M/s A O Smith India Water Products Pvt Ltd , Bangalore V. Deputy Commissioner of Income Tax Circle-1(1)(2), Bangalore

ITA 628/BANG/2017

• Counselvise Citation: [2021] 109 COUNSELVISE.COM (IT) 4529 (ITAT-BANGALORE)
• Duration Of Justice: 3 year(s) 10 month(s) 23 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 10-02-2021
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: C
• Next Hearing Date: 27-01-2021
• Assessment Year: 2012-2013
• Appeal Filed On: 17-03-2017
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Assessee Lawyers: K R VASUDEVAN
• Keywords: Unexplained expenditure; Transfer pricing; Business expenditure; International transaction; Revised return; TDS; Set aside
• Section: 92C; 143(2); 13; 92CA; 37; 92

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL C BENCH : BANGALORE BEFORE SHRI. CHANDRA POOJARI, ACCOUNTANT MEMBER AND SMT. BEENA PILLAI, JUDICIAL MEMBER IT(TP)A NO.628/BANG/2017 ASSESSMENT YEAR : 2012-13 M/S A.O SIMTH INDIA WATER PRODUCTS PVT. LTD., NO.300, PHASE II, KIADB INDL. AREA, HAROHALLI, KANAKAPURA (TQ), RAMANAGAR DIST, BENGALURU-562 112. PAN AAFCA 8954 R VS. THE DY. COMMISSIONER OF INCOME-TAX, CIRCLE-1(1)(2), BENGALURU. APPELLANT RESPONDENT ASSESSEE BY : SHRI K.R VASUDEVAN, ADVOCATE REVENUE BY : SHRI PRADEEP KUMAR, CIT (DR) DATE OF HEARING : 27-01-2021 DATE OF PRONOUNCEMENT : 10-02-2021 ORDER PER BEENA PILLAI, JUDICIAL MEMBER PRESENT APPEAL HAS BEEN FILED BY ASSESSEE AGAINST T HE FINAL ASSESSMENT ORDER PASSED BY LD. DCIT CIRCLE 1 (1) (2 ), BANGALORE FOR ASSESSMENT YEAR 2012-13 ON FOLLOWING GROUNDS OF APPEAL: PAGE 2 OF 15 IT(TP)A NO.628/BANG/2017 THE GROUNDS MENTIONED HEREINAFTER ARE WITHOUT PREJ UDICE TO ONE ANOTHER. TRANSFER PRICING THE LEARNED ASSESSING OFFICER ('LEARNED AU'), LEARN ED TRANSFER PRICING OFFICER ('LEARNED TPO') AND THE HONOURABLE DISPUTE RESOLUTION PANEL ('HON'BLE DRP') GROSSLY ERRED IN ADJUSTING TH E TRANSFER PRICE BY INR 21,17,82,872/- OF THE APPELLANT'S INTERNATIONAL TRANSACTIONS WITH ITS ASSOCIATED ENTERPRISES ('AES') U/S 92CA OF THE INCOME-TAX ACT, 1961 ('THE ACT'). 2. THE LEARNED AU/LEARNED TPO/HON'BLE DRP ERRED IN REJECTING THE TP DOCUMENTATION MAINTAINED BY THE APPELLANT BY INVOKING PROVISIONS OF SUB-SECTION (3) OF 92C OF THE ACT. 3. THE LEARNED AU/LEARNED TPO/HON'BLE DRP ERRED IN DISREGARDING THE ECONOMIC ANALYSIS PERFORMED BY THE APPELLANT IN THE TRANSFER PRICING DOCUMENTATION TO JUSTIFY THE ARM'S LENGTH NATURE OF THE INTERNATIONAL TRANSACTION PERTAINING TO PURCHASE OF RAW MATERIALS. IN THE LEARNED AU/LEARNED TPO/HON'BLE DPP ERRED IN NOT APPLYING COST PLUS METHOD ('CPM') AS THE MOST APPRO PRIATE METHOD WITH RESPECT TO THE MANUFACTURING ACTIVITY OF THE A PPELLANT. 5 THE LEARNED AO/LEARNED TPO/HON'BLE DRP OUGHT TO H AVE APPRECIATED THE FACT THE APPELLANT WAS IN ITS START UP PHASE WITH RESPECT TO THE MANUFACTURING ACTIVITY OF THE APPELLANT. THE LEARNED AU/LEARNED TPO/HON'BLE DRP ERRED IN NOT APPRECIATING THE FACT THAT THE LOSSES INCURRED DURI NG THE YEAR WERE DUE TO ECONOMIC AND BUSINESS REASONS SUCH AS: I. MARKET PENETRATION STRATEGIES; II. PRICE COMPETITIVENESS; III. UNDER-UTILIZATION OF CAPACITY; AND IV.IMPACT OF FOREIGN EXCHANGE FLUCTUATION 7. WITHOUT PREJUDICE TO THE ABOVEMENTIONED GROUNDS THAT NO TRANSFER PRICING ADJUSTMENT OUGHT TO BE MADE, THE L EARNED AO/LEARNED TPO/HON'BLE DRP ERRED IN NOT RESTRICTING THE TRANSF ER PRICING ADJUSTMENT TO THE VALUE OF THE INTERNATIONAL TRANSA CTIONS OF THE APPELLANT. 