2022 (11) TMI 1351 - AT - Income Tax

TP adjustment - Bifurcation of marketing and business support services segment into ITES and MSS segments - HELD THAT - Merely because services are rendered using IT medium they cannot be termed as ITES. As 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 2023 (1) TMI 1248 - ITAT BANGALORE - Thus we remit the issue back to the AO/TPO for fresh consideration in the light of the DRP s directions for assessment year 2013-2014. Adjustment determined in respect of warranty cost - Assessee provides telephonic support services for standard problems to the customers who purchase the products sold by DGBV in India - TPO made an adjustment on the basis that the Assessee had not made any recovery towards the warranty services and the out of pocket warranty charges paid to third parties and the same was upheld by the DRP - HELD THAT - Assessee s own case for the assessment year 2009-10 2022 (3) TMI 1511 - ITAT BANGALORE direct the TPO to re-examine the issue raised . It is ordered accordingly. This ground is allowed for statistical purposes. Provision for warranty and warranty expenses - As per AO appellant has failed to substantiate the basis of creation of provision for warranty - DRP confirmed the disallowance of provision for warranty on the ground that the scientific basis of the creating the provision was not established - HELD THAT - We notice that issue of allowability of warranty expenses was considered by the Tribunal in assessee s own case for AY 2009-10 2022 (3) TMI 1511 - ITAT BANGALORE We notice that the method of creation of warranty provision has not undergone change and is consistent with what is described in above order. Respectfully following the decision of the coordinate bench in assessee s own case we direct the AO to allow the provision made towards warranty. Disallowance u/s 40(a)(ia) of rebates given to customers - HELD THAT - As per assessee s own case for AY 2010-11 2023 (3) TMI 809 - ITAT BANGALORE we remit this issue to the AO for verification of the agreements which the assessee has entered into with the distributors in relation to discount/rebate transactions and decide the allowability based on the ratio laid down by the Hon ble High Court after giving reasonable opportunity of being heard to the assessee. This ground is allowed for statistical purposes. Addition of deferred revenue - HELD THAT - As in assessee s own case for AY 2010-11 2023 (3) TMI 809 - ITAT BANGALORE claim of the assessee deserves to be accepted and the addition made by the AO as confirmed by the DRP is hereby deleted. This ground accordingly is allowed in favour of the assessee. Disallowance of Marked to Market (MTM) Losses - as argued such losses are incurred to mitigate foreign exchange fluctuation risk in relation to imports and the same is revenue in nature - HELD THAT - MTM loss is related to the revenue assets the same is allowable as deduction. Accordingly we direct the AO to delete the disallowance of loss. Disallowance of expenditure u/s 40(a)(ia) - details of TDS were not furnished for the same - HELD THAT - We notice that with respect to the various expenses verified by the AO the assessee has submitted substantial portion of the evidences and also with respect to expenses claimed u/s.40(a)(ia) the assessee has submitted evidenced to a major extent. It is also noticed that the AO has not disallowed these expenses on the ground that tax was not deducted at source but on the basis that the assessee has not produced the evidences. For a company of assessee s size and the volume of business assessee has managed to submit more than 95% of the supporting documents with respect to the expenses claimed. It is also to be noticed that the AO has not found any discrepancy with respect to TDS compliance in the bills/evidences submitted and has fully allowed to the extend the supporting documents are submitted. Considering the above fact of the case and the decision of Hon ble Tribunal in the case of M/s Infinity Retail Limited 2022 (11) TMI 681 - ITAT MUMBAI we of the considered view that the assessee should be allowed full deduction of these expenses basis that more than 95% of the details are submitted and no discrepancy is found on the same. We therefore direct the AO to delete the additions. This ground is allowed in favour of the assessee. TDS credit - As submitted that in the final assessment order the AO has given credit of TDS less as against reflected in Form 26AS - HELD THAT - We direct the AO verify and grant credit of TDS as appearing in Form 26AS in accordance with law after giving a reasonable opportunity of being heard. Forex loss addition - AO proposed a disallowance on the ground that no evidence was provided to substantiate the same - DRP deleted the addition - HELD THAT - AO 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. DRP rightly appreciated that evidences demonstrating foreign exchange loss had been submitted and that the same cannot be said to be contingent liability. Decided against assessee.

