Dy. CIT, Circle-8, Pune V. M/s. Behr (India) Ltd., Pune

ITA 645/PUN/2013

• Counselvise Citation: [2017] 127 COUNSELVISE.COM (IT) 9567 (ITAT-PUNE)
• Duration Of Justice: 4 year(s) 1 month(s) 11 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 21-04-2017
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: A
• Next Hearing Date: 11-05-2017
• Assessment Year: 2002-2003
• Appeal Filed On: 11-03-2013
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: ANIL CHAWARE
• Assessee Lawyers: R D ONKAR
• Keywords: Depreciation; Transfer pricing; International transaction; Question of law; Revised return; Revenue expenditure
• Section: 143(3)

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL PUNE BENCH A, PUNE , , BEFORE MS. SUSHMA CHOWLA, JM AND SHRI ANIL CHATURVEDI, AM . / ITA NO. 566/PUN/2013 [ [ / ASSESSMENT YEAR : 2002-03 M/S. BEHR INDIA LIMITED, 29, MILESTONE, PUNE-NASHIK HIGHWAY, VILLAGE KURULI, KHED, CHAKAN, PUNE 411501 PAN : AABCB2186L . / APPELLANT VS. THE ASSISTANT COMMISSIONER OF INCOME TAX, CIRCLE 8, PUNE . / RESPONDENT . / ITA NO. 645/PUN/2013 [ [ / ASSESSMENT YEAR : 2002-03 THE DY. COMMISSIONER OF INCOME TAX, CIRCLE 8, PUNE . / APPELLANT VS. M/S. BEHR (INDIA) LTD., 29, MILESTONE, PUNE-NASHIK ROAD, VILLAGE KURULI, PUNE 411012 PAN : AABCB2186L . / RESPONDENT ITA NOS. 566 & 645/PUN/2013 AND ITA NO. 2637/PUN/2016 2 . / ITA NO. 2637/PUN/2016 [ [ / ASSESSMENT YEAR : 2001-02 THE DY. COMMISSIONER OF INCOME TAX, CIRCLE 8, PUNE . / APPELLANT VS. M/S. BEHR INDIA LTD., 29 TH , MILESTONE, PUNE-NASHIK HIGHWAY, VILLAGE KURULI, KHED, CHAKAN, PUNE 411501 PAN : AABCB2186L . / RESPONDENT ASSESSEE BY : S/SHRI R.D. ONKAR & SRIKANT REVENUE BY : SHRI ANIL CHAWARE / DATE OF HEARING : 22.02.2017 / DATE OF PRONOUNCEMENT: 21.04.2017 / ORDER PER SUSHMA CHOWLA, JM: OUT OF THIS BUNCH OF THREE APPEALS, THE REVENUE IS IN APPEAL AGAINST THE ORDER OF CIT(A)-6, PUNE, DATED 01-08-2016 RELATING TO ASSESSMENT YEAR 2001-02 AGAINST ORDER PASSED UNDER SECTION 143(3) OF THE INCOME-TAX ACT, 1961 (IN SHORT THE ACT). FURTHER, BOTH THE ASSESSEE AND THE REVENUE HAVE FILED CROSS APPEALS AGAINST THE ORDER OF CIT(A)-IT/TP, PUNE DATED 24-12-2012 RELATING TO ASSESSMENT YEAR 2002-03 AGAINST THE ORDER PASSED U/S. 143(3) OF THE ACT. ITA NOS. 566 & 645/PUN/2013 AND ITA NO. 2637/PUN/2016 3 2. ALL THE THREE APPEALS RELATING TO THE SAME WERE HEARD TOGETHER AND ARE BEING DISPOSED OF BY THIS CONSOLIDATED ORDER FOR THE SAKE OF CONVENIENCE. ITA NO. 2637/PUN/2016, ASSESSMENT YEAR : 2001-02 (REVENUES APPEAL) 3. THE REVENUE HAS RAISED THE FOLLOWING GROUNDS OF APPEAL:- (I) 'WHETHER ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW, THE LD CIT(A) WAS JUSTIFIED IN DELETING THE DISALLOWANCE OF PRODUCT DEVELOPMENT EXPENSES OF RS.42,21,665/- WITHOUT ANALYSING THE NATURE OF EXPENDITURE? (II) WHETHER ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW, THE LD CIT(A) WAS JUSTIFIED IN HOLDING PRODUCT DEVELOPMENT EXPENSES AS REVENUE EXPENDITURE WHEN THE BILL WISE NATURE OF EXPENSES SHOWS THAT THE PRODUCT DEVELOPMENT EXPENDITURE CONFERRED ENDURING BENEFIT TO THE ASSESSEE? (III) WHETHER ON THE FACTS AND CIRCUMSTANCES OF THE CASE THE CIT(A) ERRED IN INFERRING THAT THE EXPENDITURE WAS INCURRED TO BRING IN IMPROVISATION & IMPROVEMENT IN THE PRODUCT MANUFACTURED BY THE CO. BY MAKING CHANGES & AT THE SAME TIME REMAINING PRICE COMPETITIVE. (IV) WHETHER ON THE FACTS AND CIRCUMSTANCES OF THE CASE THE CIT(A) ERRED IN INFERRING THAT THE EXPENSES WERE INCURRED ON ACCOUNT OF SUBJECTING THE APPELLANTS PRODUCT TO TESTING WHICH IS DONE ON ONGOING BASIS EVERY YEAR TO CATER THE NEEDS OF CUSTOMERS & THAT THE EXPENSES IS INCURRED FOR TESTING & TRAILS OF PRODUCTS ALREADY BEING MANUFACTURED & SOLD BY THE ASSESSEE. 4. BRIEFLY, IN THE FACTS OF THE CASE, THE ASSESSEE WAS ENGAGED IN THE BUSINESS OF MANUFACTURING OF AUTOMOTIVE AIR CONDITIONING SYSTEMS, PARTS AND COMPONENTS. THE ASSESSEE HAD FURNISHED THE RETURN OF INCOME DECLARING NET LOSS OF RS.11,69,72,270/-. THE ASSESSMENT ORDER WAS PASSED U/S. 143(3) OF THE ACT AND LOSS WAS ASSESSED AT RS.12,22,41,490/-. IN THE SAID ASSESSMENT PROCEEDINGS THE ASSESSING OFFICER HAD MADE AN ADDITION OF RS.42,21,665/-, WHICH WAS CLAIMED AS AN EXPENDITURE UNDER THE HEAD DEVELOPMENT COST. THE ASSESSEE HAD CLAIMED THE SAID SPECIAL DEVELOPMENT COST PAID TO M/S. BEHR GMBH & CO., GERMANY FOR PREPARATION OF DESIGN AND DRAWING AND PROTOTYPE SAMPLES. THE ASSESSING OFFICER HAD CAPITALIZED THE SAID EXPENDITURE AND HAD ALLOWED DEPRECIATION. THE CIT(A) WAS OF THE VIEW THAT WHERE ORIGINALLY THE ITA NOS. 566 & 645/PUN/2013 AND ITA NO. 2637/PUN/2016 4 ASSESSEE HAD NOT CLAIMED THE SAID EXPENDITURE BUT HAD CLAIMED DURING THE COURSE OF SCRUTINY PROCEEDINGS, HENCE, THE SAME WAS NOT ALLOWABLE. 5. THE ASSESSEE CARRIED THE MATTER BEFORE THE TRIBUNAL WHEREIN IT WAS POINTED THAT THE SAID EXPENDITURE WAS INCURRED BY THE ASSESSEE IN ASSESSMENT YEAR 1998-99 I.E. BEFORE IT COMMENCED PRODUCTION AND THEREFORE THE SAME WAS TREATED AS DEFERRED REVENUE EXPENSES IN ITS BOOKS OF ACCOUNT AND WAS AMORTIZED FROM ASSESSMENT YEAR 1999-2000 ONWARDS AND DEDUCTION U/S. 35AB OF THE ACT WAS CLAIMED. THE SAID EXPENSES WERE INCURRED ON TESTING AND VALIDATION OF THE PRODUCT MANUFACTURED BY THE ASSESSEE AND HENCE THE CLAIM OF SPECIAL DEVELOPMENT COST. THE ASSESSEE ALSO EXPLAINED THAT THE TESTING WAS CARRIED OUT AT THE COLLABORATION PLACE IN GERMANY UNDER STIMULATED CONDITIONS AND THE SAID TEST WAS REQUIRED TO BRING IN IMPROVISATION AND MODIFICATIONS IN THE PRODUCT OF THE ASSESSEE. THE TRIBUNAL IN ITA NO. 779/PN/2010 RELATING TO ASSESSMENT YEAR 2001-02, VIDE ORDER DATED 26-03-2012 NOTED THAT BOTH THE AUTHORITIES BELOW HAD PROCEEDED ON THE BASIS THAT THE EXPENDITURE WAS INCURRED FOR PREPARATION OF DESIGN, DRAWINGS AND DEVELOPMENT OF PROTOTYPE SAMPLES. HOWEVER, THE ASSESSEE BEFORE THE CIT(A) EXPLAINED THAT THE EXPENDITURE WAS ON ACCOUNT OF PRODUCT TESTING AND VALIDATION AND WAS DISTINCT FROM THE EXPENDITURE FOR PREPARATION OF DESIGN AND DRAWINGS AND DEVELOPMENT OF PROTOTYPE SAMPLES. THE TRIBUNAL TOOK INTO CONSIDERATION THE PHOTOCOPIES OF INVOICES RAISED BY THE