8. WITHOUT PREJUDICE TO THE ABOVE, THE LEARNED AO/L EARNED TPO/HON'BLE DRP ERRED IN NOT ANALYZING THE IMPACT O F THE PROPOSED TRANSFER PRICING ADJUSTMENT ON THE GROSS MARGIN OF THE APPELLANT. 9. WITHOUT PREJUDICE TO THE ARGUMENT THAT CPM IS TH E MOST APPROPRIATE METHOD, THE LEARNED AO/LEARNED TPO/HON' BLE DRP ERRED IN NOT PROVIDING APPROPRIATE ADJUSTMENT TOWARDS CUSTOMS DUTY INCURRED BY THE APPELLANT VIS--VIS CO MPARABLE COMPANIES. PAGE 3 OF 15 IT(TP)A NO.628/BANG/2017 10. THE LEARNED AO/LEARNED TPO/HON'BLE DRP ERRED IN NOT CONSIDERING THE PREVIOUS TWO YEARS FINANCIAL DATA O F THE COMPARABLE COMPANIES WHILE DETERMINING THE ALP. CORPORATE TAX 11. DISALLOWANCE OF PROVISION CREATED FOR SALES/ADVERTISEMENT - RS.73,37,974 A. THE LEARNED AO/ HON'BLE DRP HAS ERRED IN CONSIDE RING PROVISION FOR ANNUAL SALES SCHEMES OR ADVERTISEMENT EXPENSES AMOUNTING TO RS.73,37,974 AS CONTINGENT LIABILITY N OT CRYSTALIZED ASON3L MARCH 2012. B. THE LEARNED AO/ HON'BLE DRP HAS ERRED IN DISALLO WING THE PROVISION FOR ANNUAL SALES SCHEMES OR ADVERTISEMENT EXPENSES AMOUNTING TO RS.73,37,974 UNDER SECTION 37 OF THE I NCOME-TAX ACT, 1961 ('THE ACT'). C. THE LEARNED AO/ HON'BLE DRP OUGHT TO HAVE APPREC IATED THAT IF A BUSINESS LIABILITY ARISES IN AN ACCOUNTING YEAR, THE DEDUCTION SHOULD BE ALLOWED IN THAT YEAR ALTHOUGH THE LIABILITY MAY BE DISCHARGED AT A FUTURE DATE. D. THE LEARNED AO/ HON'BLE DRP OUGHT TO HAVE APPREC IATED THAT THE LIABILITY TOWARDS PROVISION FOR ANNUAL SALES SC HEMES OR ADVERTISEMENT HAS BEEN DETERMINED BASED ON THE ACTU AL SALES MADE DURING FINANCIAL YEAR 2011-12 AND HENCE THE SAME CA NNOT BE CONSIDERED AS AN UNASCERTAINED LIABILITY. 12. DISALLOWANCE OF EXPENDITURE ON ADVERTISEMENT- RS.93,02,790 A. THE LEARNED AO/ HON'BLE DRP HAS ERRED IN DISALLO WING A PORTION OF EXPENDITURE INCURRED ON ADVERTISEMENT AM OUNTING TO RS.93,02,790 BY CONSIDERING THE SAME AS AN UNEXPLAI NED EXPENDITURE. B. THE LEARNED AO/ HON'BLE DRP OUGHT TO HAVE OBSERV ED THAT THE SAID ADVERTISEMENT EXPENDITURE HAS BEEN INCURRED WI TH AN INTENT TO PROMOTE SALE OF COMPANY'S PRODUCTS. C. THE LEARNED AO/ HON'BLE DRP OUGHT TO HAVE APPREC IATED THAT THE ABOVE EXPENSES HAVE BEEN INCURRED FOR THE PURPO SE OF BUSINESS AND HENCE ALLOWABLE UNDER THE PROVISIONS OF SECTION 37( 1)OF THE ACT. 13. DISALLOWANCE OF WARRANTY PROVISION - RS.94,95,2 60 A. THE LEARNED AO/ HON'BLE DRP HAS ERRED IN DISALLO WING THE WARRANTY PROVISION OF RS.94,95,260 B. THE LEARNED AO/ HON'BLE DRP HAS ERRED IN OBSERVI NG THAT THE COMPANY DOES NOT HAVE ENOUGH DATA TO CARRY OUT A TR END ANALYSIS IN A SCIENTIFIC MANNER AS AY 2012-13 IS THE FOURTH YEAR OF OPERATION OF THE COMPANY AND THIRD YEAR OF UTILISATION OF WARRANTY P ROVISIONS. C. THE LEARNED AO/ HON'BLE DRP HAS ERRED IN HOLDING THAT THE COMPANY HAS BEEN CREATING PROVISIONS ON AN AD-HOC B ASIS IGNORING THE BASIS ON WHICH THE PROVISION WAS DETERMINED. PAGE 4 OF 15 IT(TP)A NO.628/BANG/2017 D. THE LEARNED AO/ HON'BLE DRP HAS ERRED IN OBSERVI NG THAT WARRANTY PROVISION IS CONTINGENT IN NATURE AND HENC E, NOT ALLOWABLE AS A BUSINESS EXPENDITURE. E. THE LEARNED AO/ HON'BLE DRP OUGHT TO HAVE OBSERV ED THAT WARRANTY