2022 (3) TMI 1511 - AT - Income Tax

TP Adjustment - Trading segment - non consideration of segmental margin as furnished by the Assessee - HELD THAT - TPO s observation that total expenses are to be taken into consideration for computing the operating margin is incorrect as costs pertaining to a totally unrelated segment cannot be taken into consideration while computing the margin of the trading segment - on the cost of Rs. 40.31 crores incurred while rendering the technical and marketing support services the Assessee has charged a mark-up of 5%. More importantly the TPO has taken the very same costs of Rs. 40.31 crores while arriving at the margin of the MSS segment after bifurcating the same into ITES segment and MSS segments. While the DRP directed the TPO to verify and reduce the costs if they were included by the TPO in the operating expenses while arriving at the margin of the trading segment the TPO did not give effect to the same. If the segmental margin as furnished by the Assessee is taken into consideration in terms of which the margin of the Assessee stands at 2.18% the Assessee s international transaction in this segment would be at arm s length. The transfer pricing adjustment in trading segment is set aside. The matter is restored to the files of A.O. / T.P.O. for fresh TP analysis taking into account the above mentioned mistake pointed out. TPO is directed to consider the assessee s reply dated 25.01.2013 vide which it had furnished the segmental details reconciled with the financials. It is ordered accordingly. Technical and marketing support services to the AEs in respect of their direct sales made by the AEs to customers in India - Bifurcation of this segment into ITES and MSS segment - TPO held that services under the technical and marketing services segment is essentially dissemination of information and the assessee is acting as communication channel between the customers and the AEs using IT medium - HELD THAT - The functions performed by the assessee under this segment are prima facie identical for the concerned assessment year and for the assessment year 2013-2014. For assessment year 2013-2014 when the DRP had held that services rendered by the assessee are in the nature of marketing and support services and since no appeal preferred by the Revenue to the ITAT the matter had attained finality. We are of the view that the entire TP issue raised under marketing support services segment needs to be examined afresh by the AO / TPO in the light of the DRP s directions for assessment year 2013-2014. It is ordered accordingly. Since assessee s main issue relating technical and marketing support segments raised in grounds 8 and 8.1 are restored to the AO / TPO for fresh consideration the other subsidiary grounds in this segment also needs to be restored to the TPO for fresh adjudication (As the same would be relevant if TPO rejects the assessee s contentions in ground 8 and 8.1). Therefore ground are restored to the files of TPO for fresh adjudication. Warranty charges receivable determined by TPO - TPO was of the view that the Assessee had not taken note of warranty expenses while arriving at the margin of the technical and marketing support services and was of the view that no mark-up was received on expenses incurred in relation to support provided for the AE s warranty obligation - HELD THAT - The assessee had submitted that the amount of Rs.211.42 crore does not pertains to the sales made by the AEs in India and it pertains solely to the sales made by the assessee. The DRP in its directions held that the assessee was to show that expenses in relation to providing support services for AEs warranty obligation are either reduced from the cost or accounted for separately. The DRP in fact directed that since the services in relation to the warranty obligations are provided by third party service providers and the assessee is only coordinated for the same no mark up is warranted. In the light of the above directions of the DRP which we are in consonance with the TPO is directed to reexamine the issue raised in ground 10 afresh. It is ordered accordingly. Disallowance of expenditure under section 40(a)(ia) - difference between the amount debited to P L Account and the amount for which details of tax deducted at source was furnished - HELD THAT - Reconciliation submitted needs to be verified by the TPO. The DRP in its order directed the A.O. to verify the details submitted by the assessee and wherever the tax has been deducted the claim of the assessee was to be allowed. The DRP also directed the A.O. to verify as to whether the extent of Rs.10, 38, 82, 844 has been subjected to double disallowance - The above directions of the DRP we are in consonance with and the entire issue raised in ground needs to be reexamined by the Assessing Officer taking into consideration the additional evidences now filed before the Tribunal. It is ordered accordingly. Difference between service income disclosed in the P L Account and amount disclosed in the service tax returns brought to tax as undisclosed income - HELD THAT - The detailed submission of the assessee and the reconciliations are not seen considered by the A.O. nor the DRP. Therefore for fresh adjudication of the issue raised in ground the matter is restored to the A.O. The A.O. is directed to afford a reasonable opportunity of hearing before a decision is taken on the issue. It is ordered accordingly. Disallowance of depreciation claimed on assets given on lease and taxation of future lease rentals - HELD THAT - As per section 32 of the I.T.Act for claiming depreciation the assessee should be the owner of the asset and must have used the said asset for the purpose of its business. We find that the there is no distinction between an operating lease and finance lease for the purpose of the Act. The CBDT Circular No.2 dated 09.02.2001 provides that AS 19 requiring capitalization of the asset by the lessees in a finance lease transaction will have no implication on the allowance of depreciation on assets under the Income-tax Act. The right to inspect right to return of equipment were the salient terms noticed by the Hon ble Supreme Court in the case of ICDS 2013 (1) TMI 344 - SUPREME COURT and it was held that the mere fact that the equipment could be transferred to the lessee at the end of the lease period for a nominal value would not take away the lessor s right to claim depreciation - The test of ownership is discernible only on interpretation of various clauses in the lease agreement. The entire lease rental income (subsisting during the lease period) does not accrue in the first year as the same ought to be taxed as and when they accrue over the lease period. When the A.O. has accepted that the interest component of lease would accrue as and when the same is due the same principle would apply to the principle components as well. The stand of the assessee is supported by the judgment of the Hon ble Punjab Haryana High Court in the case of CIT v. Punjab Tractors Co-operative Multipurpose