Magneti Marelli Powertrain India Pvt. Ltd., Gurugram V. Addl. CIT, Special Range-6, New Delhi

ITA 7038/DEL/2017

• Counselvise Citation: [2018] 126 COUNSELVISE.COM (IT) 3690 (ITAT-DELHI)
• Duration Of Justice: 2 month(s) 7 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 31-01-2018
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: I
• Assessment Year: 2013-2014
• Appeal Filed On: 23-11-2017
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: SANJAY I BARA
• Keywords: Depreciation; Transfer pricing; Opportunity of being heard; International transaction
• Section: 143(3); 234B; 92

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL DELHI BENCH I-1, NEW DELHI BEFORE SHRI R. K. PANDA, ACCOUNTANT MEMBER AND SHRI SUDHANSHU SRIVASTAVA, JUDICIAL MEMBER ITA NO.1599/DEL/2017 ASSESSMENT YEAR : 2012-13 MAGNETI MARELLI POWERTRAIN INDIA PVT. LTD., PLOT NO.1, SUBPLOT NO.25 & 32, MARUTI SUPPLIERS PARK SECTOR- 3A, IMT MANESAR, GURGAON. VS. ADDL.CIT, SPECIAL RANGE-6, NEW DELHI. PAN : AAFCM3204N (APPELLANT) (RESPONDENT) ITA NO.7038/DEL/2017 ASSESSMENT YEAR : 2013-14 MAGNETI MARELLI POWERTRAIN INDIA PVT. LTD., PLOT NO.1, SUBPLOT NO.25 & 32, MARUTI SUPPLIERS PARK SECTOR- 3A, IMT MANESAR, GURGAON. VS. ADDL.CIT, SPECIAL RANGE-6, NEW DELHI. PAN : AAFCM3204N (APPELLANT) (RESPONDENT) APPELLANT BY : SHRI AJAY VOHRA, SR. ADV. SHRI NEERAJ JAIN, ADV. SHRI SAHIL SHARMA, CA RESPONDENT BY : SHRI SANJAY I. BARA, CIT-DR DATE OF HEARING : 21-12-2017 DATE OF PRONOUNCEMENT : 31-01-2018 O R D E R PER R. K. PANDA, AM : THE ABOVE TWO APPEALS FILED BY THE ASSESSEE ARE DIR ECTED AGAINST THE SEPARATE ORDERS OF THE ASSESSING OFFICER PASSED U/S 143(3) R.W.S. 144C FOR 2 ITA NO.1599/DEL/2017 ITA NO.7038/DEL/2017 ASSESSMENT YEARS 2012-13 AND 2013-14 RESPECTIVELY. FOR THE SAKE OF CONVENIENCE, BOTH THE APPEALS WERE HEARD TOGETHER A ND ARE BEING DISPOSED OF BY THIS COMMON ORDER. ITA NO.1599/DEL/2017 (A.Y. 2012-13) : 2. FACTS OF THE CASE, IN BRIEF, ARE THAT THE ASSESS EE IS A JOINT VENTURE (JV) COMPANY BETWEEN MAGNETI MARELLI POWERTRAIN S.P.A., ITALY (MM ITALY) HOLDING 51%, SUZUKI MOTOR CORPORATION, JAPAN (SMC) HOLDING 30% AND MARUTI SUZUKI INDIA LIMITED (MSIL) HOLDING 19% OF THE EQUITY STAK E. THE JOINT VENTURE WAS INCORPORATED IN INDIA IN THE YEAR 2007. THE ASSESS EE IS ENGAGED IN THE BUSINESS OF MANUFACTURING AND SELLING ENGINE CONTROL UNITS ( ECUS) IN INDIA. IT FILED ITS RETURN OF INCOME ON 23.11.2012 DECLARING TOTAL INCO ME 69,07,87,080/-. THE ASSESSING OFFICER REFERRED THE MATTER TO THE TPO FO R DETERMINATION OF THE ARMS LENGTH PRICE OF THE INTERNATIONAL TRANSACTIONS ENTE RED INTO BY THE ASSESSEE WITH ITS AES. 2.1 THE TPO DURING THE TP ASSESSMENT PROCEEDINGS OB SERVED THAT THE ASSESSEE DURING THE IMPUGNED ASSESSMENT YEAR HAS UN DERTAKEN THE FOLLOWING INTERNATIONAL TRANSACTIONS :- S.NO. HEAD VALUE 1 PURCHASE OF RAW MATERIALS 384,866,702 2 SALE OF GOODS 38,126,025 3 PAYMENT OF ROYALTY 61,908,166 4 PAYMENT OF TECHNICAL KNOW - HOW FEE 403,899,999 5 RE-IMBURSEMENT OF LEGAL AND PROFESSIONAL EXPENSES 21,183,190 TOTAL 90,99,84,082 3 ITA NO.1599/DEL/2017 ITA NO.7038/DEL/2017 3. FOR DETERMINATION OF THE ARMS LENGTH PRICE OF T HE ABOVE INTERNATIONAL TRANSACTIONS WITH ITS AE, THE ASSESSEE CONSIDERED T NMM AS THE MOST APPROPRIATE METHOD FOR ITS ACTIVITY PERTAINING TO M ANUFACTURE OF ECUS. THE TPO ANALYZED THE VARIOUS CLAUSES OF THE JOINT VENTU RE AGREEMENT AND THE TP APPROACH ADOPTED BY THE ASSESSEE. AFTER CONSIDERIN G THE VARIOUS ARGUMENTS ADVANCED BY THE ASSESSEE, THE TPO REJECTED THE TNMM ADOPTED BY THE ASSESSEE COMPARING THE MARGIN AT ENTITY LEVELS. HE, ON THE OTHER HAND, APPLIED CUP METHOD AS THE MOST APPROPRIATE METHOD FOR DETERMINA TION OF THE ARMS LENGTH PRICE OF THE PAYMENT OF TECHNICAL ASSISTANCE AND AC CORDINGLY MADE AN UPWARD ADJUSTMENT AT RS.40,38,99,999/-. THE ASSESSEE APPR OACHED THE DRP BUT WAS NOT SUCCESSFUL. ACCORDINGLY, THE ASSESSING OFFICER IN THE FINAL ORDER MADE ADDITION OF THE SAME. 4. AGGRIEVED WITH SUCH ORDER OF THE ASSESSING OFFIC ER/TPO/DRP, THE ASSESSEE IS IN APPEAL BEFORE THE TRIBUNAL BY RAISIN G THE FOLLOWING GROUNDS :- 1. THAT ON THE FACTS AND IN THE CIRCUMSTANCES OF T HE CASE AND IN LAW, THE LEARNED DISPUTE RESOLUTION PANEL ('DRP')/ LEARNED ASSESSING OFFICER ('AO')/ LEARNED TRANSFER PRICING OFFICER ('TPO') ERRED IN RE-COMPUT ING THE ARM'S LENGTH PRICE OF THE INTERNATIONAL TRANSACTIONS UNDER SECTION 92 OF THE INCOME-TAX ACT, 1961 ('THE ACT') OF PAYMENT OF LUMP SUM TECHNICAL FEES TO BE RS. NIL, R ESULTING IN MAKING AN ADDITION OF RS. 17,32,06,899/- TO THE RETURNED INCOME OF THE APPELLANT AND THE ORD ERS ARE BAD IN LAW AND VOID AB-INITIO. 