PROVISION IS CALCULATED BASED ON HISTORICA L TREND AND IS CREATED ON A SCIENTIFIC BASIS AND HENCE IS NOT CONT INGENT IN NATURE. THE APPELLANT CRAVES LEAVE TO ADD, ALTER, RESCIND A ND MODIFY THE GROUNDS HEREIN ABOVE OR PRODUCE FURTHER DOCUMENTS, FACTS AND EVIDENCE BEFORE OR AT THE TIME OF HEARING OF THIS APPEAL. FOR THE ABOVE AND ANY OTHER GROUNDS WHICH MAY BE RA ISED AT THE TIME OF HEARING, IT IS PRAYED THAT NECESSARY RELIEF MAY BE PROVIDED. BRIEF FACTS OF THE CASE ARE AS UNDER: 2. THE ASSESSEE IS A COMPANY AND FILED ITS RETURN O F INCOME FOR YEAR UNDER CONSIDERATION ON 29/11/2012 DECLARING CU RRENT YEAR LOSS OF RS.29,98,71,723/-. SUBSEQUENTLY, THE ASSESS EE FILED REVISED RETURN ON 31/03/2014, DECLARING LOSS OF RS.21,15,18,062/-. BOOK PROFIT WAS SHOWN TO BE AT NIL BY ASSESSEE. THE CASE WAS SELECTED FOR SCRUTINY AND NO TICE UNDER SECTION 143(2) OF THE ACT WAS ISSUED, IN RESPONSE T O WHICH, REPRESENTATIVES OF THE ASSESSEE APPEARED BEFORE THE LD. AO AND FILED REQUISITE DETAILS AS CALLED FOR. 3. THE LD.AO OBSERVED THAT, THE ASSESSEE WAS ENGAGE D IN THE BUSINESS OF MANUFACTURE AND SALE OF WATER HEATERS. DURING THE YEAR IT WAS OBSERVED THAT, THE ASSESSEE HAD INTERNA TIONAL TRANSACTION EXCEEDING RS.50 CRORES. THEREFORE WITH PRIOR APPROVAL, THE ISSUE REFERENCE WAS MADE TO THE TRANS FER PRICING OFFICER TO DETERMINED ARMS LENGTH PRICE AS PER PRO VISIONS OF SECTION 92CA OF THE ACT. PAGE 5 OF 15 IT(TP)A NO.628/BANG/2017 4. UPON RECEIPT OF REFERENCE, THE LD.TPO CALLED UPO N ASSESSEE TO FILE REQUISITE DETAILS IN FORM 3CD REGARDING THE INTERNATIONAL TRANSACTION BETWEEN THE ASSESSEE AND ITS AE. THE LD . TPO NOTED THAT ASSESSEE HAD FOLLOWING INTERNATIONAL TRANSACTI ON DURING THE YEAR UNDER CONSIDERATION: CATEGORY AMOUNT (IN RS) PURCHASE OF WATER HEATERS 4,669,014 PURCHASE OF RAW MATERIALS 303,487,860 PAYMENT TOWARDS SUPPORT SERVICES 27,501,012 PAYABLES 138,448,606 PAYMENT OF ROYALTY 17,424,633 4. ASSESSEE FOR THE YEAR UNDER CONSIDERATION APPLIE D CPM AS THE MOST APPROPRIATE METHOD IN MANUFACTURING SEGMEN T. THE LD.TPO REJECTED THE MAM ADOPTED BY THE ASSESSEE FOR THE REASON THAT FUNCTIONS PERFORMED BY THE ASSESSEE BEFORE RES ELLING THE PRODUCTS OF ITS AE AND COSTS FOR PERFORMING SUCH FU NCTIONS WERE NOT AVAILABLE. THE LD.TPO ADOPTED TNMM AS THE MAM A ND DETERMINED THE ALP OF THE TRANSACTION OF TRADING. I T IS RELEVANT TO POINT OUT THAT IN RESPECT OF MANUFACTURING SEGMENT, THE LD.TPO ACCEPTED FOLLOWING COMPARABLES CHOSEN BY THE ASSESS EE: S.NO COMPANY NAME SALES OP OP/SA LES 1 GENUS POWER INFRASTRUCTURES LTD. 717.77 86.0 4 11.99% 2 INCAP LTD. 17.61 0.76 4.32% 3 SALZER ELECTRONICS LTD. 249.12 21.8 8.75% 4 PENGUIN ELECTRONICS LTD. 86.94 5.92 6.81% PAGE 6 OF 15 IT(TP)A NO.628/BANG/2017 5 KIRLOSKAR ELECTRIC CO. LTD. 949.5 21,3 1 2.24% AVERAGE 6.82% 5. THE LD.TPO COMPUTED ASSESSEES MARGIN TO BE (-) 18.28% ON SALES AND AVERAGE MARGIN OF COMPARABLES AT 6.28%, A ND THUS PROPOSED AN ADJUSTMENT AT RS.21,17,82,872/-BY DETER MINING IN THE MARGIN OF ASSESSEE USING PLI AS OP/OC. 6. THE LD.AO WHILE PASSING THE DRAFT ASSESSMENT ORD ER FURTHER DISALLOWED: THE PROVISION CREATED FOR SALES/ADVERTISEMENT AMOUN TING TO RS.73,37,974/- UNEXPLAINED EXPENDITURE ON ADVERTISEMENT AMOUNTING TO RS.93,02,790/- PROVISION CREATED FOR WARRANTY AMOUNTING TO RS.94,9 5,260/- 7. AGGRIEVED BY THE ADDITIONS MADE BY THE LD.AO, AS SESSEE FILED OBJECTIONS BEFORE DRP. 8. BEFORE DRP THE ASSESSEE SUBMITTED THAT IT IS IN THE START-UP PHASE AND OPERATES IN THE CAPITAL INTENSIVE INDUSTR Y AND HENCE DESPITE HAVING HELD THE GROSS MARGIN, IT FAILED TO RECOVER THE OTHER OPERATIONAL COSTS AT NET LEVEL AND HENCE REPORTS LO SS, AS COMPARED TO THE COMPARABLE COMPANIES, WHO WERE EARLY ENTRANT S IN THE SPECIFIED INDUSTRY. 