2013 (8) TMI 409 - AT - Income Tax

Allowance of carry forward of loss on account of provisions of section 79 of the Income Tax Act Held that - Issue of carry forward would depend upon the finality of order for earlier years as it would have bearing on the year under appeal Issue is remitted to the file of AO to determine the carry forward losses based on the outcome to the decision for the earlier years. Allowability of warranty expenses - Assessee debited expenses on account of warranty expenses - H'ble Apex Court in the case of Rotork Controls 2009 (5) TMI 16 - SUPREME COURT OF INDIA has laid down the conditions which are required to be satisfied for making claim in respect of post sale customer service and has laid down the principle pertaining to the same - The Hon'ble Apex Court in Rotork Controls case noted that provision made for warranty based on past experience (historical trend) was most appropriate as it fulfilled accrual concept as well as matching concept. A detailed assessment of the warranty provisioning policy is required particularly if the experiences suggests that warranty provisions are generally reversed if they remained unutilized at the end of the period prescribed in the warranty Held that - There is no finding with respect to the compliance of aforesaid guidelines of Apex Court by assessee in the order of AO or DRP - Matter needs to be examined in the light of the principles laid down by Hon'ble Apex Court Matter remitted to the file of AO for deciding the issue afresh in the light of the decision of Hon'ble Apex Court in the case of Rotork Controls case. Acceptability of DRP Order for making assessment - DRP has not dealt with the objections raised by the assessee by giving any cogent reasons as to why these objections are not acceptable to them - DRP has simply approved the adjustments made by the TPO. This has resulted in DRP's order being non-speaking Held that - Ld. DR has tried very hard to meet these objections by referring to various relevant income tax rules and the case laws but this effort of Ld. DR is not arising out of the order of the DRP. Therefore assessment orders passed by assessing officer in consequence to the DRP's order have to be set aside relying upon the decision in the case of Vodafone Essar Ltd vs. Dispute Resolution Panel reported in 2011 (12) TMI 22 - Delhi High Court , wherein it has been held that when quasi-judicial forum like DRP deals with section 144C of the Act then it is obligatory on its part to ascribe cogent and germane reasons as reasons are the heart and soul of the matter and facilitate the appreciation of the order when the matter is called in question either before a superior or appellate forum - Accordingly the DRP's order along with the impugned order is set aside in respect of transfer pricing adjustments to the file of DRP with the direction to pass a speaking order after taking into consideration the submissions of both the parties.

Summary

Issues Involved:
1. Set off and carry forward of losses.
2. Disallowance of warranty expenses.
3. Reversal/utilization of provision for foreseeable losses & contingencies.
4. Disallowance of software expenses.
5. Assets written off.
6. Advances written off.
7. Loss due to floods.
8. Disallowance under section 40A.
9. Bad debts written off.
10. Reversal of freight expenses.
11. Adding back of provisions while computing book profits under section 115JB.
12. Charging of interest under section 234B.
13. Transfer pricing adjustments.

Issue-wise Detailed Analysis:

1. Set off and carry forward of losses:
The assessee's claim for set off and carry forward of losses was denied by the AO based on the assessment order for AY 2005-06. The DRP confirmed this denial. The Tribunal remitted the issue to the AO for determination based on the finality of the earlier years' orders.

2. Disallowance of warranty expenses:
The AO disallowed the warranty expenses, considering them contingent liabilities, not ascertained ones. The DRP upheld this disallowance. The Tribunal remitted the matter to the AO to be examined in light of the Supreme Court's decision in Rotork Controls India (P) Ltd., requiring a detailed assessment based on historical trends and technical evaluations.

3. Reversal/utilization of provision for foreseeable losses & contingencies:
The AO disallowed the claim for reversal/utilization of provisions made in earlier years, as the matter had not reached finality. The DRP confirmed this. The Tribunal remitted the issue to the AO for verification of whether the reversal pertains to disallowances made in FY 2004-05.

4. Disallowance of software expenses:
The AO denied depreciation on software expenses claimed by the assessee, as the matter for AY 2005-06 was under appeal. The DRP upheld this. The Tribunal allowed the claim for depreciation, directing the AO to rectify if the appeal for AY 2005-06 is decided in favor of the assessee.

5. Assets written off:
The AO disallowed the claim for assets written off due to posting errors during ERP upgradation, considering it notional. The DRP upheld this. The Tribunal found no reason to interfere with the AO's order due to lack of details provided by the assessee.

6. Advances written off:
The AO disallowed the claim for advances written off due to lack of details. The DRP confirmed this. The Tribunal remitted the issue to the AO for fresh examination, directing the assessee to provide necessary details.

7. Loss due to floods:
The AO disallowed the loss claimed due to floods, as the insurance company did not accept the full claim. The DRP upheld this. The Tribunal allowed the claim, considering it a trading loss, as the loss was incurred in the normal course of business.

8. Disallowance under section 40A:
The AO disallowed management fees paid to General Electric International (INC) USA under section 40A based on the tax audit report. The DRP confirmed this. The Tribunal remitted the matter to the AO to examine the taxability of the amount paid and decide on merits.

9. Bad debts written off:
The AO disallowed the claim for bad debts written off, as they were not charged to the Profit and Loss account. The DRP confirmed this. The Tribunal remitted the matter to the AO for fresh examination in light of the Supreme Court's decision in TRF Ltd., and to examine the issue of liquidated damages.

10. Reversal of freight expenses:
The AO disallowed the claim for reversal of freight expenses, as it was not included in the revised return. The DRP confirmed this. The Tribunal remitted the issue to the AO for examination on merits.

11. Adding back of provisions while computing book profits under section 115JB:
The AO added back provisions for foreseeable losses, claims, and import duty demands while computing book profits under section 115JB. The DRP confirmed this. The Tribunal directed the AO to re-compute book profits after considering the remitted issues and upheld the DRP's reasoning on other aspects.

12. Charging of interest under section 234B:
This ground was consequential and not adjudicated by the Tribunal.

13. Transfer pricing adjustments:
The DRP confirmed the adjustments proposed by the TPO for various divisions. The Tribunal found the DRP's order non-speaking and remitted the matter to the DRP to pass a speaking order after considering the submissions of both parties. The AO was directed to pass a fresh order based on the DRP's revised directions.

Conclusion:
The Tribunal allowed both appeals partly for statistical purposes, remitting several issues to the AO and DRP for fresh examination and decision based on the guidelines and principles laid down in relevant judicial precedents.