2. DRP/AO/TPO ERRED IN QUESTIONING THE COMMERCIAL W ISDOM OF THE APPELLANT IN ENTERING INTO INTERNATIONAL TRANSACTION OF PAYMENT OF LUMP SUM TECHNICAL FEES TO ITS ASSOCIATED ENTERPRISE ('AE'). 3. PAYMENT OF LUMP SUM TECHNICAL FEES: A. THE DRP HAS ERRED IN NOT PASSING A SPEAKING ORDER A GAINST THE OBJECTIONS RAISED BY THE APPELLANT AND HAS REFRAINED FROM INTERFERING WI TH THE ACTION OF AO/TPO BY MERELY STATING THAT THE MATTER IS SIMILAR TO THE IS SUES PERTAINING TO ASSESSMENT YEAR ('AY') 2009-10 WHERE THE MATTER WAS SET ASIDE BY HO N'BLE TRIBUNAL TO THE TPO FOR 4 ITA NO.1599/DEL/2017 ITA NO.7038/DEL/2017 FRESH ADJUDICATION. B. THE AO / TPO / DRP HAS ERRED IN DETERMINING THE VALUE OF INTERNATI ONAL TRANSACTION PERTAINING TO PAYMENT OF TECHNICAL FEES OF RS. 403, 899,999 BY THE APPELLANT TO ITS AE AS NIL BY: I. DISREGARDING THE ARM'S LENGTH AND INDEPENDENT NATUR E OF NEGOTIATIONS BETWEEN THE JOINT VENTURE ('JV') PARTNERS WHICH ARE ALSO LI STED IN THE JV AGREEMENT & THE UNCONTROLLED NATURE OF UNDERLYING TRANSACTION B ETWEEN JV COMPANY AND JV PARTNERS. II. REJECTING THE APPELLANT'S CONTENTION THAT THE P AYMENT OF TECHNICAL KNOW-HOW FEE IS A COMPOSITE TRANSACTION WHICH IS CLOSELY LINKED WITH OTHER INTERNATIONAL TRANSACTIONS AND HENCE SHOULD BE BENCHMARKED BY APP LICATION OF TRANSACTIONAL NET MARGIN METHOD ('TNMM') UNDER THE AGGREGATION AP PROACH AS ADOPTED BY THE APPELLANT AS PER PROVISIONS OF RULE 1OC OF THE INCOME-TAX RULES, 1962 ('THE RULES') WITHOUT PROVIDING ANY BASIS/ REASONS FOR TH E SAME. III. NOT PROVIDING ANY SEARCH, NAME OF THE TANGIBLE COMPARABLE COMPANIES ADOPTED, ETC. TO DETERMINE THE ARM'S LENGTH PRICE AS NIL UND ER THE COMPARABLE UNCONTROLLED PRICE ('CUP') METHOD AND IGNORING THE FACT THAT THE AVAILABILITY OF THE COMPARABLE DATA IS THE BASIC PRINCIPLE OF THE A DOPTION OF CUP METHODOLOGY FOR DETERMINATION OF ARMS LENGTH PRICE. IV. NOT FOLLOWING THE BINDING DECISION OF THE JURIS DICTIONAL DELHI HIGH COURT DATED 25 OCTOBER 2016, IN THE APPELLANT'S OWN CASE FOR TH E A Y 2009-10, WHEREIN THE DELHI HIGH COURT HAS, IN IDENTICAL CIRCUMSTANCES, D IRECTED THE TPO TO CONSIDER TNMM FOR DETERMINING THE ARM'S LENGTH PRICE OF THE LUMP SUM TECHNICAL FEES PAID TO THE AE. 4. DISALLOWANCE OF DEPRECIATION ON LUMP SUM TECHNICAL FEES THE AO/ TPO ERRED IN DISALLOWING THE DEPRECIATION O N THE LUMP SUM TECHNICAL FEE BY DETERMINING ALP OF LUMP SUM TECHNICAL FEE AS NIL . THE AO OUGHT TO HAVE ALLOWED THE FULL DEPRECIATION CLAIMED BY THE APPELL ANT ON LUMP SUM TECHNICAL FEES. 5. ENHANCEMENT OF DISALLOWANCE OF DEPRECIATION ON LUMP SUM TECHNICAL FEES: WITHOUT PREJUDICE TO GROUND NO 4, THE AO HAS ERRED IN DISALLOWING DEPRECIATION ON LUMP SUM TECHNICAL FEES, AMOUNTING TO RS. 17,32, 06,899 BY ENHANCING THE DISALLOWANCE OF DEPRECIATION IN THE FINAL ASSESSMEN T ORDER AS COMPARED TO THE DISALLOWANCE OF DEPRECIATION PROPOSED OF RS 6,79,83 ,765 IN THE DRAFT ASSESSMENT ORDER. 6. THE AO FAILED TO APPRECIATE THE FACT THAT DRP WHILE UPHOLDING THE DISALLOWANCE MADE BY THE AO IN THE DRAFT ASSESSMENT ORDER, HAD N OT DIRECTED THE AO TO ENHANCE THE DISALLOWANCE MADE IN THE DRAFT ASSESSMENT ORDER . THE AO OUGHT TO HAVE CONSIDERED ONLY RS 6,79,83,765 TOWARDS DEPRECIATION ON LUMP SUM TECHNICAL FEES FOR THE PURPOSE OF DISALLOWANCE. 7. DISALLOWANCE OF DEPRECIATION ON LUMP SUM TECHNICAL FEES ON THE BASIS OF THE AMOUNT APPEARING IN THE FINANCIAL STATEMENTS: WITHOUT PREJUDICE TO THE GROUND NO 4 TO 6, FOR THE PURPOSE OF DISALLOWANCE, THE AO ERRED IN COMPUTING DEPRECIATION ON THE BASIS OF THE AMOUNT APPEARING IN THE FINANCIAL STATEMENTS OF THE APPELLANT FOR THE FINAN CIAL YEAR ENDED 31 MARCH 2012 AS AGAINST THE TAX WRITTEN DOWN ('WDV') VALUE AS PE R PROVISIONS OF SECTION 43(6) OF THE ACT. 8. THE AO ERRED IN NOT CONSIDERING SUBMISSIONS MADE BY APPELLANT VIDE LETTER DATED 27 JANUARY 2017. 5 ITA NO.1599/DEL/2017 ITA NO.7038/DEL/2017 9. THE AO ERRED IN LEVYING INTEREST OF RS. 3,33,17,920 UNDER SECTION 234B OF THE ACT. THE APPELLANT DENIES THE LIABILITY UNDER SECTION 23 4B OF THE ACT. 10. THE AO ERRED IN INITIATING PENALTY PROCEEDINGS UNDE R SECTION 271(1)(C) OF THE ACT IN RESPECT OF FURNISHING OF INACCURATE PARTICULARS. 11. THE APPELLANT CRAVES LEAVE TO ADD, AMEND, ALTER, DE LETE, RESCIND, FORGO OR WITHDRAW ANY OF THE ABOVE GROUNDS OF OBJECTION EITH ER BEFORE OR DURING THE COURSE OF PROCEEDINGS IN THE INTEREST OF THE NATURAL JUSTI CE. THAT THE ABOVE GROUNDS ARE INDEPENDENT AND WITHOUT PREJUDICE TO EACH OTHER. 5. GROUNDS NO.1, 2 AND 11 BEING GENERAL IN NATURE A RE DISMISSED. 