9. THE DRP OBSERVED THAT ASSESSEE HAS NOT BROUGHT A NY ARGUMENT OR FACTS IN FAVOUR OF APPLICATION OF CPM I N THE INSTANT CASE WHEN IT IS A FULL-FLEDGED MANUFACTURER. THE DR P OBSERVED PAGE 7 OF 15 IT(TP)A NO.628/BANG/2017 THAT REPLIES AND SUBMISSIONS WERE GENERAL AND VAGUE WITHOUT MAKING OUT ANY CASE IN ITS FAVOUR. THE DRP THUS CON FIRMED THE ACTION OF THE LD.TPO AND APPLICATION OF TNMM AS MOS T APPROPRIATE METHOD. 10. IN RESPECT OF DISALLOWANCE OF PROVISION CREATED FOR SALES/ADVERTISEMENT, DRP HELD AS UNDER: HAVING CONSIDERED THE SUBMISSIONS, WE HAVE PERUSED THE RECORD TO FIND THAT _ HAS EXAMINED THIS ISSUE IN PARA 6 OF THE DRA FT ASST ORDER (DAO), WHEREIN HE HAS BROUGHT OUT CLEARLY, THAT THE LIABIL ITY IS CRYSTALLISED IN THE NEXT FINANCIAL YEAR AND THE OBLIGATION TO PAY IS AL SO IN THE NEXT FINANCIAL YEAR BASED ON THE 'SALES NUMBERS' OF THE CURRENT YE AR. EVERYTHING IS HAPPENING IN THE NEXT FINANCIAL YEAR AND ONLY STATI STICS OF SALES OF THE PREVIOUS YEAR ARE USED TO QUANTIFY THE INCENTIVES. THEREFORE, IT IS ALLOWABLE ONLY IN THE NEXT FINANCIAL YEAR. THE EXPE NSES ARE NOT DOUBTED AT ALL AND IT IS SAID THAT THE LIABILITY TO PAY GETS C RYSTALLISED AND ARISES IN THE NEXT FINANCIAL YEAR, THEREFORE, IT IS ALLOWABLE ONL Y IN THE NEXT YEAR. CONSIDERING THE SAME, WE ARE IN COMPLETE AGREEMENT WITH THE AO TO CONFIRM HIS ACTION AND ACCORDINGLY REJECT THIS GROU ND OF OBJECTION. 11. IN RESPECT OF DISALLOWANCE OF ADVERTISEMENT EXP ENDITURE AS UNEXPLAINED, THE DRP UPHELD THE AOS ACTION BY OBSE RVING AS UNDER: HAVING CONSIDERED THE SUBMISSIONS, WE ARE OF THE V IEW THAT THE AO HAS DISALLOWED THE CLAIM ON THE GROUND THAT THE ASSESSE E HAS NOT PROVED THE SAID EXPENDITURE WITH ANY DOCUMENTARY PROOF/EVIDENC E. INSTEAD OF LEADING THE BASIC EVIDENCE AS REQUIRED BY THE AO, ASSESSEE HAS SUBMITTED BEFORE US THAT THE INCREASE IN SALES SHOULD BE CONSIDERED AS A VALID JUSTIFICATION FOR ESTABLISHING THAT IT HAD INCURRED THIS EXPENDIT URE. BEFORE US, THE ASSESSEE HAS REFERRED TO ANNEX 1.7A AND UPON CAREFU L EXAMINATION, WE FOUND THAT IT HAS ONLY ONE PAGE (PAGE 80 OF THE PB) CONTAINING THE STATEMENT OF TDS MADE AND IT IS NOT, IN ANY SENSE, ANY EVIDENCE THIS FAILURE ON THE PART OF THE ASSESSEE CANNOT BE REDEE MED IN ANY WAY EXCEPT BY WAY OF PRODUCING THE PROPER DOCUMENTARY EVIDENCE , LEAST BY SAYING THAT INCREASE IN TURNOVER JUSTIFIES THIS. THE INCRE ASE IN TURNOVER THIS YEAR OVER LAST YEAR, COULD BE DUE TO SEVERAL FACTORS INC LUDING THE FACTORS PERTINENT TO THE PREVIOUS YEAR, TO CITE ONE; THAT T HE COMPANY HAD FULL SCALE MANUFACTURING FOR COMPLETE 12 MONTHS DURING THE YEA R IN CONTRAST TO THE 6 MONTHS OF MANUFACTURING LAST YEAR. PAGE 8 OF 15 IT(TP)A NO.628/BANG/2017 THUS, WE ARE OF THE VIEW THAT THE ASSESSEE HAS TO D ISCHARGE THE INITIAL ONUS TO ESTABLISH THE GENUINENESS OF THE TRANSACTIO N, WHICH IT FAILED DO SO. BOTH THE CITED JUDICIAL PRECEDENTS ARE NOT HELPFUL TO THE ASSESSEE, AS THE FACTS ARE TOTALLY DIFFERENT AND IN THE PRESENT CASE THE ASSESSEE HAS COMPLETELY FAILED TO ESTABLISH THE FACT THAT IT HAD GENUINELY INCURRED ANY SUCH EXPENSES CLAIMED IN THE BOOKS. IN VIEW OF THE ABOVE, WE UPHOLD THE ACTION OF THE A O AND REJECT THE OBJECTION OF ASSESSEE. 