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2021 (11) TMI 967 - AT - Income TaxTP Adjustment - markup of 4% and 5% has been disallowed by the TPO and accordingly enhanced the income of the assessee - main argument of the ld. AR was that these transactions are benchmarked by using TNMM and furnished that TP documentation whereas the TPO did not follow any prescribed method and the entire markup is disallowed without giving any reasons - HELD THAT - The observation of the revenue that the parent company gets benefited by better synergies, scale of economy, better coordination and reporting cannot be accepted. While the assessee avails supervision services from its AEs and pays markup charges, it also provides such services to the AEs for their third party contracts and receives markup charges. The pricing basis and the results arising from the same have been accepted by the TPO. Disallowing the mark-up on receipt of services while in-principle accepting the provision of similar services rendered having similar intent and basis of pricing cannot be valid ground to disallow the markup. It is not out of contest to note that no such disallowance has been made on the markup in the case of the assessee AY 2007-08 to 2012-13 and AY 2015-16. Hence, keeping in view, the entire facts and circumstances, the contention of the revenue that the AE invariably derives some benefit and hence no markup should be charged, cannot be accepted. Provision for warranty disallowance - assessee contended that the issue of warranty is a recurring provision made in the past several years - DRP for both the years in question directed the AO to modify the disallowance after verifying the provisions made in the earlier years, its actual utilization and writing back of unutilized provision for taxation - HELD THAT - Since, the provision for warranties has been made @ 3% and the unutilized portion has been reversed at a regular intervals from year to year, the appellant has been consistently following the policy of making provision for warranty as per the terms of the contract, the ITAT for AY 2008-09, AY 2010-11, AY 2011-12, AY 2012-13 AY 2013-14 has allowed provision for warranty, the provision made during AY 2014-15 is on same basis as in earlier years is hereby allowed. Allowability of provision for liquidated damages - HELD THAT - Since, the provision for liquidated damages has been made regularly and allowed in P L account and since the unutilized portion has been reversed at a regular intervals from year to year, since, the ITAT for AY 2008-09, AY 2010-11, AY 2011-12, AY 2012-13 AY 2013-14 has allowed provision for liquidated damages, the provision made during AY 2014-15 is on same basis as in earlier years is hereby allowed. Provision for anticipated losses - HELD THAT - The primary goal of financial accounting is to provide useful information to management, shareholders, creditors, and others properly interested; the major responsibility of the accountant is to protect these parties from being misled. The primary goal of the income tax system, in contrast, is the equitable collection of revenue, the major responsibility of the state is to protect the public finance. Hence, any presumptive equivalency between tax and financial accounting would be unacceptable. There are other reasons why taxation might deviate from accounting concepts of income. While the most obvious purpose of taxation is to finance public expenditure, the extent and magnitude of taxation in modern economies also makes it a powerful instrument of government economic and social policy in its own right. While it is true that some taxation measures might be introduced to improve economic decision making, others are implemented for very different reasons. The concept of tax expenditures ably describes the situation that those provisions of the income tax containing special exemptions, deductions and other tax benefits were really methods of providing benefits by deviating from the system of profits derived following accounting standards. Thus, we find that wherever exemption or deductions are called for, the same has been provided explicitly in the provision of the Income Tax Act. Even, the provision for warranty, liquidated damages have been allowed taking into consideration the matching principle of revenue accounting. In the instant case, we further find that no cogent evidences have been furnished by the assessee as to how this loss has been arrived at. Charging of interest u/s 234A - HELD THAT - We hereby direct the AO to verify the date of filing of return by the assessee with regard to the timeline extended for the instant year and charge interest accordingly.
Issues Involved:
1. Markup on Services availed (A.Y. 2014-15 & 2016-17) 2. Provision for warranty (A.Y. 2014-15 & 2016-17) 3. Provision for anticipated losses (A.Y. 2016-17) 4. Liquidated Damages (A.Y. 2014-15) 5. Charging of interest u/s 234A (A.Y. 2014-15) Issue-wise Detailed Analysis: 1. Markup on Services availed (A.Y. 2014-15 & 2016-17): The appellant, Humboldt Wedag India Private Limited (HW India), a subsidiary of KHD Humboldt Wedag International AG Cologne (KHD AG), engaged in services like designing and engineering, project management, and supervision of erection and commissioning of cement plants, undertook various international transactions with its associated enterprises (AEs). The TPO disallowed the markup of 4% on supervision services and 5% on central services charged by the AE, enhancing the income based on observations for the year 2010-11. The TPO argued that the AE was not justified in charging any markup as the primary beneficiary of the services was the assessee, and the arm’s length price of the services was decided at the actual cost. The assessee contended that these transactions were benchmarked using TNMM, and the TPO did not follow any prescribed method. The tribunal found that disallowing the markup on receipt of services while accepting the provision of similar services rendered was not valid, and no such disallowance was made in previous years. Thus, the contention of the revenue that the AE invariably derives some benefit and hence no markup should be charged was not accepted. 2. Provision for warranty (A.Y. 2014-15 & 2016-17): The assessee argued that the provision for warranty is a recurring provision made in past years and allowed by various judicial authorities. The DRP directed the AO to verify the provisions made in earlier years, its actual utilization, and writing back of unutilized provision for taxation. The tribunal examined the warranty clause in the agreements and found that the provision for warranty was made on a scientific and reasonable basis at 3% of the contract value based on historical trends. The tribunal noted that the ITAT had allowed the provision for warranty in previous years (AY 2008-09, AY 2010-11, AY 2011-12, AY 2012-13, and AY 2013-14). Thus, the provision made during AY 2014-15 was allowed. 3. Provision for anticipated losses (A.Y. 2016-17): The anticipated loss claimed by the assessee with regard to Shri Cements Ltd. was disallowed by the AO, and the DRP upheld the disallowance due to lack of contradicting details. The tribunal emphasized that accounting and taxation serve different purposes, and the primary goal of the income tax system is the equitable collection of revenue. It found that no cogent evidence was furnished by the assessee to prove the liability and how the loss was arrived at. Hence, the tribunal upheld the decision of the DRP. 4. Liquidated Damages (A.Y. 2014-15): The assessee, engaged in industrial plant engineering and supply of equipment, entered into contracts containing clauses for liquidated damages for default of delivery. The DRP directed the AO to verify the provisions made in earlier years, actual utilization, and writing back of unutilized provision to taxation. The tribunal noted that the provision for liquidated damages was made regularly, allowed in the P&L account, and reversed at regular intervals. The ITAT had allowed the provision for liquidated damages in previous years (AY 2008-09, AY 2010-11, AY 2011-12, AY 2012-13, and AY 2013-14). Thus, the provision made during AY 2014-15 was allowed. 5. Charging of interest u/s 234A (A.Y. 2014-15): The tribunal directed the AO to verify the date of filing of the return by the assessee concerning the extended timeline for the year and charge interest accordingly. Conclusion: The appeal of the assessee in ITA No.8119/Del/2018 was allowed, and the appeal in ITA No.475/Del/2021 was partly allowed. The order was pronounced in the open court on 18/08/2021.
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