Society Ltd. 1997 (8) TMI 37 - PUNJAB AND HARYANA HIGH COURT . AR on directions from the Bench had furnished primary entries for leasing. However there is no clarity on the same. It is not clear how the A.O. has arrived at the figure of Rs.5, 89, 52, 591 to be disallowed in the current year and how it pertains to the future lease rentals. Therefore in the interest of justice and equity we restore the issue of taxation of future lease rentals (also raised in the ground 13) to the files of the A.O. Disallowance of provision for warranty and expenses incurred towards warranty obligation - HELD THAT - Pursuant to the judgment of the Hon ble High Court of Karnataka 2016 (5) TMI 114 - KARNATAKA HIGH COURT dismissing the appeal filed by the Revenue - In view of the aforesaid reasoning and following the orders of the Tribunal in assessee s own case for assessment years 2002-2003 2003-2004 and 2005-2006 we direct the A.O. to allow provision for warranty as a deduction. It is ordered accordingly. Disallowance for expenditure on warranty - It is stated by AR that the assessee had filed the details along with the submissions dated 08.10.2013 for a further sum of Rs.24.41 crore before the DRP. However the same was not taken note by the DRP. Accordingly the issue of actual expenditure on warranty for the disallowance of Rs.24.76 crore is restored to the files of the A.O. The assessee shall cooperate with the A.O. and shall furnish necessary evidence for having incurred the warranty expenditure failing which the A.O. shall make necessary additions. The issue raised as regards the provision for warranty is allowed and the issue in respect of disallowance of warranty expenditure is allowed for statistical purposes. Addition u/s 69C - unexplained expenditure incurred towards freight inwards outwards or towards other logistic services obtained - HELD THAT - A.O. is not justified in stating that the assessee has not produced necessary evidence in support of its objections. The assessee had given objections and necessary evidence before the AO and the DRP.Therefore in view of the directions of the DRP which we are in consonance with we direct the A.O. to re-examine the issue raised in ground 15 afresh. Addition of VAT refund offered to tax in other assessment years - HELD THAT - It is the claim of the assessee that the entire amount has been offered to tax over a period of three years. The learned AR in his submission had stated that out of difference of Rs.43, 77, 219 brought to tax by the A.O. a sum of Rs.7, 24, 111 was offered to tax in the assessment year 2008-2009 and Rs.36, 53, 108 in the assessment year 2010-2011. It is the claim that the assessee had suffered losses to set off above income hence there is no loss to the Revenue on account of the same not been offered to tax during the relevant assessment year 2009-2010. A.O. is directed to examine whether the assessee had offered to tax Rs.43, 77, 219 in the assessment year 20082009 and 2010-2011. If it is found that the assessee had offered to tax the said income we direct the A.O. to grant corresponding deduction in the relevant assessment year (otherwise the addition of Rs.43, 77, 219 would lead to taxation of income twice). The assessee shall cooperate with the A.O. and shall provide the necessary details for the expeditious disposal of the issue. Nature of expenses - Disallowance of capital expenditure on the erroneous basis that the same was claimed as a revenue expenditure - HELD THAT - It is to be noted that in the final assessment order the A.O. observed that the ledger and other evidences collected during the course of assessment proceedings was thoroughly examined and specific inference was drawn that the assessee company had debited capital expenditure into profit and loss account. AO pursuant to the DRP s directions has not verified again in view of the above said observations. The directions of the DRP we are in approval. In the interest of justice and equity we direct the A.O. to verify once again the claim of the assessee. Disallowance of expenditure disallowed u/s 40(a) in the previous years and reversed in the current assessment year - HELD THAT - The additional evidence now submitted gives the details of the tax deducted at source along with sample invoice copies. For proper adjudication of the issue raised in grounds 18 and additional ground 24 the additional evidences are taken on record. Since the additional evidence had been admitted necessarily the same has to be examined by the A.O. A.O. after considering the submissions made before him the DRP and the additional evidence filed before the Tribunal shall take a decision in accordance with law after affording a reasonable opportunity of hearing to the assessee. It is ordered accordingly. Short credit of TDS - HELD THAT - We direct the A.O. to give correct credit for TDS in accordance with law. Set-off of loss brought forward - HELD THAT - We direct the A.O. to examine the issue whether the carry forward losses is to be set off or not. It is ordered accordingly. Disallowing in payment for Microsoft Licenses - HELD THAT - The assessee s AE centrally procure licences from independent unrelated third party vendors on behalf of the Dell Group for their usage and for usage in the products sold. The cost incurred by the AE in this regard are allocated to each of the Dell group entities on the basis of usage of licences by them and are recovered from them at cost.The assessee had also paid Customs Duty on import of licences. The licences so procured by the assessee are used in the products sold by it. In absence of installing such licences the product sold by the assessee cannot be utilized by the cutomers. Therefore the usage of licences cannot be doubted. Allocation of cost is as per the usage and on the payment made tax is deducted at source. In absence of any material the TPO cannot determine an adjustment on the basis of mere conjecture and surmises. In any event in an adhoc manner ALP cannot be determined at Nil. Moreover the above transactions are undertaken by the assessee on a year to year basis and have not been questioned in any of the subsequent years by the TPO. DRP s action in upholding the objections of the assessee relating to mark up of warranty cost - HELD THAT - It is to be noted that the DRP s direction was not given effect to and therefore ground is misconceived. However this issue is connected with ground 10 raised in assessee s appeal. Since we have directed the AO / TPO to reexamine ground 10 of the assessee s appeal ground 4 raised in Revenue s appeal is also restored to the files of the AO / TPO. Disallowance of Forex loss - DRP deleted the addition - HELD THAT - O completely ignored the detailed workings on forex loss. Having mentioned in the order that sample invoice copies were submitted the AO erred in contending that no evidences were provided by the assessee. The DRP rightly appreciated that evidences demonstrating foreign exchange loss had been submitted and that the same cannot be said to be contingent liability.