12. IN REGARDS TO DISALLOWANCE OF WARRANTY PROVISIO N, THE DRP UPHELD THE ACTION OF LD. AO BY OBSERVING AS UNDER: HAVING CONSIDERED THE SUBMISSIONS, WE HAVE EXAMIN ED PARA 7 OF THE TP ORDER THIS ISSUE WAS DISCUSSED WHILE CONCLUDING IN PARA 7.5-7.6 THAT: 7.5 EVEN GOING BY THE WARRANTY PROVISION WORKINGS, IT IS SEEN THAT FOR THE PAST THREE YEARS, THE ACTUAL UTILIZATION OF WARRANT Y VARIES FROM 17% TO 43%. FURTHER, THE RETURNS UNDER WARRANTY ALSO VARY FROM 0.15% TO 0.40% OF PRODUCTION. 7.6 GOING BY ALL THE ABOVE, IT IS INFERRED THAT THE WARRANTY PROVISIONS NOT BEEN MADE IN A SCIENTIFIC MANNER AS LAID OUT BY THE RATIO SUPRA) OF THE APEX COURT. THEREFORE, THE UNUSED WARRANTY PROVISIO NS OF 94,95,260/- IS BEING DISALLOWED AND ADDED TO THE TAXABLE INCOME. CONSIDERING THESE FACTS, WE ARE OF THE VIEW THAT TH E ASSESSEE HAS NO VALID AND SCIENTIFIC BASIS IN CREATING THE SAID WAR RANTY PROVISION @1.85% OF SALES, AS LAID BY THE HONBLE SC IN THE CASE OF ROTORK INDIA. ONLY UPON PROVING THAT THE ASSESSEE HAS A SCIENTIFIC BASIS BE HIND THE SAID CALCULATION OF THE PROVISION, THEN COMES THE OVERAL L LIMIT OF 3%. HENCE, WE ARE OF THE VIEW THAT THE SAID CLAIM IS NOT ALLOWABL E AND ACCORDINGLY, REJECT THE OBJECTION. HOWEVER, IT IS OBSERVED FROM THE BALANCE SHEET, P & L ACCOUNT AND COMPUTATION OF INCOME FILED ALONG WITH THE ROI THAT THE SAID PROVISION OF WARRANTY IS FOUND NOT DEBITED/CLAIMED AS EXPENDITUR E FOR THE YEAR. THE AO IS ACCORDINGLY DIRECTED TO VERIFY THIS FACT TO E NSURE THAT THE ASSESSEE HAS DEBITED THIS EXPENDITURE, AS THE DISALLOWANCE I S VALID ONLY WHEN THE SAID AMOUNT IS INDEED CLAIMED AS EXPENDITURE FOR TH E YEAR. 13. BASED UPON THE ABOVE DIRECTIONS, LD.AO PASSED F INAL ASSESSMENT ORDER BY MAKING ADDITION IN THE HANDS OF ASSESSEE. 14. AGGRIEVED BY ORDER OF THE LD.AO, ASSESSEE IS I N APPEAL BEFORE US NOW. PAGE 9 OF 15 IT(TP)A NO.628/BANG/2017 15. AT THE OUTSET, THE LD.AR SUBMITTED THAT, GROUND NO. 1-3 ARE GENERAL IN NATURE AND THEREFORE DO NOT REQUIRE ANY ADJUDICATION. 16. IT HAS BEEN SUBMITTED THAT, GROUND NO.4-10 ARE IN RESPECT OF TRANSFER PRICING ADDITION MADE BY THE LD.AO. HE SUBMITTED THAT, THESE ISSUE HAVE BEEN ADDRESSED BY COORDINATE BENCH OF THIS TRIBUNAL IN THE ASSESSEES OWN CASE FOR ASSESSMENT YEAR 2011-12, REPORTED IN [2018] 98 TAXMANN.COM 295, WHEREIN THE ISSUE HAS BEEN REMANDED TO THE LD.TPO. 17. THE LD.CIT.DR DID NOT HAVE ANY OBJECTION FOR TH E ISSUE BEING REMANDED TO THE LD.TPO, TO BE DEALT WITH IN A CCORDANCE WITH DIRECTIONS BY THIS TRIBUNAL IN ASSESSEES OWN CASE FOR ASSESSMENT YEAR 2011-12. 18. WE NOTE THAT, THIS TRIBUNAL FOR ASSESSMENT YEAR 2011-12 (SUPRA) DECIDED THE ISSUE AS UNDER: 16. AGGRIEVED BY THE ORDER OF THE DRP AS AFORESAID, TH E REVENUE HAS PREFERRED THE PRESENT APPEAL BEFORE THE TRIBUNAL. 17. WE HAVE HEARD THE RIVAL SUBMISSIONS. THE LD. DR SU BMITTED THAT THE BASIS ON WHICH THE DRP DELETED THE TP ADJUSTMEN T MADE BY THE AO WAS NOT CORRECT. IN THIS REGARD, THE LD. DR SUBMITT ED THAT THE REQUIREMENT OF SECTION 92(1) OF THE ACT FOR DETERMI NATION OF ALP IN RESPECT OF AN INTERNATIONAL TRANSACTION HAS TO BE F OLLOWED AND MERELY FOR THE REASON THAT ON SUCH DETERMINATION, THE PROF IT MARGIN OF THE ASSESSEE WILL BE EXORBITANT CANNOT BE THE BASIS TO DELETE THE ADDITION MADE ON ACCOUNT OF DETERMINATION OF ALP. HIS SUBMIS SION THAT IF THE DRP FINDS THAT THE MAM IS CPM FOR INTERNATIONAL TRA NSACTION FOR PURCHASE OF RAW MATERIALS AND RPM FOR INTERNATIONAL TRANSACTION FOR TRADING IN WATER HEATERS IS APPROPRIATE, THEN THE D RP OUGHT TO HAVE EMBARKED UPON AN ENQUIRY AS TO WHETHER THE ALP COMP UTED BY THE ASSESSEE IN ACCORDANCE WITH THOSE METHODS WAS CORRE CT. IT WAS SUBMITTED BY HIM THAT BY DEFAULT PRICE PAID IN INTE RNATIONAL TRANSACTION CANNOT BE CONSIDERED AS AT ARM'S LENGTH. IT WAS THE REFORE SUBMITTED BY HIM THAT DETERMINATION OF MAM AND DETERMINATION OF ALP BASED ON THE MAM SHOULD BE DIRECTED TO BE CARRIED OUT. PAGE 10 OF 15 IT(TP)A NO.628/BANG/2017 18. THE LD. COUNSEL FOR THE ASSESSEE, ON THE OTHER HAN D, POINTED OUT THAT AS FAR AS INTERNATIONAL TRANSACTION OF TRADING IN HEATERS IS CONCERNED, IN ASSESSEE'S OWN CASE, THIS TRIBUNAL HA S HELD THAT RPM IS THE MAM FOR DETERMINING THE ALP. THE DECISION OF IT AT IN DY. CIT V. A.O. SMITH INDIA WATER HEATING (P.) LTD.[2018] 97 T AXMANN.COM 218 (BANG. - TRIB.) WAS SOUGHT TO BE RELIED UPON BY THE LD. COUNSEL FO R THE ASSESSEE. WITH REGARD TO THE INTERNATIONAL TRANSACT ION OF PURCHASE OF RAW MATERIALS, THE LD. COUNSEL FOR THE ASSESSEE BRO UGHT TO OUR NOTICE THAT THE ONLY REASON GIVEN BY THE TPO FOR REJECTING THE CPM AS MAM IS THE ABSENCE OF DETAILS REGARDING COMPUTATION OF GRO SS PROFIT OF THE ASSESSEE. IN THIS REGARD, OUR ATTENTION WAS DRAWN T O THE TP STUDY WHERE THE GROSS MARGINS EARNED BY THE ASSESSEE HAVE BEEN CLEARLY GIVEN. THESE DETAILS HAVE ALREADY BEEN EXTRACTED WH ILE DEALING WITH THE CONTENTIONS OF THE ASSESSEE BEFORE THE DRP IN T HE EARLIER PART OF THIS ORDER. IT WAS THEREFORE SUBMITTED BY THE LD. COUNSE L FOR THE ASSESSEE THAT THE CONCLUSIONS OF THE TPO THAT CPM IS NOT THE MAM IN RESPECT OF INTERNATIONAL TRANSACTION FOR PURCHASE OF RAW MATER IALS IS NOT CORRECT. THE LD. COUNSEL FOR THE ASSESSEE THEREFORE PRAYED T HAT THE ORDER OF THE DRP SHOULD BE UPHELD. 19. WE HAVE GIVEN A CAREFUL CONSIDERATION TO THE RIVAL SUBMISSIONS. AS FAR AS INTERNATIONAL TRANSACTIONS FOR PURCHASE OF R AW MATERIALS IS CONCERNED, THE ONLY REASON GIVEN BY THE TPO IN REJE CTING CPM AS MAM IS THE ABSENCE OF GROSS MARGINS OF THE ASSESSEE AND THE MANNER IN WHICH IT WAS COMPUTED. IN THIS REGARD, WE FIND THAT IN A LETTER DATED 14.10.2014 FILED BY THE ASSESSEE BEFORE THE TPO IN ANNEXURE-2, THE ASSESSEE HAS GIVEN COST OF SALES AND OTHER INDIRECT COST. THE SAME IS AT PAGE 525 OF ASSESSEE'S PB. IN THESE CIRCUMSTANCES, WE ARE OF THE VIEW THAT THE REASONS GIVEN BY THE TPO FOR REJECTING CPM AS MAM CANNOT BE SUSTAINED. 