Income Tax Appellate Tribunal - BangaloreDy.C.I.T., Bangalore vs Lenovo India Pvt. Ltd.,, Bangalore on 31 March, 2017IN THE INCOME TAX APPELLATE TRIBUNAL
                            BANGALORE BENCH ' B '

              BEFORE SHRI VIJAY PAL RAO, JUDICIAL MEMBER AND
                 SHRI S. JAYARAMAN, ACCOUNTANT MEMBER

                         I.T. (T.P) A. No.511 /Bang/2015
                           (Assessment Year : 2010-11)

Dy. Commissioner of Income Tax,
Circle 4(1)(1), Bangalore.                                     .... Appellant.
         Vs.
M/s. Lenovo India Pvt. Ltd.,
Doddenakundi Village,
Marathalli Post, Bangalore.                                  ..... Respondent.
PAN AABCI 3372H

                     I.T. (T.P) A. Nos.580 & 581/Bang/2015
                           (Assessment Year : 2010-11)
                                    (By Assessee)

                        I.T. (T.P) A. No.1307/Bang/2011
                          (Assessment Year : 2007-08)
                                   (By Assessee)

Assessee By : Shri P. Pardiwala, Senior Advocate
Revenue By : Ms. Neera Malhotra, CIT (DR) (ITAT)-2, Bengaluru.

Date of Hearing : 16.02.2017.
Date of Pronouncement : 31.03.2017.

                                  O R D E RPer Bench :Cross appeals are directed against the assessment order dt.30.01.2015 passed

under Section 143(3) r.w.s. 144C of the Income Tax Act, 1961(in short 'the Act')2IT(TP)A Nos.511, 580 & 581/Bang/2015
                                                                              & 1307/Bang/2011
in pursuant to the directions of the Dispute Resolution Panel (in short 'DRP')

dt.22.12.2014 as well as appeal by the assessee against the order passed underSection 154of the Act for the Assessment Year 2010-11. The assessee has also

filed appeal against the order dt.18.10.2011 of Commissioner of Income Tax

(Appeals) for the Assessment Year 2007-08.2. First we take up the appeal of the assessee for the Assessment Year 2007-08

wherein the assessee has raised the following grounds :1.    " The order dated October 18, 2011 passed by the learned Commissioner of Income-tax
      (Appeals)-I, Bangalore undersection 250of the Income-tax Act, 1961 is bad in law and
      on facts.2.    Provision for Warranty

2.1   The learned CIT(A)-I has erred in law and on facts in disallowing an amount of
      Rs 149,126,412 in respect of provision for warranty for the FY 2006-07 without
      appreciating the fact that Assessee maintains its books on a mercantile basis of
      accounting and that the said warranty provision has been created on a scientific manner,
      having due regard to the nature of activity, its global warranty accrual processes and the
      industry requirement in which the Assessee operates.2.2   The learned CIT(A)-I has erred in law in disregarding the decision of the Honorable
      Supreme Court in the case of Rotork Controls Private Limited and has proceeded to
      disallow provision for warranty which has been created on a scientific and consistent
      basis.2.3   The learned CIT(A)-I has erred in law, in disregarding the Honourable Delhi High Court
      decision which has held that formula used globally for computing the provision for
      warranty is acceptable as a scientific formula and the computation of provision based on
      such formula is an allowable expenditure.2.4   The learned CIT(A)-I has erred in law in relying on his decision in Apple India (P) Ltd,
      wherein the said decision has been reversed by the Honourable Bangalore Tribunal in
      the case of Apple India (P) Ltd.3     Disallowance of Marketing support fees as capital expenditure3.1   The learned CIT(A)-I has erred in law in arbitrarily disallowing an amount of
      Rs 139,237,553 being the amounts paid to IBM as marketing support fees without3IT(TP)A Nos.511, 580 & 581/Bang/2015
                                                                                  & 1307/Bang/2011
       considering the fact that Lenovo India, in its first few years of operation in India, did not
       have marketing and logistics network in India for the sale of desktops and laptops and
       therefore it was required to contract, for a period of five years, with IBM India for
       provision of logistic support and sales force for marketing and distribution of Lenovo
       India's products to retain the market share in India.3.2    The learned CIT(A)-I has erred in law and on facts in arbitrarily concluding that
       marketing support fee paid by Lenovo India is capital in nature.

3.3    The learned CIT(A)-I has erred in law and on facts in relying on the cases of Assam
       Bengal Cement Co. Ltd.1 and Woodhead and Sons Ltd.2 as the facts in those cases are
       different from Lenovo India's case.4      Disallowance of Superannuation fund

4.1    The learned CIT(A)-I has erred in law in taxing an amount of Rs 4,073,620 towards
       disallowance of superannuation fund payments undersection 40A(9)read withsection
       36(1)(v)of the Act.5      The learned CIT(A)-I has erred on facts in computing the total loss of the Company at
       Rs 47,830,738.The Assessee 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
Honourable Bench of the Income Tax Appellate Tribunal to decide this appeal according to law."3.       Ground No.1 is general in nature and does not require any specific

adjudication.4.    Ground No.2 is regarding disallowance of the provision for warranty.5.       We have heard the learned Senior Counsel for the assessee as well as

learned CIT, DR and carefully perused the material on record. At the outset, we

note that an identical issue was considered by this Tribunal in assessee's own case

for the Assessment Year 2006-07 as well as for the Assessment Year 2011-12.

