2017 (9) TMI 1648 - AT - Income Tax

TPA - services provided by the AE under the head of management services are not in the nature of stewardship activities - Held that - Determination of ALP for Management Support Services at Rs. NIL is unwarranted and accordingly reject the adjustment made to the income of the assessee by the ld TPO and hence addition to be deleted TPA - determination of ALP for payment of royalty at Rs. NIL is unwarranted and accordingly reject the adjustment made to the income of the assessee by the ld TPO and hence addition to be deleted Allowability of employees contribution to PF - sum deposited before the due date of filing the return of income u/s. 139(1) - Held that - The date of deposit of employees contribution to PF before the due date of filing the return u/s. 139(1) of the Act is not in dispute. This issue is settled in favour of the assessee by the decision of the Hon ble Jurisdictional High Court in the case of CIT v. Vijay Shree Ltd. (2011 (9) TMI 30 - CALCUTTA HIGH COURT). Respectfully following the same, the Ground No. 12 raised by the assessee for the Asst Year 2011-12 is allowed. Short TDS credit - tds credit denied - Held that - AO while framing the final assessment order had not carried out the directions of the ld DRP. Once the assessee produces the TDS certificates before the ld AO in support of its claim for credit of TDS, the duty of the ld AO is to grant the same on getting satisfied whether the relatable income thereon has been duly offered to tax by the assessee in accordance with the provisions of the Act. Hence we direct the ld AO to grant the credit of TDS after verification of the fact whether the relatable income thereon is offered to tax Provision for warranty allowability - Held that - Provision for warrant is an ascertained liability based on the claims made by WBSEDCL during the year under appeal for which the liability to incur the same had definitely arisen during the year under appeal and accordingly eligible for deduction in the year of arising of liability. Entire provision for warranty in the sum of ₹ 206.68 lakhs would be squarely allowed as deduction in the year under appeal under the normal provisions of the Act. Whether said provision for warranty would have to be construed as ascertained liability or unascertained liability for computing the book profits u/s. 115JB? - Held that - The assessee herein had made provision for warranty based on a systematic and scientific working and method by taking into account the past history of incurrence product warranties and the said workings were also filed before the lower authorities. Hence it could be safely concluded that the said provision for warranty is not made based on ad hoc provision. We hold that the provision for warranty in the sum of ₹ 206.68 lakhs would be allowed as deduction under normal provisions of the Act as well as while computing book profits u/s. 115JB of the Act. Accordingly, the Grounds 11 & 16 raised by the assessee for the Asst Year 2011-12 are allowed. Disallowance made on account of provision for obsolescence of inventory - Held that - We hold that the provision made for obsolete stocks in the sum is squarely allowable as deduction as a business loss under normal provisions of the Act. Accordingly, the Ground No. 10 raised by the assessee for the Asst Year 2011-12 is allowed. With regard to the allowability of the provision for obsolete stock while computing the book profits u/s. 115JB of the Act, the ld AO had correctly disallowed the same on the ground that it is an unascertained liability and accordingly to be added back while computing book profits u/s. 115JB of the Act. As pursuant to the amendment brought in by the Finance (No. 2) Act, 2009 with retrospective effect from 1.4.2001, the said provision for obsolete stock represents provision made for diminution in value of asset and hence the same requires to be added back while computing the book profits u/s. 115JB of the Act. When this was put to the ld AR, he fairly conceded for the addition u/s. 115JB of the Act. Net profits while computing book profits u/s. 115JB - whether the provision for interest would be ascertained or unascertained liability? - addition made on account of provision for interest on MSMED - Held that - While computing the income under normal provisions under various heads alone, the provisions of section 23 of MSMED Act, 2006 would assume relevance and significance. Hence we hold that the interest payable under MSMED Act, 2006 need not be added back to the net profits while computing book profits u/s. 115JB of the Act. Moreover, the ld AR also placed the scrutiny assessment orders of the assessee on record for the Asst Year 2014-15 u/s. 143(3) of the Act dated 26.12.2016, wherein this aspect has been duly examined by the ld AO in the assessment and deduction was duly granted by him in the assessment. In view of these facts and findings, we hold that the provision for interest payable to suppliers registered under MSMED Act, 2006 in the sum of ₹ 29,21,911/- is only an ascertained liability and need not be added back to the book profits computed u/s. 115JB