Summary

Issues Involved:
1. Transfer Pricing Adjustments
2. Adjustment in respect of Warranty Cost
3. Disallowance of Provision for Warranty
4. Disallowance under Section 40(a)(ia) for Rebates Given to Customers
5. Addition of Deferred Revenue
6. Disallowance of Marked to Market (MTM) Losses
7. Disallowance of Expenditure under Section 40(a)(ia)
8. Credit for Tax Deducted at Source (TDS)
9. Corporate Tax Issues

Detailed Analysis:

1. Transfer Pricing Adjustments:
The Tribunal addressed the bifurcation of marketing and business support services into IT Enabled Services (ITES) and Marketing Support Services (MSS). The Assessee provides business support services which include telephonic support, marketing support, and logistic support. The TPO had bifurcated these services into ITES and MSS segments and benchmarked them separately, which was upheld by the DRP. However, the Tribunal found that the services rendered by the Assessee do not fall under ITES merely because they use IT medium. The Tribunal remitted the issue back to the AO/TPO for fresh consideration in light of the DRP's directions for the assessment year 2013-2014.

2. Adjustment in respect of Warranty Cost:
The Assessee provides telephonic support services for products sold by its AE under warranty. The TPO made an adjustment on the basis that the Assessee had not made any recovery towards warranty services. The Tribunal noted that the Assessee had indeed recovered the expenses incurred with a markup of 5%. The issue was remitted back to the TPO for re-examination.

3. Disallowance of Provision for Warranty:
The Assessee created a provision for warranty services, which the AO disallowed, stating it was not scientific. The DRP confirmed the disallowance but allowed actual expenses incurred towards warranty. The Tribunal, citing previous decisions, held that the provision was based on a scientific method and directed the AO to allow the provision made towards warranty.

4. Disallowance under Section 40(a)(ia) for Rebates Given to Customers:
The AO disallowed rebates given to distributors, treating the relationship as principal-agent and thus subject to TDS under Section 194H. The Tribunal noted that the relationship was on a principal-to-principal basis and remitted the issue back to the AO for verification of the agreements and to decide the allowability based on the ratio laid down by the Hon'ble High Court.

5. Addition of Deferred Revenue:
The AO added deferred revenue to the taxable income, which was upheld by the DRP. The Tribunal found that the Assessee's method of recognizing revenue proportionately over the period of service was consistent with accounting principles and previous decisions. The addition was deleted.

6. Disallowance of Marked to Market (MTM) Losses:
The AO disallowed MTM losses on hedging transactions, considering them notional and contingent. The DRP directed the AO to verify if MTM gain was offered to tax in earlier years. The Tribunal held that MTM losses related to revenue assets are allowable as deductions and directed the AO to delete the disallowance.

7. Disallowance of Expenditure under Section 40(a)(ia):
The AO disallowed certain expenses for lack of TDS evidence. The Tribunal noted that the Assessee had provided substantial evidence for most expenses and directed the AO to allow the deduction, emphasizing that more than 95% compliance was achieved.

8. Credit for Tax Deducted at Source (TDS):
The Assessee claimed that the AO had not given full credit for TDS. The Tribunal directed the AO to verify and grant credit as per Form 26AS.

9. Corporate Tax Issues:
The Tribunal addressed various corporate tax issues, including forex loss addition deleted by the DRP and directions regarding MTM loss, following previous decisions and providing necessary directions for verification and compliance.

Conclusion:
The Tribunal allowed the Assessee's appeal partly and remitted several issues back to the AO/TPO for fresh consideration and verification. The Revenue's appeal was partly allowed for statistical purposes, with specific directions provided for each issue.