2019 (11) TMI 1395 - AT - Income Tax

Addition on account of unearned revenue - revenue recognition as per AS 7 - HELD THAT - On perusal of the summary of unearthed revenue, as mentioned elsewhere, clearly shows the F.Ys in which Revenue has been recognised. This is in consonance with the well recognised Accounting Standard 7 issued by the Institute of Chartered Accountants, which is the highest accounting body created by an Act of the Parliament and the same cannot be brushed aside lightly. In our considered opinion, as managed services are to be rendered for 42 months, income thereof is spread over four years since services are rendered for 10 months in the F.Y. under consideration commensurate amount is booked in the current year and the balance is treated as unearned revenue at the year-end as these services are provided by indeterminate number of acts over a specified period of time. Revenue is, therefore, recognised on straight-line basis over a period for which services are to be rendered. Needless to mention her that same accounting principle has been accepted in earlier A.Y. It is also pertinent to note that the assessee has offered tax in subsequent years amount as and when services are rendered and, therefore, by any stretch of imagination, it cannot be said that there is some revenue leakage. For this proposition, we derive support from the decision of the Hon'ble Supreme Court in the case of Excel Industries 2013 (10) TMI 324 - SUPREME COURT - the light of contractual terms and conditions and considering the fact that the unearned revenue has been offered for tax in the subsequent years as exhibited in chart elsewhere, we are of the considered opinion that the addition is uncalled for and deserves to be deleted. Disallowance of provision for liquidated damages - scrutiny assessment proceedings - HELD THAT - As decided in NOKIA SIEMENS NETWORKS INDIA PVT. LTD. 2018 (4) TMI 311 - ITAT DELHI total provision for liquidated damages was of ₹ 19,66,51,910/- out of which ₹ 2,04,52,238/- were utilized and credited/written back, the remaining amount of ₹ 17,61,99,672/- was the actual amount of the damages which were accounted for in the profit and loss account. CIT(A) categorically stated that when the payments were actually made, the accounts were adjusted with reference to any remission or waiver that the company may get in respect of damages payable for the late delivery and the same was brought to tax u/s 41(1) of the Act by crediting the liquidated damages accounts. Therefore, the impugned amount was not only the provision but the actual amount of the liquidated damages pertaining to the period of delay falling within the previous year relating to the assessment year under consideration. The Ld. CIT(A) categorically stated that the assessee was following this method consistently. Disallowance of expenditure incurred in foreign currency - While scrutinizing the return of income and on perusal of Form 15CA the AO noticed that the assessee has made certain payments in foreign currency without deducting tax at source - HELD THAT - It is not in dispute that school fees of the children of the employees have been paid by the assessee company. We are of the considered view that if the same is treated as perquisites in the hands of the employees then the same takes the colour of the salaries. We, accordingly, restore this issue to the files of the AO. The assessee is directed to demonstrate that the school fees has been treated as perquisites in the hands of the employees and the AO is directed to examine the same and decide the issue afresh after giving a reasonable opportunity of being heard to the assessee. Ground no. 4 is treated as allowed for statistical purposes. Disallowance out of technical training expenditure - HELD THAT - It is true that amount of ₹ 18.94 crores is part of the details of the expenditure in foreign currency as mentioned else where. It is equally true that the Chartered Accountant certificate clearly shows that it is a contra entry inadvertently shown under the head details of expenditure in foreign currency. We find that complete ledger accounts were given to the lower authorities which were not examined by them. In the interest of justice and fair play, we restore this issue to the files of the AO. The AO is directed to examine the ledger accounts and verify whether it is contra entries and after verifying the same and if found correct delete the addition, after giving a reasonable opportunity of being heard to the assessee. Ground no. 5 is treated as allowed for statistical purposes. Disallowance of depreciation on goodwill - HELD THAT - Issue is now well settled in favour of the assessee and against the Revenue by the decision of the Hon ble Supreme Court in the case of Smifs Securities Ltd. 2012 (8) TMI 713 - SUPREME COURT . So far as the claim of depreciation is concerned, we find that the Assessing Officer himself has allowed the claim of depreciation while giving effect to the order of the coordinate bench in 2018 (10) TMI 424 - ITAT DELHI for AY 2008-09. Since the depreciation has already been allowed for AY 2008-09 by the coordinate bench (supra). We, accordingly, direct the AO to allow the depreciation on goodwill as per the provisions of law. Transfer pricing adjustments - international transaction under taken by the appellant namely provision of marketing support services and provision of warranty support service s - HELD THAT - As decided in own case 2019 (8) TMI 1394 - ITAT DELHI cost of marketing team should be bifurcated based on revenue of AE from its operations in India vis a vis revenue generated by the assessee from its sales to third party vendors. We, accordingly, restore this issue to the file of the Assessing Officer/TPO. The assessee is directed to submit the India Specific Profit and Loss Account, network equipment sales to Indian telecom operators of the AE duly certified by an authorised public accountant of Finland. The TPO is directed to examine the same and decide the issue afresh after giving reasonable and sufficient opportunity of being heard to the assessee. Warranty support services - As decided in 2019 (8) TMI 1394 - ITAT DELHI since the TP adjustment is of a very small amount being 1.01 crores. Considering the facts in totality, we direct the TPO to accept the TSS segment as part of network division for bench marking the international transaction which means that this segment should be taken with the main network division of aggregated approach for bench marking.

