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TMI Blog2016 (10) TMI 175X X X X Extracts X X X X X X X X Extracts X X X X ..... is not the case of AO that the non-resident payee had any PE in India and, therefore, the business income in the hands of non-resident payee could not be taxed in India. Further, we are in agreement with the detailed analysis carried out by ld. CIT(A) in holding that no technical services were provided to the assessee and the services were in the nature of normal maintenance/ repairs/ replacement etc., performed outside India. Therefore, such payments did not fall within the purview of Explanation 2 to section 9(1)(vii) of the Act. Further, we are in agreement with ld. CIT(A)’s conclusion regarding taxability under the provisions of relevant tax treaty/ DTAA, wherein after elaborate discussion he has concluded that no technical knowledge was made available to assessee. From the above it is clear that the amount paid by the assessee to non-resident was not chargeable to tax in terms of the provisions of the Act or DTAA. - Decided in favour of assessee. Revision u/s 263 - justification for writing off of stock as per the books of a/c - Held that:- It cannot be said that by adopting an ad hoc method of arriving at net realizable value by impairing the value of service stock by 25%, in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... income. This specific finding of ld. CIT(A) has not at all been controverted by the department by bringing any evidence on record and, therefore, we confirm the findings of ld. CIT(A) in deleting the disallowance of 79,18,827/- made on account of interest expenditure relatable to earning of exempt income by AO. In the result this ground is dismissed. X X X X Extracts X X X X X X X X Extracts X X X X ..... llowing ground of appeal: "Whether ld. CIT(A) was correct on facts and circumstances of the case and in law in deleting the addition of ₹ 2,55,57,990/- made by the AO on account of payment under AMC contract". 5.1. Brief facts apropos this issue are that ld. CIT in his order passed u/s 263 dated 18.3.2009 contained at page 131 onwards of the paper book, noted from the Notes to Account that assessee had made payment of AMC of ₹ 255.58 lakhs on which no tax was deducted. This payment was made to following persons: Particulars Country Amount paid (Rs) Gilat Satellite Networks Limited Israel 17,700,589 Telesystems International Corporation USA 2,769,374 Agilis Communication Technologies Pte Ltd. Singapore 4,673,272 Gilat Satellite Networks Limited Holland 113,150 Miscellaneous 301,586 Total 25,557,971 5.2. Ld. CIT passed order u/s 263 primarily on the ground that this issue had not been examined by the AO. AT his juncture we may point out that Tribunal vide its order dated 8.10.2010 has upheld the action of ld. CIT on this count. Accordingly the AO has passed the impugned assessment order. 5.3. Before AO, the assessee, vide its letter dated 15.10.20 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the non-resident payee is chargeable to tax in India in the hands of non-resident payee or not. The applicability of section 195 will be decided accordingly. Reliance was placed on the decision of Hon'ble Supreme Court in the case of Gee India Technology Vs. CIT 327 ITR 456. 5.7. As regards the chargeability of income under the provisions of the Act in relation to a sum paid to the non-resident assessee, the assessee pointed out that the same is to be determined on the basis of provisions of the Act as well as the provisions of DTAA and the provisions of the Act or the provisions of the DTAA, whichever is more beneficial can be resorted to by the assessee. In this regard reliance was placed on the decision of Hon'ble Supreme Court in the case of Hindustan of India and another vs. Azadi Bachao Andolan & another 263 ITR 706. The assessee submitted that the said services being in the nature of routine repairs/ replacement and maintenance, were not in the nature of FTS since there was no technical, managerial or consultancy services, which was being provided by Gillette Israel to the assessee. Therefore the payment did not fall within the provisions of Explanation to section 9(1)(vii ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to the Hub Station Equipment and all assistance necessary or desirable to overcome the Major Degradation. 2.6 Product Replacement and Repair: Throughout the tern of this agreement, Gilat shall repair or replace any failed or defective part or parts of the Hub Station Equipment in accordance with the provisions of Sub-Paragraphs 2.6.1 through 2.6.4. 2.6.2 The time within which the 'Buyer must send to Gilat Hub Station Equipment in accordance with Sub Paragraph 2.6.1 is the earlier of (i) the Buyer accumulating defective parts consisting of twenty five percent (25%) of the Buyer's stock of spare parts, and (ii) sixty (60) days of the Buyer discovering a defect in the Hub Station Equipment or any parts thereof. 