Deputy Commissioner Of Income Tax, LTU, Bangalore V. M/s. Toyota Kirloskar Motors Private Limited, Bangalore

ITTPA 836/BANG/2014

• Counselvise Citation: [2022] 104 COUNSELVISE.COM (IT) 5161 (ITAT-BANGALORE)
• Duration Of Justice: 7 year(s) 7 month(s) 29 day(s)
• Appeal Type: Income Tax (Transfer Pricing) Appeal
• Pronouncement Date: 20-02-2022
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: B
• Assessment Year: 2005-2006
• Appeal Filed On: 22-06-2014
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Assessee Lawyers: PADAMCHAND KHINCHA
• Keywords: Depreciation; Transfer pricing; Opportunity of being heard; International transaction; Question of law; Set aside
• Section: 92C; 115JB; 251; 43; 48; 13; 22

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL ‘B’ BENCH : BANGALORE BEFORE SHRI. CHANDRA POOJARI, ACCOUNTANT MEMBER AND SMT. BEENA PILLAI, JUDICIAL MEMBER IT(TP)A No. 350/Bang/2014 Assessment Year : 2005-06 M/s. Toyota Kirloskar Motor Pvt. Ltd., Plot No. 1, Bidadi Industrial area, Ramanagaram District, Bangalore Rural – 562 109. PAN: AAACT5415B Vs. The Additional Commissioner of Income Tax (LTU), Bangalore. APPELLANT RESPONDENT & IT(TP)A No. 836/Bang/2014 Assessment Year : 2005-06 The Deputy Commissioner of Income Tax, LTU, Bangalore. Vs. M/s. Toyota Kirloskar Motor Pvt. Ltd., Plot No. 1, Bidadi Industrial area, Ramanagaram District, Bangalore Rural – 562 109. PAN: AAACT5415B APPELLANT RESPONDENT Assessee by : Shri Padamchand Khincha, CA Revenue by : Dr. Manjunath Karkihalli, CIT DR Page 2 of 23 IT(TP)A Nos. 350/Bang/2014 & 836/Bang/2014 Date of Hearing : 08-02-2022 Date of Pronouncement : 21-02-2022 ORDER PER BEENA PILLAI, JUDICIAL MEMBER Present cross appeals are filed by assessee and revenue against order dated 20.03.2014 passed by Ld.CIT(A), LTU, Bangalore for assessment year 2005-06 on following grounds of appeal: Assessee’s appeal: “GENERAL GROUNDS 1. The Order of the learned Commissioner of Income Tax (Appeals) —LTU to the extent prejudicial to the appellant is bad in law and liable to be quashed. 2. The learned Additional Commissioner of Income Tax, LTU, Bangalore (hereinafter referred as "AO" for short), learned Joint Commissioner of Income Tax (Transfer Pricing) — II, Bangalore (hereinafter referred as "TPO" for short) and the learned Commissioner of Income Tax (Appeals) —LTU (hereinafter referred as "CIT (A)"respectively; collectively referred as "lower authorities") have erred in passing the Orders in the manner passed by them. The Orders being bad in law are liable to be quashed. 3. The learned AO and TPO have erred in passing the Orders without giving sufficient opportunity of being heard and at the fag end of the limitation period. The learned CIT(A) has erred in confirming such an action of the AO and the TPO. GROUNDS RELATING TO TRANSFER PRICING — LEGAL ISSUES 4. The learned AO has erred in making reference for the determination of the A Length price of the international transaction to the TPO, without appreciating that learned AO being jurisdictional officer for all matters relating to the appellant, co not have referred the matter of determination of arm's length price to another office The CIT(A) has erred in confirming the action of the AO. 5. The learned AO has erred in making a reference to TPO for determining arm's lengtl price without demonstrating as Page 3 of 23 IT(TP)A Nos. 350/Bang/2014 & 836/Bang/2014 to why it was necessary and expedient to do so. The CIT(A) has erred in confirming the action of the AO. 6. The lower authorities have erred in not appreciating that the charging or computation provision relating to income under the head "Profits & Gains of Business or Profession" do not refer to or include the amounts computed under Chapter X' and therefore addition under Chapter X is bad in law. 7. The lower authorities have erred in passing the order without demonstrating that the appellant had any motive of tax evasion. 8. The lower authorities have erred in not appreciating that there being no disallowance under section 40A(2) for purchase of parts and components, royalty and technical fees paid, adjustment under Chapter X ought not to be made. 9. The lower authorities have erred in making transfer pricing adjustment for the year under consideration, although, the method adopted, the associated enterprises, the nature of transactions and the comparables were same as in the earlier years in which no similar adjustment had been made. GROUNDS RELATING TO ALP OF AGGREGATION OF TRANSACTIONS INCLUDING ROYALTY PAID 10. The lower authorities have erred in: a. not appreciating that the trading and manufacturing segments are intertwined and inter-related