20. AS FAR AS INTERNATIONAL TRANSACTION OF TRADING IN WATER HEATERS IS CONCERNED, THIS TRIBUNAL HAS ALREADY TAKEN A VIEW I N ASSESSEE'S OWN CASE FOR AY 2010-11 THAT RPM IS THE MAM. FOLLOWING THE AFORESAID ORDER, WE HOLD THAT THE TPO IS NOT CORRECT IN REJEC TING THE RPM AS MAM. 21. AS FAR AS DETERMINATION OF ALP FOR BOTH INTERNATIO NAL TRANSACTIONS ARE CONCERNED, WE ARE OF THE VIEW THAT THE PROVISIO NS OF SECTION 92 MANDATE DETERMINATION OF ALP. THE FACT THAT AFTER C ARRYING OUT SUCH EXERCISE, THE PROFIT MARGINS OF THE ASSESSEE WOULD BE ABNORMAL CANNOT BE THE BASIS TO ACCEPT THE PRICE PAID IN THE INTERN ATIONAL TRANSACTIONS AS AT ARM'S LENGTH. IN OTHER WORDS, IT IS MANDATORY TO DETERMINE THE ALP IN THE MANNER CONTEMPLATED BY THE ACT AND THE R ULES. IN OUR VIEW, THE DRP FELL INTO AN ERROR IN ACCEPTING THE PRICE R ECEIVED BY THE ASSESSEE IN INTERNATIONAL TRANSACTIONS AS AT ARM'S LENGTH WITHOUT CARRYING OUT SUCH AN EXERCISE. WE THEREFORE FEEL IT PROPER TO SET ASIDE THE ORDER OF DRP AND REMAND TO THE AO/TPO FOR FRESH CONSIDERATION THE PAGE 11 OF 15 IT(TP)A NO.628/BANG/2017 DETERMINATION OF ALP ON THE BASIS OF MAM AS ADOPTED BY THE ASSESSEE IN ITS TP STUDY. 22. THE LD. COUNSEL FOR THE ASSESSEE SUBMITTED BEFORE US THAT THE COMPARABLES CHOSEN BY THE ASSESSEE IN ITS TP STUDY WERE ALSO CHOSEN BY THE TPO, WHEN HE ADOPTED TNMM. HIS PRAYER WAS TH AT PURSUANT TO THE REMAND BY THE TRIBUNAL, THE TPO SHOULD BE DIREC TED TO RESTRICT HIMSELF FROM CHOOSING ANY FRESH COMPARABLES. IN OUR VIEW, THE TPO HAS TO CARRY OUT THE EXERCISE IN ACCORDANCE WITH THE LA W AND NO RESTRICTION CAN BE PLACED ON HIS POWERS TO BRING ANY RELEVANT A ND APPROPRIATE DATA ON RECORD IN THE MATTER OF DETERMINATION OF AL P. 23. IN THE RESULT, THE APPEAL BY THE REVENUE IS ALLOWE D FOR STATISTICAL PURPOSES. 19. WE NOTE THAT, FOR ASSESSMENT YEAR 2011-12, IT W AS THE REVENUE WHO WAS AGGRIEVED BY THE DIRECTIONS OF DRP IN CONSIDERING CPM AS THE MOST APPROPRIATE METHOD FOR DETERMINING ALP OF THE INTERNATIONAL TRANSACTION UNDER TRADING SEGMENT. FOR ASSESSMENT YEAR 2011-12, THE LD.TPO HAD ADOPTED RP M AS AGAINST CPM CONSIDERED BY ASSESSEE, WITH SAME SET O F COMPARABLES AS CONSIDERED BY ASSESSEE THEREIN. 20. IN THE PRESENT FACTS THE LD.TPO ADOPTED TNMM AS AGAINST CPM ADOPTED BY ASSESSEE WITH THE SAME SET OF COMPAR ABLES AS CONSIDERED BY ASSESSEE FOR DETERMINING THE ARMS LE NGTH PRICE OF THE TRANSACTION UNDER TRADING SEGMENT. ADMITTEDLY, NO DIFFERENCE HAS BEEN POINTED OUT IN F ACTS AND CIRCUMSTANCES FOR ASSESSMENT YEAR UNDER CONSIDERATI ON VIS-A-VIS ASSESSMENT YEAR 2011-12. RESPECTFULLY FOLLOWING THE DIRECTIONS OF THIS TRIBUNAL FOR ASSESSMENT YEAR 2011-12 IN ASSESSEES OWN CASE, WE DIRECT THE LD.TPO TO DETERMINED THE ARMS LENGTH PRICE OF THE TRANSACTION UNDER TRADING SEGMENT BY USING C PM AS THE MOST APPROPRIATE METHOD AND TO CARRY OUT THE EXERCI SE OF PAGE 12 OF 15 IT(TP)A NO.628/BANG/2017 DETERMINING THE ARMS LENGTH PRICE OF THE TRANSACTI ON IN ACCORDANCE WITH LAW. 21. NEEDLESS TO SAY THAT PROPER OPPORTUNITY OF BEIN G HEARD SHALL BE GRANTED TO ASSESSEE IN ACCORDANCE WITH LAW. ACCORDINGLY THESE GROUNDS STANDS ALLOWED FOR STATIS TICAL PURPOSES. 22. GROUND NO. 11 IS RAISED BY ASSESSEE AGAINST DISALLOWANCE OF PROVISION CREATED FOR SALES/ADVERTISEMENT AMOUNTING TO RS.73,37,974/-. 23. WE HAVE CONSIDERED THE SUBMISSIONS ADVANCED BY BOTH SIDES IN THE LIGHT OF RECORDS PLACED BEFORE US. WE NOTE THAT DRP UPHELD THE ACTION OF THE LD.AO AS THE LIABILITY WAS NOT CRYSTALLISED DURING THE YEAR UNDER CONSIDER ATION. DRP REFERRED TO THE CATEGORICAL OBSERVATION IN THE DRAF T ASSESSMENT ORDER WHEREIN THE SAID FACT HAS BEEN NOTED BY THE L D.AO. THE DRP ALSO NOTED THAT THE SAID EXPENSES WOULD BE ALLO WABLE ONLY WHEN IT IS CRYSTALLISED WHICH FALLS IN THE NEXT YEA R. THIS HAS NOT BEEN CONTROVERTED BY ANY DOCUMENTS/EVIDENCES BY THE LD.AR EVEN BEFORE US. UNDER SUCH CIRCUMSTANCES WE DO NOT FIND ANY INFIRMITY WITH THE OBSERVATIONS OF DRP IN UPHOLDING THE ACTION OF THE LD.AO. ACCORDINGLY THIS GROUND RAISED BY ASSESSEE STANDS D ISMISSED. 