2.6.3 Upon receipt by Gilat of such defective Hub Station Equipment Gilat shall repair or replace such Hub Station Equipment or parts thereof found by Gilat to be defective. Gilat shall deliver to Buyer each repaired or replacement unit of Hub Station Equipment accompanied by a written "failure analysis" setting forth a description of the fault found and the corrective action taken by Gilat. Gilat shall bear the cost of returning to the Buyer of Mumba ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e services were in the nature of normal maintenance/ repairs/ replacement etc., performed outside India. Therefore, such payments did not fall within the purview of Explanation 2 to section 9(1)(vii) of the Act. Further, we are in agreement with ld. CIT(A)'s conclusion regarding taxability under the provisions of relevant tax treaty/ DTAA, wherein after elaborate discussion he has concluded that no technical knowledge was made available to assessee. From the above it is clear that the amount paid by the assessee to non-resident was not chargeable to tax in terms of the provisions of the Act or DTAA. 8.3. In view of above discussion, the revenue's appeal is dismissed. ITA 5907/Del/2010 (Assessee's appeal for AY 2006-07 u/s 263): 9. This appeal, preferred by the assessee, arises out of CIT, Delhi-IV's order dated 30.09.2010 passed u/s 263 of the Income-tax Act, 1961, relating to AY 2006- 07. 10. The assessee continued to carry on the same business as in AY 2004-05. The assessee had filed return of income declaring income of ₹ 22,83,76,292/- which was subsequently revised at an income of ₹ 44,18,870/-. The assessment was completed after making following three addition ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... esented only 25% of the cost of spares and accessories, which was written off during the financial year under consideration. Further an amount of ₹ 103.78 lakhs (which had been written off in the earlier year), was written back (i.e. it was offered as income), during the financial year and, hence, it was only the net amount of ₹ 458.13 Lakhs, which was ultimately charged to the P&L A/c. The assessee further explained as under: "The Customer Care Organization (company known as "CCO") spares comprise of various small value items (such as cables, router and modem parts, VSAT components) that are required for the purpose of servicing the original equipments located at customers' locations and also located at HCL's premises. The CCO inventory comprises of small value items but is numerous in quantity, and widely issued to various locations, departments and regions. The main equipment for which such spares are maintained, it is earnestly submitted, has a useful life of 4/5 years." 11. The assessee's main plank of argument was that accounting policy had been consistently followed by the assessee company and the choice of the method of valuation of inventories rested with th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... entitle the AO to issue notice for reassessment. Ld. counsel referred to page 28 of the PB, wherein the assessee's reply dated 3.12.2008 to the AO in connection with the queries raised is contained in which assessee had given justification for writing off of stock as per the books of a/c as under: 6. Justification for the write off of stock as per the books of accounts. The breakup of the write off as indicated under schedule 16 to the financials is follows Break up of write down Amount Description Depreciation of spares 56,191,665.00 Note 1 below Provision of inventory pertaining to more than 365 days -10,378,048.00 Note 2 below Note 1: An amount of R.s 5.61 crores, represent the write off of spares and accessories required to service the main equipment that has been installed at Customer sites across India .These stores and spares are purchased in bulk and kept in the stores, and the company follows a policy of writing off25% of the costs of these spares ,on a YOY basis .Since these spares had already been depreciated by 75% as on lst April-05, the remaining 25% of depreciation on these spares had been charged to COGS and it is the value has been included i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ories on account of impairment of stock to the extent of ₹ 3,47,216/- has been disallowed. On an appeal, the learned CIT(A) reduced the disallowance to ₹ 25% of total disallowance of ₹ 3,47,216/- made by the AO." 11.3. Ld. counsel referred to para 17 of the Tribunal's order wherein the Tribunal had taken note of various decisions relating to valuation of stockin- trade at cost or market price, whichever is lower, and, had deleted the disallowance of assessee's claim to the extent of 25% sustained by ld. CIT(A) and allowed the assessee's total claim made in the return of income. Ld. counsel furth4er referred to the decision of Hon'ble Delhi High Court in the case of M/s Hughes Communication India Ltd., wherein also the issue before the Hon'ble Delhi High Court was whether ld. ITAT erred in deleting the addition of ₹ 90,35,298/- made by the AO on account of provisions for impairment of stock. Ld. counsel referred to para 7 of the decision, wherein the Hon'ble High Court, inter alia, observed that on a question of valuation of the closing stock any alleged difference or discrepancy tends to balance itself out over a period of years if the same method is consis ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... this submission is contrary to the finding of the Tribunal which has referred to the assessee's letter dated 27.12.2006 submitted before the assessing officer along with the necessary details in support of the valuation. These details have also been extracted by the Tribunal in para 11 of its order. We are, therefore, unable to accept the contention of the revenue that the claim of the assessee remains unsupported." 