GERMAN COMPANY AND OBSERVED THAT THE SAME PRIMA FACIE SUPPORTS THE ASSERTION OF THE ASSESSEE THAT THE EXPENDITURE WAS TOWARDS TESTING OF THE PRODUCTS MANUFACTURED BY THE ASSESSEE. HOWEVER, SINCE, THIS FACTUAL ASPECT WAS NOT BEFORE THE ASSESSING OFFICER, ALTHOUGH PLEA WAS RAISED BEFORE THE CIT(A), THE MATTER WAS RESTORED TO THE FILE OF ASSESSING OFFICER WHO WAS DIRECTED TO CULL OUT THE APPROPRIATE FACTS AND DETERMINE THE NATURE OF ITA NOS. 566 & 645/PUN/2013 AND ITA NO. 2637/PUN/2016 5 EXPENDITURE, IN ACCORDANCE WITH LAW. IN THE SECOND ROUND OF ASSESSMENT PROCEEDINGS, THE ASSESSING OFFICER SHOW CAUSED THE ASSESSEE WHO IN TURN, EXPLAINED IN DETAIL THE NATURE OF EXPENDITURE. THE ASSESSEE EXPLAINED THAT THE EXPENDITURE INCURRED WAS TO BRING IN IMPROVISATION AND MODIFICATIONS IN THE PRODUCT AS PER THE REQUIREMENTS OF THE CUSTOMERS WHEREIN TESTING OF PRODUCTS CONSIST OF COOLING PERFORMANCE, AIR FLOW, AIR DISTRIBUTION, BODY LEAKAGE TESTS AND ALSO REIMBURSEMENT OF EXPENSES ON PROTO SAMPLE OF COMPONENTS/SUBPARTS DEVELOPMENT AND THEIR TESTING. THE ASSESSING OFFICER WAS OF THE VIEW THAT THE TESTING WAS DONE SO AS TO BRING BETTER END PRODUCTS AND THEREBY NEW CUSTOMERS WOULD BE ATTRACTED, HENCE, IT WAS CLEARLY IN THE DIRECTION THAT A NEW BENEFIT IS SOUGHT AFTER. THE ASSESSING OFFICER, THUS, HELD THAT THE SAID EXPENDITURE WAS TO BE CAPITALIZED IN THE HANDS OF THE ASSESSEE. ACCORDINGLY, THE ASSESSING OFFICER DISALLOWED EXPENDITURE OF RS.42,21,665/-. 6. THE CIT(A) NOTED THAT THE ISSUE WAS COVERED IN FAVOUR OF THE ASSESSEE COMPANY BY THE ORDER OF CIT(A) RELATING TO ASSESSMENT YEARS 2002-03, 2003- 04, 2007-08 AND 2008-09 AND NOTED THAT PERCENTAGE OF PRODUCT DEVELOPMENT EXPENDITURE TO TOTAL SALE WAS ONLY 1.77% IN ASSESSMENT YEAR 2000-01 AND 0.97% FOR ASSESSMENT YEAR 2001-02 AND 0.77% FOR ASSESSMENT YEAR 2002-03. THE CIT(A) ALSO REFERRED TO THE DECISION OF PUNE BENCH OF THE TRIBUNAL IN THE CASE OF ASSTT. CIT VS. SPICER INDIA LTD. IN ITA NOS. 1191/PN/2007, 1192/PN/2007 AND 102/PN/2008 RELATING TO ASSESSMENT YEARS 2001-02, 2003-04 AND 2002-03, ORDER DATED 24-04-2008 AND ALLOWED THE CLAIM OF THE ASSESSEE. 7. THE REVENUE IS IN APPEAL AGAINST THE ORDER OF CIT(A). ITA NOS. 566 & 645/PUN/2013 AND ITA NO. 2637/PUN/2016 6 8. THE LEARNED DEPARTMENTAL REPRESENTATIVE FOR THE REVENUE POINTED OUT THAT THE EXPENDITURE INCURRED BY THE ASSESSEE WAS IN RESPECT OF MODIFICATION OF THE PARTS MANUFACTURED BY THE ASSESSEE WHICH RESULTS IN ENDURING BENEFIT AND HENCE, THE EXPENDITURE IS CAPITAL IN NATURE. THE LEARNED DEPARTMENTAL REPRESENTATIVE FOR THE REVENUE PLACED RELIANCE ON THE RATIO LAID DOWN BY THE HONBLE SUPREME COURT IN COMMISSIONER OF INCOME TAX VS. SARAVANA SPG. MILLS (P.) LTD. REPORTED IN 293 ITR 201 (SC). 9. THE LEARNED AUTHORIZED REPRESENTATIVE FOR THE ASSESSEE ON THE OTHER HAND POINTED OUT THAT THE ASSESSEE WAS ENGAGED IN MANUFACTURE OF AUTOMOTIVE AIR CONDITIONING SYSTEMS AND AS PART OF ONGOING MANUFACTURING, TESTING WAS DONE, WHEREIN MANUFACTURING PARTS OF THE AIR CONDITIONER WERE SENT TO GERMANY FOR TESTING OF THESE ITEMS, SINCE THE FINAL PRODUCT WAS TO BE SOLD TO AE. HE FURTHER POINTED OUT THAT SUCH VALIDATION AND TESTING WAS DONE IN EACH YEAR WHEREIN THE ASSESSING OFFICER HAD DISALLOWED THE EXPENDITURE BEING OF ENDURING BENEFIT. 10. WE HAVE HEARD THE RIVAL CONTENTIONS AND PERUSED THE RECORD. THE ASSESSEE WAS ENGAGED IN THE BUSINESS OF MANUFACTURING OF AIR CONDITIONERS AND ITS COMPONENTS WHICH WERE IN TURN USED IN THE AUTOMOTIVE INDUSTRIES. THE ASSESSEE IN ORDER TO TEST THE VALIDATION OF THE PRODUCT INCURRED EXPENDITURE ON A REGULAR BASIS TO BRING IN IMPROVISATION AND MODIFICATIONS IN THE PRODUCT AS PER THE REQUIREMENTS OF THE CUSTOMERS. THE SAID EXERCISE WAS CARRIED OUT BY THE ASSESSEE IN ORDER TO TEST THE MARKET SUITABILITY OF THE PRODUCTS WHEREIN THE PRODUCTS WERE SENT TO GERMANY IN ORDER TO TEST ITS VALIDATION, SINCE, THE FINAL PRODUCT WAS BEING SOLD TO AE. IN THE FIRST ROUND OF ASSESSMENT PROCEEDINGS THE SAID EXPENDITURE WAS CONNECTED WITH THE EXPENDITURE INCURRED IN THE FIRST YEAR OF COMMENCEMENT OF BUSINESS ON PRODUCT DEVELOPMENT AND HENCE, THE ITA NOS. 566 & 645/PUN/2013 AND ITA NO. 2637/PUN/2016 7 EXPENDITURE WAS HELD TO BE CAPITAL IN NATURE. HOWEVER, WHERE EXPENDITURE ON TESTING OF THE PRODUCT WHICH IS REQUIRED TO BE INCURRED ON A REGULAR BASIS AND WHICH DOES NOT RESULT INTO CREATION OR ACQUISITION OF ANY ASSETS, THEN THERE IS NO MERIT IN HOLDING THE EXPENDITURE TO BE OF ENDURING BENEFIT. THE ASSESSEE IS CARRYING OUT THIS EXERCISE OF MODIFICATION AND IMPROVISATION IN THE PRODUCTS IN ORDER TO TEST SUITABILITY IN THE ENVIRONMENT IN WHICH IT IS TO BE USED AND HENCE, THE SAID EXPENDITURE IS DULY ALLOWABLE IN THE HANDS OF THE ASSESSEE AS REVENUE EXPENDITURE. THE BILL WISE NATURE OF EXPENSES ARE TABULATED AT PAGE 6 OF THE ORDER OF CIT(A) AND PERUSAL OF THE SAME REFLECTS EXPENDITURE TO BE REVENUE IN NATURE. ONCE, THE EXPENDITURE HAS NOT BEEN INCURRED FOR THE DEVELOPMENT OF NEW PRODUCT BUT IS FOR THE IMPROVISATION OF THE PRODUCTS ALREADY BEING MANUFACTURED BY THE ASSESSEE, THEN SUCH AN EXPENDITURE WHICH IS A REGULAR EXPENDITURE INCURRED BY THE ASSESSEE FOR SMOOTH AND EFFICIENT WORKING OF ITS BUSINESS, IS TO BE ALLOWED AS REVENUE EXPENDITURE IN ITS HANDS. WE ALSO FIND SUPPORT FROM THE RATIO LAID DOWN BY THE TRIBUNAL IN ASSTT. CIT VS. SPICER INDIA LTD. (SUPRA) WHEREIN SIMILAR EXPENDITURE WAS ALLOWED AS REVENUE EXPENDITURE IN THE HANDS OF THE SAID ASSESSEE. THE LEARNED DEPARTMENTAL REPRESENTATIVE FOR THE REVENUE HAS PLACED RELIANCE ON THE RATIO LAID DOWN IN COMMISSIONER OF INCOME TAX VS. SARAVANA SPG. MILLS (P.) LTD. (SUPRA) WHICH WAS A CASE OF CURRENT REPAIRS TO THE PLANT AND MACHINERY WHICH STAND ON A DIFFERENT FOOTING AND THE SAID RATIO IS NOT APPLICABLE TO THE FACTS OF THE PRESENT CASE. UPHOLDING THE ORDER OF CIT(A), WE DISMISS THE GROUNDS OF APPEAL RAISED BY THE REVENUE. ITA NOS.566/PUN/2013 (ASSESSEES APPEAL) AND ITA NO. 645/PUN/2013 (REVENUES APPEAL), ASSESSMENT YEAR : 2002-03 11. THE ASSESSEE IN ITA NO.566/PUN/2013 HAS RAISED THE FOLLOWING GROUNDS OF APPEAL : ITA NOS. 566 & 645/PUN/2013 AND ITA NO. 2637/PUN/2016 8 BEING AGGRIEVED BY THE ORDER PASSED BY THE LEARNED COMMISSIONER OF INCOME TAX (APPEALS) INTERNATIONAL TAXATION/TRANSFER PRICING, PUNE (CLT A) BEHR INDIA LIMITED (THE APPELLANT) SUBMITS FOLLOWING GROUNDS FOR YOUR DUE CONSIDERATION: ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW THE LEARNED CLT A ERRED : I. IN RESPECT OF INTERNATIONAL TRANSACTIONS ENTERED INTO BY THE APPELLANT WITH ITS ASSOCIATED ENTERPRISE/S- TRANSFER PRICING ISSUES 1. IN CONFIRMING THE UPWARD ADJUSTMENT TO THE ARM'S LENGTH PRICE (ALP) DETERMINED BY THE APPELLANT IN RESPECT OF ITS INTERNATIONAL TRANSACTIONS ENTERED INTO WITH ITS ASSOCIATED ENTERPRISES. 