warranting a "Combined Transaction Approach" in arriving at the arm's length price. b. not appreciating that the appellant had adopted the TNMM at the entity level, in which process, the royalty payment was considered as closely linked transaction and hence was subsumed into the operating expenditure and accordingly already considered in the comparability exercise. c. not appreciating that once the net profit margin is tested on the touchstone of arm's length price under TNMM, it pre- supposes that the various components of income and expenditure considered in the process of arriving at the net profit are also at arm's length; Page 4 of 23 IT(TP)A Nos. 350/Bang/2014 & 836/Bang/2014 d. not appreciating that once a profit based method is adopted at the entity level for comparability purposes, it precludes the adoption or switch over to another method for a segment of that entity's operation. e. doing separate evaluation of royalty by adopting CUP method without justifying how the same was most appropriate method. 11. The CIT(A) has erred in remanding the matter back to the TPO with the direction to identify suitable comparables and determine arm's length price of royalty payment without appreciating that under section 251 of the Income Tax Act, the CIT(A) cannot restore the matter back to the AO/TPO. 12. The CIT(A) erred in remanding the matter back to the TPO after observing that "The fact that the royalty rate was within the permissible limit specified by Government of India and approved by RBI is an additional argument in support of the legitimacy of the said payment". GROUNDS RELATING TO COMPUTATION OF ALP OF MANUFACTURING SEGMENT 13. The lower authorities have erred in: a. not appreciating that a customs duty adjustment was required to be made in order to put all comparables on a level playing field; b. Rejecting comparables selected by the appellant on unjustifiable grounds; c. not appropriately computing the operating margins of comparables and that of the appellant; d. not considering cash profit to sales as PLI as adopted by the appellant for determining arm's length price; and e. not making proper adjustment for enterprise level and transactional level differences between the appellant and the comparable companies. 14. Without prejudice to above, the lower authorities have erred in not allowing the benefit of the +/-5% range as per the proviso to section 92C (2). CORPORATE TAX GROUNDS 15. The learned CIT(A) has erred in confirming the action of the AO of disallowing the provision towards warranty while computing the book profits under section 115JB of Page 5 of 23 IT(TP)A Nos. 350/Bang/2014 & 836/Bang/2014 the Act without appreciating that provision was in respect of a liability that was real, ascertainable and bonafide and not a contingent liability. 16. The learned AO has erred in levying interest under section 234B. The appellant submits that each of the above grounds/ sub-grounds are independent and without prejudice to one another. The appellant craves leave to add, alter, vary, omit, substitute or amend the above grounds of appeal, at any time before or at, the time of hearing, of the appeal, so as to enable the Income Tax Appellate Tribunal to decide the appeal according to law. The appellant prays accordingly.” Revenue’s appeal: “1. The order of Ld CIT(A) is opposed to law and facts of the case. 2. The Ld. CIT(A) has erred in directing the TPO identify suitable comparables and also directed the TPO to provide adequate opportunity to the assessee but as per the TP guidelines the Royalty payments are to be considered separately alongwith under Intra group services. 3. For these and such other grounds that may be urged at the time of hearing.” At the outset, the Ld.AR submitted that the issue alleged in the present appeal stands squarely covered by Coordinate Bench of this Tribunal for A.Ys. 2007-08 and 2013-14. 2. Brief facts of the case are as under: 2.1 The assessee is a private limited company, and a subsidiary of Toyota Motor Corporation (hereinafter referred as “TMC” for short), a company incorporated under the laws of Japan. The assessee was set up in India to manufacture and sell Multi Utility Vehicle (hereinafter referred as “MUV” for short) under the model name Qualis. During the year under consideration, it launched Innova and Passenger Car under the model name Corolla. The Page 6 of 23 IT(TP)A Nos. 350/Bang/2014 & 836/Bang/2014 assessee received technical know-how from TMC and various support services from TMC. The assessee also imports completely built units for further sale, and purchases certain parts and components locally for further export to other Associated Enterprises. 