We find that for the Assessment Year 2006-07, the Tribunal in the first round of4IT(TP)A Nos.511, 580 & 581/Bang/2015
                                                                          & 1307/Bang/2011
appeal vide order dt.16.3.2012 in ITA No.1457/Bang/2010 remanded this issue to

the assessing authority to reconsider its affairs in the light of the guidelines issued

by the Hon'ble Supreme Court in the case ofRotok Controls India Pvt. Ltd. Vs.

CIT314 ITR 62.     The issue was again brought before this Tribunal for the

Assessment Year 2007-08 and vide its order dt.30.5.2016, the Tribunal decided

this issue in favour of the assessee in IT(TP)A No.582/Bang/2015. We further

note that this issue was again considered by this Tribunal in assessee's own case

for the Assessment Year 2011-12 vide order dt.21.10.2016 in IT(TP)A

No.373/Bang/2016 in para 10 as under :" 10.    We heard rival submissions and perused material on record. The only issue
in this ground of appeal is whether provision for warranty expenditure is allowable.
It is no doubt true if the tests evolved by the Hon'ble Supreme Courtinthe above
caseare satisfied then the provision for warranty expenditure is allowable. The AO
had compared the current year provision vis-à-vis actual expenditure incurred
during the year of warranty. According to the learned counsel, the warranty
expenditure incurred during the year is out of the provision created in the earlier
year. Therefore the comparison of provision for the year vis-à-vis the actual
expenditure incurred during the year does not stand to any reason. In this
connection, the findings of the co-ordinate bench in the assessee's own case for
assessment year 2006-07 are relevant which are quoted below:"16. We have perused the materials and heard the rival contentions.
     Question before us is whether assessee had made the provisioning for
     warranty in a scientific manner. It is not disputed that in the impugned
     assessment year it had started doing the business of sale of laptops and
     desktops. Obviously assessee had no historical data with it. It is also not
     disputed that assessee had taken over this business from IBM, who had
     substantial experience in such business. Hence if the assessee relied on the
     methodology followed by IBM for working out the warranty provision we
     cannot say that it was incorrect. There is no case for the Revenue that any
     provisioning made by IBM in respect of such business in any earlier years were
     disallowed for a reason that it was unscientific. It is true that assessee had5IT(TP)A Nos.511, 580 & 581/Bang/2015
                                                                    & 1307/Bang/2011
adopted two factors namely, repair action rate and cost per claim from IBM
data available at Asia Pacific Level. It might also be true that assessee had
not produced records relating to IBM to show that these rates were correctly
worked out by IBM. Nevertheless a look at the warranty provisioning table of
the assessee for the succeeding assessment years reveals the following :6IT(TP)A Nos.511, 580 & 581/Bang/2015
                                                                           & 1307/Bang/2011
     There is much strength in the argument of the Ld. AR that provision done for a
     year should be compared with the actual spending in the succeeding year.
     This is for the simple reason that expenditure incurred against warranty given
     on sales made in any given year would be reflected in the succeeding year,
     when the provisioning is done on the basis of machine months. Assessee had
     done the provisioning based on machine months. If by application of the
     formula of multiplying machine months with repair action rate and cost per
     claim, an excessive warranty provisioning had resulted, then definitely in the
     succeeding year the expenditure incurred on warranty would be much less.
     The table above would show that expenditure on warranty was higher in
     almost all succeeding years except financial year 2009-09. In such
     circumstances we cannot say that assessee had followed a method which was
     not scientific. We are of the opinion that the three conditions set out by the
     Hon'ble Apex Court in the case of Rotork Controls India (Pvt) Ltd have been
     satisfied by the assessee, viz., establishing that there is a present obligation
     on account of a past event, working out the probable estimate of the outflow
     of the resources required and substantiating the reliability of such estimate.
     Especially so since the assessee was mandatorily required to follow AS-I and
     principles of prudence stipulated in such AS-I required provisioning for all
     known liabilities even if it could not be determined with certainty, but was
     made based on available data. We therefore delete the addition made by the
     AO disallowing the provision for warranty. Ground 7 of the assessee stands
     allowed.It is worth mentioning that the co-ordinate bench has considered the historical data
pertaining to financial year 2005-06 to 2011-11 and came to the conclusion that
the provision was made based on historical data and following scientific method.
Therefore, we do not find any reason to interfere with the conclusion reached by
the co-ordinate bench. Accordingly, we hold that the provision for warranty
expenditure is allowable. This ground of appeal is allowed."Thus the Tribunal has taken a consistent view on this issue. The ld. Senior Counsel

has also relied upon the decision dt.10.4.2013 of Hon'ble jurisdictional High Court

in the case ofCIT Vs. IBM India Limitedfor the Assessment Year 1998-99 wherein

the Hon'ble Supreme Court has held that the conditions as stipulated by the

Hon'ble Supreme Court in the decision in the case of Rotork Controls India Pvt.7IT(TP)A Nos.511, 580 & 581/Bang/2015
                                                                         & 1307/Bang/2011
Ltd. Vs. CIT(supra) were found to be fulfilled and no case of interference with

the finding of the Tribunal is made out. It is pertinent to note that in this case the

assessee has acquired this business from IBM and for the first year after

acquisition i.e. for the Assessment Year 2006-07, the claim of the assessee for

provision of warranty was based on the historical data of IBM. Thus in view of the

above facts and circumstances of the case as well as by following the decision of

this Tribunal in assessee's own case, we decide this issue in favour of the assessee

and allow the claim of the assessee on account of provision for warranty which

was found to be based on scientific basis and method.6.     Ground No.3 is regarding Transfer Pricing Adjustment - disallowance of

marketing support service charges paid by the assessee to IBM.7.   We have heard the learned Senior Counsel for the assessee as well as learned