2. IN NOT ALLOWING AN ADJUSTMENT ASKED FOR BY THE APPELLANT TO THE OPERATING PROFIT MARGIN FOR THE PURPOSE OF ARRIVING AT AND BENCHMARKING THE ARM'S LENGTH PRICE (ALP) OF THE INTERNATIONAL TRANSACTIONS OF IMPORTS OF RAW MATERIAL AND COMPONENTS, PRODUCT TESTING SERVICES AND EXPORT OF PRODUCTS TO THE ASSOCIATED ENTERPRISES ON ACCOUNT OR ECONOMIC CRITERIA VIZ. LOW UTILISATION OF PRODUCTION CAPACITY AND EXCEPTIONAL EXPENSES SUCH AS WARRANTY EXPENSES INCURRED BEING IN THE START UP PHASE AND BOTH OR WHICH HAD MATERIALLY INF1UENCED OPERATING PROFIT MARGIN OF THE RELEVANT PREVIOUS YEAR. (PARA 2.1.1.9 PAGES 9 & 10 OF THE CITA'S ORDER). 3. IN REJECTING THE APPELLANT'S PRAYER TO ALLOW ADJUSTMENT TOWARDS RISK UNDERTAKEN BY IT IN RESPECT OF IT ENABLED DESIGN ENGINEERING SERVICES PROVIDED TO THE AE/S IN THE LIGHT OF THE FUNCTIONS PERFORMED BY IT. (PARAS 2.1.2.8 TO 2.1.2.11 PAGES 14 & 15 OF CLTA'S ORDER) 4. IN NOT ALLOWING ADJUSTMENT ASKED FOR REDUCTION FROM 80% OF THE TOTAL LEASED LINE COST ATTRIBUTED BY THE LEARNED TPO TO 40 % IN ARRIVING AT THE OPERATING PROFIT EARNED BY THE APPELLANT IN PROVIDING IT ENABLED DESIGN ENGINEERING SERVICES BY RELYING ON THE ESTIMATE OF THE SAID COST MADE BY THE TPO ON PRESUMPTIVE BASIS INSTEAD OF ON THE BASIS OF USAGE OF THE LEASED LINES AS CONTENDED BY THE APPELLANT. (PARAS 2.1.2.4 TO 2.1.2.6 PAGES 13 & 14 OF CITA'S ORDER). II. IN RESPECT OF OTHER NON TRANSFER PRICING ISSUES 5. IN NOT ALLOWING THE DEDUCTION CLAIMED IN RESPECT OF INCREMENTAL PROVISION FOR WARRANTY AMOUNTING TO RS.31,37,190/- ON THE GROUND THAT IT WAS CREATED ON AN ADHOC BASIS AND ALLEGEDLY DID NOT MEET THE TESTS LAID DOWN BY THE HONOURABLE SUPREME COURT IN THE CASE OF ROTORK CONTROLS LIMITED 314 ITR 62 (SC). [PARAS 2.2.1 TO 2.2.6 PAGES 15 TO 17 OFCITA'S ORDER] 6. YOUR APPELLANT CRAVES LEAVE TO ADD, ALTER, AMEND, MODIFY OR DELETE ANY OF THE ABOVE GROUNDS OF APPEAL, IF NECESSARY. 12. THE REVENUE IN ITA NO.645/PUN/2013 HAS RAISED FOLLOWING GROUNDS OF APPEAL : ITA NOS. 566 & 645/PUN/2013 AND ITA NO. 2637/PUN/2016 9 1. WHETHER ON THE FACTS AND CIRCUMSTANCES OF THE CASE, THE CIT(A)(IT/TP) WAS JUSTIFIED IN HOLDING THAT ADJUSTMENT SHOULD BE MADE ON PROPORTIONATE BASIS TO THE INTERNATIONAL TRANSACTION WHEN THE ASSESSEE HAS BENCHMARKED THE INTERNATIONAL TRANSACTIONS FOLLOWING AGGREGATION APPROACH WHEN NO SEGMENTAL DATA IS AVAILABLE FOR WORKING OUT THE SEPARATE PROFITABILITY OF EACH INTERNATIONAL TRANSACTION. 2. WHETHER ON THE FACTS AND CIRCUMSTANCES OF THE CASE, THE CIT(A)(IT/TP) WAS JUSTIFIED IN HOLDING PRODUCT DEVELOPMENT EXPENSES AS REVENUE EXPENDITURE WITHOUT ANALYZING THE NATURE OF EXPENDITURE DESPITE HIS OBSERVATION THAT A DETAILED STUDY IS REQUIRED TO INFER AS TO WHETHER DEVELOPMENT EXPENDITURE OF A PARTICULAR PRODUCT CONFERRED ENDURING BENEFIT TO THE ASSESSEE. 3. THE APPELLANT CRAVES LEAVE TO ADD, AMEND OR ALTER ANY OF THE ABOVE GROUNDS OF APPEAL. 13. THE ASSESSEE HAS ALSO FILED ADDITIONAL GROUNDS OF APPEAL WHICH READS AS UNDER : ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW, THE APPELLANT PRAYS THAT THE LEARNED CIT APPEALS IT/TP, PUNE BE DIRECTED: TO EXCLUDE THE SO CALLED EXTERNAL COMPARABLE VIZ. BANCO PRODUCTS (INDIA) LIMITED EVEN THOUGH IT WAS TAKEN AS A RESULT OF EVIDENCE ADDUCED BY THE APPELLANT IN THE LIGHT OF THE FACT THAT THE SAID COMPANY WAS ENGAGED IN MANUFACTURE AND SALE OF DIVERSIFIED PRODUCTS VIZ. GASKETS, RADIATORS AND COMPRESSED FIBRE JOINTING SHEETS AND THEREFORE ITS PLI OF OP TO SALES WAS NOT AT ALL COMPARABLE IN THE ABSENCE OF SEGMENTAL DATA IN RESPECT OF RADIATORS AND ESPECIALLY WHEN THE GASKETS CONSTITUTING ABOUT 50% OF THE SALES IN TERMS OF VALUE IN THE AUTO COMPONENT SEGMENT WERE DISTINCT AND DIFFERENT DUE TO DIFFERENT TECHNOLOGY, USE OF DIFFERENT RAW MATERIAL AND DIFFERENT END USE AND THEREFORE THE PLI OF THE SAID EXTERNAL COMPARABLE WAS NOT COMPARABLE VIS-A-VIS THE PLI OF OP TO SALES OF THE APPELLANT EARNED IN THE MANUFACTURING ACTIVITY. 14. BRIEFLY, IN THE FACTS OF THE CASE, THE ASSESSEE FOR THE YEAR UNDER CONSIDERATION HAD FILED THE RETURN OF INCOME DECLARING TOTAL LOSS OF RS.8,65,82,840/-. SUBSEQUENTLY, THE ASSESSEE FILED REVISED RETURN OF INCOME DECLARING TOTAL LOSS OF RS.9,19,72,558/-. IN THE REVISED RETURN OF INCOME THE ASSESSEE MADE DISALLOWANCES AMOUNTING TO RS.1,85,250/- BY WAY OF PROVISION OF LEAVE ENCASHMENT AND ALSO CLAIMED EXPENDITURE OF RS.55,75,000/- ON ACCOUNT OF PRODUCT DEVELOPMENT EXPENSES. A REFERENCE U/S. 92CA(1) OF THE ACT WAS MADE TO THE TRANSFER PRICING OFFICER (TPO) FOR THE COMPUTATION OF ARMS LENGTH PRICE IN RELATION TO THE INTERNATIONAL TRANSACTIONS UNDERTAKEN BY THE ITA NOS. 566 & 645/PUN/2013 AND ITA NO. 2637/PUN/2016 10 ASSESSEE. THE TPO NOTED THAT THE ACTIVITIES OF THE ASSESSEE FOR THE DOMESTIC MARKET AND FOR ITS AE. THE TPO HAS ALSO REFERRED TO THE INTERNATIONAL TRANSACTIONS OF THE ASSESSEE WITH ITS AE WHICH ARE TABULATED UNDER PARA 4 AT PAGE 20 OF THE TPOS ORDER. THE ASSESSEE HAD APPLIED TNMM METHOD AS MOST APPROPRIATE METHOD TO BENCH MARK ITS INTERNATIONAL TRANSACTION. THE FIRST INTERNATIONAL TRANSACTION WAS THE PROVISION OF ENGINEERING SERVICES, UNDER WHICH THE ASSESSEE WAS RENDERING COMPUTER AIDED DESIGN ENGINEERING SERVICES TO BEHR GROUP ENTITIES. THE ASSESSEE SET UP A DESIGN ENGINEERING SERVICES DIVISION IN WHICH BOTH THE INTERNATIONAL TRANSACTIONS TO VARIOUS BEHR ENTITIES WERE RS.1.66 CRORES. THE TPO NOTED THAT THE ASSESSEE WAS CHARGING EURO 25.56 PER MAN HOUR FOR RENDERING THE SERVICES WHICH WAS A FIXED RATE AND THE SERVICES WERE RENDERED TO THE DIFFERENT ENTITIES IN INDIA I.E. (OFFSHORE) AND ALSO AT THE PREMISES OF AES (ON-SITE). THE ASSESSEE HAD IDENTIFIED FIVE COMPANIES AS COMPARABLES AND THE ARITHMETIC MEAN OF THE SAID CONCERNS WAS 3.52%. THE TPO WAS OF THE VIEW THAT OUT OF FIVE CONCERNS SELECTED, ONLY THREE CONCERNS WERE COMPARABLE AND USING THE DATA FOR THE FINANCIAL YEAR UNDER CONSIDERATION, THE ARITHMETIC MEAN WAS WORKED OUT AT 15.07% AS AGAINST THE OP/OC OF THE ASSESSEE AT 3.52%. THE TPO ALSO REWORKED THE OPERATING COST OF THE DESIGN ENGINEERING SERVICES BY ALLOCATING CERTAIN COST ON ACCOUNT OF LEASED LINE, HENCE, THE ADJUSTMENT OF RS.11,11,428/-. 