2.2 During the year under consideration, the assessee entered into the following international transactions with its Associated enterprises: Sl. No. Description Amount(Rs.) 1 Purchase of parts and components 827,65,33,358 2 Sale of transmission parts, other parts and components 114,59,76,937 3 Sale of prototypes 31,81,449 4 Purchase of automobiles and accessories 73,53,16,920 5 Sale of Vehicles 1,71,11,649 6 Sale of parts and Components 5,15,236 7 Purchase of Capital Goods 278,10,24,980 8 Payment towards Software License 61,38,417 9 Payment of Royalty 61,44,90,556 10 Payment of Technical assistance 26,09,17,628 2.3 The assessee selected TNMM as most appropriate method for determining the arm’s length price of international transactions entered by it with its AE. TNMM was applied using combined transaction approach at the entity level. While computing ALP, the assessee aggregated manufacturing and trading segment. The assessee had high import content when compared to comparable selected and therefore made custom duty Page 7 of 23 IT(TP)A Nos. 350/Bang/2014 & 836/Bang/2014 adjustment. It is submitted that the adjustment was made only for basic custom duty, for which input credit is not available. 2.4 The assessee used 7 comparables with CP/NS as the PLI and computed its margin at 15% as against 7% of the comparables selected. SI. No. Name of the Company OP on Sales % CP on Sales % 1 Ashok Leyland Ltd. 7 10 2 Bajaj Tempo Ltd. 3 6 3 Eicher Motors Ltd. 6 8 4 Hindustan Motors Ltd. -2 2 5 Mahindra and Mahindra Ltd. 4 8 6 Swaraj Mazda Ltd. 6 6 7 Tata Motors Ltd. 8 11 Arithmetic Mean 4 7 2.5 Dissatisfied with the aggregation of the transaction by the assessee, the Ld.TPO separated Manufacturing and Trading segment. In respect of Manufacturing Segment, the Ld.TPO adopted TNMM as the MAM for TP analysis and selected 5 companies out of 7 companies selected by the assessee. The Ld.TPO rejected Bajaj Tempo Ltd due to re-organization in FY 04- 05 and Hindustan Motor Ltd due to consistent losses. The operating margins of the remaining companies were re- determined at 6.93% on sales. Since the operating profit margin of the assessee on sales was at 3.63% and was within the tolerance limit of 5%, the international transactions in Manufacturing Segment were considered by the Ld.TPO to be at arm’s length. Page 8 of 23 IT(TP)A Nos. 350/Bang/2014 & 836/Bang/2014 2.6 In respect of Trading Segment, the Ld.TPO adopted TNMM as the MAM and conducted search in database which yielded 15 comparables with mean gross margin of 18.25% on sales. Since the assessee’s gross margin was computed at 15.05% on sales and was within the 5% tolerance range, the international transactions in Trading Segment was also considered by the Ld.TPO to be at arm’s length. No adverse inference was drawn with respect to payment of technical fees to AE’s and same was considered as at ALP. The Ld.TPO subsequently considered royalty transaction for separate scrutiny. The Ld.TPO observed in respect of Royalty transaction as under: a) that the assessee after payout of royalty could not earn the average profit margin earned by the comparable companies; b) that prejudice has been caused to Income Tax Department due to payment of lower taxes on royalties. c) that the purchase consideration paid for Semi Knocked Down (SKD) units and Completely Knocked Down (CKD) units includes payment for technology. In the case of independent parties, the import price paid includes premium for technology as well as for the brand. Thus, no extra payment is required in the guise of Royalty; d) that the RBI permission was granted in the context of Foreign Exchange Management. The RBI did not make any enquiry regarding arm's length nature of the Royalty payment; Page 9 of 23 IT(TP)A Nos. 350/Bang/2014 & 836/Bang/2014 e) that the assessee has not produced any evidence that it had actually received any technical know-how during the year under consideration from AE; f) that there is no proof that the Other group concerns or third parties are also charged identical royalty; g) that the taxpayer has also not been able to show it derived any economic benefit from the alleged know how received from the AE. 2.7 Based on the above reasons, the Ld.TPO determined the ALP of international transaction relating to Royalty at NIL by selecting CUP method as the most appropriate method to determine the ALP. Accordingly, a TP adjusted of Rs.61,44,90,556/- was made in respect of the Royalty payment by the Ld.TPO. 2.8 The Ld.AO incorporated the TP additions in the assessment order. While computing the total income in the order, the Ld.AO added back (i) Rs.33,65,497/-(Net) being