12.3. Referring to the aforementioned observations, ld. CIT(DR) submitted that in original assessment proceedings, AO should have discussed supporting evidence for valuation of stock. The valuation could not be made on ad hoc basis. Thus, assessment order has been passed without due application of mind. 12.4. Ld. CIT(DR) relied on the decision of Hon'ble Supreme Court in the case of Malabar Industries and also referred to the decision in the case of NIIT 60 Taxman.com 313, wherein it has been held that merely raising of query would not be sufficient without proper application of mind and whether proper application of mind is there or not, is to be decided keeping in view the level of enquiry expected from an authority, conversant with nuances of law. 13. Ld. Sr. cou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... material as estimated realizable value. Since the finding recorded by the CIT(A) has not been controverted by Ld. D.R. We, therefore, do not find any reason to interfere in the finding of CIT(A) for deleting the addition on account of valuation of closing stock of finished goods in respect of its defective obsolete stock." 13.3. Ld. counsel further referred to page 142 of the PB wherein the decision of Hon'ble Delhi High Court in the case of CIT Vs. Samsung India Electronics Ltd. is contained and pointed out that in para 15 the Hon'ble High Court has, inter alia, observed that the method of valuation of closing stock can be disturbed only if it is found that the method of valuation is such that true profits and gains cannot be deduced there from. In this regard Hon'ble Delhi High Court has referred to the decision in the case of CIT Vs. Bharat Commercial and Industrial Ltd. 240 ITR 256 wherein the loss arising out of the reduced valuation of slow moving raw material on the basis of estimated realizable value was held allowable. 13.4. Ld. counsel further referred to page 77 of PB, to point out that out of the total revenue of ₹ 2538368049, the revenue from service was S ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o account impairment in stock was determined @ 25%. Both these statements on same accounts cannot be reconciled. 14.2. Ld. counsel has relied on the decision in the case of M/s Hughes Network Systems (supra). In this case in para 18 the Tribunal has noted that the assessee had furnished the details of inventory with their respective net realizable value as at the end of the year. The AO had not pointed out any defect or irregularity in the details of rate adopted by the assessee for valuing the stock at net realizable value by making any query or by undertaking exercise to ascertain the net realizable value as at the end of the irrespective year. Further, AO failed to point out any specific item in respect of which the net realizable value adopted by the assessee was found to be not justified or excessive having regard to the nature of the item and the cost incurred by the assessee. Thus, in this case specific details regarding net realizable value of inventory was made available by assessee. Therefore, this decision is not applicable to the facts of the case because in the present case the assessee has simply reduced 25% valuation considering the same as to reduce the value of in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d of valuation. Under such circumstances, the assessment order was prejudicial to the interests of revenue. Ld. CIT(A) completely overlooked the fact that true profits of an year could not be deduced without resorting to proper technical estimate of net realizable value. He failed to appreciate that spares had no shelved life of 4/5 years inasmuch as assessee itself had written back considerable sum by way of write back. It is true that in the long run this exercise will be revenue neutral keeping in view the concept of going concern of an organization but the main object of employing correct method of accounting is to determine the true profits of an year. We, accordingly, uphold the order passed by ld. CIT u/s 263. 15. In the result, assessee's appeal is dismissed. ITA no. 5651/Del/2012 ( Revenue's appeal for AY 2006-07) : 16. This appeal, preferred by the revenue, arises out of CIT(A)-XVIII, New Delhi's order dated 24.08.2012 in appeal no. 233/11-12 relating to AY 2006-07. 