15. THE SECOND PROVISION CONSIDERED BY THE TPO WAS IMPORT OF COMPONENTS, SERVICES FOR MANUFACTURING OF AUTOMOTIVE AIR CONDITIONING SYSTEMS AND EXPORT OF HEAT EXCHANGERS. THE ASSESSEE HAD SELECTED THREE CONCERNS I.E. BANCO PRODUCTS (INDIA) LTD., INDIA RADIATORS LIMITED AND SUBROS LTD. AS FINAL COMPARABLES AND APPLIED TNMM METHOD TO BENCHMARK ITS INTERNATIONAL TRANSACTIONS. THE PLI WAS TAKEN AS OPERATING MARGIN ON NET SALES. THE TPO ITA NOS. 566 & 645/PUN/2013 AND ITA NO. 2637/PUN/2016 11 COMPUTED THE PLI AT (-) 3.579%. THE TPO WAS OF THE VIEW THAT ONLY TWO CONCERNS BANCO PRODUCTS AND SUBROS LTD. WERE COMPARABLES AND THEIR MARGINS WERE RECOMPUTED BY APPLYING THE PLI TO OPERATING NET SALES AND THE ARITHMETIC MEAN OF TWO COMPARABLES WERE WORKED OUT AT 12.6% AND ADJUSTMENT TO THE EXTENT OF RS.10,37,04,812/- FOR THE ARMS LENGTH PRICE OF DESIGN ENGINEERING SERVICE WAS PROPOSED BY THE TPO. THE ASSESSING OFFICER MADE THE SAID ADJUSTMENT IN THE HANDS OF THE ASSESSEE TO THE EXTENT OF RS.10,48,16,240/-. THE ASSESSING OFFICER ALSO REWORKED THE DEPRECIATION ALLOWABLE TO THE ASSESSEE. THE ASSESSING OFFICER MADE DISALLOWANCES OF THE INCREMENTAL PROVISIONS MADE FOR WARRANTY AMOUNTING TO RS.31,37,190/- HOLDING IT TO BE CONTINGENT LIABILITY. FURTHER, DISALLOWANCE WAS MADE OF THE PRODUCT DEVELOPMENT EXPENSES OF RS.55,74,832/-. HOWEVER, DEPRECIATION ON THE SAME WAS ALLOWED @ 25% WHEREIN OTHER DISALLOWANCES WERE MADE OUT OF EXPENSES CLAIMED BY THE ASSESSEE. 16. THE CIT(A) DISMISSED THE PLEA OF THE ASSESSEE FOR REWORKING THE PLI BY MAKING ADJUSTMENT ON ACCOUNT OF LOWER CAPACITY UTILIZATION AND ON ACCOUNT OF EXCEPTIONAL EXPENSES SUCH AS WARRANTY EXPENSES. HOWEVER, THE PLEA OF THE ASSESSEE FOR EXCLUSION OF NON-OPERATING INCOME FOR COMPUTING ITS PLI AND THAT OF THE COMPARABLE COMPANIES WAS ACCEPTED. SIMILARLY, THE ASSESSEES PLEA FOR MAKING THE ADJUSTMENT ONLY TO THE VALUE OF INTERNATIONAL TRANSACTION AND NOT TO THE ENTIRE TURNOVER WAS ALSO ACCEPTED. IN RESPECT OF THE ADJUSTMENT MADE TO ENGINEERING DESIGN SERVICES, THE CIT(A) UPHELD THE COST ALLOCATION MADE BY THE TPO I.E. TO BE ALLOWED 80% OF THE TOTAL LEASED LINE COST TO THE ENGINEERING DESIGN SERVICES. THE CIT(A) ALSO REJECTED THE PLEA OF THE ASSESSEE FOR GRANTING RISK ADJUSTMENT. IN RESPECT OF CORPORATE ISSUES, THE CIT(A) CONFIRMED THE DISALLOWANCES OF WARRANTY PROVISIONS OF RS.31,37,190/-. HOWEVER, THE PRODUCT ITA NOS. 566 & 645/PUN/2013 AND ITA NO. 2637/PUN/2016 12 DEVELOPMENT EXPENSES WERE ALLOWED AS EXPENDITURE IN THE HANDS OF THE ASSESSEE. 17. BOTH THE ASSESSEE AND THE REVENUE ARE IN APPEAL AGAINST THE RESPECTIVE PORTION OF THE ORDER OF CIT(A). 18. THE FIRST ISSUE RAISED BY THE REVENUE IS AGAINST THE ORDER OF CIT(A) IN HOLDING THAT THE ADJUSTMENT SHOULD BE MADE TO THE INTERNATIONAL TRANSACTION AND NOT TO THE TOTAL TURNOVER. THE LEARNED AUTHORIZED REPRESENTATIVE FOR THE ASSESSEE AT THE OUTSET POINTED OUT THAT THE SAID ISSUE IS SQUARELY COVERED IN FAVOUR OF THE ASSESSEE AS PER THE DECISION OF HONBLE BOMBAY HIGH COURT IN COMMISSIONER OF INCOME TAX VS. ALSTOM PROJECTS INDIA LIMITED IN INCOME TAX APPEAL NO.362 OF 2014, ORDER DATED 14 TH SEPTEMBER, 2016. 19. THE LEARNED DEPARTMENTAL REPRESENTATIVE FOR THE REVENUE ON THE OTHER HAND PLACED RELIANCE ON THE ORDER OF ASSESSING OFFICER/TPO. 20. WE HAVE HEARD THE RIVAL CONTENTIONS AND PERUSED THE RECORD. THE ISSUE ARISING BY WAY OF GROUND NO. 1 RAISED BY THE REVENUE IS AGAINST THE DIRECTION OF CIT(A) IN RESTRICTING THE TP ADJUSTMENT, IF ANY, TO THE VALUE OF INTERNATIONAL TRANSACTIONS AND NOT TO THE TOTAL TURNOVER OF THE ASSESSEE. WE FIND THAT THE SAID ISSUE IS SQUARELY COVERED BY THE DECISION OF HONBLE BOMBAY HIGH COURT IN COMMISSIONER OF INCOME TAX VS. ALSTOM PROJECTS INDIA LIMITED (SUPRA), WHEREIN THE HONBLE HIGH COURT HAS HELD THAT IN THE ABSENCE OF SEGMENTAL ACCOUNTS, TP ADJUSTMENTS HAVE TO BE RESTRICTED ONLY TO TRANSACTIONS WITH ASSOCIATED ENTERPRISES ON PROPORTIONATE BASIS. THE RELEVANT EXTRACT OF THE FINDINGS OF HONBLE HIGH COURT ARE AS UNDER : 10. WE MAY ONCE MORE NOTE THAT THE INCOME TAX DEPARTMENT WITHIN THE JURISDICTION OF THIS COURT MUST ADOPT A CONSISTENT VIEW ON ISSUES OF LAW. IN THIS ITA NOS. 566 & 645/PUN/2013 AND ITA NO. 2637/PUN/2016 13 CASE, WE FIND THAT THE REVENUE URGES THE ABSENCE OF SEGMENTAL ACCOUNTS WOULD WARRANT ENTITY WISE ADJUSTMENT, WHEN THE REVENUE HAD ITSELF IN PEDRO ARALDITE PVT. LTD. (SUPRA) DID NOT CANVAS THE POINT, AS EVEN ACCORDING TO IT THE ISSUE STOOD COVERED BY THE EARLIER ORDERS OF THIS COURT IN FAVOUR OF THE ASSESSEE. THE REVENUE MUST APPLY THE LAW EQUALLY TO ALL AND CANNOT TAKE INCONSISTENT POSITION IN LAW (DE HORS THE FACTS) TO APPLY DIFFERENT STANDARDS TO DIFFERENT ASSESSEE. THE ADMINISTRATION OF THE TAX LAWS SHOULD NOT DEGENERATE INTO AN ARBITRARY AND INCONSISTENT APPLICATION OF LAW DEPENDENT UPON THE ASSESSEE CONCERNED. 11. WE ALSO NOTE THAT THE DELHI HIGH COURT IN COMMISSIONER OF INCOME TAX VS. KEIHIN PANALFA LTD. (ITA NO.11 OF 2015) DECIDED ON 9TH SEPTEMBER, 2015 HAS WHILE DEALING WITH TRANSFER PRICING ADJUSTMENT IN THE ABSENCE OF SEGMENTAL ACCOUNTS HELD THAT ADJUSTMENTS HAVE TO BE RESTRICTED ONLY TO TRANSACTIONS WITH ASSOCIATED ENTERPRISES. IT FURTHER HELD THAT WHERE SEPARATE ACCOUNTS ARE NOT AVAILABLE, THEN PROPORTIONATE ADJUSTMENTS TO BE MADE ONLY IN RESPECT OF THE INTERNATIONAL TRANSACTIONS WITH ASSOCIATED ENTERPRISES. 