CIT, DR and carefully perused the material on record. The Assessing Officer has

disallowed the claim of Marketing Support Service Charges by treating the same

as capital in nature as it was connected with the business acquired by the

assessee from IBM. The CIT (Appeals) confirmed the disallowance made by the

Assessing Officer.8.    At the outset, we note that an identical issue has been considered by this

Tribunal in assessee's own case for the Assessment Year 2006-07 and again for8IT(TP)A Nos.511, 580 & 581/Bang/2015
                                                                                        & 1307/Bang/2011
the Assessment Year 2008-09 vide order dt.14.8.2014 in                                ITA     Nos.607 &

542/Bang/2013 in paras 16 & 17 as under :" 16. The claim of the assessee was with regard to marketing support and
transition fees amounting to Rs.6,78,19,000 paid to M/s. IBM India Pvt. Ltd.
towards various services rendered by the said company to the assessee. This was
disallowed for by the Assessing Officer for the reason that the expenditure was
incurred by the assessee for retaining the customer / dealer base of M/s. IBM
India Pvt. Ltd. which resulting in acquiring an enduring benefit. In its appeal before
the CIT (Appeals) the argument of the assessee was that similar issue was decided
by this Tribunal in assessee's own case for the Assessment Year 2006-07. Learned
CIT (Appeals) relying on the decision of the Tribunal mentioned supra, allowed the
claim. Ld. DR has fairly admitted that the issue stood covered in favour of the
assessee. However, according to him, the marketing support service agreement
was only an appendix to the main agreement for acquiring business form M/s.
IBM India Pvt. Ltd. and therefore, the outgo was essential in the capital field.
Nevertheless, we find that co-ordinate Bench of the Tribunal has allowed the claim
of the assessee in its order dt.16.3.2012 in ITA No.1457(B)/10 for Assessment Year
2006-07, holding as under :" Having heard both the parties and having considered their rival contentions and the material on
record, we find that the question before us is whether the payment for the marketing support
agreement is revenue or capital in nature? The assessee has filed the copy of the marketing support
agreement which is in paper book No.2 at pages 23 to 120. Thearticle 2of the said agreement describes
the market support services to be delivered by IBM. From a reading of the said services, it is clear that
the IBM was to provide the services to the purchaser as provided in the services description attachment
to facilitate the sale of the products by the assessee and to extend services to the customers through
one or more of its subsidiaries or 3 rd parties under contract with the seller/IBM or one of its
subsidiaries. Thus, it is clear that the services rendered by IBM are for smooth and efficient carrying on
of the business of the assessee for a period of 5 years. This might give an enduring benefit to the
assessee but every activity which gives enduring benefit to the assessee would not get the character of
capital nature. It has been held by the various high courts in a catena of decisions that the enduring
benefit is not the only criteria to decide the nature and character of an expenditure. The necessary test
is whether it is for acquisition of any capital asset or for the purpose of carrying on the business, deriving
revenue from it. The marketing support services cannot however be considered as acquisition of a
capital asset. The support services are for the purpose of sale of the products manufactured by the
assessee and, therefore, it is clearly established that it is for efficient running of the business and
deriving revenues there-from. In such circumstances, we are inclined to hold that the fees paid by the
assessee for marketing support services rendered by IBM, is clearly revenue in nature and is allowable
as deductionu/s 37of the Income-tax Act."9IT(TP)A Nos.511, 580 & 581/Bang/2015
                                                                        & 1307/Bang/201117. Respectfully following the above, we dismiss the appeal filed by the revenue."


It is clear that the Tribunal has taken a consistent view on this issue for the

Assessment Year 2006-07 and it was followed for the Assessment Year 2008-09. It

is petinent to note that the market support service charges are paid under the

same agreement as for the Assessment Years 2006-07 & 2008-09. Therefore

following the decision of this Tribunal for the earlier Assessment Year as well as in

the subsequent Assessment Year we decide this issue in favour of the assessee

and allow the claim of the assessee.9.      Ground No.4 is regarding disallowance of superannuation fund.10.    The Assessing Officer has disallowed an amount of Rs.40,73,620 towards

the payment to superannuation fund on the ground that the fund was not

approved by the competent authority.          On appeal, the CIT (Appeals) has

confirmed the disallowance made by the Assessing Officer on the reason that

though the approval was given on 13.7.2017 w.e.f. 13.03.2007 however the

payment was made on 7.4.2007 when the assessee was yet to get the approval.

Thus on the principle of impossibility the deduction was denied.11.   Before us, the ld. Senior Counsel has submitted that the CIT (Appeals) has

accepted the fact that the approval was granted vide order dt.13.7.2007 w.e.f.

13.3.2007. Therefore the payment made by the assessee after the approval10IT(TP)A Nos.511, 580 & 581/Bang/2015
                                                                        & 1307/Bang/2011
granted w.e.f. 13.3.2007 is an allowable deduction as it was the payment on or

before the filing of return underSection 139(1)of the Act. The ld. Senior Counsel

has pointed out that the CIT (Appeals) has denied this deduction only on the

ground that on the date of payment i.e. 7.4.2007, the assessee was yet to get the

approval whereas if the assessee would have made the payment after 13.7.2007

the date of approved still the claim of the assessee was allowable deduction as it

was prior to the due date of filing the return underSection 139as per the

provisions ofsection 43Bof the Act.12.     On the other hand, the learned Departmental Representative has relied

upon the orders of the authorities below.13. We have considered the rival submissions and relevant material on record.