6. SO FAR AS GROUNDS OF APPEAL NO.3 TO 8 ARE CONCER NED, THE LD. COUNSEL FOR THE ASSESSEE AT THE OUTSET SUBMITTED THAT IDENTICAL ISSUE HAD COME UP BEFORE THE TRIBUNAL IN ASSESSEES OWN CASE IN THE IMMEDIATELY PRECEDING ASSESSMENT YEAR AND THE TRIBUNAL VIDE ITA NO.801/DEL/2016 ORDER DAT ED 12.07.2017 FOR THE ASSESSMENT YEAR 2011-12 HAS DISCUSSED THE ISSUE AND RESTORED THE ISSUE TO THE FILE OF THE ASSESSING OFFICER/TPO. THEREFORE, HE H AS NO OBJECTION IF THE ISSUE IS RESTORED TO THE FILE OF THE ASSESSING OFFICER/TPO W ITH SIMILAR DIRECTIONS. LD. DR HAS NO OBJECTION FOR THE SAME. WE FIND THE TRIB UNAL IN ASSESSEES OWN CASE IN THE PRECEDING ASSESSMENT YEAR VIDE ITA NO.801/DE L/2016 ORDER DATED 12.07.2007 HAS RESTORED THE ISSUE TO THE FILE OF TH E ASSESSING OFFICER/TPO BY OBSERVING AS UNDER :- 7. AFTER HEARING BOTH SIDES, WE FIND IDENTICAL ISS UE HAD COME UP BEFORE THE TRIBUNAL IN ASSESSEES OWN CASE IN THE IMMEDIATELY PRECEDING AY 2009-10. WE FIND THE TRIBUNAL IN ITA NO.6728/DEL/2013 ORDER DATED 10 .03.2014 HAS SET ASIDE THE ISSUE TO THE FILE OF THE AO/TPO WITH CERTAIN DIRECTION FO R FRESH DETERMINATION OF THE ALP OF THE INTERNATIONAL TRANSACTION. THE RELEVANT OBSERVA TION OF THE TRIBUNAL FROM PARA 5 ONWARDS READS AS UNDER:- 5. WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSED THE RELEVANT MATERIAL ON RECORD. AT THE OUTSET, WE NOTE THAT THE RECORDING B Y THE TPO THAT THE ASSESSEE MADE PAYMENT OF RS. 38.58 CRORE IN THE YEAR IN QUES TION FOR WHICH DEDUCTION 6 ITA NO.1599/DEL/2017 ITA NO.7038/DEL/2017 WAS CLAIMED, IS NOT CORRECT. IT HAS BEEN DEMONSTRAT ED BY THE LD. AR THAT THE AMOUNT SO PAID WAS CAPITALIZED AND THE ASSESSEE CLA IMED ALLOWANCE FOR DEPRECIATION ON SUCH CAPITALIZED AMOUNT TO THE TUNE OF RS. 6 CRORE AND ODD. BE THAT AS IT MAY, THE SIMPLE FACT THAT THE ASSESSEE C APITALIZED THE AMOUNT IN THE YEAR AND CLAIMED DEPRECIATION ON IT, WILL NOT TAKE THE TRANSACTION OUTSIDE THE AMBIT OF `INTERNATIONAL TRANSACTION. IT IS AN UNDI SPUTED FACT THAT THE ASSESSEE INCURRED LIABILITY FOR THE SAID AMOUNT AND DID ACQU IRE TECHNICAL ASSISTANCE IN THE FINANCIAL YEAR RELEVANT TO THE ASSESSMENT YEAR UNDER CONSIDERATION IN RESPECT OF ECUS TO BE MANUFACTURED DISTINCTLY FOR S UZUKI SWIFT CAR APPLICATION; MS SWIFT APPLICATION ; TATA INDICA CAR APPLICATION; AND FIAT INDIA PALIO-LINEA CAR APPLICATION. HENCE, THE CHARA CTER OF INTERNATIONAL TRANSACTION IS INTACT. EVEN, THIS ASPECT HAS NOT BE EN DISPUTED ON BEHALF OF THE ASSESSEE EITHER BEFORE US OR THE AUTHORITIES BELOW. 6. IT IS SEEN THAT THE ASSESSEE CLUBBED TRANSACTION S OF IMPORT OF RAW MATERIAL, SUB-ASSEMBLES AND COMPONENTS, PAYMENT OF TECHNICAL ASSISTANCE FEES, PAYMENT OF ROYALTY, PAYMENT OF SOFTWARE AND PURCHASE OF FIX ED ASSETS UNDER ONE SEGMENT OF MANUFACTURING OF THE AUTOMOTIVE COMPONE NTS AND ANALYZED ALL SUCH TRANSACTIONS ON A COMBINED BASIS. THIS TYPE OF COMBINED BENCHMARKING OF ALL THE INTERNATIONAL TRANSACTIONS IS NOT IN ACC ORDANCE WITH LAW. THE MERE FACT THAT THE OVERALL PROFIT EARNED BY THE ASSESSEE IS MORE, WOULD NOT IPSO FACTO LEAD TO THE INTERFERENCE THEN ALL THE INTERNATIONAL TRANSACTIONS ARE AT ALP. THE SPECIAL BENCH OF THE TRIBUNAL IN THE CASE OF LG ELE CTRONICS INDIA PVT. LTD. VS ACIT 2013 140 ITD 41 (DELHI) (SB) HAS HELD TO THIS EXTENT. THUS, THE APPROACH SO ADOPTED BY THE ASSESSEE IN COMBINING SO MANY INTERNATIONAL TRANSACTION FOR DETERMINING ALP ON A CONSOLIDATED B ASIS, IS INCORRECT. 7. THE NEXT MAJOR FLAW IN THE ASSESSEES CALCULATIO N IS THAT IT TOOK INTO CONSIDERATION THE PROJECTED OPERATING PROFIT MARGI N TO SHOW THAT ITS INTERNATIONAL TRANSACTION FOR THE CURRENT YEAR WAS AT ALP. THE REQUIREMENT UNDER THE RELEVANT PROVISIONS OF THE ACT ALONG WITH THE RULES IS TO CONSIDER THE `ACTUAL FIGURES AND NOT ANY `PROJECTED FIGURES. I T IS BEYOND OUR COMPREHENSION AS TO HOW THE PROJECTED FIGURES CAN B E SUBSTITUTED FOR THE ACTUALS WHEN THE REQUIREMENT IS TO BENCHMARK ACTUAL INTERNATIONAL TRANSACTIONS AT ALP. WE, THEREFORE, DO NOT APPROVE THE METHODOLOGY ADOPTED BY THE ASSESSEE IN THIS REGARD. 8. IT IS FURTHER SEEN THAT THE ASSESSEE SHOWED MEAN OPERATING MARGIN OF CERTAIN COMPARABLES AT 6.65% ON THE BASIS OF PAST THREE YEA RS DATA. WE DO NOT APPROVE THIS KIND OF APPROACH ADOPTED BY THE ASSESS EE FOR THE OBVIOUS REASON THAT RULE 10B(4) PROVIDES THAT THE DATA TO BE USED IN ANALYZING THE COMPARABILITY OF AN UNCONTROLLED TRANSACTION WITH A N INTERNATIONAL TRANSACTION SHALL BE THE DATA RELATING TO THE FINANCIAL YEAR IN WHICH THE INTERNATIONAL TRANSACTION HAS BEEN ENTERED INTO. PROVISO OF THIS RULE FOR USE OF MULTIPLE YEAR DATA IS ONLY AN EXCEPTION AND NOT A RULE, WHICH CAN BE INVOKED IF THE DATA FOR THE CURRENT YEAR DOES NOT RESULT INTO THE DETERMINA TION OF CORRECT PRICES. NOTHING OF THE SORT HAS BEEN SHOWN AS TO WHY THE DA TA OF THE COMPARABLES FOR 7 ITA NO.1599/DEL/2017 ITA NO.7038/DEL/2017 THE CURRENT YEAR WAS NOT APPROPRIATE. WE, THEREFORE , REJECT THIS POINT OF VIEW CANVASSED BY THE ASSESSEE IN MAKING COMPARABILITY. 