Summary

Issues Involved:
1. Addition on account of unearned revenue.
2. Disallowance of provision for liquidated damages.
3. Disallowance of expenditure incurred in foreign currency.
4. Disallowance out of technical training expenditure.
5. Disallowance of depreciation on goodwill.
6. Transfer pricing adjustments.

Issue-wise Detailed Analysis:

1. Addition on account of unearned revenue:
The Assessing Officer (AO) added ?1,02,88,91,000/- as unearned revenue, arguing that income is due to accrue once invoices are raised, citing the Supreme Court decision in Tuticorn Alkali Chemicals & Fertilizers Ltd. The assessee contended that revenue should be recognized as per Accounting Standard-7 (AS-7) using the percentage of completion method, and only when services are rendered. The tribunal agreed with the assessee, emphasizing that revenue recognition should align with AS-7 and services rendered, referencing the Supreme Court's decision in Excel Industries and the Delhi High Court's decision in Dinesh Kumar Goyal. Consequently, the addition was deleted.

2. Disallowance of provision for liquidated damages:
The AO disallowed ?57,93,45,721/- for liquidated damages, deeming it unscientific and contingent. The assessee argued that the liability was certain and based on consistent accounting practices. The tribunal cited the Supreme Court's decision in Bharat Earth Movers Ltd., which supports the provision for a definite liability. Following the tribunal's earlier decision in the assessee's favor for AY 2004-05, the tribunal directed the deletion of the addition.

3. Disallowance of expenditure incurred in foreign currency:
The AO disallowed ?9,70,103/- paid as school fees for employees' children, considering it non-business expenditure. The assessee argued it was for employee welfare and treated as perquisites. The tribunal restored the issue to the AO for verification, instructing the assessee to demonstrate that the fees were treated as perquisites in the employees' hands.

4. Disallowance out of technical training expenditure:
The AO added ?18,94,84,993/- due to discrepancies in foreign currency expenditure details. The assessee claimed it was a contra entry mistakenly included. The tribunal restored the issue to the AO for verification, directing the examination of ledger accounts to confirm the contra entry and delete the addition if verified.

5. Disallowance of depreciation on goodwill:
The AO disallowed depreciation on goodwill, arguing Section 32 does not specifically provide for it. The tribunal referenced the Supreme Court's decision in Smifs Securities Ltd., which allows depreciation on goodwill. Noting that the AO had allowed depreciation in AY 2008-09 following the tribunal's order, the tribunal directed the AO to allow depreciation on goodwill.

6. Transfer pricing adjustments:
The AO made adjustments of ?1,17,24,04,607/- for marketing support services and warranty support services. The tribunal referred to its earlier decision for AY 2009-10, directing the bifurcation of marketing team costs based on revenue from AE and third-party sales, and to accept the TSS segment as part of the network division for benchmarking. The tribunal restored the issue to the AO/TPO for fresh examination, following the same principles.

Conclusion:
The appeal was allowed in part for statistical purposes, with specific directions for each issue. The tribunal emphasized adherence to established accounting standards and legal precedents, ensuring fair and accurate assessment of the assessee's income and expenses.