The CIT (Appeals) has confirmed the disallowance by citing the reasons in para 7.2

as under :" 7.2 During appellate hearing the A Rs filed a copy of approval which
      shows that approval was given on 13.7.2007 w.r.e from 13.3.2007. On
      enquiry it was also pointed out that on 7.4.2007 such fund was paid to
      the credit of Govt. I consider this an impossibility because on 7.4.2007,
      the appellant was yet to get the approval and the number. Thus on the
      principles of impossibly the deduction is not allowed. Hence addition is
      upheld. Grounds of appeal is dismissed."From the above finding of the CIT (Appeals) it is clear that the approval was given

to the fund on 13.07.2007 with retrospective effect from 13.3.2007. Therefore11IT(TP)A Nos.511, 580 & 581/Bang/2015
                                                                                   & 1307/Bang/2011
the approval to the assessee was given and effective before the end of the

financial year relevant to the assessment year under consideration. The assessee

paid the amount to the credit of the Govt. on 7.4.2007 which is well within the

limit as prescribed underSection 43Bof the Act. Therefore once the assessee has

paid the amount in the fund before the time period prescribed underSection 43Band the fund was approved w.e.f. 13.3.2007 then there is no plausible reason to

reject the claim of deduction on this account.                  Accordingly, in the facts and

circumstances of the case where the assessee has complied with all the requisite

conditions, we allow the claim of the assessee and consequently the orders of the

authorities below are set aside.Now we take up the appeal of the assessee for A.Y. 2010-11.14.      This appeal is against the assessment order dt.30.01.2015 passed underSection 143(3)r.w.s. 144C of the Act. The assessee has raised the following

grounds :1. The assessment order dated January 30, 2015 (served on February 2,2015) passed by the
          learned Deputy Commissioner of Income-tax, Circle 4(1)(1), Bangalore ("learned AO") undersection 143(3)read withsection 144C(13)of the Income-tax Act, 1961 ("Act") is not in
          accordance with the law and is contrary to the facts and circumstances of the present case.Transfer Pricing Adjustments2.     Non-implementation of the directions of the Honorable DRP by learned TPO

a.     The learned AO and the TPO have erred in passing an order without following the clear directions
       of the Honorable Dispute Resolution Panel ("DRP"), which is directly in violation ofsection12IT(TP)A Nos.511, 580 & 581/Bang/2015
                                                                                  & 1307/Bang/2011
     144C(10) of the Act and hence liable to be struck down as beyond the jurisdiction of the AO and
     as being bad in law.b.   The learned AO and the TPO have erred in adopting the Transaction Net Margin Method
     ("TNMM") as the Most Appropriate Method ("MAM") when the DRP, based on elaborate reasons
     and after examining the merits of the appellant's case had held that the Comparable Uncontrolled
     Price ("CUP") method was the MAM for the benchmarking of the import transactions undertaken
     by the appellant during the year.c.   The learned AO and the TPO have erred in rejecting the CUP method despite the appellant's
     request for rectification of the apparent error in the impugned order of the TPO/AO.

d.   The learned AO and the TPO have erred in concluding that there was a contradiction in the order
     of the DRP, when it is evident from the clear direction of the DRP that CUP method was upheld
     as the MAM for benchmarking the transactions, based on the merits of the appellant's case.

·    It is also evident that there is no contradiction with the order of the Honourable Income-tax
     Appellate Tribunal ("ITAT" or "the Tribunal") in the appellant's own case for AY 2006-07, wherein
     it was held that when the appellant's transactions for the AY 2007-08 and 2008-09 have been
     accepted to be at arm's length, the TP analysis conducted by the appellant for AY 2006-07 under
     the CUP method should also be accepted to be at ALP.e.   The learned AO and the TPO have erred in not recognizing the settled principle in law that the
     onus and right of choosing the MAM for benchmarking the transaction rests with the Appellant
     and that the method cannot be rejected by the AO/TPO arbitrarily or without adequate reasons.

·    It would be evident from the TP and assessment orders for AY 2007-08 and 2008-09 in the
     appellant's case that the appellant's transactions have been accepted to be at arm's length and
     there is no rejection of the MAM adopted by the appellant.

f.   Without prejudice to the other grounds of appeal, the learned AO and the TPO have erred in not
     considering that the DRP had not merely followed the decision of the ITAT in the appellant's case
     for AY 2006-07, but had independently examined the appellant's facts for the year and upheld the
     CUP method as the MAM.3.   Rejection of the transfer pricing documentation of the Appellant

a.   Without prejudice to the above, the learned TPO has erred in law and on facts in rejecting the
     Transfer Pricing ("TP") documentation which has been prepared by the Appellant in the manner
     as contemplated under the relevant provisions of the Act and the Income-tax Rules,1962 ("the
     Rules") without taking due cognizance of the directions of the DRP.13IT(TP)A Nos.511, 580 & 581/Bang/2015
                                                                                  & 1307/Bang/20114.   Use of multiple year data

a.   Without prejudice to the fact that CUP is the MAM, if TNMM is to applied as MAM, the Honorable
     DRP and the learned TPO / AO have erred in law and on facts in rejecting the use of multiple
     year data, without considering that the past year data had an influence on the determination of
     arm's length price5.   Manufacturing segment