9. WE FURTHER OBSERVE THAT THE APPROACH ADOPTED BY THE TPO IS ALSO NOT CORRECT. HE REJECTED TNMM AS APPLIED BY THE ASSESSE E BY HOLDING THAT CUP METHOD WAS APPLICABLE. HOWEVER, HE COMPUTED THE ALP OF SUCH TRANSACTION UNDER CUP AS NIL. THERE IS NO DISPUTE ON THE FACT T HAT THE ASSESSEE DID RECEIVE TECHNICAL INFORMATION IN RESPECT OF ECUS TO BE MANU FACTURED BY IT FOR FOUR DIFFERENT MODELS OF CARS PERTAINING TO MARUTI, FIAT AND TATA. WHEN TECHNICAL INFORMATION WAS ADMITTEDLY OBTAINED, IT COULD NOT B E SAID THAT THE ASSESSEE OUGHT NOT TO HAVE PAID ANY CONSIDERATION FOR THAT T O ITS A.E. THE TPO SEEMS TO HAVE GONE WRONG BY CONSIDERING THAT THE FOREIGN A.E CONTRIBUTED CAPITAL TO THE TUNE OF RS. 20 CRORES AND ODD AND TOOK AWAY A SUM O F RS. 38 CRORES AND ODD IN THE SHAPE OF FEES FOR TECHNICAL SERVICES. THIS TYPE OF COMPARISON MADE BY THE TPO FOR DETERMINING THAT THE ALP OF THE INTERNATION AL TRANSACTION OF PAYMENT OF TECHNICAL FEE AT NIL, HAS NO LEGAL LEGS TO STAND ON. WHEN HE RESORTED TO THE APPLICATION OF CUP METHOD, IT WAS INCUMBENT UPON HI M TO ASK THE ASSESSEE FOR THE SUBMISSION OF DETAILS OF SOME COMPARABLE UNCONT ROLLED TRANSACTIONS. THERE IS NO REFERENCE TO THE ASKING OR SUPPLYING OF ANY S UCH INFORMATION BY THE ASSESSEE IN THE FIRST INSTANCE, OR THE TPO THEREAFT ER VENTURING TO FIND OUT SUCH COMPARABLES AT HIS OWN. WHAT IS REQUIRED UNDER THE CUP METHOD IS TO COMPARE THE PRICE PAID WITH CERTAIN UNCONTROLLED CO MPARABLE TRANSACTION TO ANALYZE IF THE PRICE PAID IN AN INTERNATIONAL TRANS ACTION IS AT ALP. NOTHING OF THE SORT HAS BEEN DONE BY THE TPO TO MAKE COMPARISO N OF ANY COMPARABLE CASE WITH THAT OF THE ASSESSEE. HE SIMPLY PROCEEDED TO ADOPT NIL VALUE OF AS ALP OF THE INTERNATIONAL TRANSACTION OF PAYMENT OF TECHNICAL FEE AND PROPOSED ADDITION FOR THE FULL AMOUNT. IN OUR CONSIDERED OPI NION, WHEN THE ASSESSEE DID RECEIVE TECHNICAL INFORMATION AND EARNED INCOME BY USING THE SAME, IT CANNOT BE SAID THAT IT HAS ALP AT NIL. SOME SORT OF COMPAR ISON IS INEVITABLE UNDER THIS METHOD, UNLESS IT IS SHOWN THAT THE ASSESSEE DID NO T GET ANY ADVANTAGE AT ALL BY MAKING PAYMENT TO ITS AE. 10. THUS IT IS SEEN THAT NEITHER THE ASSESSEE FOLLO WED CORRECT METHODOLOGY FOR DETERMINATION OF ALP OF THIS INTERNATIONAL TRANSACT ION, NOR THE TPO/DRP APPLIED THE CUP METHOD FOR DETERMINATION OF ALP IN CORRECT PERSPECTIVE. IN SUCH A SITUATION, THE ORDER PASSED BY THE A.O MAKIN G ADDITION PROPOSED BY THE TPO, CANNOT BE UPHELD. IN OUR CONSIDERED OPINION, T HE ENDS OF JUSTICE WOULD MEET ADEQUATELY IF THE IMPUGNED ORDER ON THIS ISSUE IS SET ASIDE AND THE MATTER IS RESTORED TO THE FILE OF AO/TPO FOR A FRESH DETER MINATION OF ALP OF THIS INTERNATIONAL TRANSACTION. WE ORDER ACCORDINGLY. TH E LD. AR HAS AGREED TO ASSIST THE TPO IN PROVIDING DATA OF CERTAIN COMPARA BLE CASES WHICH COULD ASSIST IN THE DETERMINATION OF ALP. IN SUCH FRESH P ROCEEDINGS, THE TPO WILL ASCERTAIN AS TO WHICH METHOD CAN BE CORRECTLY APPLI ED AND THEN DECIDE THE QUESTION BEFORE HIM. NEEDLESS TO SAY, A REASONABLE OPPORTUNITY OF BEING HEARD WILL BE GIVEN TO THE ASSESSEE. 8. WE FIND WHEN THE ASSESSEE CHALLENGED THE ORDER O F THE TRIBUNAL BEFORE THE HONBLE HIGH COURT, THE FOLLOWING QUESTIONS OF LAW WERE FRAMED: 8 ITA NO.1599/DEL/2017 ITA NO.7038/DEL/2017 1. WHETHER THE INCOME TAX APPELLATE TRIBUNAL WAS RIGH T IN HOLDING THAT ROYALTY AND TECHNICAL ASSISTANCE FEE DID NOT FORM P ART OF A COMPOSITE TRANSACTION AND HAVE TO BE TREATED AS TWO SEPARATE TRANSACTIONS FOR THE PURPOSE OF BENCHMARKING AND COMPUTING ARMS LENGTH P RICE? 2. WHETHER THE INCOME TAX APPELLATE TRIBUNAL WAS RIGHT IN HOLDING THAT TRANSACTIONAL NET MARGIN METHOD SHOULD NOT BE APPLI ED FOR BENCHMARKING/COMPUTING ARMS LENGTH PRICE IN RESPEC T OF TRANSACTION RELATING TO TECHNICAL ASSISTANCE FEE. 9. SO FAR AS QUESTION NO.1 IS CONCERNED, THE HONBL E HIGH COURT DECIDED THE ISSUE AGAINST THE ASSESSEE; SO FAR AS QUESTION NO.2 IS CONCERNED, THE HONBLE HIGH COURT ANSWERED THE ISSUE IN FAVOUR OF THE ASSESSEE HOLDING THAT TNMM HAD TO BE APPLIED BY THE TPO/AO IN RESPECT OF THE TECHNICAL F EE PAYMENT TOO. THE RELEVANT OBSERVATION OF THE HONBLE HIGH COURT FROM PARA 14 ONWARDS READ AS UNDER:- 14. THE ASSESSEE/APPELLANT DURING 2008-09 ENTERED INTO FOUR LICENSE & TECHNOLOGY ASSISTANCE AGREEMENTS (LTAAS) WITH ITS O VERSEAS AE FOR FOUR PRODUCTS FOR OBTAINING ECU TECHNOLOGY. IN RETURN FO R THE TECHNICAL KNOWHOW, THE ASSESSEE AGREED TO COMPENSATE THE AE THROUGH A FEE AMOUNTING TO US $ 2 MILLION FOR EACH LTAA (TOTAL US $ 8 MILLION EQUIVAL ENT TO OVER RS.38 CRORES) ON INSTALLMENT BASIS. IT EXPLAINED THAT THE OVERSEA S AE PROVIDES CRUCIAL AND PIVOTAL SUPPORT TO THE ASSESSEE IN CARRYING OUT ITS BUSINESS IN INDIA BY PROVIDING ACCESS TO PATENTED PRODUCTS AND TECHNOLOG Y DEVELOPED BY IT. THE ASSESSEE ARGUED THAT WITHOUT RECEIVING SUCH TECHNOL OGY/TECHNICAL KNOW-HOW/ INFORMATION/ASSISTANCE FROM THE OVERSEAS AE, THE AS SESSEE WOULD NOT BE ABLE TO CONDUCT/CARRY OUT MANUFACTURING AND SALES OF ECU S IN INDIA AT ALL. THE ASSESSEE STRENGTHENED THIS CONTENTION BY SAYING THA T IT EARNED REVENUE OF RS.42.23 CRORES FROM THE SALE OF ECUS USING THE ABO VE MENTIONED TECHNICAL KNOW-HOW AS A RESULT OF PAYMENT OF RS.38.59 CRORES DURING FY 2008-09. FURTHER, THE ASSESSEE ALSO EARNED AGGREGATE REVENUE OF RS.174.89 CRORES DURING A PERIOD OF 3 CONSECUTIVE YEARS (I.E. FY 200 8-09, FY 2009-10 AND FY 2010-11) AGAINST A TOTAL PAYMENT OF US $ 8,000,000, EQUIVALENT TO RS.38.59 CRORES PAID IN FY 2008-09. DURING THE TRANSFER PRIC E PROCEEDINGS, THE ASSESSEE WAS UNABLE TO SUBSTANTIATE THE NEED FOR PA YMENT OF TECHNICAL ASSISTANCE FEES TO ITS FOREIGN AE. THE TPO HAS OBSE RVED THAT THE ASSESSEE TRIED TO ESTABLISH ITS CASE FOR THE ARM'S LENGTH NATURE O F THE TRANSACTION BY STATING THAT IT GAINED IN THE FORM OF HIGHER SALES. THE TPO OBSERVED THAT NEITHER ANY COST BENEFIT ANALYSIS NOR ANY BENCHMARKING EXERCISE WAS UNDERTAKEN AT THE TIME OF ENTERING INTO THE AGREEMENT. THE TPO S REJECTION OF THE TNMM METHOD AT ENTITY LEVEL WAS UNDOUBTEDLY NOT CORRECT. THAT, HOWEVER, WOULD NOT CONCLUDE THE ISSUE. 15. THE ASSESSEE S ARGUMENT THAT THE TECHNOLOGY ITSELF WOULD NOT HAV E BEEN GIVEN TO IT, BUT FOR THE SUBSTANTIAL FEE (PAID OVER AND ABOVE THE ROYALTY PAYABLE), IN THE OPINION OF THIS COURT, REQUIRES A CLOSER SCRUTINY. THE INITIAL BURDEN IS ALWAYS UPON THE ASSESSEE TO PROVE THAT TH E INTERNATIONAL TRANSACTION WAS AT ARM S LENGTH. ITS TP REPORT NECESSARILY HAD TO DRAW A C OMPARISON WITH OTHER ENTITIES (MAYBE COMPETITORS) TO SHOW THE GENERAL DEGREE OF 9 ITA NO.1599/DEL/2017 ITA NO.7038/DEL/2017 PROFITABILITY OF THE VENTURE IN QUESTION. THE LOWER AUTHORITIES QUITE CORRECTLY TURNED DOWN THE METHOD OF EXPLAINING THE JUSTIFICAT ION OF THE TECHNICAL FEE WITH PROOF OF ITS NECESSITY BY RELYING ON PROFITS. UND OUBTEDLY THE ASSESSEE WAS OBLIGED TO MAKE THE PAYMENT AND THAT OBLIGATION ARO SE FROM THE AGREEMENTS, A PRE-INCORPORATION BINDING CONTRACT. HOWEVER, THAT S UCH CONTRACTUAL OBLIGATION EXISTED CANNOT IPSO FACTO BE THE END OF THE ENQUIRY . ALP DETERMINATION IN RESPECT OF EVERY PAYMENT THAT IS PART OF AN INTERNA TIONAL TRANSACTION IS TO BE CONDUCTED IRRESPECTIVE OF SUCH OBLIGATION UNDERTAKE N BY THE PARTIES. IF THE TRANSACTIONS ARE, IN THE OPINION OF THE TPO, NOT AT ARM'S LENGTH, THE REQUIRED ADJUSTMENT HAS TO BE MADE, AS PROVIDED IN THE ACT, IRRESPECTIVE OF THE FACT THAT THE EXPENDITURE IS ALLOWABLE UNDER OTHER PROVISIONS OF THE ACT. THERE CAN CONCEIVABLY BE VARIOUS REASONS NOT TO SUBJECT SUCH PAYMENTS, SUCH AS FOR INSTANCE, IF NO SIMILAR DATA EXISTS AT ALL; OR THAT SECTIONAL DATA FOR SUCH PAYMENTS IS ABSENT. QUITE POSSIBLY, THIS MAY ALSO B E A GENERAL PATTERN OF EXPENDITURE WHICH AES MAY INSIST TO PART WITH TECHN OLOGY; FURTHER, SIMILARLY, OTHER MODELS OF PAYMENT- DEFERRED OR LUMP SUM, ALON G WITH ROYALTY OR INCLUSIVE OF IT, MAY BE DISCERNED IN COMPARABLE TRA NSACTIONS. HOWEVER, TO SAY THAT SUCH A SUBSTANTIAL AMOUNT HAD TO NECESSARILY B E PAID AND THAT IT WAS A COMMERCIAL DECISION, DICTATED BY NEED FOR THE TECHN OLOGY, IN THE LIGHT OF A SPECIFIC QUERY, IT COULD NOT BE SAID BY THE ASSESSE E THAT LATER PROFITS JUSTIFIED IT, OR THAT HAS ESSENTIALITY PRECLUDED THE SCRUTINY. 16. IN THE LIGHT OF THE ABOVE DISCUSSION, THIS COUR T HOLDS THAT THE EXPLANATION BY THE ASSESSEE THAT THE PAYMENT OF RS.38.58 CRORES IN THE CIRCUMSTANCES WAS CORRECTLY NOT ACCEPTED. THE FIRST QUESTION IS ANSWE RED AGAINST THE ASSESSEE. THE REMIT DIRECTED BY THE IMPUGNED ORDER IS, THEREF ORE, UPHELD. 