value of testing vehicles not forming part of closing stock, (ii) Rs.90,64,082 (Net) being write off of slow moving stock, (ii) Rs.7,49,494 (Net of depreciation) being value of software licenses purchased being debited to software expense. The Ld.AO also added Rs.6,06,00,000/- being provision for warranty to book profits u/s 115JB of the Act. Aggrieved by the order of Ld.AO, the assessee filed appeal before Ld.CIT(A). Page 10 of 23 IT(TP)A Nos. 350/Bang/2014 & 836/Bang/2014 2.9 Regarding the treatment of trading and manufacturing segment to be at arm’s length, the Ld.CIT(A) upheld the observations of the Ld.TPO/AO. 2.10 With respect to separate analysis of Royalty payment, the Ld.CIT(A) was of the opinion that the Ld.TPO is not precluded under the Act from applying appropriate methods for different classes of transaction while applying TNMM at the enterprise level. With respect to determining "NIL" ALP of Royalty Payment, the Ld.CIT(A) held that Ld.TPO's observation that no benefit was derived by the assessee from the technology for which royalty was paid is not supported by facts and evidence. The Ld.CIT(A) agreed that the assessee has received the technology and related intangibles in terms of production processes, standards and know-how, which were not created locally by itself. In view of this, the Ld.CIT(A) held that Ld.TPO's determination of ALP of royalty at NIL is without basis. However, the Ld.CIT(A) directed the Ld.TPO to identify suitable comparables and after providing adequate opportunity to the assessee, to determine the appropriate ALP of royalty payment. 2.11 In respect of provision for warranty not being added back to book profits u/s 115JB, the Ld.CIT(A) held that due to lack of any technical report indicating the past trend of utilization of warranty provision, the view taken by the Ld.AO was upheld. Aggrieved by the order of Ld.CIT(A), the assessee as well as department are in appeal before us. Page 11 of 23 IT(TP)A Nos. 350/Bang/2014 & 836/Bang/2014 3. Ground nos. 1-3 are general in nature and do not require adjudication. 4. Ground nos. 4-9 are academic in nature and therefore have not been argued by the Ld.AR. Ground Nos. 10-12: 5. The Ld.AR submitted that assessee selected TNMM as the most appropriate method and operating margin at entity level after including royalty was compared with comparable companies. The operating margin of the assessee are at arm's length as concluded by the Ld.TPO. 6. The assessee submits that once the operating margin at segment or entity level is at arm's length, separate analysis of Royalty is not required. This is for the following reasons: Section 92C(1) provides that the arm's length price shall be computed applying the most appropriate method out of the methods listed in section 92C(I). Rule 10C lays down the guidelines for selection of the most appropriate method. The most appropriate method is to be selected having regard to nature of transaction or class of transaction or class of associated persons, functions performed, assets employed and risks assumed etc. 7. The assessee selected TNMM as the "most appropriate method" is not disputed by the revenue. The Ld.AR submitted that the TNMM considers the net profit margin earned by an organization. Adjustments are made to the net profits to factor in the differences at the transaction level or the enterprise level. It is submitted that the adjustments are also made for difference in the accounting methodology. TNMM makes a comparison at the Page 12 of 23 IT(TP)A Nos. 350/Bang/2014 & 836/Bang/2014 entity / global / segment level and not at the transactional level. He assailed that the merit of this method is that, it is resilient to minor functional differences. As a result of this characteristic, examination is not made at the individual component level of income or expenditure that has been reckoned in arriving at the net profit but at the entity level. The Ld.AR emphasized that when comparison is made at the macro (global) level, where multiple intertwined transactions exist, it is not possible to identify or pinpoint the contribution of each facet or transaction to the earning of net profit. 