a.   Without prejudice to the above, the Honorable DRP and the learned AO/TPO erred in law and in
     facts in adopting the following filters for conducting TNMM analysis, without appreciating the TP
     documentation prepared by the Appellant:·       Rejection of companies whose data is not available for FY 2009-10;
     ·       Rejection of companies whose income from Manufacturing / Industrial segment is less
             than 75 percent of total operating revenue;·       Rejection of companies having different financial year ending (other than
             March 31, 2010); and
     ·       Rejection of companies which have persistent operating losses.b.   The Honorable DRP and the learned AO / TPO, has erred in law and on facts, by including the
     following additional comparable companies without considering the detailed submissions of the
     Appellant:·       Fatpipe Networks India Limited; and
     ·       Smartlink Network Systems Limitedc.   The Honorable DRP has erred in law and on facts in not providing any directions on
     VXL Instruments Limited and WEP Peripherals Limited despite the fact that the said companies
     was mentioned to be comparable by the learned TPO in the TP order but was not included in the
     final set of comparable companies6.   Computation of the operating margins

a.   The Honorable DRP has erred in law and on facts in upholding the learned AO / TPOs stand in
     treating the provision of doubtful debts as non-operating in nature thereby wrongly computing the
     operating margin of the comparable companies after excluding the provision for doubtful debts.

b.   The Honorable DRP has erred in law and on facts in upholding the learned AO / TPOs stand in
     not excluding an exceptional item of expense amounting to Rs 97,011,754 thereby wrongly
     computing the operating margin of the Appellant.14IT(TP)A Nos.511, 580 & 581/Bang/2015
                                                                                      & 1307/Bang/20117. Risk adjustment



a.     Without prejudice to the fact that CUP is MAM, theHonorable DRP and learned AO / TPO has
       erred in not granting risk adjustment based on comparability adjustments while adjudicating the
       matter at TNMM8.     Disallowance of provision for warranty

a.     The DRP and the learned AO have erred in law in arbitrarily disallowing the provision for warranty
       amounting to Rs 28,87,73,978 claimed as a deduction by Lenovo (India) Private Limited ("Lenovo
       India" or the "Appellant").b.     The Honorable DRP and the learned AO have not appreciated the fact that Lenovo
       Indiamaintains its books on a mercantile basis of accounting and that the said warranty provision
       has been created on a scientific manner followed consistently over the years, having due regard
       to the nature of activity, its global warranty accrual processes and the industry requirement in
       which the Appellant operates.c.     The Honorable DRP and the learned AO haveerred on facts in failing to consider that Lenovo
       India has provided for warranty on a scientific and consistent manner every year applying the
       principles laid out by the Honourable Supreme Court in the case of Rotork Controls India Private
       Limited3 and therefore such expenditure is an allowable deduction undersection 37of the Act.

d.     The learned AO has erred in not appreciating the fact that warranty provision created for AY
       2008-09 and AY 2009-10 was accepted to be created on a scientific basis by the learned AO
       after examining the same and allowed as a deduction undersection 37of the Act.

e.     The Learned AO has erred in appreciating that Lenovo India provides warranty for a period from
       one year to three years on its products and accordingly, the entire provision could not be utilized
       in one year and has to be spread over multiple years.The Appellant further craves to adjudicate upon the following grounds for the first time before the
Honourable ITAT which were not raised before the DRP. These grounds are purely legal grounds
requiring no further examination of facts and therefore, it is humbly prayed that these grounds be
admitted based on the decision of Honourable Supreme Court in the case of National Thermal Power
Corporation - 229 ITR 383.9. Addition of provisions undersection 115JBof the Act

       9.1 The learned AO has erred in law and on facts in holding that the warranty provision of
           Rs 28,87,73,978 and provision for leave encashment amounting to Rs 19,05,538 are15IT(TP)A Nos.511, 580 & 581/Bang/2015
                                                                                      & 1307/Bang/2011
            unascertained liabilities and not appreciating that the provisions have been created as per the
            provisions of the relevant accounting standards / principles which is consistently followed by
            the Assessee year on year.9.2 The learned AO has erred in law by treating the provisions as unascertained liabilities and
            adding it back to the book profits undersection 115JBof the Act without providing an
            opportunity of being heard during the assessment proceedings.

        9.3 Without prejudice to the above ground that the provision for leave encashment is not an
            unascertained liability, the learned AO has erred in disallowing Rs 19,05,538, without
            appreciating the fact that no additional provision was created during the year and that the
            closing balance of provision for leave encashment vis-à-vis the opening balance has reduced
            by Rs 1,94,659.It is humbly requested that the above grounds raised for the first time before the HonourableITAT be
allowed to be adjudicated upon otherwise the appellant shall suffer irreparable loss.10.   The learned AO has erred on facts by incorrectly calculating the amount of brought forward book
      loss and brought forward depreciation undersection 115JBof the Act.