24. GROUND NO. 12 IS AGAINST DISALLOWANCE OF EXPENDITURE ON ADVERTISEMENT AMOUNTING TO RS.93,02,790/-. 25. THE LD.AO CONFIRMED THE ADDITION, AS NO SUPPORT ING EVIDENCE DOCUMENTS COULD BE FILED BY ASSESSEE. PAGE 13 OF 15 IT(TP)A NO.628/BANG/2017 26. THE LD.AR PRAYED FOR ONE MORE OPPORTUNITY TO BE GRANTED TO ASSESSEE TO SUPPORT ITS CLAIM. 27. LD.CIT.DR DID NOT OBJECT THE ISSUE BEING REMAND ED TO THE LD.AO. 28. ACCORDINGLY, WE REMAND THIS ISSUE TO THE LD.AO FOR ASSESSEE TO PROVIDE NECESSARY DOCUMENTS IN SUPPORT OF ITS CL AIM. THE LD.AO SHALL VERIFY THE DETAILS/EVIDENCES FILED BY A SSESSEE AND CONSIDER THE CLAIM IN ACCORDANCE WITH LAW. NEEDLESS TO SAY THAT PROPER OPPORTUNITY OF BEING HE ARD MAY BE GRANTED TO ASSESSEE. ACCORDINGLY THIS GROUND RAISED BY ASSESSEE STANDS A LLOWED FOR STATISTICAL PURPOSES. 29. GROUND NO. 13 HAS BEEN RAISED BY ASSESSEE AGAINST DISALLOWANCE OF WARRANTY PROVISION OF RS.94,95,260/ -. IT HAS BEEN SUBMITTED THAT THE DRP DIRECTED LD. AO TO VERIFY THE FACT TO ENSURE THAT ASSESSEE DEBITED THE SAID EXPEN DITURE AS THE DISALLOWANCE IS VALID ONLY WHEN THE SAID AMOUNT IS INDEED CLAIMED AS EXPENDITURE FOR THE YEAR. IT HAS BEEN SU BMITTED THAT NO VERIFICATION HAS BEEN CARRIED OUT BY LD. AO AS D IRECTED BY DRP. 30. THE LD.AR PRAYED FOR ONE MORE OPPORTUNITY TO BE GRANTED TO ASSESSEE TO SUPPORT ITS CLAIM. 31. THE LD.CIT.DR DID NOT OBJECT THE ISSUE BEING RE MANDED TO THE LD.AO. 32. ACCORDINGLY, WE REMAND THIS ISSUE TO THE LD.AO FOR ASSESSEE TO PROVIDE NECESSARY DOCUMENTS IN SUPPORT OF ITS CL AIM. THE PAGE 14 OF 15 IT(TP)A NO.628/BANG/2017 LD.AO SHALL VERIFY THE DETAILS/EVIDENCES FILED BY A SSESSEE AND CONSIDER THE CLAIM IN ACCORDANCE WITH LAW. NEEDLESS TO SAY THAT PROPER OPPORTUNITY OF BEING HE ARD MAY BE GRANTED TO ASSESSEE. ACCORDINGLY THIS GROUND RAISED BY ASSESSEE STANDS A LLOWED FOR STATISTICAL PURPOSES. IN THE RESULT APPEAL FILED BY ASSESSEE STANDS PARTL Y ALLOWED AS INDICATED HEREINABOVE. ORDER PRONOUNCED IN THE OPEN COURT ON 10 TH FEBRUARY, 2021 SD/- SD/- (CHANDRA POOJARI) (BEENA PILLAI) ACCOUNTANT MEMBER JUDICIAL ME MBER BANGALORE, DATED, THE 10 TH FEBRUARY, 2021. /VMS/ COPY TO: 1. APPELLANT 2. RESPONDENT 3. CIT 4. CIT(A) 5. DR, ITAT, BANGALORE 6. GUARD FILE BY ORDER ASSISTANT REGISTRAR, ITAT, BANGALORE PAGE 15 OF 15 IT(TP)A NO.628/BANG/2017 DATE INITIAL 1. DRAFT DICTATED ON ON DRAGON SR.PS 2. DRAFT PLACED BEFORE AUTHOR -2-2021 SR.PS 3. DRAFT PROPOSED & PLACED BEFORE THE SECOND MEMBER -2-2021 JM/AM 4. DRAFT DISCUSSEDAPPROVED BY SECOND MEMBER. -2-2021 JM/AM 5. APPROVED DRAFT COMES TO THE SR.PS/PS -2-2021 SR.PS/PS 6. KEPT FOR PRONOUNCEMENT ON -2-2021 SR.PS 7. DATE OF UPLOADING THE ORDER ON WEBSITE -2-2021 SR.PS 8. IF NOT UPLOADED, FURNISH THE REASON -- SR.PS 9. FILE SENT TO THE BENCH CLERK -2-2021 SR.PS 10. DATE ON WHICH FILE GOES TO THE AR 11. DATE ON WHICH FILE GOES TO THE HEAD CLERK. 12. DATE OF DISPATCH OF ORDER. 13. DRAFT DICTATION SHEETS ARE ATTACHED NO SR.PS