8. He submitted that in the process of adopting the TNMM, the assessee adopted the Net Profit as the starting point, and in arriving at its net profit, the assessee considered and factored the royalty payments. The Ld.AR submitted that, royalty is integral to and inseparable to its dealings in the business segments. It is submitted that being a relevant aspect of dealings, it would be impractical and also inappropriate to evaluate such payments on an individual and stand-alone basis, de hors the segment to which a benefit from such services accrues. He reiterated that the Ld.TPO in the TP Order held the profits so determined to be satisfying the arm's length test. This aspect has not been disputed. He thus submitted that once the net profit margin is demonstrated to be at arm's length, it pre-supposes that the various components of income and expenditure, including the international transactions that have been considered in the process of arriving at the Net Profit are also at arm's length, and under such circumstances, it is impermissible to select another Page 13 of 23 IT(TP)A Nos. 350/Bang/2014 & 836/Bang/2014 method to examine an individual transaction of a segment already considered and evaluated. 9. In support of this contention the Ld.AR relied on the judgment of the Hon’ble Delhi High Court in the case of Sony Ericsson Mobile Communications India (P.) Ltd. v CIT reported in [2015] 55 taxmann.com 240 (Delhi) which explains the terms "closely linked transaction" and under what circumstances a "bundled approach" can be adopted. The judgment also overrules ITAT Special Bench decision in the case of L.G. Electronics India Pvt. Ltd v. ACIT reported in [2013] 29 taxmann.com 300 (Delhi - Trib.) (SP) that rejected 'bundled approach'. 10. The Ld.AR thus submitted that its manufacturing activity and payment of royalty are closely inter-linked, interdependent and flow from a common source. He at the cost of repetition reiterated that once the net profit margin is determined to be at arm’s length, it pre-supposes that the various components of income and expenditure considered in the process of arriving at the net profit are also at arm’s length is to be upheld. On the contrary, the Ld.DR relied on the orders passed by the authorities below. We have perused the submissions advanced by both sides in the light of records placed before us. It is the contention of the Ld.AR that assessee has paid royalty to TMC in accordance with the technical service agreement being an integral part of the manufacturing activity. Admittedly, the Ld.TPO upon segregating the manufacturing and trading activity found the margin determined under the separate Page 14 of 23 IT(TP)A Nos. 350/Bang/2014 & 836/Bang/2014 segments to be at arm’s length. It has been submitted by Ld.AR that for: A.Y. 2008-09 in IT(TP)A No. 1595/Bang/2012, A.Y. 2010-11 in IT(TP)A No. 16/Bang/2015 and A.Y. 2013-14 in ITA Nos. 2016 & 1972/Bang/2018 the Coordinate Bench of this Tribunal in assessee’s own case has analysed that the royalty payment has been made by assessee towards the license to manufacture items on exclusive basis. It is also been submitted that in the sister concern’s case being Toyota Kirloskar Auto Parts for A.Y. 2007-08 in IT(TP)A No. 1356/Bang/2011, this Tribunal has taken similar view. We note that for A.Y. 2007-08, this Tribunal in assessee’s own case for A.Y. 2007-08 reported in [2014] 48 taxmann.com 380 has considered the issue of separately bench marking the royalty as under. “48. On the issue whether the TPO can come to a conclusion that the ALP of an international transaction is nil because no services were rendered or that the assessee did not derive any benefit from the AE for which payments were made, we have considered the submissions of the learned counsel for the assessee. This issue is purely academic because we have already held that the conclusions of the TPO/DRP that the trading and manufacturing segment of the Assessee are distinct and not inter related warranting combined transaction approach is not correct and that a IT(TP)A No.1315/Bang/2011 combined transaction approach has to be adopted and that on the basis of combined transaction approach the price paid for the international transaction is at Arm's Length. We may also that legally the TPO should adopt the ALP as nil. On similar approach by TPO adopting ALP at Nil the ITAT, Bangalore Bench, in the case of M/s.Festo Controls Pvt. Ltd. vs. DCIT in ITA No.969/Bang/2011 (AY: 2007-08) dated 4-1-2013, the Tribunal examined the question as to whether the TPO can determine the ALP at nil on the ground that no services Page 15 of 23 IT(TP)A Nos. 350/Bang/2014 & 836/Bang/2014 were rendered. The Tribunal, on the above issue followed the decision of the Mumbai Bench of the ITAT in the case of Castrol India Ltd. v. ACIT in ITA No.3938/MUM/2010 dated 14.09.2012 wherein it was held that it was incumbent upon the TPO to work out the ALP of the relevant transactions by following some authorized method and the entire cost borne by the assessee cannot be disallowed by taking the ALP at Nil. The Tribunal also referred to the decision of the Hon'ble Delhi High Court in