The Appellant craves leave to add, alter, vary, omit, substitute or amend the above grounds, at
any time before or at the time of hearing of the appeal. Each of the above objections is
independent and without prejudice to the other grounds preferred by the Appellant."15.        Ground No.1 is general in nature and does not require any specific

adjudication.16.     Ground No.2 is regarding MAM and Transfer Pricing Adjustment.17.      At the outset, ld. Senior Counsel for the assessee submitted that the DRP

accepted the objections of the assessee regarding the CUP as MAM instead of

TNMM adopted by the TPO. However the TPO/A.O. while passing the final order

in pursuant to the directions of the DRP have not given effect to the directions on

this issue. He has further contended that the DRP has decided this issue in detail16IT(TP)A Nos.511, 580 & 581/Bang/2015
                                                                        & 1307/Bang/2011
and passed directions in para 4.6 but the TPO/Assessing Officer has not followed

the directions of the DRP while passing the final order.          Consequently, the

assessee filed a petition underSection 154of the Act which was also dismissed by

the TPO/A.O.    Thus the assessee has also filed a separate appeal against the

order passed underSection 154. The ld. Senior Counsel for the assessee has

pointed out that for the Assessment Years 2007-08 as well as 2008-09, the

Tribunal has decided an identical issue in favour of the assessee. Therefore the

issue is otherwise covered in favour of the assessee.18.       On the other hand, the learned Departmental Representative has

submitted that while passing the directions, the DRP has not properly understood

the directions of the Tribunal for the Assessment Year 2007-08 and therefore the

TPO/A.O. has given the reasons for not following the directions of the DRP. Thus

the learned Departmental Representative has submitted that when the DRP has

passed incorrect directions, the TPO/A.O. has rightly not followed the same.19.    We have considered the rival submissions as well as the relevant material

on record. It is pertinent to note that an appeal before the Tribunal lies only when

the final order is passed to frame the assessment in pursuant to the directions of

the DRP. Therefore before the final order is passed no appeal lies against the

directions of the DRP.    It is also undisputed proposition of law as per the17IT(TP)A Nos.511, 580 & 581/Bang/2015
                                                                       & 1307/Bang/2011
provisions ofsection 144Cthat directions of the DRP are binding on the TPO/A.O.

Therefore the cause of action to file the appeal arises only after passing order

framing assessment is passed in pursuant to the directions of the DRP. If the final

order is not against or prejudicial to the interest of revenue then the revenue

would have no grievance against the final order as well as the directions of the

DRP. Even otherwise, the interest of revenue depends upon the demand raised

by the Assessing Officer as per the final order to frame the assessment in

pursuant to the directions of the DRP. Thus once the TPO/A.O. has not passed

the final order in pursuant to the directions of the DRP, the revenue has no cause

of action and consequently has no right to file the appeal against such order as

well as directions of the DRP. When the directions of DRP is binding then the

TPO/A.O. is bound to give the effect to the directions of DRP irrespective of the

fact whether the same are acceptable or not to the department. The remedy

against the directions is available to the department to file the appeal but only

when a final order is passed in pursuant to the directions of the DRP. This

conduct of the TPO/A.O. is otherwise a clear defiance and disregard to the

binding directions of the higher authorities.20.   As regards the contention of the learned Departmental Representative that

the DRP did not understood the order of the Tribunal in correct prospective, we18IT(TP)A Nos.511, 580 & 581/Bang/2015
                                                                      & 1307/Bang/2011
are of the view that even if the directions of the DRP are not acceptable to the

department and may be contrary to the precedent, the remedy is only to

challenge the same in the appeal and not to refuse to give effect the same.

However we find that the DRP has duly considered this issue in paras 4.5 & 4.6 as

under :19IT(TP)A Nos.511, 580 & 581/Bang/2015
                         & 1307/Bang/201120IT(TP)A Nos.511, 580 & 581/Bang/2015
                         & 1307/Bang/201121IT(TP)A Nos.511, 580 & 581/Bang/2015
                         & 1307/Bang/201122IT(TP)A Nos.511, 580 & 581/Bang/2015
                                                                                     & 1307/Bang/2011




Thus it is clear that the DRP has taken an independent view and not merely

followed the decision of this Tribunal. The reference of the decision of this

Tribunal has been made only to fortify the finding of the DRP. We further note

that the Tribunal in assessee's own case for the Assessment Years 2007-08 &

2008-09 while dealing with an identical issue vide order dt.30.05.2015 has held in

