO. 06. WE HAVE PERUSED THE MATERIALS AND HEARD THE RIV AL CONTENTIONS. DIRECTIONS GIVEN BY THE TRIBUNAL IN THE EARLIER ROU ND OF PROCEEDINGS AS IT APPEARS AT PARA 12 OF ITS ORDER IS REPRODUCED HEREU NDER : IT(TP)A.582/BANG/2015 PAGE - 4 12. HAVING HEARD BOTH THE PARTIES AND HAVING CONSID ERED THE RIVAL CONTENTIONS AND THE MATERIAL ON RECORD, W E FIND THAT THE ASSESSEE HAS FOLLOWED THE INTERNAL CUP METHOD F OR ARRIVING AT ALP FOR THE IMPORT OF RAW MATERIAL, WHE RE AS THE TPO, IN HIS ORDER, HAS MENTIONED THAT THE ASSESSEE HAS ADOPTED THE EXTERNAL CUP METHOD. SIMILARLY, FOR THE ROYALTY PAYMENT, THE ASSESSEE HAS ADOPTED THE EXTERNAL CUP METHOD AND IT WAS A SINGLE PAYMENT, WHEREAS THE TPO OBSERV ED AT PAGE 21 OF HIS ORDER THAT IT IS RECURRING PAYMENT. THERE WERE MANY FLAWS IN THE TPO'S ORDER WHICH DEMONSTRATE THA T THE FACTS OF THE CASE HAVE NOT BEEN PROPERLY APPRECIATE D BY THE TPO WHILE MAKING THE IP STUDY ANALYSIS. ANOTHER FAC T WORTH NOTING IS THAT THE SIMILAR TRANSACTION WITH THE ASS OCIATED ENTERPRISES FOR THE SUBSEQUENT YEARS HAVE BEEN CONS IDERED BY THE TPO AND HAVE BEEN ACCEPTED WITHOUT ANY ALP ADJUSTME NTS. THERE HAS TO BE A CONTINUITY AND UNIFORMITY IN THE APPROACH THE REVENUE TOWARDS AN ISSUE AND PARTICULARLY IN THE CA SE OF THE SAME ASSESSEE. IN THE CASE OF THE ASSESSEE BEFORE U S, THE ADJUSTMENTS HAVE BEEN MADE ONLY FOR THE RELEVANT AS SESSMENT YEAR, WHEREAS SIMILAR TRANSACTIONS HAVE BEEN ACCEPT ED TO BE AT ALP FOR THE SUBSEQUENT YEARS EVEN THOUGH THE SAME M ETHOD HAS BEEN FOLLOWED BY THE ASSESSEE. WHEN THE FACTS AND C IRCUMSTANCES ARE EXACTLY THE SAME, THE REVENUE CANNOT BE PERMITT ED TO TAKE A DIFFERENT APPROACH IN TWO DIFFERENT ASSESSMENT YEAR S. IN VIEW OF THE SAME, WE DEEM IT AND PROPER TO REMIT THIS IS SUE OF TP STUDY TO THE FILE OF THE ASSESSING AUTHORITY WITH A DIREC TION TO VERIFY AS TO WHETHER THE SIMILAR TRANSACTIONS OF THE ASSESSEE WITH ASSOCIATED ENTERPRISES HAVE BEEN ACCEPTED BY THE TP O FOR THE ASSESSMENT YEAR 2007-08 AND 2008-09 AND IF IT IS FO UND TO BE TRUE, THEN THE AO IS DIRECTED TO ADOPT THE TP ANALY SIS CONDUCTED BY THE ASSESSEE FOR THE RELEVANT ASSESSMENT YEAR AL SO TO BE AT ALP AND MAKE THE ASSESSMENT ACCORDINGLY. THESE GROU NDS ARE ACCORDINGLY ALLOWED FOR STATISTICAL PURPOSES. 