Summary

Issues Involved:

1. TP Adjustment in Trading Segment.
2. TP Adjustment in Technical and Marketing Support Services Segment.
3. TP Adjustment for Warranty Charges.
4. Disallowance of Expenditure under Section 40(a)(ia).
5. Difference between Service Income and Service Tax Returns.
6. Disallowance of Depreciation on Leased Assets.
7. Disallowance of Provision for Warranty and Warranty Expenses.
8. Addition under Section 69C.
9. Addition of VAT Refund.
10. Disallowance of Capital Expenditure.
11. Disallowance of Reversed Expenditure under Section 40(a).
12. Short Credit of TDS.
13. Set-off of Loss Brought Forward.
14. DRP's Directions on Depreciation Cost Allocation.
15. Disallowance of Payment for Microsoft Licenses.
16. Mark-up on Warranty Cost.
17. Disallowance of Forex Loss.

Detailed Analysis:

1. TP Adjustment in Trading Segment:
The Assessee's trading segment involves importing and selling IT hardware products. The TPO proposed a TP adjustment by ignoring installation revenue and segmental details provided by the Assessee. The DRP directed the TPO to reconsider certain aspects, but the final assessment did not reflect these directions. The Tribunal admitted additional evidence and directed the TPO to re-examine the segmental details reconciled with financials.

