ITAT provides reprieve to Lenovo

ITAT provides reprieve to Lenovo

It relied on the Supreme Court and its own verdict in earlier cases

The Bangalore Bench of the Income Tax Appellate Tribunal (ITAT) has directed the Income Tax department to use the Comparable Uncontrolled Price (CUP) as the most appropriate method and allowed the warranty expenditure.

The appellant, Lenovo (India) Private Limited is a company incorporated under the Companies Act, 1956 with its registered office in Bangalore. It primarily deals in the business of manufacture and sale of desktops, laptops and smartphones.

The assessee had filed an Income Tax Return (ITR) in November 2013 declaring a loss of Rs.56,28,18,000. The authorities for scrutiny picked up the ITR and statutory notices were issued to the assessee. On receipt of the notices, the authorized representative of the assessee filed the requisite details.

However, the assessing officer (AO) observed that with its Associate Enterprise (AE), the assessee had entered into international transactions exceeding Rs.15 crores. Accordingly, referenced u/s. 92CA was made to the transfer-pricing officer (TPO). The TPO directed the assessee to file the economic details of international transactions in Form 3CEB.

The officer detected that during the Assessment Year 2013-2014, the assessee had imported certain parts and components from its AE's for manufacturing personal computers. He also imported certain components from third parties, choosing CUP as the most appropriate method for determining the Arm's Length Price (ALP). He had compared the price paid for the import of components to unrelated persons and the AE.

But, the TPO did not accept the Transfer Pricing (TP) analysis by the assessee and rejected the CUP method adopted by the assessee to its manufacturing segment. The officer applied the Transactional Net Margin Method (TNMM) and determined the ALP, as a result, Rs.10,19,77,372 were to be adjusted.

Meanwhile, the AO observed that the assessee had created a provision of warranty and asked him to explain why the provision should not be disallowed. The assessee submitted that the provision for warranty of Rs.13,40,69,800 was based on the total number of obligations outstanding as of 31 March 2013.

In addition, he submitted that the methodology of arriving at the provision and the computation were as per the principles laid down by the Supreme Court in an earlier case.

The AO, however, rejected the submissions of the assessee and denied the claim. He said that the provision for the warranty was disclosed as a contingent liability under AS 29.

Thereafter, the assessee filed an objection before the Dispute Resolution Panel (DRP) against the proposed adjustment and imposition of contingent liability. But the DRP upheld the order of the TPO and also the application of TNMM.

The assessee then approached ITAT, submitting that the coordinate bench of the same tribunal in his own case had already considered the issue during earlier assessment years.

Thus, the Coram of Judicial Member Beena Pillai and Accountant Member Chandra Poojari held, "As the submissions advanced are on identical facts that have already been considered by this tribunal for preceding assessment years, we direct the TPO to replace the TNMM with CUP as the most appropriate method."

The tribunal further ruled, "Based on the view taken by the coordinate bench and relying on the earlier decision of the Supreme Court, we allow the provision for warranty expenditure."