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2018 (7) TMI 224 - AT - Income TaxDisallowance of Provision for Warranty - Held that - Merely because the assessee had returned back the provisions in subsequent year cannot be a basis for disallowing the assessee s claim in the current year, particularly when the assessee had given specific basis for making warranty provisions. The Hon ble Apex Court in case of Rotork Controls India (P) Ltd. (2009 (5) TMI 16 - SUPREME COURT OF INDIA) has given the criteria which are fulfilled by the assessee herein. Thus, issue is squarely covered in favour of the assessee Disallowance of Liquidated Damages ( LD ) u/s 37(1) - Held that - Assessing Officer as well as the CIT(A) has not taken correct cognizance as to liquidated damages incurred by the company and accordingly deducted by the customers from the payment of sale proceeds is as per the agreed terms and contract. All these factors have not been properly assessed by the Assessing Officer as well as CIT(A). The Ld. AR s contention that these provisions have been set off in the next Assessment Year i.e. 2008-09 the same has to be verified at the level of the Assessing Officer. Therefore, we direct the Assessing Officer to verify all these documents along with the claim of set off of this claim in the year 2008- 09. Therefore, this issue is restored to the file of the Assessing Officer. Needless to say, the Assessing Officer has to give proper opportunity of hearing to the assessee by following principles of natural justice. Therefore, Ground No. 2 and 2.1 is partly allowed for statistical purpose. Adjustment made u/s 145A - Unutilized Countervailing duty - Held that - Assessing Officer as well as the CIT(A) has not taken the cognizance of the actual calculation relating to the counter valley duty and service tax paid by the assessee. Therefore this needs to be examine at the level of the Assessing Officer. We direct the Assessing Officer to look into this aspect as per the provisions of Section 145A as well as in the light of the provisions of given under the Income Tax Act and decide this issue afresh. Needless to say, the assessee be given opportunity of hearing by following principles of natural justice. Addition of Countervailing Duty paid on imported goods - additional ground - Held that - Countervailing Duty of ₹ 1,84,25,285/- paid on imported machinery is permissible deduction in accounting the total income for the ay 2007-08 and hence the assessee is entitled to deduction of ₹ 1,84,25,285/-. This ground was not at all taken before the lower authorities at any stage. Therefore, this is a factual ground which cannot be entertained at this stage and therefore, the additional ground is rejected. Transfer pricing adjustment - Held that - iT is pertinent to note that recovery of expenses such as travel, telephone expenditure of ₹ 2,54,531 are third party costs and hence no mark up is required as per the Transfer Pricing Provisions. In relation to support of dedicated employees and ad-hoc support sample cases of salary cost of employees and the corresponding amount recovered from AEs below shows that a markup of more than 5% was charged. The Company has earned a high mark up over the salary cost paid by the Company to its employees. These contentions of the Ld. AR are supported by the documentary evidences and were not taken into cognizance by the TPO/Assessing Officer as well as DRP Disallowance being the custom duty on leased machine is not proper on behalf of the Assessing Officer - Held that - It is pertinent to note that the assessee the company capitalized the value of the machine in the books of accounts inclusive of customs duty. Therefore, the customs duty paid by the company was never debited to the P&L account, and thus, disallowing customs duty is not proper on behalf of the Assessing Officer. Disallowance of countervailing Duty paid in earlier years and shown as assets in the balance sheet in this year as written off - Held that - As pointed out by the Ld. AR that though countervailing duty of ₹ 2,278,207/- and ₹ 18,425,285/- paid in AY 2006-07 and 2007-08 was allowable deduction in the respective assessment years, however, the Company could not claim the same in computing the total income for the AY 2006-07 and AY 2007-08 under erroneous misconception that the same was creditable against other duties / taxes payable. From the perusal of the submissions of the Ld. AR it can be seen that in this A.Y. 2008-09, the issue of countervailing duty was allowed by the Assessing Officer with the proper direction of the DRP. Therefore, there is no need to interfere with the same. Ground dismissed.