07. THEREAFTER ON 30.01.2014, TPO HAD PASSED A FRES H ORDER U/S.92CA OF THE ACT, PURPORTEDLY TO COMPLY WITH THE DIRECTIONS OF THE TRIBUNAL. IN THE SAID ORDER, TPO STATED THAT ASSESSEE HAD RELIED ON RPM METHOD FOR A. YS. IT(TP)A.582/BANG/2015 PAGE - 5 2007-08 AND 2008-09, WHEREAS IN THE ASSESSMENT FOR THESE ASSESSMENT YEARS TNMM WAS ADOPTED BY THE REVENUE. THUS AS PER THE T PO, TP ANALYSIS OF THE ASSESSEE COULD NOT BE CONSIDERED AS ACCEPTED FO R A. YS. 2007-08 AND 2008-09. TAKING THIS VIEW, TPO CHOSE NOT TO MAKE A NY CHANGE TO ITS ORIGINAL ORDER DT.28.09.2010. ASSESSEE HAD THEREAF TER MOVED AN APPLICATION BEFORE THE DRP WHICH HELD AS UNDER AT PARAS 2.2 TO 2.4 OF ITS ORDER DT.29.12.2014 : 2.2 IN GIVING EFFECT TO THE ABOVE DIRECTIONS THE TPO HAS MENTIONED THAT IN BOTH AY 2007-08 AND 2008-09, THE RESPECTIVE TPOS HAD NOT ACCEPTED THE CUP METHODOLOG Y FOLLOWED BY THE TAX PAYER IN ITS TP ANALYSIS AS THE MOST APPROPRIATE METHOD (MAM). AFTER REJECTING THE CUP A S MAM THE TPOS IN BOTH THE YEARS PROCEEDED TO CONDUCT SEPARATE ANALYSIS FOLLOWING THE TRANSACTION NET MAR GIN METHOD (TNMM) AS MAM. THE RESULT OF THIS INDEPENDEN T ANALYSIS BY THE TPO WAS THAT IN BOTH THE MANUFACTUR ING AND TRADING SEGMENT THE TPO FOUND THAT THE TAX PAYER'S PROFIT MARGIN WAS HIGHER THAN THE TPO'S ANALYZED MARGIN, A ND, HENCE NO ADJUSTMENT WAS CALLED FOR. THE FACT THAT T HE TPOS IN BOTH THE YEARS HAD REJECTED THE CUP AS MAM AND A PPLIED TNMM WAS TAKEN BY THE AO, WHILE GIVING EFFECT TO TH E ITAT'S DIRECTION, TO INDICATE THAT THOSE TPOS HAD NOT ACCE PTED THE TP ANALYSIS OF THE ASSESSEE IN AY 2007-08 & 2008-09. IT WAS, THEREFORE, CONCLUDED THAT THE TAX PAYER'S CLAIMS MA DE BEFORE THE HON'BLE ITAT WERE INCORRECT TO THE EXTENT THAT A TP ANALYSIS OF THE ASSESSEE WAS ACCEPTED BY THE TPO IN BOTH THE YEARS. 2.3 IN ITS OBJECTIONS THE TAX PAYER HAS GRIEVED THAT ALTHOUGH THE TPO IN AY 2007-08 AND AY 2008-09 HAD S ENT SHOW CAUSES PROPOSING TO REJECT THE CUP METHOD AND APPLY IT(TP)A.582/BANG/2015 PAGE - 6 TNMM, THE TAX PAYER IN BOTH THE YEARS HAD REPLIED B Y GIVING DETAILED JUSTIFICATION FOR ITS BELIEF THAT CUP WAS THE MOST APPROPRIATE METHOD THEREAFTER, THE PURPORTED INDEPENDENT ANALYSIS CARRIED OUT BY THE TPO UNDER T NMM IN BOTH THE YEARS WAS NEVER COMMUNICATED TO THE TAX PAYER. DURING THE SET ASIDE PROCEEDINGS ALSO, THE PRESENT AO HAS NOT MADE AVAILABLE THIS ANALYSIS TO THE TAX PAYER. THE TAX PAYER, THEREFORE, HAD NO REASON TO BELIEVE THAT SUBSEQUENT TO ITS REPLY TO THE SHOW CAUSES, THE TPO S HAD NOT ACCEPTED ITS CONTENTIONS ABOUT CUP BEING MAM AND TN MM HAVING BEEN APPLIED. 