the case of CIT v. EKL Appliances Ltd., ITA No.1068/2011 dated 29.03.2012. In the aforesaid decision, the assessee entered into an agreement pursuant to which it paid brand fee/ royalty to an associated enterprise. The TPO disallowed the payment on the ground that as the assessee was regularly incurring huge losses, the know- how/ brand had not benefited the assessee and so the payment was not justified. This was reversed by the CIT (A) & Tribunal on the ground that as the payment was genuine, the TPO could not question commercial expediency. On appeal by the department, the Hon'ble Delhi High Court held that the "transfer pricing guidelines" laid down by the OECD make it clear that barring exceptional cases, the tax administration cannot disregard the actual transaction or substitute other transactions for them and the examination of IT(TP)A No.1315/Bang/2011 a controlled transaction should ordinarily be based on the transaction as it has been actually undertaken and structured by the associated enterprises. The guidelines discourage re-structuring of legitimate business transactions except where (i) the economic substance of a transaction differs from its form and (ii) the form and substance of the transaction are the same but arrangements made in relation to the transaction, viewed in their totality, differ from those which would have been adopted by independent enterprises behaving in a commercially rational manner. The OECD guidelines should be taken as a valid input in judging the action of the TPO because, in a different form, they have been recognized in India's tax jurisprudence. The Hon'ble Court held that it is well settled that the revenue cannot dictate to the assessee as to how he should conduct his business and it is not for them to tell the assessee as to what expenditure the assessee can incur (Eastern Investment Ltd 20 ITR 1 (SC), Walchand & Co 65 ITR 381 (SC) followed). Even Rule 10B(1)(a) does not authorise disallowance of expenditure on the ground that it was not necessary or prudent for the assessee to have Page 16 of 23 IT(TP)A Nos. 350/Bang/2014 & 836/Bang/2014 incurred the same. In light of the aforesaid decisions, we are of the view that the stand taken by the assessee in this regard deserves to be accepted. It is clear from the decisions referred to above that the TPO has to work out the ALP of the international transaction by applying the methods recognized under the Act. He is not competent to hold that the expenditure in question has not been incurred by the assessee or that the assessee has not derived any benefits for the payment made by the assessee and therefore he cannot consider the ALP as NIL. We hold accordingly.” 11. We note that post ITAT order, the department filed MP for Assessment Year 2007-08 before the Hon’ble Tribunal seeking clarification as to whether the TPO can compute ALP of the royalty payment. In M.P. No. 7/Bang/2015 [TS-70-ITAT- 2015(Bang)], the Tribunal further clarified that when margins at entity level were accepted, the matter of dwelling into ALP at transaction level was irrelevant. “21. In this M.P., the Revenue after referring to paras 50, 51 and 48 has submitted as follows:- "5. The above para reads to mean that the TPO is to recomputed the ALP in accordance with the methods laid down in the Act and also sates that the Assessee's stand is accepted opening it to a reading that the appeal has been allowed in favour of the Assessee as well as that of it being set aside for the TPO to do it in accordance with the methods recognized under the Act. 6. The Tribunal was also pleased to set aside the matter to the file of the TPO for AY 2008-09 when read with para 51 leads to a belief that the TPO is to recomputed the ALP. 7. Therefore, it is requested that the Hon'ble ITAT may clarify and adjudicate the above issue." 22. The ld DR reiterated the stand of Revenue as contained in the petition. We have considered the contentions in the petition and are of the view that the same are devoid of any merit. The addition by way of adjustments to the ALP has been deleted by the Tribunal in para 47 of its order. The observations in para 48 to 51 has been very clearly mentioned MP No.7/Bang/2015 to be purely academic. Therefore, the confusion as is sought to be brought out in the petition is without any basis and is rather mischievous. All that the AO has to do while giving Page 17 of 23 IT(TP)A Nos. 350/Bang/2014 & 836/Bang/2014 effect to the order of Tribunal is to delete the addition on account of adjustment to ALP. We may also add that the miscellaneous petition is thoroughly misconceived and has been filed without a proper reading of the order of the Tribunal. We hope that such miscellaneous petitions will not be filed by the revenue in future, when the orders in question clearly set out its conclusions. The miscellaneous petition is therefore dismissed.” 