17. AS FAR AS THE SECOND QUESTION IS CONCERNED, THE TPO ACCEPTED TNMM APPLIED BY THE ASSESSEE, AS THE MOST APPROPRIATE ME THOD IN RESPECT OF ALL THE INTERNATIONAL TRANSACTIONS INCLUDING PAYMENT OF ROY ALTY. THE TPO, HOWEVER, DISPUTED APPLICATION OF TNMM AS THE MOST APPROPRIAT E METHOD FOR THE PAYMENT OF TECHNICAL ASSISTANCE FEE OF RS.38,58,80, 000 ONLY FOR WHICH COMPARABLE UNCONTROLLED PRICE (CUP) METHOD WAS SO UGHT TO BE APPLIED. HERE, THIS COURT CONCURS WITH THE ASSESSEE THAT HAV ING ACCEPTED THE TNMM AS THE MOST APPROPRIATE, IT WAS NOT OPEN TO THE TPO TO SUBJECT ONLY ONE ELEMENT, I.E PAYMENT OF TECHNICAL ASSISTANCE FEE, TO AN ENTI RELY DIFFERENT (CUP) METHOD. THE ADOPTION OF A METHOD AS THE MOST APPROPRIATE ON E ASSURES THE APPLICABILITY OF ONE STANDARD OR CRITERIA TO JUDGE AN INTERNATIONAL TRANSACTION BY. EACH METHOD IS A PACKAGE IN ITSELF, AS IT WERE, CONTAINING THE NECESSARY ELEMENTS THAT ARE TO BE USED AS FILTERS TO JUDGE TH E SOUNDNESS OF THE INTERNATIONAL TRANSACTION IN AN ALP FIXING EXERCISE . IF THIS WERE TO BE DISTURBED, THE END RESULT WOULD BE DISTORTED AND WI THIN ONE ALP DETERMINATION FOR A YEAR, TWO OR EVEN FIVE METHODS CAN BE ADOPTED . THIS WOULD SPELL CHAOS AND BE DETRIMENTAL TO THE INTERESTS OF BOTH THE ASS ESSEE AND THE REVENUE. THE SECOND QUESTION IS, THEREFORE, ANSWERED IN FAVOUR O F THE ASSESSEE; THE TNMM HAD TO BE APPLIED BY THE TPO/AO IN RESPECT OF THE T ECHNICAL FEE PAYMENT TOO. 10 ITA NO.1599/DEL/2017 ITA NO.7038/DEL/2017 18. IN VIEW OF THE ABOVE CONCLUSIONS, THE APPEAL HA S TO FAIL; SUBJECT TO THE FINDINGS AND OBSERVATIONS REGARDING APPLICABILITY O F TNMM, IT IS DISMISSED. 10. RESPECTFULLY FOLLOWING THE ORDER OF THE HONBLE HIGH COURT IN ASSESSEES OWN CASE, WE RESTORE THE ISSUE TO THE FILE TO THE AO WI TH THE DIRECTION TO FOLLOW THE ORDER OF THE HONBLE HIGH COURT AND APPLY THE TNMM IN RESPEC T OF THE TECHNICAL FEE PAYMENT FOR DETERMINING THE ALP. THE GROUND RAISED BY THE ASSESSEE IS ACCORDINGLY ALLOWED FOR STATISTICAL PURPOSES. 11. SO FAR AS GROUND NO.5 IS CONCERNED, LD. COUNSEL FOR THE ASSESSEE REFERRED TO THE FINDINGS OF THE DRP ON THIS ISSUE WHICH READ AS UNDER:- 10. FINDING DRP HAS DULY EXAMINED THE ISSUE, TPO HAS RIGHTLY A PPLIED CUP AS MAM REJECTING APPROACH OF THE ASSESSEE TO BENCHMARK ALL TRANSACTIONS ON AGGREGATED BASIS FOLLOWING TNMM. HONBLE ITAT IN A SSESSEES OWN CASE FOR AY 2009-10 HAS ALSO HELD THAT COMBINED BENCHMARKING OF ALL THE INTERNATIONAL TRANSACTIONS IS NOT IN ACCORDANCE WITH LAW. TPO HA S RIGHTLY DETERMINED ALP OF SAID INTERNATIONAL TRANSACTION AT NIL BY OBSERVI NG THAT INDEPENDENT ENTERPRISES SHALL NOT ENTER INTO SUCH TRANSACTION W HEN EURO 5 TECHNOLOGY IS NOT ON HORIZON IN INDIA AND THIS TECHNOLOGY IS RELEVANT FOR EUROPEAN COUNTRIES WHEREAS ASSESSEE IS BARRED FROM SELLING ITS PRODUCT S ABROAD. HOWEVER, ENTIRE R&D COST HAS BEEN CAPITALIZED BY THE ASSESSEE AND N O DEPRECIATION ON IT HAS BEEN CLAIMED BY THE ASSESSEE IN ITS P&L A/C NOR ANY CLAIM OF DEDUCTION HAS BEEN MADE BY THE ASSESSEE IN ITS COMPUTATION OF INC OME. HENCE, NO ADJUSTMENT TO INCOME IS CALLED FOR AND ENTIRE ADJUS TMENT SHALL BE BALANCE SHEET ITEM ONLY. THE OBJECTION IS ACCORDINGLY DISP OSED OFF. 12. HE SUBMITTED THAT SINCE NO ADJUSTMENT HAS BEEN MADE DURING THE YEAR, THEREFORE, THIS ISSUE IS ACADEMIC FOR THE TIME BEIN G. HOWEVER, THE ASSESSEE RESERVES ITS RIGHT FOR THE FUTURE. 13. AFTER HEARING BOTH SIDES, WE FIND MERIT IN THE ABOVE SUBMISSION OF THE LD. COUNSEL FOR THE ASSESSEE. IT IS AN ADMITTED FACT T HAT NO ADJUSTMENT TO INCOME ON ACCOUNT OF R & D HAS BEEN MADE, THEREFORE, THE ISSU E HAS BECOME ACADEMIC IN NATURE FOR THE TIME BEING. THE ASSESSEE MAY RAISE THIS IS SUE IN FUTURE. THE GROUND RAISED BY THE ASSESSEE IS DISPOSED OF IN THE ABOVE TERMS. 7. RESPECTFULLY FOLLOWING THE DECISION OF THE TRIBU NAL IN ASSESSEES OWN CASE IN THE PRECEDING YEAR, WE RESTORE THE ISSUE TO THE FILE OF THE ASSESSING OFFICER/TPO FOR APPLYING THE TNMM IN RESPECT OF TEC HNICAL FEE PAYMENT FOR DETERMINATION THE ARMS LENGTH PRICE. THE GROUNDS NO.3 TO 8 ARE ACCORDINGLY ALLOWED FOR STATISTICAL PURPOSES. 11 ITA NO.1599/DEL/2017 ITA NO.7038/DEL/2017 8. SO FAR AS GROUND NO.9 IS CONCERNED, THE SAME REL ATES TO LEVY OF INTEREST U/S 234B, WHICH IN OUR OPINION IS MANDATORY AND CONSEQU ENTIAL IN NATURE. ACCORDINGLY, THE SAID GROUND IS DISMISSED. 9. GROUND NO.10 RELATES TO INITIATION OF PENALTY PR OCEEDINGS U/S 271(1)(C) BEING PREMATURE ON THIS JUNCTURE IS DISMISSED. ITA NO.7038/DEL/2017 (A.Y. 2013-14) : 10. THE GROUNDS RAISED BY THE ASSESSEE ARE AS UNDER :- 1. THAT THE ASSESSING OFFICER ERRED ON FACTS AND I N LAW IN COMPLETING ASSESSMENT UNDER SECTION 144C/143(3) OF THE INCOME-TAX ACT, 19 61 ('THE ACT') AT AN INCOME OF RS. 115,62,01,030/- AS AGAINST THE INCOME OF RS. 112,20,39,550 RETURNED BY THE APPELLANT. 