2.4 THE OBJECTIONS AS ABOVE ARE FOUND TO CARRY MERI T. THE DIRECTIONS OF THE HON'BLE TRIBUNAL WAS IN RESPE CT OF 'TRANSACTIONS OF THE ASSESSEE'. IT WAS NOT IN RESPE CT OF THE MOST APPROPRIATE METHOD APPLIED FOR ANALYSIS OF THE TRANSACTIONS FOR PURPOSES OF DETERMINING ARM'S LENG TH PRICE (ALP). THE TPO HAS PROCEEDED IN HIS IMPUGNED ORDER DOWN THE SECOND PATH I.E. WITH REGARD TO MAM. THIS WAS CLEARLY NOT HIS MANDATE. AS FAR AS THE TRANSACTION IN QUESTION WAS CONCERNED, THE CONCLUSION OF THE TPOS IN BOTH A YS 2007-08 AND 2008-09 WAS THAT THE RELEVANT TRANSACTI ONS WERE AT ARM'S LENGTH. THIS IS THE VERIFICATION WHIC H WAS EXPECTED BY THE HON'BLE ITAT. THE OBJECTIONS OF THE TAX PAYER ARE FOUND TO BE IN ORDER AND THE TPO'S REITER ATION OF THE POSITION ADOPTED IN HIS ORIGINAL ORDER DT. 28.0 9.2010 IS INAPPROPRIATE. HOWEVER, A READING OF THE FINAL ASSESSMENT ORDER PA SSED BY THE AO ON 30.01.2015 SHOW THAT TPO HAD PURSUANT TO THE DRP DI RECTIONS PASSED AN ORDER DT.29.01.2015 NOT COMPLYING WITH THE DIRECTIO NS OF THE DRP. AO HAD THEREFORE PERSISTED WITH THE SAME ADJUSTMENT THAT H E HAD DONE EARLIER. SECTION 144C WHICH DWELLS ON THE POWERS OF THE DRP, STATES AS UNDER AT SUB-SECTION (10): IT(TP)A.582/BANG/2015 PAGE - 7 144C(10) : EVERY DIRECTION ISSUED BY THE DISPUTE RE SOLUTION PANEL SHALL BE BINDING ON THE ASSESSING OFFICER. 08. IT IS CLEAR THAT THE DIRECTIONS OF THE DRP IS B INDING ON THE AO. NO DOUBT AS PER SECTION 92CA(4) OF THE ACT, AN AO HAS TO COMPUTE TOTAL INCOME IN CONFORMITY WITH THE ARMS LENGTH PRICE DET ERMINED BY THE TPO. HOWEVER, ONCE THERE IS AN ORDER OF DRP, AO IS BOUND BY THE DIRECTIONS OF THE DRP BY VIRTUE OF SUB-SECTION (1) TO SECTION 144 C OF THE ACT. AO IS NOT REQUIRED TO REFER THE MATTER WHICH HAS BEEN DECIDED BY THE DRP TO THE TPO AGAIN. WE ARE THEREFORE OF THE OPINION THAT THE AD DITION MADE BY THE AO WITHOUT CONSIDERING THE DIRECTIONS OF THE DRP REPRO DUCED BY US ABOVE CANNOT STAND IN THE FACE OF THE CLEAR LEGAL MANDATE . WE DELETE SUCH ADDITIONS. GROUNDS 2 TO 6 OF THE ASSESSEE IS TREAT ED AS PARTLY ALLOWED. 09. VIDE ITS GROUND 7, GRIEVANCE OF THE ASSESSEE IS ON DISALLOWANCE OF WARRANTY PROVISION OF RS.42,19,22,899/-. DIRECTION S OF THE TRIBUNAL WITH RESPECT TO THE PROVISION FOR WARRANTY IN THE EARLIE R ROUND OF PROCEEDINGS, WHICH APPEAR AT PARAS 19 AND 20 OF ITS ORDER DT.15. 