12. WE ARE IN RESPECTFUL AGREEMENT WITH THE VIEW OF THE DELHI HIGH COURT IN KEIHIN PANALFA LTD. (SUPRA). ONE MUST NOT LOOSE SIGHT OF THE FACT THAT THE TRANSFER PRICING ADJUSTMENT IS DONE UNDER CHAPTER X OF THE ACT. THE MANDATE THEREIN IS ONLY TO REDETERMINE THE CONSIDERATION RECEIVED OR GIVEN TO ARRIVE AT INCOME ARISING FROM FOR INTERNATIONAL TRANSACTIONS WITH ASSOCIATED ENTERPRISES. THIS IS PARTICULARLY SO AS IN RESPECT OF TRANSACTION WITH NON ASSOCIATED ENTERPRISES, CHAPTER X OF THE ACT IS NOT TRIGGERED TO MAKE ADJUSTMENT TO CONSIDERATIONS RECEIVED OR PAID UNLESS THEY ARE SPECIFIED DOMESTIC TRANSACTIONS. THE TRANSACTION WITH NON ASSOCIATED ENTERPRISES ARE PRESUMED TO BE AT ARMS LENGTH AS THERE IS NO RELATIONSHIP WHICH IS LIKELY TO INFLUENCE THE PRICE. IF THE CONTENTION OF THE REVENUE IS ACCEPTED, IT WOULD LEAD TO ARTIFICIAL INCREASE IN THE PROFITS OF TRANSACTIONS ENTERED INTO WITH NON ASSOCIATED ENTERPRISES BY APPLYING THE MARGIN AT ENTITY LEVEL WHICH IS NOT THE OBJECT OF CHAPTER X OF THE ACT. ABSENCE OF SEGMENTAL ACCOUNTING IS NOT AN INSURMOUNTABLE ISSUE, AS PROPORTIONATE BASIS COULD BE ADOPTED AS DONE BY THE DELHI HIGH COURT IN KEIHIN PANALFA LTD. (SUPRA). 13. IN THE ABOVE VIEW, NO SUBSTANTIAL QUESTION OF LAW ARISES. THEREFORE, WE DO NOT ENTERTAIN THE PRESENT APPEAL. 21. APPLYING THE RATIO LAID DOWN BY THE HONBLE BOMBAY HIGH COURT, WE UPHOLD THE ORDER OF CIT(A) AND DISMISS THE GROUND NO.1 RAISED BY THE REVENUE. 22. THE ISSUE IN GROUND OF APPEAL NO.2 RAISED BY THE REVENUE IS AGAINST THE ORDER OF CIT(A) IN HOLDING THAT THE PRODUCT DEVELOPMENT EXPENSES ARE TO BE ALLOWED AS REVENUE EXPENDITURE. THE SAID ISSUE RAISED BY THE REVENUE IS IDENTICAL TO THE ISSUE RAISED BY THE REVENUE IN ASSESSMENT YEAR 2001-02. WE HAVE ALREADY ALLOWED THE CLAIM OF THE ASSESSEE IN THE PARAS HEREINABOVE AND DISMISS THE GROUND OF APPEAL NO.2 RAISED BY THE REVENUE. FOLLOWING THE SAME PARITY OF REASONING WE DISMISS THE GROUND NO. 2 RAISED BY THE REVENUE. ITA NOS. 566 & 645/PUN/2013 AND ITA NO. 2637/PUN/2016 14 23. NOW, COMING TO THE APPEAL FILED BY THE ASSESSEE. THE GROUND OF APPEAL NO.1 RAISED BY THE ASSESSEE IS IN RELATION TO ADJUSTMENT OF RS.10.37 CRORES MADE TO THE TOTAL TRANSACTED PRICE OF RS.8.31 CRORES CONSISTING OF IMPORT OF MATERIAL AND COMPONENTS, EXPORT OF HEAT EXCHANGERS AND PRODUCT TESTING CHARGES UNDERTAKEN IN THE MANUFACTURING SEGMENT. THE ASSESSEE HAS ALSO RAISED ADDITIONAL GROUND OF APPEAL TO THE EXTENT THAT BANCO PRODUCTS (INDIA) LIMITED SHOULD BE EXCLUDED FROM THE FINAL LIST OF COMPARABLES THOUGH THE ASSESSEE HAD APPLIED THE MARGINS OF THE SAID CONCERNS IN ITS TP STUDY REPORT. 24. THE LEARNED AUTHORIZED REPRESENTATIVE FOR THE ASSESSEE STRESSED THAT THE ADDITIONAL GROUND OF APPEAL RAISED BY THE ASSESSEE DOES NOT INVOLVE ANY FRESH FACTS AND ALL THE FACTS ARE ALREADY AVAILABLE ON RECORD AND HENCE, THE SAME MAY BE ADMITTED. IT IS ALSO POINTED OUT BY THE LEARNED AUTHORIZED REPRESENTATIVE FOR THE ASSESSEE THAT THOUGH BANCO PRODUCTS (INDIA) LIMITED WAS ALSO ENGAGED IN THE BUSINESS OF GASKET AND RADIATORS FOR AUTOMOBILE APPLICATION BUT IN THE ABSENCE OF SEGMENTAL DETAILS, IT WAS NOT POSSIBLE TO COMPARE THE MARGINS. FURTHER, IT WAS POINTED THAT THE SAID CONCERN WAS ALSO ENGAGED IN DIVERSIFIED ACTIVITIES AND ALSO THAT THE DIVISION OF MANUFACTURE OF GASKET WAS HIVED OFF. IN RESPECT OF THE OTHER ISSUE, THE LEARNED AUTHORIZED REPRESENTATIVE FOR THE ASSESSEE POINTED OUT THAT THERE WERE CERTAIN ERRORS IN THE COMPUTATION OF PLI. SUCH ERRORS POINTED OUT WERE THAT IN THE OPERATING COST OF THE ASSESSEE DEPRECIATION WAS INCLUDED, WHEREAS IN THE CASE OF COMPARABLE CONCERNS, DEPRECIATION WAS NOT CONSIDERED AS PART OF OPERATING COST. HE PLACED RELIANCE ON THE RATIO LAID DOWN ON THE DECISION OF HONBLE BOMBAY HIGH COURT IN THE CASE OF COMMISSIONER OF INCOME TAX VS. M/S. WELSPUN ZUCCHI TEXTILES LTD. IN INCOME TAX APPEAL NO. 1286 OF 2014, ORDER DATED 6 TH JANUARY, 2017 TO POINT OUT THAT DEPRECIATION IS TO BE CONSIDERED AS PART OF OPERATING COST. ITA NOS. 566 & 645/PUN/2013 AND ITA NO. 2637/PUN/2016 15 HE FURTHER POINTED OUT THAT CERTAIN INCOME WAS NOT CONSIDERED AS OPERATING REVENUE AS DUTY DRAWBACK, GROUP SALES AND SALES TAX SET OFF. HE STRESSED THAT ALL THE ITEMS WERE PART OF MANUFACTURING OPERATION AND HENCE, SHOULD BE INCLUDED IN THE PROFIT MARGINS. ANOTHER CONTENTION RAISED BY THE ASSESSEE WAS THAT FOR THE COMPARABLE SUBROS LTD., THE OPERATING PROFITS WERE WRONGLY TAKEN AT 36.52% AS AGAINST CORRECT OPERATING PROFITS 3.55%. HE ALSO POINTED THAT IN CASE THE ASSESSEE CONCERN BANCO PRODUCTS (INDIA) LTD. IS EXCLUDED, THEN ONLY ONE CONCERN I.E. SUBROS LTD. REMAINS AS COMPARABLE. HE REFERRED TO THE RATIO LAID DOWN IN PETRO ARALDITE (P.) LTD. VS. DEPUTY COMMISSIONER OF INCOME TAX REPORTED IN 31 TAXMANN.COM 281 (MUMBAI-TRIB.) TO PROPOSE THAT EVEN ONE COMPARABLE IS ENOUGH TO APPLY THE TRANSFER PRICING PROVISIONS. 25. WE HAVE HEARD THE RIVAL CONTENTIONS AND PERUSED THE RECORD. THE FIRST TRANSFER PRICING ISSUE RAISED BY THE ASSESSEE IS IN RELATION TO ITS SEGMENT CONSISTING OF IMPORT OF MATERIAL AND COMPONENTS, EXPORT OF HEAT EXCHANGERS AND PRODUCT TESTING CHARGES. THE ASSESSEE WAS ENGAGED IN THE MANUFACTURE OF SALE OF AIR CONDITIONING SYSTEMS AND COMPONENTS THEREOF IN ITS MANUFACTURING SEGMENTS. THE TNMM METHOD HAD BEEN ADOPTED AND ACCEPTED TO BE THE MOST APPROPRIATE METHOD FOR BENCHMARKING THE ARMS LENGTH PRICE OF THE INTERNATIONAL TRANSACTION WITH ITS AE. THE TPO WHILE COMPUTING THE PLI OF THE ASSESSEE HAD INCLUDED DEPRECIATION AS PART OF TOTAL OPERATING COST. HOWEVER, WHILE WORKING OUT THE PLI OF THE EXTERNAL COMPARABLES, DEPRECIATION WAS EXCLUDED FROM THE OPERATING COST, BY ADDING DEPRECIATION TO OPERATING PROFIT, AT PAGES 15 AND 16 OF THE ORDER OF TPO. THE SAID COMPARISON MADE BY THE TPO IS INCORRECT WHERE UNDER THE TRANSFER PRICING PROVISIONS AN APPLE IS TO BE COMPARED TO AN APPLE. ITA NOS. 566 & 645/PUN/2013 AND ITA NO. 2637/PUN/2016 16 26. THE HONBLE BOMBAY HIGH COURT IN THE CASE OF COMMISSIONER OF INCOME TAX VS. M/S. WELSPUN ZUCCHI TEXTILES LTD. (SUPRA) HAD HELD THAT DEPRECIATION WAS TO BE INCLUDED WHILE ARRIVING AT THE TOTAL COST OF THE ASSESSEE. THE HONBLE BOMBAY HIGH COURT FURTHER HELD THAT DEPRECIATION WAS AN OPERATING EXPENSES TO DETERMINE THE OPERATING COST. WHILE APPLYING TNMM METHOD FOR THE PURPOSE OF DETERMINING THE ARMS LENGTH PRICE OF THE INTERNATIONAL TRANSACTION UNDERTAKEN BY THE ASSESSEE WITH ITS AE, WHERE WHILE DETERMINING THE PLI OF THE ASSESSEE DEPRECIATION HAS BEEN INCLUDED AS PART OF OPERATING COST, THEN, SIMILARLY WHILE COMPUTING THE PLI OF THE COMPARABLES, DEPRECIATION SHOULD BE INCLUDED AS PART OF OPERATING COST OF THE COMPARABLES. ACCORDINGLY, WE DIRECT THE ASSESSING OFFICER TO COMPUTE THE PLI OF THE COMPARABLES IN THIS REGARD. 