para 7 as under :" 07. Thereafter on 30.01.2014, TPO had passed a fresh orderu/s.92CAof the Act, purportedly to
comply with the directions of the Tribunal. In the said order, TPO stated that assessee had relied on RPM
method for A. Ys. 2007-08 and 2008-09, whereas in the assessment for these assessment years TNMM
was adopted by the Revenue. Thus as per the TPO, TP analysis of the assessee could not be considered
as accepted for A. Ys. 2007-08 and 2008-09. Taking this view, TPO chose not to make any change to its
original order dt.28.09.2010. Assessee had thereafter moved an application before the DRP which held
as under at paras 2.2 to 2.4 of its order dt.29.12.2014 :2.2 In giving effect to the above directions the TPO has mentioned that in both AY 2007-08 and 2008-09,
the respective TPOs had not accepted the CUP methodology followed by the tax payer in its TP analysis
as the Most Appropriate Method (MAM). After rejecting the CUP as MAM the TPOs in both the years
proceeded to conduct separate analysis following the Transaction Net Margin Method (TNMM) as
MAM. The result of this independent analysis by the TPO was that in both the manufacturing and
trading segment the TPO found that the tax payer's profit margin was higher than the TPO's analyzed
margin, and, hence no adjustment was called for. The fact that the TPOs in both the years had rejected
the CUP as MAM and applied TNMM was taken by the AO, while giving effect to the ITAT's direction, to
indicate that those TPOs had not accepted the TP analysis of the assessee in AY 2007-08 & 2008-09. It
was, therefore, concluded that the tax payer's claims made before the Hon'ble ITAT were incorrect to
the extent that a TP analysis of the assessee was accepted by the TPO in both the years.2.3 In its objections the tax payer has grieved that although the TPO in AY 2007-08 and AY 2008-09 had
sent show causes proposing to reject the CUP method and apply TNMM, the tax payer in both the23IT(TP)A Nos.511, 580 & 581/Bang/2015
                                                                                          & 1307/Bang/2011
years had replied by giving detailed justification for its belief that CUP was the most appropriate method
Thereafter, the purported independent analysis carried out by the TPO under TNMM in both the years
was never communicated to the tax payer. During the set aside proceedings also, the present AO has
not made available this analysis to the tax payer. The tax payer, therefore, had no reason to believe that
subsequent to its reply to the show causes, the TPOs had not accepted its contentions about CUP being
MAM and TNMM having been applied.2.4 The objections as above are found to carry merit. The directions of the Hon'ble Tribunal was in
respect of "transactions of the assessee". It was not in respect of the most appropriate method applied
for analysis of the transactions for purposes of determining Arm's Length Price (ALP). The TPO has
proceeded in his impugned order down the second path i.e. with regard to MAM. This was clearly not
his mandate. As far as the transaction in question was concerned, the conclusion of the TPOs in both AYs
2007-08 and 2008-09 was that the relevant transactions were at Arm's length. This is the verification
which was expected by the Hon'ble ITAT. The objections of the tax payer are found to be in order and
the TPO's reiteration of the position adopted in his original order dt. 28.09.2010 is inappropriate.However, a reading of the final assessment order passed by the AO on 30.01.2015 show that TPO had
pursuant to the DRP directions passed an order dt.29.01.2015 not complying with the directions of the
DRP. AO had therefore persisted with the same adjustment that he had done earlier.Section 144Cwhich dwells on the powers of the DRP, states as under at sub-section (10):144C(10) : Every direction issued by the Dispute Resolution Panel shall be binding on the Assessing
Officer."In view of the above discussion as well as the decision of this Tribunal in

assessee's own case, we delete the addition made by the TPO/A.O. on account of

transfer pricing adjustment.21. Ground Nos.5 to 7 are regarding Transfer Pricing Adjustment. In view of our

finding in respect of Ground No.4 of assessee's appeal for the A.Y. 2007-08, these

grounds of the assessee's appeal become infructuous and being consequential.22.    Ground No.8 is regarding disallowance of provision of warranty.23.    We have heard the ld. Senior Counsel as well as ld. CIT, DR and considered

relevant material on record. This issue is identical as involved in the assessee's24IT(TP)A Nos.511, 580 & 581/Bang/2015
                                                                       & 1307/Bang/2011
own case for the Assessment Year 2007-08, in view of our finding on this issue for

the Assessment Year 2007-08, this ground stands allowed.24.     Ground No.9 is regarding addition in respect of warranty provision as well

as leave encashment while computing the book profit underSection 115JBof the

Act.25.     We have heard the ld. Senior Counsel as well as ld. CIT, DR and considered

relevant material on record. As regards the adjustment on account of warranty

provision while computing the book profit underSection 115JBof the Act, in view

of our finding on the issue of allowability of warranty provision the same cannot

be treated as uncertain liability/provision. As regards the provision for leave

encashment though the said claim was not allowable in view of the provision ofSection 43Bhowever in view of the decision of Hon'ble Supreme Court in the case

of     BEML   245 ITR 421, this is a certain liability though payable in future we