03.2012, IS REPRODUCED HEREUNDER : 19. HAVING HEARD BOTH THE PARTIES AND HAVING CONSID ERED THE RIVAL CONTENTIONS, WE FIND THAT THE HONBLE SUPREME COURT IN THE CASE OF ROTORK CONTROLS IND. PVT. LTD., (CITED SUPR A) HAS HELD THAT WHEN A PRODUCT IS SOLD WITH A WARRANTY PROVISI ON, IT CANNOT IT(TP)A.582/BANG/2015 PAGE - 8 BE HELD THAT THE ASSESSEE HAS NO OBLIGATION FOR THE SAID WARRANTY BUT FOR MAKING A PROVISION FOR THE SAID WARRANTY A RELIABLE ESTIMATE SHOULD BE MADE ON THE AMOUNT OF OBLIGATION AND A SCIENTIFIC METHOD SHOULD BE USED. IN THE SAID DECIS ION, IT WAS HELD THAT A PROVISION IS A LIABILITY WHICH CAN BE M EASURED ONLY BY USING SUBSTANTIAL DEGREE OF ESTIMATION AND IT IS RECOGNIZED WHEN A) AN ENTERPRISE HAS A PRESENT OBLIGATION AS A RES ULT OF A PAST EVENT; B) IT IS PROBABLE THAT AN OUT-FLOW OF RESOURCES WIL L BE REQUIRED TO SETTLE THE OBLIGATION; AND C) A RELIABLE ESTIMATE CAN BE MADE ON THE AMOUNT OF THE OBLIGATION. 20. IN THE CASE BEFORE US, THE ASSESSEE HAS ACQUIRE D THE BUSINESS OF DESK TOPS AND LAP TOPS FROM IBM IN THE FINANCIAL YEAR RELEVANT TO THE ASSESSMENT YEAR 2006-07. THIS BEING THE FIRST YEAR OF ITS BUSINESS IN PERSONAL COMPUTERS, IT HAS NO DATA RELATING TO THE PROBABLE EXPENDITURE IT WOULD HAVE TO MEET ON ACCOUNT OF WARRANTY PROVISION. IT IS ALSO NOT DISPU TED THAT IBM WAS CARRYING ON BUSINESS IN INDIA IN THE EARLIER AS SESSMENT YEARS AND IBM WAS MAKING THE PROVISION FOR WARRANTY ON THE BASIS OF ITS GLOBAL DATA. THEREFORE, IT CANNOT BE S AID THAT THE ASSESSEE CANNOT USE THE DATA USED BY IBM FOR THE PA ST YEAR FOR MAKING THE ESTIMATION. IF THE ASSESSEE HAS MADE THE PROVISION ON A SCIENTIFIC BASIS, IT HAS TO BE ALLOWED AS DEDU CTION. HOWEVER, THIS FACT AS TO WHETHER THE ASSESSEE HAS M ADE THE PROVISION IN A SCIENTIFIC METHOD HAS TO BE VERIFIED BY THE ASSESSING AUTHORITY. IN VIEW OF THE SAME, WE DEEM I T FIT AND PROPER TO REMAND THIS ISSUE TO THE ASSESSING AUTHOR ITY TO RECONSIDER THE ISSUE AFRESH IN THE LIGHT OF THE GUI DELINES ISSUED BY THE HONBLE SUPREME COURT IN THE CASE OF ROTRACK CONTROLS INDIA PVT. LTD (CITED SUPRA) AND OTHER JUDICIAL PRE CEDENTS. THIS GROUND IS ACCORDINGLY ALLOWED FOR STATISTICAL PURPO SES. IT(TP)A.582/BANG/2015 PAGE - 9 10. PURSUANT TO THE ABOVE PROCEEDINGS, AO HAD CONSI DERED THE QUESTION OF OF WARRANTY PROVISIONING ONCE AGAIN. ASSESSEE T HERE UPON SUBMITTED A LETTER DT.06.03.2014 TO THE AO WHEREIN IT GAVE THE METHODOLOGY FOR WARRANTY PROVISIONING. AS PER THE ASSESSEE, WARRAN TY OBLIGATIONS WERE WORKED OUT BASED ON THE NUMBER OF LAPTOPS AND DESKT OPS SOLD BY IT, WHICH CARRIED A WARRANTY OBLIGATION AS ON 31 ST MARCH EVERY YEAR. ASSESSEE ALSO GAVE