2. THAT THE ASSESSING OFFICER (AO) ERRED ON FACTS A ND IN LAW IN MAKING ADDITION OF RS. 10,26,00,000 ON ACCOUNT OF THE ALLEGED DIFFEREN CE IN THE ARM'S LENGTH PRICE OF THE INTERNATIONAL TRANSACTION OF PAYMENT OF TECH NICAL KNOW HOW FEES ON THE BASIS OF THE ORDER PASSED UNDER SECTION 92CA(3) OF THE ACT BY THE TPO. 2.1 THAT THE LD. DISPUTE RESOLUTION PANEL (DRP)/ TR ANSFER PRICING OFFICER (TPO) ERRED ON FACTS AND IN LAW IN ALLEGEDLY HOLDING THAT THE ARM'S LENGTH PRICING OF THE INTERNATIONAL TRANSACTION OF PAYMENT OF TECHNICAL K NOW-HOW FEES AT NIL BY OBSERVING THAT INDEPENDENT ENTERPRISES SHALL NOT EN TER INTO SUCH TRANSACTION. 2.2 THAT THE LD. DRP/ AO/ TPO ERRED ON FACTS AND IN LAW IN ARBITRARILY APPLYING THE CUP METHOD FOR BENCHMARKING THE INTERNATIONAL T RANSACTIONS OF PAYMENT OF TECHNICAL KNOW-HOW FEES WITHOUT BRINGING ON RECORD ANY COMPARABLE AS PER RULE 108(1 )(A) OF THE INCOME TAX RULES, 1962 ('THE RULE S'). 2.3 THAT THE LD. DRP/ AO / TPO ERRED ON FACTS AND I N LAW IN REJECTING TRANSACTIONAL NET MARGIN METHOD (TNMM') AS THE MOST APPROPRIATE METHOD FOR BENCHMARKING THE INTERNATIONAL TRANSACTION OF PAYME NT OF TECHNICAL KNOW-HOW FEES. 2.4 THAT THE LD. DRP/ AO/ TPO ERRED ON FACTS AND IN LAW IN HOLDING THAT BENCHMARKING ANALYSIS UNDERTAKEN BY THE APPELLANT I N RESPECT OF THE INTERNATIONAL TRANSACTIONS OF PAYMENT OF TECHNICAL KNOW HOW FEE B Y AGGREGATING WITH OTHER TRANSACTIONS AND APPLYING TNMM WAS INCORRECT AND EA CH SUCH TRANSACTION IS REQUIRED TO BE ANALYZED SEPARATELY. 2.5 THAT THE LD. DRP/ AO/ TPO ERRED IN LAW IN NOT A PPRECIATING THAT THE TPO HAVING ACCEPTED APPLICATION OF TNMM FOR BENCHMARKIN G OF ROYALTY, WHICH ALONG WITH PAYMENT OF TECHNICAL ASSISTANCE FEE FORM PART OF TH E COMPOSITE CONSIDERATION FOR RIGHTS FLOWING TO THE APPELLANT UNDER THE LICENSE A ND TECHNICAL ASSISTANCE AGREEMENT, IT WAS NOT PERMISSIBLE TO BENCHMARK PAYM ENT OF TECHNICAL ASSISTANCE FEE APPLYING ANY OTHER METHOD/ ON ANY OTHER BASIS. 2.6 THE LD. DRP/ AO / TPO ERRED ON FACTS AND IN LAW IN OBSERVING THAT SINCE THE 12 ITA NO.1599/DEL/2017 ITA NO.7038/DEL/2017 ASSESSEE IS PAYING ROYALTY, THEREFORE THERE IS NO N EED TO PAY TECHNICAL KNOW-HOW FEE NOT APPRECIATING THAT THE SAME WAS PART OF THE COMPOSITE FEE PAID FOR OBTAINING THE LICENSE IN TERMS OF THE LICENSE TECHN ICAL ASSISTANCE AGREEMENTS. 2.7 THE LD. DRP/ AO / TPO ERRED ON FACTS AND IN LAW IN NOT APPRECIATING THAT THE TECHNICAL KNOW-HOW FEE WAS PAID IN CONSIDERATION FO R THE RIGHT AND LICENSE TO MANUFACTURE ECUS AND ALSO THE EXTENSIVE INFORMATION AND DOCUMENTARY EVIDENCES FURNISHED BY THE APPELLANT TO SUBSTANTIAT E ACTUAL RECEIPT OF TECHNICAL KNOW-HOW FROM THE AE AND THE BENEFITS DERIVED THERE FROM. 2.8 THE LD. DRP/ AO / TPO ERRED ON FACTS AND IN LAW IN NOT APPRECIATING THAT THE PRICE PAID/ PAYABLE BY THE APPELLANT AS TECHNICAL K NOW-HOW FEE TO ITS AE WAS NEGOTIATED BETWEEN INDEPENDENT THIRD PARTIES, BEING JOINT VENTURE PARTNERS AND SHAREHOLDERS. 2.9 WITHOUT PREJUDICE THAT THE LD. AO/ TPO ERRED ON FACTS AND IN LAW IN NOT APPRECIATING THAT AS PER THE DRP DIRECTIONS THE TP ADJUSTMENT ON TECHNICAL KNOW- HOW FEES OUGHT TO BE MADE ONLY TO THE EXTENT OF DEP RECIATION AMOUNT ALLOWABLE. 3. THE LD. DRP/ AO HAS ERRED IN FACTS AND IN LAW IN MAKING DISALLOWANCE OF PROVISION OF WARRANTIES TO THE EXTENT OF RS.58,63 ,194 ALLEGEDLY HOLDING THAT THE APPELLANT HAS CONSISTENTLY BEEN MAKING EXCESS PROVI SION AND HAS BEEN SHIFTING THE TAX LIABILITY. THE APPELLANT CRAVES LEAVE TO ADD, ALTER, SUPPLEMEN T, AMEND, VARY, WITHDRAW OR OTHERWISE MODIFY THE GROUND MENTIONED HEREIN ABOVE AT OR BEFORE THE TIME OF HEARING. 11. GROUND NO.1 BEING GENERAL IN NATURE IS DISMISSE D. 12. GROUND NO.2 TO 2.9 ARE IDENTICAL TO GROUND NO.3 TO 8 IN ITA NO.1599/DEL/2017. WE HAVE ALREADY DECIDED THE ISSU E IN THE PRECEDING PARAGRAPHS AND RESTORED THE ISSUE TO THE FILE OF TH E TPO/ASSESSING OFFICER WITH CERTAIN DIRECTIONS. FOLLOWING SIMILAR REASONING, W E RESTORE THE ISSUE TO THE FILE OF THE ASSESSING OFFICER FOR DECIDING THE ISSUE IN THE LIGHT OF THE DIRECTION IN THE PRECEDING YEAR. THE GROUNDS RAISED BY THE ASSESSEE ARE ALLOWED FOR STATISTICAL PURPOSES. 13. GROUND NO.3 RELATES TO DISALLOWANCE OF PROVISIO N OF WARRANTY TO THE EXTENT OF RS.58,63,194/-. 