12. It is also observed that the principle of aggregation has been upheld by various High Courts as well as decision of this Tribunal. Admittedly, the assessee has treated royalty to be closely interlinked with the transactions, which was rejected by the revenue authorities. Reliance has been placed on following decisions in respect of above proposition. a) DCIT vs. Air Liquide Engineering India P Ltd. reported in [2014] 43 taxmann.com 299 (Hyderabad Tribunal) b) Dell International Services India Pvt. Ltd. vs. JCIT in IT(TP)A No. 130/Bang/2014 & IT(TP)A No. 121/Bang/2014 dated 22.12.2021 c) McCann Erikson India Pvt Ltd vs. ACIT — ITA No.5871/Del/2011 d) M/s. Thyssen Krupp Industries India Pvt Ltd V ACIT — ITA No. 7032/Mum/2011 e) Lumax Industries Ltd v ACIT TS-152-ITAT-2013(DEL)-TP. f) Hindustan Unilever Limited v Ad CIT ITA No. 7868/Mum/2010 g) DCIT v CMA CGM Global India (P) Ltd ITA No. 5979/Mum/2010 h) Yokogawa India Limited v ACIT ITA No. 1329/Bang/2011 Page 18 of 23 IT(TP)A Nos. 350/Bang/2014 & 836/Bang/2014 13. We note that assessee’s margins have been computed including royalty payment which is higher than the margin of the comparables. It is also not disputed by the revenue that the comparables in case of the comparables, the royalty, margins are computed after including royalty and research and development expenses. The view taken by the Coordinate Bench of this Tribunal in assessee’s own case for A.Y. 2007-08 has been reproduced hereinabove wherein all these aspects have been considered. This Tribunal for A.Y. 2007-08 has deleted the adjustment made by the Ld.TPO in respect of royalty by separately bench marking the transactions. This has been fortified by the clarification given in a Miscellaneous Petition filed by the department which is also reproduced hereinabove. This view is also supported by various decisions of Coordinate Benches of this Tribunal as well as various High courts. Cojoint reading of these orders, we direct the Ld.AO/TPO to delete the adjustment proposed for royalty as a separate international transaction. Respectfully following the above view, we direct the Ld.AO/TPO to delete the adjustment proposed towards royalty as a separate international transaction. Accordingly, ground nos. 10 to 12 raised by assessee stands allowed. Ground no. 13: 14. We note that that Ld.TPO has held the Trading and Manufacturing segment to be at arm’s length independently for year under consideration. Accordingly we are of the view that this issue is academic for the year under consideration. Page 19 of 23 IT(TP)A Nos. 350/Bang/2014 & 836/Bang/2014 However, liberty is granted to assessee to contest this issue in appropriate year as and when it may arise. Corporate tax issues raised: 15. Ground No. 15 The assessee is in the business of manufacture of motor vehicles. The contractual obligations mandate the performance of certain services free of cost after the sale of the vehicles. This is during the warranty period. This is a normal phenomenon in the automobile industry. It is stated that as the products are sold by the assessee, it undertakes obligation to rectify any mal-functioning in the product sold. The payer thus has a right, without payment of any money to have the defect rectified, provided the defect is notified within the specified period. The price charged for the products includes an element the expenditure that is likely to be incurred in meeting the demands for rectification of the defects during the warranty period. Assessee submitted that since the gross amount is reflected as turnover, correct accounting treatment would require that appropriate amount, reflecting the probable charges that the assessee is likely incur, be debited to the profit and loss account. The Ld.AO disallowed the provision towards warranty while computing the book profits under section 115JB of the Act on the ground that it is provision to meet contingent liability and is not an ascertained liability. However, the Ld.AO allowed the same in normal computation. Page 20 of 23 IT(TP)A Nos. 350/Bang/2014 & 836/Bang/2014 Aggrieved by the order of Ld.AO, the assessee preferred appeal before the Ld.CIT(A) who upheld the view of Assessing Officer. Aggrieved by the order of Ld.CIT(A), the assessee is in appeal before us now. 16. It is stated that the liability is of a known nature. Its incurrence is not uncertain. It is a liability in present, though may be discharged at a later date. The past reality and experience is normally a sure guide of the amount that the appellant is likely to incur. It is only that the amount cannot be determined with substantial accuracy. Being a known liability [the amount of which however cannot be determined with any substantial accuracy], the amounts shown in the financial statements would satisfy the definition of a ‘provision’. 