THE DETAILS OF THE WORK OUT. AS PER THE ASSES SEE IT WAS CONSIDERING THE UNEXPLAINED WARRANTY PERIOD IN RESPECT OF EACH MACH INE WHICH WAS SOLD AND MULTIPLYING IT BY THE REPAIR RATE AND COST PER CLAIM. AS PER THE ASSESSEE, REPAIR ACTION RATE WAS A PERCENTAGE OF TH E CLAIMS OUT OF THE TOTAL SALES BASED ON HISTORICAL DATA. SIMILARLY COST PER CLAIM WAS THE AVERAGE OF COST BASED ON HISTORICAL GLOBAL DATA. ASSESSEE POI NTED OUT THAT RELEVANT PREVIOUS YEAR WAS THE FIRST YEAR OF OPERATION OF TH E ASSESSEE, HAVING TAKEN OVER THE PC BUSINESS OF IBM AS A GOING-CONCERN BASI S. IN OTHER WORDS ASSESSEE ARGUED THAT PROVISION FOR WARRANTY WAS BAS ED ON HISTORICAL DATA AND PRINCIPLES ADOPTED BY IBM FOR MAKING SIMILAR PR OVISION. ASSESSEE ALSO GAVE A PERSPECTIVE OF THE EXPENDITURE INCURRED ON WARRANTIES FOR ASSESSMENT YEARS UP TO A. Y. 2009-10. AS PER THE A SSESSEE, SUCH EXPENDITURE WAS INCREASING, AND THE PROVISIONING WA S JUSTIFIED. IT(TP)A.582/BANG/2015 PAGE - 10 11. HOWEVER, AO DID NOT FIND THE ABOVE CONTENTIONS ACCEPTABLE. ACCORDING TO HIM, PERCENTAGE OF UTILISATION FOR WAR RANTY PROVISION MADE BY THE ASSESSEE IN THE IMPUGNED ASSESSMENT YEAR AS WEL L AS SUBSEQUENT ASSESSMENT YEARS PROVED THAT ONLY ABOUT 22% OF SUCH PROVISIONS WERE UTILISED. ACCORDING TO THE AO THERE WAS A GREAT MI SMATCH BETWEEN THE PROVISION CREATED AND THE ACTUAL EXPENDITURE. HE M ADE A CORRELATIVE STUDY OF THE ACTUAL WARRANTY SPENDING WITH THE WARRANTY P ROVISION FOR F. YS. 2005-06 TO 2009-10. ACCORDING TO HIM, THERE WAS AN INCREASE OF SALES TURNOVER FROM RS.1044 CRORES IN F . Y. 2005-06 TO R S.1805 CRORES IN F. Y. 2007-08 WHEREAS AND THERE WAS A DROP IN TURNOVER TO RS.1286 CRORES IN F. Y. 2008-09, THOUGH IT MARGINALLY INCREASED TO RS.1, 329 CRORES IN F. Y. 2009-10. AS PER THE AO, THERE WAS NO PROPORTION BE TWEEN THE WARRANTY AND THE TURNOVER. AO ALSO NOTED THAT WARRANTY PROV ISION UTILISED WERE ALWAYS LESSER THAN THE PROVISION CREATED. THUS ACC ORDING TO THE AO, ASSESSEE COULD NOT SHOW ANY SCIENTIFIC METHODOLOGY ADOPTED FOR ESTIMATING THE PROVISION OF WARRANTY. THEREFORE, HE ALLOWED T HE ACTUAL WARRANTY EXPENDITURE OF RS.7.66 CRORES AND MADE A DISALLOWAN CE OF THE BALANCE CLAIM. SUCH DISALLOWANCE CAME TO RS.27,27,96,488/- . IT(TP)A.582/BANG/2015 PAGE - 11 12. THOUGH THE ASSESSEE ASSAILED THE ABOVE ADDITION PROPOSED BY THE AO BEFORE THE DRP, IT DID NOT MEET WITH ANY SUCCESS. AS PER THE DRP, ANALYSIS DONE BY THE AO WAS RATIONAL AND FAIR AND NO EVIDEN CE OR TECHNICAL STUDIES DISCLOSING THE PAST TRENDS OF SALE AND ITS RELATION WITH WARRANTY PROVISIONING WAS PRODUCED BY THE ASSESSEE. 