27. THE NEXT ISSUE RAISED FOR COMPUTATION OF PLI IS IN RELATION TO THE WORKING OF OPERATING REVENUE. THE ASSESSEE DURING THE YEAR UNDER CONSIDERATION HAD RECEIVED DUTY DRAWBACK OF RS.73.17 LAKHS AND HAD ALSO SHOWN SCRAP SALES OF RS.23.04 LAKHS. THE TPO HAD EXCLUDED BOTH DUTY DRAWBACK AND SCRAP SALES FROM THE OPERATING PROFITS OF THE ASSESSEE, AS WELL AS THAT THE EXTERNAL COMPARABLES. THE HONBLE BOMBAY HIGH COURT IN THE CASE OF COMMISSIONER OF INCOME TAX VS. M/S. WELSPUN ZUCCHI TEXTILES LTD. (SUPRA) HAS LAID DOWN THAT DUTY DRAWBACK IS TO BE INCLUDED IN THE OPERATING PROFITS WHILE APPLYING THE TRANSFER PRICING PROVISIONS. SUCH AN INCLUSION OF DUTY DRAWBACK BENEFIT IS TO BE MADE BOTH IN THE HANDS OF THE ASSESSEE AND THE EXTERNAL COMPARABLES. ACCORDINGLY, WE DIRECT THE TPO TO INCLUDE THE DUTY DRAWBACK BENEFIT AS PART OF OPERATING MARGINS OF THE ASSESSEE AND SIMILAR EXERCISE SHOULD BE MADE IN RESPECT OF OPERATING MARGINS OF EXTERNAL COMPARABLES. SIMILARLY, SCRAP SALES OF RS.23.04 LAKS IS TO BE INCLUDED AS PART OF OPERATING PROFITS OF THE ASSESSEE AND ITA NOS. 566 & 645/PUN/2013 AND ITA NO. 2637/PUN/2016 17 SIMILAR ADJUSTMENT SHOULD BE MADE TO THE OPERATING PROFITS OF THE EXTERNAL COMPARABLES. 28. NOW, COMING TO THE COMPARABLES WHICH WERE FINALLY SELECTED FOR BENCHMARKING THE INTERNATIONAL TRANSACTIONS OF THE ASSESSEE IN THE MANUFACTURING DIVISION. THE MARGINS SHOWN BY THE ASSESSEE WERE PROPOSED TO BE COMPARED TO THE MARGINS OF TWO CONCERNS I.E. BANCO PRODUCTS (INDIA) LTD. AND M/S. SUBROS LTD. IN RESPECT OF M/S. SUBROS LTD., THE LEARNED AUTHORIZED REPRESENTATIVE FOR THE ASSESSEE POINTED OUT THAT THE OPERATING PROFIT WAS WRONGLY TAKEN AT 36.52% AS AGAINST 3.55% SHOWN BY THE ASSESSEE. THE CONTENTION OF THE ASSESSEE NEEDS VERIFICATION. ACCORDINGLY, WE DIRECT THE ASSESSING OFFICER/TPO TO VERIFY THE SAME AND COMPUTE THE MARGINS OF M/S. SUBROS LTD. 29. THE MARGINS OF THE OTHER CONCERN WHICH WAS APPLIED TO BENCHMARK THE INTERNATIONAL TRANSACTION OF THE ASSESSEE WAS BANCO PRODUCTS (INDIA) LTD. THE SAID CONCERN WAS PICKED UP BY THE ASSESSEE IN ITS TP STUDY REPORT TO BE COMPARABLE WHICH WAS ACCEPTED BY THE TPO. HOWEVER, THE ASSESSEE BEFORE US CLAIMS THAT THERE WERE DISTINCTIVE FACTORS WHICH AFFECTED THE COMPARABLE BANCO PRODUCTS (INDIA) LTD. WITH THE ASSESSEE. THE FIRST DIFFERENCE IS THE APPLICATION OF THE PRODUCTS MANUFACTURED BY THE SAID CONCERN AND BY THE ASSESSEE. THE SECOND ASPECT IS THE NON-AVAILABILITY OF THE SEGMENTAL INFORMATION IN RESPECT OF MANUFACTURE OF RADIATORS. THE ASSESSEE HAS FILED TABULATED DETAILS IN THIS REGARD AND HAS POINTED OUT THAT IN THE AFORESAID FACTS AND ON ANALYSIS OF FUNCTIONS, ASSETS AND RISK OF THE SAID CONCERN, THE SAME WAS NOT COMPARABLE WITH THE ASSESSEE. THE ASSESSEE FURTHER POINTED OUT THAT IN VIEW OF THE DECISION OF SPECIAL BENCH OF CHANDIGARH BENCH OF THE TRIBUNAL IN DY. COMMISSIONER OF INCOME TAX VS. QUARK SYSTEMS (P) LTD. REPORTED IN 132 ITA NOS. 566 & 645/PUN/2013 AND ITA NO. 2637/PUN/2016 18 TTJ 1 (SB)(CHD.) AND THE DECISION OF HONBLE DELHI HIGH COURT IN CHRYSCAPITAL INVESTMENT ADVISORS (INDIA) (P.) LTD. REPORTED IN 376 ITR 183, WHEREIN IT HAS BEEN HELD THAT IF ANY ENTERPRISES WERE WRONGLY TAKEN AS A COMPARABLE THEN THE ASSESSEE COULD NOT BE ESTOPPED FROM POINTING OUT THE MISTAKE IN TAKING UP THE SAME COMPARABLE. APPLYING THE PRINCIPLE LAID DOWN IN DY. COMMISSIONER OF INCOME TAX VS. QUARK SYSTEMS (P) LTD. (SUPRA) AND CHRYSCAPITAL INVESTMENT ADVISORS (INDIA) (P.) LTD. (SUPRA) THE ASSESSEE CAN ESTABLISH ITS CASE OF POINTING OUT THAT A COMPARABLE WHICH WAS INITIALLY SELECTED BY IT TO BE FUNCTIONALLY COMPARABLE, IS IN FACT NOT COMPARABLE, AS NOT FUNCTIONALLY COMPARABLE. THE ASSESSEE IN THE TP STUDY REPORT HAS PICKED UP BANCO PRODUCTS (INDIA) LTD. TO BE COMPARABLE BUT NOW AT THIS JUNCTURE CLAIMS THAT THE SAID CONCERN IS NOT COMPARABLE. THE TPO HAD APPLIED THE MARGINS OF BANCO PRODUCTS (INDIA) LTD. AND M/S. SUBROS LTD. TO BENCHMARK THE INTERNATIONAL TRANSACTION IN THE MANUFACTURING SEGMENT. HOWEVER, THE ASPECTS POINTED OUT BY THE ASSESSEE BEFORE US HAVE NOT BEEN PLACED BEFORE THE ASSESSING OFFICER/TPO, WHO HAD PROCEEDED ON THE GROUND THAT THE ASSESSEE HAD PICKED UP SAID CONCERN TO BE FUNCTIONALLY COMPARABLE. ACCORDINGLY, WE DEEM IT FIT TO ADMIT THE ADDITIONAL GROUND OF APPEAL RAISED BY THE ASSESSEE. IN THIS REGARD, WE REMIT THE ISSUE BACK TO THE FILE OF ASSESSING OFFICER/TPO TO DETERMINE WHETHER THE SAID CONCERN BANCO PRODUCTS (INDIA) LTD. IS FUNCTIONALLY COMPARABLE TO THE ASSESSEE OR NOT. REASONABLE OPPORTUNITY OF HEARING SHALL BE ALLOWED TO THE ASSESSEE IN THIS REGARD. ACCORDINGLY, THE GROUND OF APPEAL NO. 1 RAISED BY THE ASSESSEE AND THE ADDITIONAL GROUND RAISED BY THE ASSESSEE ARE ALLOWED. 30. THE GROUND NO. 2 RAISED BY THE ASSESSEE IS NOT PRESSED AND HENCE, THE SAME IS DISMISSED AS NOT PRESSED. ITA NOS. 566 & 645/PUN/2013 AND ITA NO. 2637/PUN/2016 19 31. THE ISSUE IN GROUND NO. 3 IS IN RESPECT OF ARMS LENGTH PRICE IN DESIGN ENGINEERING SERVICES. THERE ARE THREE ASPECTS TO THE SAID ADJUSTMENT MADE ON ACCOUNT OF APPLICATION OF TRANSFER PRICING PROVISIONS I.E. (A) ALLOWABILITY OF RISK ADJUSTMENT, (B) EXCLUSION OF PUBLIC SECTOR COMPANIES BEING NOT COMPARABLE TO CAPTIVE SERVICE PROVIDER AND (C) REJECTION OF CONCERN GILCON PROJECT SERVICES LTD. ON THE PREMISE THAT THE FINANCIAL RESULTS WERE NOT AVAILABLE IN PUBLIC DOMAIN. 