13 ITA NO.1599/DEL/2017 ITA NO.7038/DEL/2017 14. FACTS OF THE CASE, IN BRIEF, ARE THAT THE ASSES SEE COMPANY CLAIMED AN AMOUNT OF RS.63,44,240/- AS DEDUCTION ON ACCOUNT OF PROVISION FOR WARRANTY. THE ASSESSING OFFICER ASKED THE ASSESSEE TO EXPLAIN AS TO WHY THE AMOUNT SHOULD NOT BE ADDED BACK TO THE INCOME OF THE ASSES SEE. THE ASSESSEE IN ITS REPLY SUBMITTED AS UNDER :- AS PER COMPANYS SALES POLICY, IT IS REQUIRED TO P ROVIDE TWO YEARS WARRANTY TO ITS CUSTOMERS FOR THE PRODUCTS SOLD TO THEM. ACCORDING LY, THE COMPANY HAS A POLICY TO MAINTAIN A PROVISION AS ON THE END OF EVERY FINANCI AL YEAR, AN AMOUNT EQUIVALENT TO 0.5% OF THE SALES (NET OF EXCISE DUTY) MADE, WHICH ARE STILL COVERED UNDER THE WARRANTY PERIOD OF TWO YEARS. THE PERCENTAGE OF 0. 5% OF THE SALES (NET OF EXCISE DUTY) FOR THE TWO YEARS COVERED UNDER THE WARRANTY IS DET ERMINED BY THE COMPANY ON THE BASIS OF ITS EXPERIENCE IN OPERATING IN THE AUTOMOB ILE COMPONENTS INDUSTRY AND THE INFORMATION ABOUT SALES RETURN/FREE SUPPLIES. THE QUALITY TEAM OF THE ASSESSEE CONSISTING OF QUALIFIED ENGINEERS HAVE IDENTIFIED T HE RISKS WHICH COULD LEAD TO A DEFECT IN THE PRODUCT MANUFACTURED I.E., RISK OF COMPONENT S USED (0.2%), DESIGNING RISK (0.05%), CRITICAL MANUFACTURING PROCESS (0.05%) AND SHORTING/CAMPAIGN RISK/PENALTY (0.2%). 15. THE ASSESSEE ALSO RELIED ON THE DECISION OF THE HONBLE SUPREME COURT IN THE CASE OF ROTORK CONTROLS INDIA (P) LTD. REPORTED IN 314 ITR 62. HOWEVER, THE ASSESSING OFFICER WAS NOT CONVINCED WITH THE AR GUMENTS ADVANCED BY THE ASSESSEE. HE OBSERVED THAT AS PER THE DECISION OF THE HONBLE SUPREME COURT, THE REVERSAL OF EXCESS PROVISION OF WARRANTIES, THE PART OF THE PROVISION OF WARRANTIES THAT CAN BE CLAIMED AS DEDUCTION SHOULD BE THE ACTUAL UTILIZATION OF PROVISION OF WARRANTIES. THIS CORRECTION TO PRO VISION FOR WARRANTIES CAN BE DONE EITHER BY WAY OF THE SAID REVERSAL IN THE AC COUNTS OR BY WAY OF ADDING BACK TO INCOME IN THE COMPUTATION OF INCOME. SIN CE THE ASSESSEE IN THE 14 ITA NO.1599/DEL/2017 ITA NO.7038/DEL/2017 PRESENT CASE HAS DONE NEITHER OF THEM, THEREFORE, H E MADE ADDITION OF RS.58,63,194/-. 16. THE ASSESSEE WAS UNSUCCESSFUL BEFORE THE DRP WH O HELD THAT THE BASIS OF 5% SALE ON WHICH PROVISION WAS MADE IS FAR FROM REA LITY. THEY OBSERVED THAT THE ASSESSEE WAS CONSISTENTLY BEEN MAKING EXCESS PR OVISIONS AND HAS BEEN SHIFTING THE TAX LIABILITY. THE DRP ACCORDINGLY UP HELD THE ACTION OF THE ASSESSING OFFICER IN COMPUTING THE PROVISION BY TAK ING INTO ACCOUNT THE ACTUAL EXPENDITURE. 17. AGGRIEVED WITH SUCH ORDER OF THE ASSESSING OFFI CER/DRP, THE ASSESSEE IS IN APPEAL BEFORE THE TRIBUNAL. 18. WE HAVE CONSIDERED THE RIVAL ARGUMENTS MADE BY BOTH THE SIDES ON THIS ISSUE. FROM THE ASSESSMENT ORDER, WE FIND THE ASSE SSING OFFICER HAS ANALYZED THE SALES AND PROVISIONS FOR WARRANTY AS WELL AS TH E UTILIZATION OF SUCH PROVISION ON ACTUAL BASIS FOR ASSESSMENT YEAR 2009-10 TO 2013 -14, THE DETAILS OF WHICH ARE AS UNDER :- AY SALES PROVISION FOR WARRANTIES UTILIZATION OF PROVISION OF WARRANTIES (ACTUAL) 2013-14 314,43,33,263 63,44,240 4,81,046 2012-13 227,39,04,332 59,05,744 9,70,475 2011-12 198,21,51,618 78,00,273 10,95,138 2010-11 155,78,29,397 77,88,887 3,55,115 2009-10 42,29,54,932 21,15,567 0 19. FROM THE ABOVE, IT IS SEEN THAT ALTHOUGH AS PER THE SUBMISSIONS OF THE ASSESSEE BEFORE THE ASSESSING OFFICER, THEY ARE REQ UIRED TO PROVIDE TWO YEARS 15 ITA NO.1599/DEL/2017 ITA NO.7038/DEL/2017 WARRANTY TO ITS CUSTOMERS FOR THE PRODUCT SOLD TO T HEM, HOWEVER, IT IS NOT DISCERNABLE FROM THE RECORDS AS TO WHETHER THE EXCE SS PROVISION THAT HAS BEEN MADE FOR WARRANTY AFTER THE PERIOD OF TWO YEARS HAS BEEN REVERSED BY THE ASSESSEE OR NOT. THE ASSESSEE HAS NOT DEMONSTRATED BEFORE US AS TO HOW IT HAS REVERSED SUCH EXCESS PROVISIONS OF EARLIER YEAR IN THE SUBSEQUENT YEAR I.E. AFTER THE LAPSE OF TWO YEARS PERIOD FOR WHICH WARRANTY IS GIVEN TO CUSTOMERS FOR THE PRODUCT SOLD TO THEM. WE, THEREFORE, RESTORE THE I SSUE TO THE FILE OF THE ASSESSING OFFICER WITH THE DIRECTION TO GIVE ONE MO RE OPPORTUNITY TO THE ASSESSEE TO SUBSTANTIATE WITH EVIDENCE TO HIS SATIS FACTION REGARDING THE POLICY ADOPTED BY THE ASSESSEE AND THE REVERSAL OF SUCH EX CESS PROVISIONS AFTER THE WARRANTY PERIOD IS OVER. THE ASSESSING OFFICER SHA LL DECIDE THE ISSUE AFTER GIVING DUE OPPORTUNITY OF BEING HEARD TO THE ASSESS EE. WE HOLD AND DIRECT ACCORDINGLY. THE GROUND RAISED BY THE ASSESSEE IS ALLOWED FOR STATISTICAL PURPOSES. 20. IN THE RESULT, BOTH THE APPEALS FILED BY THE AS SESSEE ARE ALLOWED FOR STATISTICAL PURPOSES. ORDER PRONOUNCED IN THE OPEN COURT ON THIS 31 ST DAY OF JANUARY, 2018. SD/- SD/- (SUDHANSHU SRIVASTAVA) (R. K. PANDA) JUDICIAL MEMBER ACCOUNTANT MEMBER DATED: 31-01-2018. SUJEET 16 ITA NO.1599/DEL/2017 ITA NO.7038/DEL/2017 COPY OF ORDER TO: - 1) THE APPELLANT 2) THE RESPONDENT 3) THE DRP-2, NEW DELHI 4) THE DR, I.T.A.T., NEW DELHI BY ORDER //TRUE COPY// ASSISTANT REGISTRAR ITAT, NEW DELHI