13. NOW BEFORE US, LD. AR STRONGLY ASSAILING THE OR DERS OF THE LOWER AUTHORITIES SUBMITTED THAT IT WAS THE FIRST YEAR IN WHICH THE ASSESSEE WAS SELLING DESKTOPS AND LAPTOP COMPUTERS. AS PER THE LD. AR S UCH BUSINESS WAS TAKEN OVER BY THE ASSESSEE FROM IBM. LD. AR POINTED OUT THAT ASSESSEE WAS THEREFORE FORCED TO FALL BACK UPON THE DATA ARCHIVED BY IBM W ITH REGARD TO WARRANTY PROVISION. AS PER THE LD. AR, ASSESSEE HAD FILED A LETTER ON 25.05.2012 BEFORE THE AO WHEREIN THE COMPUTATION OF WARRANTY PROVISIO N WAS CLEARLY GIVEN. RELYING ON PAPER BOOK PAGE 33, LD. AR SUBMITTED THA T THERE WAS A SPECIFIC FORMULA SUBMITTED BY THE ASSESSEE FOR WORKING OUT T HE WARRANTY PROVISION REQUIRED FOR DESKTOPS AND LAPTOPS MANUFACTURED AND TRADED BY IT. ASSESSEE HAD ADOPTED THE REPAIR PERCENTAGE RATE FOLLOWED AT ASIA PACIFIC LEVEL BY IBM. ASSESSEE HAD ALSO TAKEN THE COST CLAIM AS PER THE A SIA PACIFIC LEVEL OF IBM. THERE WAS NO FINDING BY ANY OF THE LOWER AUTHORITIE S THAT THE REPAIR PERCENTAGE OR COST PER CLAIM WHICH WERE THE BASIC BUILDING BLO CKS OF THE WARRANTY PROVISION IT(TP)A.582/BANG/2015 PAGE - 12 WERE ESTIMATED WITHOUT SCIENTIFIC BASIS OR WITHOUT SUFFICIENT BACK-UP DATA. LOWER AUTHORITIES HAD NOT CONSIDERED THIS, BUT SIMP LY WENT BY A TURNOVER RATIO. AS PER THE LD. AR, EVEN IF RELATIONS BETWEEN ACTUAL WARRANTY EXPENDITURE AND WARRANTY PROVISIONING WERE TO BE RECKONED, ASSESSEE WAS STILL ON A SAFE WICKET. AS PER LD. AR, FINANCIAL YEAR 2005-06 WAS THE FIRST YEAR IN WHICH ASSESSEE WAS DOING A BUSINESS OF DESKTOPS AND LAPTOPS. IT WAS D UE TO THIS REASON THAT THE PROVISIONING FOR THAT YEAR WAS MUCH HIGHER THAN WHA T WAS INCURRED FOR WARRANTY REPAIRS. AS PER THE LD. AR PROVISION MADE ON 31.03 .2006 OUGHT TO BE COMPARED WITH ACTUAL SPENDINGS FOR F. Y. 2006-07. IF THAT W AS CONSIDERED, LD. AR SUBMITTED THAT SPENDING OF THE ASSESSEE ON WARRANTY WERE MUCH HIGHER THAN THE PROVISIONING MADE. THUS ACCORDING TO HIM WARRANTY PROVISIONING WAS DONE BY THE ASSESSEE ON A SCIENTIFIC BASIS AND THE DISALLOW ANCE WAS UNJUSTIFIED. 