17. The AO passed the assessment order u/s 143(3) read with section 263 of the I.T. Act, on 9.12.2011, determining total income at ₹ 29,36,07,013/- as against the returned income of ₹ 22,83,7 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ness of which had not been questioned in the past. (b) Where accounts are prepared without disclosing the real written down value albeit notional loss on written down value, it is duty of AO to determine the taxable income by making such computation as he thinks fit. 17.4. The AO, after detailed discussion made the addition of ₹ 458.13 lakhs, inter alia, observing that the loss claimed by assessee was on account of presumptive write off of goods. 17.5. Ld. CIT(A) after considering detailed submissions, as reproduced in his order, deleted the addition for following reasons: (i) The inventory used for the purpose of servicing original equipment comprised of small value items but enormous in quantity issued to various locations, departments and regions. The assessee valued such inventory at the lower of cost or net realizable value, which ever was less every year in accordance with the accounting standard II, issued by the Institute of Chartered Accountants of India. (ii) The assessee estimated 4-5 years as usual academic life of these spare parts as per industry norms and, accordingly, every year 25% of the value of these spare parts was written down to the P&L A/c. ( ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... vident that the claim was advanced in both th cases on the basis of proper estimation on technical basis resorted by assessee and not on ad hoc basis as has been done in the present case. We are in agreement with the contention of ld. counsel for the assessee that the AO's conclusion that there was no fall at all in the value of spares also is not correct because it cannot be held that there was no decline in the net realizable value of spares. However, estimation should have proper technical backing. 20.1. We are in agreement with the contention of ld. CIT(DR), in view of the decision of Hon'ble Supreme Court in British Paints (supra), that if a method employed by assessee is not resulting into computation of true profits of business of an year then the same can be ignored by AO. In view of section 145(3), the AO is required to examine the correctness of method employed by assessee in preparation of its accounts. The method employed by assessee should be such from which true profits of an year can be deduced. However, in the present case since the assessee has debited the P&L a/c merely on presumptive basis, therefore, we restore the matter to the file of AO for providing the ass ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing the fact that while making the disallowance under Sections 14A (2) and 14A (3) of the Act read with Rule 8D, the assessing officer has failed to discharge the statutory onus of recording the finding that any expense was, in fact, incurred in connection with earning of tax free dividend income. 1.3 That in the facts & circumstances of the case the Ld. Commissioner of Income-tax (Appeals) erred in law in sustaining the disallowance u/s 14A read with Rule 8D despite the fact that the calculation of disallowance as per the formula prescribed under Rule 8D would be 'NI L' 1.4 Without prejudice to the above grounds and in the alternative, the Ld . Commissioner of Income-tax (Appeals) erred in law, in the facts & circumstances of the case in sustaining the disallowance of ₹ 27,42,886/- by ignoring the fact that in no view of the matter, the maximum amount of disallowance by considering the average of the value of the relevant investments, should not exceed ₹ 7,50,000/- only. 24. Apropos ground no. 1, as against disallowance of ₹ 1,06,61,713/- made by AO u/s 14A ld. CIT(A) restricted the disallowance to ₹ 27,42,886/- being 0.5% of average investm ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of non-interest bearing funds. 30. Ld. counsel for the assessee referred to the decision in assessee's own case for AY 2007-08 and 2008-09, contained at page 147 onwards of the PB and pointed out that in AY 2008-09 the ground raised by revenue was dismissed, inter alia, observing that revenue had not placed any material evidencing that borrowed funds had actually been utilized in making investment. He, therefore, submitted that as regards disallowance made on account of interest under Rule 8D was concerned, since the same investment continued in AY 2009-10, therefore, no disallowance could be made in this year also. 31. We have considered the submissions of both the parties and have perused the record of the case. Ld. CIT(A) has noticed that the assessee had raised funds of ₹ 14761.18 lakhs which were outstanding as on 31.3.2008. These funds were raised from following parties: Category Nature of Loan taken Amount outstanding as on 31.10.2008 (Rs. / Lacs) Amount outstanding as on 31.10.2009 (Rs. / Lacs) Related interest cost incurred during the relevant FY under consideration (Rs./Lacs) Purpose for which loan was taken Supporting Documents 1 Loan taken from CISCO S ..... X X X X Extracts X X X X X X X X Extracts X X X X
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