further note that the Tribunal in assessee's own case for the Assessment Year

2011-12 has considered and decided this issue vide order dt.21.10.2016 in paras

11 & 12 as under :" 11. Ground No.3 relates to addition of provision for gratuity, leave encashment
and warranty to book profits. The AO added provision for warranty, gratuity and
leave encashment on the ground that these provisions are unascertained liabilities.
The Hon'ble DRP also confirmed the same.11.1     Before us, learned counsel for the assessee submitted that provision for
gratuity was allowed as deduction in the proceedingsu/s 154of the Act and
therefore, not pressed. As regards provision for leave encashment, he submitted25IT(TP)A Nos.511, 580 & 581/Bang/2015
                                                                       & 1307/Bang/2011
that it is not a contingent provision and is allowable as deduction in view of the
decision of the Hon'ble Supreme Court in the case ofBharat Earth Movers vs. CIT(supra). As regards provision for warranty, learned counsel for the assessee
submitted that since same is allowable as business expenditure, it cannot be added
to book profits.11.2 On the other hand, ld.CIT(DR) placed reliance on the orders of the lower
authorities.12.     The only issue relates to addition of provision for leave encashment and the
provision for warranty expenditure added to book profits while computing tax
liabilityu/s 115JBof the Act. As regards provision for warranty expenditure, we had
already held that it is not a contingent liability and hence is allowable as deduction.
Therefore, the question of addition to book profits does not arise. As regards
provision for leave encashment, following the decision of the Hon'ble Gujarat High
Court in the case ofDCIT vs. Inox Leisure Ltd.(351 ITR 314), the same is
allowable as deduction.The Hon'ble Gujarat High Court, after considering the
decision of the Hon'ble Apex Court in the case ofBharat Earth Movers(supra) held
as follows:"16. Coming to the question No. 2, we notice that the same arises out of the
     Tribunal's decision to uphold the CIT(A)'s view that the provision of Rs.
     5,10,000/- made by the assessee towards its gratuity liability cannot be added
     back for the purpose of computation of the assessee's income underSection
     115JBof the Act.Section 115JBof the Act as is well known pertains to special
     provision for payment of tax by certain companies. Sub-section (1) ofSection
     115JBof the Act provides that a minimum alternative tax to be paid by the
     companies as computed under the said provision. Sub-section (2) ofSection
     115JB requires every company for the purposes of the said section to prepare
     its profit and loss account in accordance with the provisions of paras 2 and 3
     of Schedule 6 of theCompanies Act. Explanation 1 to said section provides
     that for the purposes of the said section, "book profit" means the net profit as
     shown in the profit and loss account for the relevant previous year prepared
     under sub-section (2), as increased by various items specified in Clauses (a) to(i) provided therein. Clause (c) thereof reads as thus:"(c) The amount or amounts set aside to provisions made for meeting
       liabilities, other than ascertained liabilities;"In other words, if an amount is specified for provision which is for meeting
     with the liabilities not ascertained such provision so made shall have to be
     added back to the book profit of the company. Put it differently, if such
     provision is made for ascertained liability, no such addition back shall be
     made. In this context, the Tribunal was called upon to decide whether the
     assessee having made provision of Rs. 5,10,000/- towards gratuity would be
     covered under Clause (c) to Explanation 1 toSection 115JBof the Act. The26IT(TP)A Nos.511, 580 & 581/Bang/2015
                                                                        & 1307/Bang/2011
Tribunal relied on the decision of the Bombay High Court in case ofCIT v.
Echjay Forgings (P.) Ltd. [2001] 251 ITR 15/116 Taxman 322 and confirmed
the view of the CIT(A).17.     Having heard learned counsel for the parties and having perused
documents on record, we notice that CIT(A) as well as the Tribunal both noted
that such provision for payment of gratuity was made on the basis of actuarial
valuation method to this aspect. The revenue has not been able to make any
dispute. If we proceed on that basis, law to our mind, seems fairly well settled.
Bombay High Court in case of Echjay Forgings (P.)Ltd(supra) in the context
of similar provisions made inSection 115JBof the Act examined whether the
provision of gratuity liability of a company is required to added back to its
book profit. In this context, it was held that the assessee had made the
provision for gratuity on the basis of actuarial calculations. He, therefore,
cannot be said that the provision for gratuity is not ascertained liability.18.In case ofBharat Earth Movers v. CIT[2000] 245 ITR 428/112 Taxman
61 the Apex Court held that the amounts set apart by an assessee to meet its
liability on account of leave encashment of employees is not a contingent
liability. It was observed that what should be certain is the incurring of the
liability which should also be estimated with reasonable certainty though the
actual quantification may not be possible then. Its requirements are satisfied
the liability is not a contingent one. The liability is in praesenti though it will
be discharged at a future date.19. Likewise in case ofMetal Box Co. of India Ltd. v. Their Workmen[1969]
73 ITR 53 (SC), the Apex Court examined the question whether it is legitimate
in such a scheme of gratuity to estimate the liability on an actuarial valuation
and deduct the same in profit and loss account while working out the net profit
of a company and further whether such appropriation amounts to a reserve or
provision. The Supreme Court held that an assessee can while working out its
net profits, provide from its gross receipts his liability to pay a certain sum
towards gratuity liabilities of the employees. If such liability is properly
ascertainable and it is possible to arrive at proper discounted present value.20. In case of Rotork Controls India (P.)Ltd. v. CIT[2009] 314 ITR 62/180
Taxman 422 (SC), the Supreme Court in the context of an assessee making
provision for estimated expenditure towards warranty observed that provision
is a liability which can be measured only by using substantial degree of
estimation. Such provision is recognized when an assessee had a present
obligation as a result of past events, and it is possible that any outflow of
resources will be required to settle the obligation and further a reliable
estimate can be made of the amount of obligation.27IT(TP)A Nos.511, 580 & 581/Bang/2015
                                                                              & 1307/Bang/201121.    Considering the above judicial pronouncements and the facts on hand,
      we have no hesitation in upholding the Tribunal's view that though actual
      payment of gratuity may be made at a later point of time upon periodical
      release of the employees from service, it is provision having been made on
      actuarial basis it cannot be stated to be an uncertained liability so as to add it
      back in terms of Clause (c) to Explanation 1 toSection 115JB. "Respectfully followingthe above decision, we hold that provision for leave
encashment need not be added back to book profits for the purpose of determining
tax liabilityu/s 115JBof the Act."Following the earlier order of this Tribunal in assessee's own case, we decide this

ground in favour of the assessee and delete the addition made by the Assessing

Officer on account of these two amounts while computing the book profit.26.    The assessee's appeal against the order passed underSection 154becomes

infructuous in view of our finding on this issue in the main appeal.27.    The revenue's appeal also becomes infructuous and stands dismissed on the

reasoning as discussed while deciding this issue in assessee's appeal.28. In the result, the assessee's appeal for the Assessment Years 2007-08 as well

as 2010-11 are allowed and assessee's appeal against the order underSection 154and revenue's appeal for the A.Y. 2010-11 are dismissed.Order pronounced in the open court on the 31st day of Mar.,2017.Sd/-                                        Sd/-
              (S. JAYARAMAN)                              (VIJAY PAL RAO)
            Accountant Member                             Judicial Member
Bangalore, Dt.31.03.2017.
*Reddy gp