32. THE LEARNED AUTHORIZED REPRESENTATIVE FOR THE ASSESSEE POINTED OUT THAT RISK ADJUSTMENT SHOULD BE ALLOWED IN THE DESIGN ENGINEERING SERVICES WHICH WAS DENIED BY THE TPO. IN RESPECT OF PUBLIC SECTOR COMPANIES, THE LEARNED AUTHORIZED REPRESENTATIVE FOR THE ASSESSEE POINTED OUT THAT THE SAID CONCERNS HAVE SOCIAL OBLIGATIONS FOR PROVIDING SERVICES AND FROM RISK PERSPECTIVE, THE SAID CONCERNS WERE NOT AT ALL COMPARABLE. SINCE THE ASSESSEE WAS A CAPTIVE SERVICE PROVIDER, THEN ITS MARGINS COULD NOT BE COMPARED WITH THE PUBLIC SECTOR ENTERPRISES. RELIANCE IN THIS REGARD WAS PLACED ON THE RATIO LAID DOWN BY THE DELHI BENCH OF TRIBUNAL IN BECHTEL INDIA PVT. LTD. VS. DCIT IN ITA NO.1478/DEL/2015, RELATING TO ASSESSMENT YEAR 2010-11, ORDER DATED 21.12.2015 AND THE HONBLE BOMBAY HIGH COURT IN CIT VS. M/S. THYSSEN KRUPP INDUSTRIES INDIA PVT. LTD. IN INCOME TAX APPEAL NO.2218 OF 2013, JUDGMENT DATED 28.03.2016. IN RESPECT OF THIRD ASPECT OF TRANSFER PRICING, THE LEARNED AUTHORIZED REPRESENTATIVE FOR THE ASSESSEE POINTED OUT THAT ONE CONCERN WAS SELECTED BY THE ASSESSEE AS COMPARABLE BUT THE SAME WAS REJECTED ON THE GROUND THAT THE RESULTS OF THE SAID CONCERN WERE NOT AVAILABLE. HOWEVER, THE FINANCIAL RESULTS OF GILCON PROJECT SERVICES LTD. WERE AVAILABLE IN PROWESS AND HENCE THE SAME SHOULD BE CONSIDERED FOR BENCHMARKING INTERNATIONAL TRANSACTIONS OF THE ASSESSEE. ITA NOS. 566 & 645/PUN/2013 AND ITA NO. 2637/PUN/2016 20 33. THE LEARNED DEPARTMENTAL REPRESENTATIVE FOR THE REVENUE RELIED ON THE ORDERS OF TPO AND THE CIT(A). 34. WE HAVE HEARD THE RIVAL CONTENTIONS AND PERUSED THE RECORD. IN THE IT ENABLED SERVICES DIVISION, THE ASSESSEE WAS PROVIDING SERVICES TO ITS PARENT COMPANY IN GERMANY AND WAS A LIMITED SCOPE SERVICE PROVIDER. THE ASSESSEE ADOPTED TNMM METHOD AS THE MOST APPROPRIATE METHOD TO BENCHMARK ITS INTERNATIONAL TRANSACTIONS AND HAD APPLIED PLI OF OP/OC. FOR BENCHMARKING THE SAID TRANSACTIONS, THE TPO HAD SELECTED CERTAIN CONCERNS AS COMPARABLE. OUT OF FIVE EXTERNAL COMPARABLES SELECTED, THE TPO FINALLY TAKEN M/S. KITCO LTD., M/S. WATER & POWER CONSULTANCY SERVICES (INDIA) LTD. AND M/S. ENGINEERS INDIA LTD. THE ASSESSEE IS AGGRIEVED BY THE INCLUSION OF SAID THREE CONCERNS IN THE FINAL SET OF COMPARABLES, WHEREIN THE SAID THREE CONCERNS WERE PUBLIC SECTOR ENTERPRISES PROVIDING CONSULTANCY AND END TO END SOLUTIONS TO GOVERNMENT AND OTHER COMPANIES. THE SAID CONCERNS I.E. WAPCOS IS A MINI RATNA I PUBLIC SECTOR ENTERPRISE; ENGINEERS INDIA LTD. WAS A GOVERNMENT OF INDIA ENTERPRISE AND BECAME PUBLIC LISTED COMPANY IN 1996 AND KITCO WAS ESTABLISHED IN 1972 BY IDBI, GOVERNMENT OF KERALA, SEVEN PUBLIC SECTOR BANKS AND OTHER NATIONAL AND STATE LEVEL FINANCIAL INSTITUTIONS, TO PROVIDE TECHNICAL ASSISTANCE AND CONSULTANCY. WE FIND MERIT IN THE PLEA OF THE ASSESSEE THAT WHERE THE CONCERNS WERE WORKING ON GOVERNMENTAL POLICIES AND SOCIAL OBLIGATIONS, THE RISK PROFILE AND FUNCTIONS OF THE SAID PUBLIC / GOVERNMENT ENTERPRISES WERE COMPLETELY DISTINCT AND DISSIMILAR FROM A CONCERN WHICH WAS A CAPTIVE SERVICE PROVIDER TO ITS ASSOCIATED ENTERPRISES. THE ASSESSEE WAS OPERATING ON COST PLUS METHOD WHICH WAS DISTINCT FROM THE OPERATIONS OF THE PUBLIC SECTOR / GOVERNMENT ENTERPRISES. FURTHER, EVEN FROM THE RISK PERSPECTIVE, THE ASSESSEE ITA NOS. 566 & 645/PUN/2013 AND ITA NO. 2637/PUN/2016 21 DOES NOT BEAR MATERIAL RISK INCLUDING CREDIT RISK PRODUCT LIABILITY, ETC., WHEREAS THE SAID CONCERNS BEAR THE MARKET AND CREDIT RISK AND OTHER RISKS. 35. THE HONBLE BOMBAY HIGH COURT IN CIT VS. M/S. THYSSEN KRUPP INDUSTRIES INDIA PVT. LTD. REPORTED IN 239 TAXMAN 46 (BOM) HAD EXCLUDED ENGINEERS INDIA LTD. BEING GOVERNMENT COMPANY AND WHERE SUBSTANTIAL PART OF ITS REVENUE CAME FROM EXECUTING PROJECTS OF PUBLIC SECTOR UNDERTAKINGS. FOLLOWING THE SAME PARITY OF REASONING, WE HOLD THAT ENGINEERS INDIA LTD. AND THE OTHER CONCERNS M/S. KITCO AND M/S. WAPCOS ARE TO BE EXCLUDED FROM THE FINAL LIST OF COMPARABLES. 36. THE NEXT OBJECTION RAISED BY THE ASSESSEE IS AGAINST EXCLUSION OF A CONCERN WHICH WAS SELECTED BY THE ASSESSEE BEING FUNCTIONALLY COMPARABLE. THE TPO HAD REJECTED GILCON PROJECT SERVICES LTD. AS COMPARABLE ON THE BASIS THAT THE RESULTS OF THE SAID CONCERNS WERE NOT AVAILABLE IN PUBLIC DOMAIN. HOWEVER, THE ASSESSEE CLAIMS THAT THE SAID DETAILS ARE DULY AVAILABLE IN THE PROWESS DATA BASE. IN VIEW THEREOF, WE REMIT THIS ISSUE BACK TO THE FILE OF ASSESSING OFFICER TO VERIFY THE CLAIM OF ASSESSEE AND IN CASE, THE DETAILS OF THE SAID CONCERN ARE AVAILABLE IN THE PROWESS DATA BASE, IN THE ABSENCE OF ANY FINDING THAT THE SAID CONCERN WAS FUNCTIONALLY NOT COMPARABLE, THE MARGINS OF THE SAID CONCERN BE APPLIED TO BENCHMARK THE INTERNATIONAL TRANSACTIONS OF THE ASSESSEE IN DESIGN ENGINEERING SERVICES DIVISION. 37. THE ASSESSEE BY WAY OF GROUND OF APPEAL NO.3 HAD ALSO RAISED THE ISSUE OF ADJUSTMENT TOWARDS RISK UNDERTAKEN BY IT IN ITES SEGMENT I.E. DESIGN ENGINEERING SERVICES. WE HAVE ALREADY DECIDED SIMILAR ISSUE IN HONEYWELL TURBO TECHNOLOGIES (INDIA) PVT. LTD. VS. DCIT IN ITA NO.2584/PUN/2012 ORDER DATED 10-02-2017 WHEREIN IT WAS HELD AS UNDER : ITA NOS. 566 & 645/PUN/2013 AND ITA NO. 2637/PUN/2016 22 32. UNDER THE TP PROVISIONS, WHERE IN THE FACTS OF THE PRESENT CASE, THE ASSESSEE IS RISK MITIGATING ENTITY, WHEREIN ALL THE RISKS ARE TAKEN CARE OF BY THE ASSOCIATE ENTERPRISES, THEN ADJUSTMENT ON ACCOUNT OF DIFFERENCE IN THE RISK PROFILE OF COMPARABLE COMPANIES MERITS TO BE ALLOWED WHILE BENCHMARKING THE INTERNATIONAL TRANSACTION OF ASSESSEE. THE BANGALORE BENCH OF TRIBUNAL IN THE CASE OF PHILIPS SOFTWARE CENTRE PVT. LTD. VS. ACIT REPORTED IN 26 SOT 226 HAS UPHELD THAT THE ADJUSTMENT OF RISK TO BE COMPUTED AS DIFFERENCE BETWEEN THE PLR AND THE RISK FREE RATE OF TURN. THE ASSESSEE PREPARED A SUMMARY COMPUTATION CONSIDERING THE AFORESAID RULE, WHICH READS AS UNDER:- 33. FURTHER, THE DELHI BENCH OF TRIBUNAL IN THE CASE OF SONY INDIA PV T. LTD. REPORTED IN 114 ITD 448 HAS ALLOWED 20% RISK ADJUSTMENT CONSIDERING THE FACT THAT IT MAY NOT BE POSSIBLE TO QUANTIFY RISK ADJUSTMENTS. THE ASSESSEE APPLYING THE SAID RATIO IN THE CASE OF SONY INDIA PVT. LTD. (SUPRA) HAS WORKED OUT THE RISK ADJUSTMENT ON THE OPERATING MARGINS OF COMPARABLES TO BE ALLOWED WHEN COMPUTED @ 20%. WE DIRECT THE ASSESSING OFFICER TO ALLOW THE RISK ADJUSTMENT AND RE-COMPUTE THE MARGINS OF COMPARABLES BY APPLYING THE RATIO LAID DOWN BY DELHI BENCH OF TRIBUNAL IN THE CASE OF SONY INDIA PVT. LTD. (SUPRA) AND COMPUTE THE TP ADJUSTMENT, IF ANY, IN THE HANDS OF ASSESSEE. 