Issues Involved:
1. Adjustment to Arm's Length Price (ALP) for international transactions.
2. Disallowance of depreciation on Intellectual Property Rights (IPR).
3. Disallowance of depreciation on Goodwill.
4. Short credit of TDS.
5. Provision for warranty.
6. Provision for obsolescence of inventory.
7. Provision for interest on MSMED.

Detailed Analysis:

1. Adjustment to Arm's Length Price (ALP) for international transactions:
The appellant, engaged in manufacturing and distribution of electric meters, entered into various international transactions. The transactions were segmented into manufacturing (domestic and export), trading, and services. The Transfer Pricing Officer (TPO) rejected the transactional level analysis and adopted an entity-wide analysis, leading to adjustments in the ALP. The appellant argued for a transaction-by-transaction approach, citing Indian Transfer Pricing Regulations, OECD Guidelines, and UN TP Manual. The tribunal accepted the appellant's method, emphasizing that the segmentation provided a better and more scientific method for determining ALP. The tribunal directed the TPO to consider the certified segmental profitability for determining the ALP of the relevant international transactions.

2. Disallowance of depreciation on Intellectual Property Rights (IPR):
The appellant acquired intellectual property rights (IPR) from a sole proprietorship, including designs, software, and technical know-how. The Assessing Officer (AO) disallowed the depreciation claim, arguing that the IPR did not have government recognition. The tribunal, referencing earlier decisions and OECD guidelines, held that IPR, including know-how, does not require registration for depreciation claims. The tribunal allowed the depreciation on IPR, directing the AO to rework the opening WDV and subsequent depreciation.

3. Disallowance of depreciation on Goodwill:
The appellant claimed depreciation on goodwill arising from the acquisition of a business. The tribunal, referencing its earlier decisions and the Supreme Court's ruling in CIT v. Smifs Securities Ltd., allowed the depreciation on goodwill.

4. Short credit of TDS:
The appellant claimed TDS credit, which was partially disallowed by the AO. The tribunal directed the AO to verify the TDS certificates and allow due credit after ensuring the related income was offered to tax.

5. Provision for warranty:
The appellant made a provision for warranty based on scientific data and historical trends. The AO disallowed the provision, treating it as an unascertained liability. The tribunal, referencing the Supreme Court's decisions in Bharat Earth Movers and Rotork Controls India (P.) Ltd., held that the provision for warranty was an ascertained liability and allowed it under normal provisions and while computing book profits under Section 115JB.

6. Provision for obsolescence of inventory:
The appellant created a provision for obsolete inventory based on AS-2 guidelines. The AO disallowed the provision, treating it as an unascertained liability. The tribunal, referencing the Delhi High Court's decision in Hotline Teletube & Components Ltd., held that the provision for obsolete inventory was allowable as a business loss under normal provisions but should be added back while computing book profits under Section 115JB due to the retrospective amendment by the Finance (No. 2) Act, 2009.

7. Provision for interest on MSMED:
The appellant made a provision for interest on delayed payments to suppliers under the MSMED Act, 2006, and disallowed it under normal provisions but claimed it under Section 115JB. The tribunal held that the provision for interest was an ascertained liability and should not be added back while computing book profits under Section 115JB, emphasizing that Section 23 of the MSMED Act refers to computation under sections 29 and 57 of the Income Tax Act, not Section 115JB.

Conclusion:
The tribunal provided a detailed analysis of each issue, emphasizing the need for a scientific and systematic approach in determining ALP, recognizing the validity of depreciation claims on IPR and goodwill, and ensuring accurate TDS credit. The tribunal also clarified the treatment of provisions for warranty, obsolete inventory, and MSMED interest under normal provisions and Section 115JB, aligning with judicial precedents and statutory guidelines.

← Previous Next →