14. PER CONTRA, LD. DR SUBMITTED THAT ASSESSEE HAD RELIED ON DATA PERTAINING TO IBM FOR ARGUING THAT IT WAS FOLLOWING SCIENTIFIC METHOD. BUT HOW IT HAD ARRIVED AT THE REPAIR RATE OR COST PER CLAIM FROM H ISTORICAL DATA OF IBM WAS NEVER BROUGHT BEFORE THE LOWER AUTHORITIES. ASSESSEE HAD SIMPLY PRODUCED CERTAIN FIGURES AND RELIED ON IT WITHOUT ANY BACK-UP DATA. AS PER THE LD. DR, HONBLE SUPREME COURT IN THE CASE OF ROTORK CONTROLS INDIA (PVT) LTD VS CIT [(2009) 314 ITR 62] SPECIFICALLY STIPULATED THAT AN ASSESSEE SHOULD PRO VE THE SCIENTIFIC IT(TP)A.582/BANG/2015 PAGE - 13 METHOD FOLLOWED BY IT FOR PROVISIONING AND IT WAS T HE ONUS OF THE ASSESSEE TO PRODUCE HISTORICAL DATA TO PROVE SUCH METHOD. HAVI NG NOT DONE THAT, AS PER THE LD. DR, IT COULD NOT BE SAID THAT ASSESSEE WAS FOLL OWING A SCIENTIFIC METHOD. THUS ACCORDING TO HIM, LOWER AUTHORITIES WERE JUSTI FIED IN DISALLOWING THE CLAIM OF WARRANTY PROVISION TO THE EXTENT IT WENT BEYOND ACTUAL WARRANTY EXPENDITURE. 15. AD LIBITUM REPLY OF THE LD. AR WAS THAT ASSESSE E WAS MANDATORILY REQUIRED TO FOLLOW AS-I AND II, W.E.F. 25.01.1996 B Y VIRTUE OF NOTIFICATION NO.9949, DT.25.01.1996. AS PER THE LD. AR, AS-I RE QUIRED PROVISIONING TO BE MADE FOR ALL KNOWN LIABILITIES AND LOSSES, EVEN THO UGH THE AMOUNT REPRESENTED ONLY A BEST ESTIMATE IN THE LIGHT OF AVAILABLE INFO RMATION. AS PER THE LD. AR JUDGMENT OF HONBLE SUPREME COURT IN THE CASE OF RO TORK CONTROLS INDIA (PVT) LTD WAS FOR A. YS. 1994-95 TO 1996-97 WHEN IT WAS N OT REQUIRED TO FOLLOW AS-I MANDATORILY. THUS ONCE THE NOTIFICATION DT.25.01.1 996 CAME INTO OPERATION, A SCIENTIFIC ESTIMATE COULD BE MADE CONSIDERING THE P AST DATA FOR AVAILING OF THE DEDUCTION. AS PER THE LD. AR, THIS IS WHAT ASSESSE E HAD DONE. RELIANCE WAS ALSO PLACED ON JUDGMENT OF HONBLE DELHI HIGH COURT IN THE CASE OF CIT V. ERICSSION COMMUNICATIONS P. LTD [(2009) 318 ITR 340]. RELYING ON THE JUDGMENT OF HONBLE APEX COURT IN THE CASE OF COMMI SSIONER OF SALES-TAX V. M/S. H. M. ESUFALL [(1973) AIR 2266] LD AR SUBMITTE D THAT AN ESTIMATE COULD IT(TP)A.582/BANG/2015 PAGE - 14 BE AN OVER ESTIMATE OR UNDER ESTIMATE AND THERE WOU LD ALWAYS BE AN ELEMENT OF GUESS WORK WHILE MAKING AN ESTIMATE. THIS, AS PER THE LD. AR, WAS NOT A REASON TO REJECT A LEGITIMATE CLAIM OF THE ASSESSEE. 16. WE HAVE PERUSED THE MATERIALS AND HEARD THE RIV AL 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 OF SALE OF LAPTOPS A ND DESKTOPS. OBVIOUSLY ASSESSEE HAD NO HISTORICAL DATA WITH IT. IT IS ALS O NOT DISPUTED THAT ASSESSEE HAD TAKEN OVER THIS BUSINESS FROM IBM, WHO HAD SUBSTANT IAL EXPERIENCE IN SUCH BUSINESS. HENCE IF THE ASSESSEE RELIED ON THE METH ODOLOGY FOLLOWED BY IBM FOR WORKING OUT THE WARRANTY PROVISION WE CANNOT SAY TH AT