Issues Involved:
1. Disallowance of provision for warranty expenses. 2. Disallowance of liquidated damages. 3. Adjustment under Section 145A of the Income Tax Act for unutilized countervailing duty. 4. Additional ground for deduction of countervailing duty on imported machinery. 5. Transfer pricing adjustment for support services of employees. 6. Disallowance of provision for liquidated damages for delay in supply. 7. Disallowance of custom duty on leased machine. 8. Disallowance of countervailing duty paid in earlier years and written off. Detailed Analysis: 1. Disallowance of Provision for Warranty Expenses: The CIT(A) upheld the disallowance of ?1,76,90,014/- on account of warranty provision estimated at 10% of sales. The assessee argued that the provision was based on a systematic and scientific manner considering various factors such as the life of machines and expected service costs. The Tribunal referenced the Supreme Court's decision in Bharat Earth Movers vs. CIT and Rotork Controls India (P) Ltd. v. CIT, which established criteria for deductibility of warranty provisions. The Tribunal found that the assessee's provision met these criteria and allowed the appeal, reversing the CIT(A)'s decision. 2. Disallowance of Liquidated Damages: The CIT(A) upheld the disallowance of ?1,34,98,850/- for liquidated damages provided for delays in supply. The assessee contended that these damages were contractual obligations and not unilateral deductions. The Tribunal noted that the liquidated damages were incurred per the terms of the purchase orders and agreements with public sector banks. The Tribunal directed the Assessing Officer to verify the documents and the claim of set-off in the subsequent assessment year, restoring the issue for further examination. 3. Adjustment under Section 145A for Unutilized Countervailing Duty: The CIT(A) upheld the addition of ?1,99,98,194/- under Section 145A for unutilized countervailing duty, arguing it should be added to the value of closing inventory. The assessee argued that their accounting method was in conformity with ICAI guidelines and had no impact on net profit. The Tribunal directed the Assessing Officer to re-examine the issue, considering the provisions of Section 145A and the actual calculations related to countervailing duty and service tax. 4. Additional Ground for Deduction of Countervailing Duty on Imported Machinery: The assessee claimed a deduction for countervailing duty of ?1,84,25,285/- paid on imported machinery. The Tribunal rejected this additional ground, noting it was not raised before the lower authorities and was a factual issue that could not be entertained at this stage. 5. Transfer Pricing Adjustment for Support Services of Employees: The Assessing Officer made an addition of ?4,10,274/- for transfer pricing adjustment related to support services of employees deputed to associated enterprises. The Tribunal found that the company had charged more than the proposed 5% mark-up and allowed the appeal, reversing the Assessing Officer's decision. 6. Disallowance of Provision for Liquidated Damages for Delay in Supply: The Assessing Officer disallowed ?8,50,077/- for liquidated damages related to delays in supply. The Tribunal directed the Assessing Officer to verify the documents and the claim of set-off in the subsequent assessment year, restoring the issue for further examination. 7. Disallowance of Custom Duty on Leased Machine: The Assessing Officer disallowed ?1,08,930/- being the custom duty on a leased machine, arguing it should have been capitalized. The Tribunal found that the company had capitalized the value of the machine inclusive of customs duty and allowed the appeal, reversing the Assessing Officer's decision. 8. Disallowance of Countervailing Duty Paid in Earlier Years and Written Off: The Assessing Officer disallowed ?2,07,03,492/- for countervailing duty paid in earlier years and written off in the current year. The Tribunal upheld the Assessing Officer's decision, noting that the expenditures were of prior periods and could not be allowed as deductions in the current year. Conclusion: The Tribunal allowed the appeals partly for statistical purposes, directing further verification and examination by the Assessing Officer on several issues while allowing some claims and rejecting others based on the evidence and legal precedents. The judgments emphasized the necessity of adhering to contractual obligations, proper accounting methods, and the principles of natural justice in tax assessments.
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