38. FOLLOWING THE SAID RATIO, WE DIRECT THE ASSESSING OFFICER TO ALLOW THE RISK ADJUSTMENT AND RE-COMPUTE THE MARGINS OF COMPARABLES BY APPLYING THE RATIO LAID DOWN BY DELHI BENCH OF TRIBUNAL IN THE CASE OF SONY INDIA PVT. LTD. REPORTED IN 114 ITD 448 AND COMPUTE THE TP ADJUSTMENT, IF ANY, IN THE HANDS OF ASSESSEE. 39. NOW, COMING TO THE NEXT ISSUE RAISED BY WAY OF GROUND OF APPEAL NO.4 I.E. ALLOCATION OF LEASE LINE COST TO TWO SEGMENTS OPERATED BY THE ASSESSEE I.E. MANUFACTURING SEGMENT AND ITES SEGMENT. THE ASSESSEE HAD ESTIMATED THE USE OF TWO LINES OUT OF SIX LINES FOR DESIGN ENGINEERING SEGMENT I.E. ABOUT 40% OF THE LEASE LINE COST. HOWEVER, THE TPO AND THE CIT(A) WERE OF THE VIEW THAT 80% OF THE TOTAL COST WAS ATTRIBUTABLE TO DESIGN ENGINEERING SEGMENT. THE CASE OF THE ASSESSEE WAS THAT IT HAD CONSISTENTLY FOLLOWED THE SAID ALLOCATION PROCEDURE ON THE BASIS OF USAGE AND SINCE OUT OF SIX LINES, TWO LINES WERE USED BY ITES SEGMENT, THEN THERE WAS NO NEED TO DISTURB THE SAME. THE ASSESSEE PARTICULAR % AVERAGE PRIME LENDING RATE DURING AY 2008-09 (A) 12.93 PERCENT AVERAGE BANK RATE DURING AY 2008-09 (B) 6.00 PERCENT DIFFERENCE BETWEEN THE PRIME LENDING RATE AND BANK RATE C = (A-B) 6.93 PERCENT RISK ADJUSTMENT (C) 6.93 PERCENT ITA NOS. 566 & 645/PUN/2013 AND ITA NO. 2637/PUN/2016 23 WAS OPERATING BOTH THE SEGMENTS AND WHERE THE ASSESSEE HAD CONSISTENTLY FOLLOWED A BASIS FOR ALLOCATION OF THE LEASE LINE COST, THEN THERE IS NO MERIT IN ADHOC APPORTIONMENT OF THE SAID COST BASIS. HENCE, WE REVERSE THE ORDERS OF TPO AND THE CIT(A) IN THIS REGARD AND ALLOW THE GROUND OF APPEAL NO.4 RAISED BY THE ASSESSEE. 40. THE LAST ISSUE RAISED BY THE ASSESSEE IS CORPORATE ISSUE AGAINST THE DISALLOWANCE OF PROVISION FOR WARRANTY. 41. BRIEF FACTS RELATING TO THE ISSUE ARE THAT THE ASSESSEE HAD MADE PROVISION FOR WARRANTY LIABILITY INCURRED BY IT ON ITS SALES OF AIR-CONDITIONERS AND HEAT EXCHANGERS. THE PROVISION WAS BEING REGULARLY MADE FROM YEAR TO YEAR AND ACTUAL EXPENSES WERE CLAIMED TO HAVE BEEN INCURRED AGAINST THE SAID PROVISION. THE ASSESSING OFFICER HAD DISALLOWED THE CLAIM OF ASSESSEE PLACING RELIANCE ON THE DECISION OF THE PUNE BENCH OF TRIBUNAL IN THE CASE OF THERMAX BABCOCK & WILCOX LTD. REPORTED IN 79 ITD 63 RELATING TO ASSESSMENT YEAR 1990-91, WHICH WAS UPHELD BY THE CIT(A). 42. THE LEARNED AUTHORIZED REPRESENTATIVE FOR THE ASSESSEE POINTED OUT THAT WHERE THE ASSESSEE WAS FOLLOWING A CONSISTENT METHOD OF MAKING A PROVISION FOR WARRANTY ON REASONABLE BASIS, THE SAME SHOULD BE ALLOWED IN THE HANDS OF ASSESSEE. IN RESPECT OF RELIANCE PLACED UPON BY THE ASSESSING OFFICER, THE LEARNED AUTHORIZED REPRESENTATIVE FOR THE ASSESSEE POINTED OUT THAT THE DISALLOWANCE IN ASSESSMENT YEAR 1990-91 IN THE CASE OF THERMAX BABCOCK & WILCOX LTD. (SUPRA) WAS MADE SINCE THE ASSESSEE HAD NOT SOLD A SINGLE UNIT OF MANUFACTURED PRODUCT. HOWEVER, THE TRIBUNAL ITSELF IN THE SAID CASE IN ASSESSMENT YEARS 1992-93 AND 1993-94, HAD DISTINGUISHED ITS OWN DECISION AND ALLOWED THE CLAIM OF ASSESSEE. FURTHER, RELIANCE WAS PLACED ON THE RATIO ITA NOS. 566 & 645/PUN/2013 AND ITA NO. 2637/PUN/2016 24 LAID DOWN BY THE HON'BLE SUPREME COURT IN ROTORK CONTROLS INDIA P. LTD. VS. CIT (2009) 314 ITR 62 (SC). 43. THE LEARNED DEPARTMENTAL REPRESENTATIVE FOR THE REVENUE PLACED RELIANCE ON THE ORDERS OF AUTHORITIES BELOW. 44. WE HAVE HEARD THE RIVAL CONTENTIONS AND PERUSED THE RECORD. THE ISSUE ARISING BY WAY OF GROUND OF APPEAL NO.5 RAISED BY THE ASSESSEE IS AGAINST THE DISALLOWANCE OF PROVISION MADE FOR WARRANTY. THE ASSESSEE WAS ENGAGED IN THE BUSINESS OF MANUFACTURE AND SALE OF AIR-CONDITIONERS, HEAT EXCHANGERS, ITS PARTS AND COMPONENTS. AGAINST THE SALE OF AIR-CONDITIONERS AND HEAT EXCHANGERS MANUFACTURED BY IT, THE ASSESSEE WAS MAKING PROVISION FOR WARRANTY ON SCIENTIFIC BASIS. IF ANY EXPENDITURE WAS ACTUALLY INCURRED FOR WARRANTY, THEN THE SAME WAS DEBITED AGAINST THE PROVISION. THE ASSESSING OFFICER WAS OF THE VIEW THAT THE SAID EXPENDITURE IS NOT ALLOWABLE IN THE HANDS OF ASSESSEE, PLACING RELIANCE ON THE DECISION OF THE PUNE BENCH OF TRIBUNAL IN THE CASE OF THERMAX BABCOCK & WILCOX LTD. (SUPRA) RELATING TO ASSESSMENT YEAR 1990-91. FIRST OF ALL, WHERE THE ASSESSEE IS FOLLOWING SYSTEMATIC BASIS FOR MAKING THE SAID PROVISION FOR WARRANTY WHICH HAS BEEN CONSISTENTLY FOLLOWED BY THE ASSESSEE, THEN THE SAME MERITS TO BE ALLOWED IN THE HANDS OF ASSESSEE. IN THIS REGARD, WE FIND SUPPORT FROM THE RATIO LAID DOWN BY THE HON'BLE SUPREME COURT IN ROTORK CONTROLS INDIA P. LTD. VS. CIT (SUPRA). 45. NOW, COMING TO THE STAND OF THE ASSESSING OFFICER THAT IN ASSESSMENT YEAR 1990-91 IN THE CASE OF THERMAX BABCOCK & WILCOX LTD. (SUPRA), DISALLOWANCE WAS MADE SINCE THE ASSESSEE HAD NOT SOLD SINGLE UNIT OF MANUFACTURED PRODUCT IN THE SAID YEAR. THE TRIBUNAL IN THE LATER ASSESSMENT YEARS 1992-93 AND 1993-94 IN ITA NOS.1246/PN/1995, 157/PN/1997 AND ITA NOS. 566 & 645/PUN/2013 AND ITA NO. 2637/PUN/2016 25 158/PN/1997, VIDE CONSOLIDATED ORDER DATED31.05.2005 IN THE SAID CONCERN HAD ALLOWED THE CLAIM OF PROVISION FOR WARRANTY. ACCORDINGLY, WE REVERSE THE ORDER OF CIT(A) IN THIS REGARD AND DIRECT THE ASSESSING OFFICER TO ALLOW THE CLAIM OF THE ASSESSEE VIS--VIS PROVISION FOR WARRANTY. 46. IN THE RESULT, BOTH THE APPEALS OF REVENUE ARE DISMISSED AND THE APPEAL OF ASSESSEE IS PARTLY ALLOWED. ORDER PRONOUNCED ON THIS 21 ST DAY OF APRIL, 2017. SD/- SD/- (ANIL CHATURVEDI) (SUSHMA CHOWLA) / ACCOUNTANT MEMBER / JUDICIAL MEMBER / PUNE ; DATED : 21 ST APRIL, 2017 . RK / GCVSR / COPY OF THE ORDER IS FORWARDED TO : 1. / THE APPELLANT; 2. / THE RESPONDENT; 3. THE CIT (A) - I T/TP, PUNE ; 4. THE DIT (TP/IT), PUNE ; 5. , , / DR A, ITAT, PUNE; 6. [ / GUARD FILE. / BY ORDER, // TRUE COPY // / ASSISTANT REGISTRAR, , / ITAT, PUNE