2. TP Adjustment in Technical and Marketing Support Services Segment:
The TPO bifurcated the segment into ITES and MSS segments, allocating costs arbitrarily and selecting non-comparable companies. The DRP upheld the TPO's action. The Tribunal noted that similar services were considered as marketing support services in AY 2013-14 and directed the TPO to re-examine the issue afresh.

3. TP Adjustment for Warranty Charges:
The TPO attributed a portion of warranty expenses to MSS segment and imposed a mark-up. The DRP directed verification of whether warranty expenses incurred on behalf of AEs were separately accounted. The Tribunal directed the TPO to re-examine the issue in light of the DRP's directions.

4. Disallowance of Expenditure under Section 40(a)(ia):
The AO disallowed expenses for which TDS details were not provided. The DRP directed verification of TDS details and double disallowance. The Tribunal admitted additional evidence and directed the AO to re-examine the issue considering the additional evidence.

5. Difference between Service Income and Service Tax Returns:
The AO added the difference between service income in financials and service tax returns as undisclosed income. The Tribunal noted that Rs. 54.81 crores represented service tax paid on reverse charge basis and directed the AO to re-examine the reconciliation provided by the Assessee.

6. Disallowance of Depreciation on Leased Assets:
The AO disallowed depreciation on leased assets, treating the lessee as the owner. The Tribunal found that the Assessee was the owner and directed the AO to re-examine the issue, including whether the lessee claimed depreciation.

7. Disallowance of Provision for Warranty and Warranty Expenses:
The AO disallowed provision for warranty and actual warranty expenses. The Tribunal, following earlier orders in Assessee's cases, allowed the provision for warranty and directed the AO to verify evidence for actual warranty expenses.

8. Addition under Section 69C:
The AO added unexplained freight expenses under Section 69C. The Tribunal found that the Assessee provided explanations and evidence and directed the AO to re-examine the issue.

9. Addition of VAT Refund:
The AO added the difference between VAT refund recognized and disbursed as undisclosed income. The Tribunal directed the AO to verify if the Assessee offered this amount to tax in earlier or subsequent years and to grant corresponding deductions.

10. Disallowance of Capital Expenditure:
The AO disallowed capital expenditure claimed as revenue expenditure. The Tribunal directed the AO to verify the Assessee's claim that the expenditure was capitalized and not claimed as revenue expenditure.

11. Disallowance of Reversed Expenditure under Section 40(a):
The AO added reversed expenditure disallowed in previous years. The Tribunal admitted additional evidence and directed the AO to re-examine the issue, considering the additional evidence.

12. Short Credit of TDS:
The Assessee claimed short credit for TDS. The Tribunal directed the AO to give correct credit for TDS in accordance with law.

13. Set-off of Loss Brought Forward:
The Assessee claimed set-off of brought forward loss from AY 2008-09. The Tribunal directed the AO to examine if the carry forward losses to be set off were correct.

14. DRP's Directions on Depreciation Cost Allocation:
The Revenue challenged the DRP's direction to adopt Rs. 2.99 crore as depreciation cost in the trading segment. The Tribunal restored the issue to the AO/TPO for re-examination.

15. Disallowance of Payment for Microsoft Licenses:
The TPO determined ALP as Nil for reimbursement of Microsoft licenses. The DRP accepted the Assessee's objections. The Tribunal upheld the DRP's decision, noting the usage of licenses and cost allocation.

16. Mark-up on Warranty Cost:
The Revenue challenged the DRP's decision on mark-up on warranty cost. The Tribunal restored the issue to the AO/TPO for re-examination.

17. Disallowance of Forex Loss:
The AO disallowed forex loss as contingent liability. The DRP allowed the Assessee's claim. The Tribunal upheld the DRP's decision, noting that the forex loss was not contingent and was supported by evidence.

Conclusion:
The Tribunal's order involves multiple issues related to TP adjustments, disallowances, and additions. Several issues were restored to the AO/TPO for re-examination, considering additional evidence and detailed explanations provided by the Assessee. The Tribunal upheld the DRP's decisions on certain issues, providing relief to the Assessee.