IT WAS INCORRECT. THERE IS NO CASE FOR THE REVENUE THAT ANY PROVISIONING MADE BY IBM IN RESPECT OF SUCH BUSINESS IN ANY EARLIER YEARS WERE DISALLOWED FOR A REASON THAT IT WAS UNSCIENTIFIC. IT IS TRUE THAT ASSESSEE HAD ADOPTED TWO FACTORS NAMELY, REPAIR ACTION RATE AND COST PER CLAIM FROM IBM DATA AVAILA BLE 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 ASSESSEE FOR THE SUCCEEDING ASSESSMENT YEARS REVEALS THE FOLLOWING : IT(TP)A.582/BANG/2015 PAGE - 15 IT(TP)A.582/BANG/2015 PAGE - 16 THERE IS MUCH STRENGTH IN THE ARGUMENT OF THE LD. A R THAT PROVISION DONE FOR A YEAR SHOULD BE COMPARED WITH THE ACTUAL SPEND ING IN THE SUCCEEDING YEAR. THIS IS FOR THE SIMPLE REASON THAT EXPENDITU RE INCURRED AGAINST WARRANTY GIVEN ON SALES MADE IN ANY GIVEN YEAR WOUL D BE REFLECTED IN THE SUCCEEDING YEAR, WHEN THE PROVISIONING IS DONE ON T HE BASIS OF MACHINE MONTHS. ASSESSEE HAD DONE THE PROVISIONING BASED ON MACHINE MONTHS. IF BY APPLICATION OF THE FORMULA OF MULTIPLYING MACHI NE MONTHS WITH REPAIR ACTION RATE AND COST PER CLAIM, AN EXCESSIVE WARRA NTY PROVISIONING HAD RESULTED, THEN DEFINITELY IN THE SUCCEEDING YEAR TH E EXPENDITURE INCURRED ON WARRANTY WOULD BE MUCH LESS. THE TABLE ABOVE WOULD SHOW THAT EXPENDITURE ON WARRANTY WAS HIGHER IN ALMOST ALL SU CCEEDING YEARS EXCEPT FINANCIAL YEAR 2009-09. IN SUCH CIRCUMSTANCES WE C ANNOT SAY THAT ASSESSEE HAD FOLLOWED A METHOD WHICH WAS NOT SCIENTIFIC. WE ARE OF THE OPINION THAT THE THREE CONDITIONS SET OUT BY THE HONBLE APEX CO URT IN THE CASE OF IT(TP)A.582/BANG/2015 PAGE - 17 ROTORK CONTROLS INDIA (PVT) LTD HAVE BEEN SATISFIED BY THE ASSESSEE, VIZ., ESTABLISHING THAT THERE IS A PRESENT OBLIGATION ON ACCOUNT OF A PAST EVENT, WORKING OUT THE PROBABLE ESTIMATE OF THE OUTFLOW OF THE RESOURCES REQUIRED AND SUBSTANTIATING THE RELIABILITY OF SUCH ESTIMATE . ESPECIALLY SO SINCE THE ASSESSEE WAS MANDATORILY REQUIRED TO FOLLOW AS-I AN D PRINCIPLES OF PRUDENCE STIPULATED IN SUCH AS-I REQUIRED PROVISION ING FOR ALL KNOWN LIABILITIES EVEN IF IT COULD NOT BE DETERMINED WITH CERTAINTY, BUT WAS MADE BASED ON AVAILABLE DATA. WE THEREFORE DELETE THE A DDITION MADE BY THE AO DISALLOWING THE PROVISION FOR WARRANTY. GROUND 7 O F THE ASSESSEE STANDS ALLOWED. 17. IN THE RESULT, APPEAL OF THE ASSESSEE IS ALLOWE D. ORDER PRONOUNCED IN THE OPEN COURT ON 30 TH DAY OF MAY, 2016. SD/- SD/- (VIJAY PAL RAO) (ABRA HAM P GEORGE) JUDICIAL MEMBER ACCOUNTANT MEMBER MCN IT(TP)A.582/BANG/2015 PAGE - 18