17. The Ld.AR submitted that in the present facts, the provision for warranty, cannot be considered as not probable. Also, obligation of warranty charges would result in outflow of resources embodying economic benefits. A reliable estimate of the warranty charges can also be made. The past reality and experience would be a lamp-post in the estimation of such liability. Hence, provision for warranty is not a contingent liability. He also placed reliance on the decision of Hon’ble Karnataka High Court in case of Toyota Kirloskar Motors P Ltd. reported in (2013) 30 taxmann.com 294 in support of its contention. On the contrary, the Ld.DR relied on the orders passed by the authorities below. Page 21 of 23 IT(TP)A Nos. 350/Bang/2014 & 836/Bang/2014 We have perused the submissions advanced by both sides in the light of records placed before us. 18. We note that Hon’ble Karnataka High Court in assessee’s own case (supra), held as under. “4. In so far as claiming the amount set out towards warranty is concerned, the apex court in the case of Rotark Controls India P. Ltd. v. CH110091 314 ITR 62/180 Taxman 422 (SC) has held that the principle is that the historical trend indicates that a large number of sophisticated goods were being manufactured in the past and the facts show that defects existed in some of the items manufactured and sold, then provision made for warranty in respect of such sophisticated goods would be entitled to deduction from the gross receipts under section 37. The argument of the Revenue is unless in the past there is a cash outflow incurred by the assessee in pursuance of the warranty, the estimate cannot be made regarding the amount to be claimed as deduction under the heading of "warranty". In this case, as there is no such evidence, the assessee is not entitled to the said benefit. 5. The law laid down by the apex court makes it clear the historical trend referred to therein is to the question whether in the past there was any defect in the manufactured goods and not the actual expenditure incurred in rectifying the defect or in substituting the defective product with a defectless product. Assuming that the amount of warranty claiming deduction is actual and not incurred by the assessee, the difference in the amount is taxed in the subsequent year. In that view of the matter and in the light of the law laid down by the apex court as aforesaid, the authorities were justified in allowing the warranty claimed as deduction. However, they have made it very clear that there should not be double deduction and for verifying the same, the matter is remitted back to the authorities which, in the facts of this case, would meet the ends of justice. We do not see any justification to interfere with the said finding passed by the Tribunal. Therefore, we do not see any substantial question of law that would arise for consideration which merits admission of this appeal. Accordingly, appeal is dismissed.” Page 22 of 23 IT(TP)A Nos. 350/Bang/2014 & 836/Bang/2014 19. Respectfully following the above, we remand this issue back to Ld.AO for verifying if there is any double deduction claimed by assessee. The Ld.AO is directed to carry out necessary verification and consider the claim in accordance with law. Needless to say that proper opportunity of being heard be granted to assessee. Accordingly, this ground raised by assessee stands allowed for statistical purposes. Accordingly the appeal filed by assessee stands partly allowed. Revenue’s appeal: 20. The issues raised by revenue relates to identifying suitable comparables to compute ALP of Royalty payment. As we have deleted the adjustment proposed by the Ld.TPO in the foregoing paras the issues raised by revenue in their appeal does not arise. Accordingly, the appeal filed by revenue stands dismissed. In the result, the appeal of assessee stands partly allowed and the appeal of revenue stands dismissed. Order pronounced in the open court on 21 st February, 2022. Sd/- Sd/- (CHANDRA POOJARI) (BEENA PILLAI) Accountant Member Judicial Member Bangalore, Dated, the 21 st February, 2022. /MS / Page 23 of 23 IT(TP)A Nos. 350/Bang/2014 & 836/Bang/2014 Copy to: 1. Appellant 4. CIT(A) 2. Respondent 5. DR, ITAT, Bangalore 3. CIT 6. Guard file By order Assistant Registrar, ITAT, Bangalore