9911796707
TMI Blog2017 (7) TMI 358X X X X Extracts X X X X X X X X Extracts X X X X ..... holly owned subsidiary of Ford Motor Company, USA (FMC). In February 1995, Ford purchased 5.8% of Mahindra & Mahindra (M&M) and in September 1995, Ford and M&M sought the approval for establishing a joint venture company to manufacture and distribute vehicles and subsequently after getting the approval, the joint venture was established. In March 1998, the equity pattern changed to 70:30 with Ford having the majority stake and the company was renamed as Ford India Private Ltd. (FIPL). The equity pattern changed in various stages and finally in March 2005, the Ford International Services purchased the remaining shares from M&M, Thus FIPL became a wholly owned subsidiary of FMC. FIPL established its fully Integrated facility in Chennai in 1999. 2.1 During the assessment proceedings, the AO found the international transaction with the A.E for Rs. 559.73 crores for the A.Y 2005-06 and Rs. 835.83 Cr. for the A.Y 2008-09. The details of International transaction for the AY 2005-06 are reproduced here under: S. No. Details of International transactions Quantum of International & Transactions (Rs.) 1 Export of auto components and service parts 1450298239 2 Import of Auto Component ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... filiates called National Sales Companies. The primary function of an NSC is to use its Field Sales Force to call on the independent dealers. Accordingly the Ford NSC is functionally comparable to uncontrolled wholesale distributors doing business in many product Industries. A distributor is essentially here the service provider providing distribution services to its service provider to earn mark up on its distribution cost and also a cost on its capital incurred. The tested party is the NSC. After conducting an independent search the assessee identified comparable companies in North America, Europe and Asia Pacific. Various adjustments were made by the assesses on inventory and accounts receivable. Other adjustments were made on advertising and other direct marketing expenses. The analysis were carried out during the earlier year periods. FAR analysis was also done on this activity. 2.5 There is no mention about the entrepreneurial segment of the assessee company's activities, even though the volume of sales of this segment is substantial. There is no FAR analysis or any description of the nature and scope of the activity and the methodology to be adopted for comparison with uncon ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and product development expenses. Accordingly issued the show cause notice to the assessee and the assessee filed reply to the show cause notice objecting for the TP study made by the AO for substituting the single year data instead of multiple year data adopted by the assessee and for separate adjustments on account of brand building, product development, advertisement and marketing expenses and also sought for some economic adjustments. The TPO rejected the objections raised by the assessee and determined the ALP of Rs. 1,744.24 Cr. and for the adjustment of Rs. 122.62 Cr towards the ALP transactions for the AY 2005-06 as per the details given below: Operating Income 16216171090 Operating cost 16424047843 Operating profit -207876753 OP/Cost -1.27 PLI of comparables 5.01% ALP OP/Cost 6.28% ALP Profit 1018375544 ALP Sales (Cost + ALP Profit) 17442423387 Difference 1226252297 Apart from the above the TPO suggested for the following adjustments: S.No. Nature of adjustment Amount in Rs. In crores 1 Arms length adjustment for international transactions 122.62 2 Amount receivable by the assessee from the holding company for building the brand and lo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and argued at length. 5.0 We have heard the rival submissions and perused the material placed on record. On going through the DRP order in Page NO.4 the DRP has given the following Directions to the AO/TPO. In addition to his report dated the 4th June' 2012 as mentioned above the Transfer Pricing officer also attended and participated during the course of the hearings before the Dispute Resolution Panel in terms of Order Sheet entry dated the 4th June, 2012 wherein he was in agreement with the adjustment detail given by the Eligible Assessee in terms of Annexure-C of its additional submissions before the Transfer Pricing Officer during the course of the proceeding before the Dispute Resolution Panel as detailed above. The Assessing authority and the Transfer Pricing Officer shall take any fresh position from those in the Transfer Pricing Order only after due verification of facts and contents and with full justification on merit. Consequently The TPO has passed an order on 16/10/2012 making amendment to the TPO's order u/s 92CA(3) dated 31/10/2011 substituting the entity level adjustment to Rs. 33.91 crores and restricting the item wise adjustments of AMP, Brand Development an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 2) On receipt of the draft order, the eligible assessee shall, within thirty days of the receipt by him of the draft order,- (a) file his acceptance of the variations to the Assessing Officer; or (b) file his objections, if any, to such variation with,- (i) the Dispute Resolution Panel; and (ii) the Assessing Officer. (5) The Dispute Resolution Panel shall, in a case where any objection is received under sub-section (2), issue such directions, as it thinks fit, for the guidance of the Assessing Officer to enable him to complete the assessment. (6) The Dispute Resolution Panel shall issue the directions referred to in sub-section (5), after considering the following, namely:- (a) draft order; (b) objections filed by the assessee; (c) evidence furnished by the assessee; (d) report, if any, of the Assessing Officer, Valuation Officer or Transfer Pricing Officer or any other authority; (e) records relating to the draft order; (f) evidence collected by, or caused to be collected by, it; and (g) result of any enquiry made by, or caused to be made by, it. (8) The Dispute Resolution Panel may confirm, reduce or enhance the variations proposed in th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... vendor's place. * In addition, the Appellant submits that the creation of such provision was accepted by the statutory auditors and tax auditors as being in line with Accounting Standard-2 issued by the Institute of Chartered Accountants of India and section 145 of the Act respectively. * In this regard, reliance has been placed on the following decisions to substantiate the Appellant's claim: Judicial Precedents Principle/Ruling CIT v. Becton Dickinson [2013] (ITA Nos.39-43 of 2012) (Delhi High Court) * The Delhi Tribunal had expressed a finding that the assesse had a foolproof method of identification of slow moving or dead stock and had put a realizable value for the purpose of valuing the same. Further, the Tribunal had noted that the assessee had consistently been following the same method accounting over a period of time and the same was in accordance with the commercially accepted accounting principles of valuation. * The Delhi High Court upheld the finding and verdict of the Tribunal that the provision for stock obsolescence created by the assessee during the year was an allowable expenditure. In addition, reliance is also placed on the following decision ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... In our view, the CIT(A) was correct in law and on facts to have deleted the addition made by the AO which was based not taking into consideration the hard realities of assessee's business. The addition in our view, is properly deleted and we decline to interfere." In the instant case the assessee has not established such fool proof method of identification of slow moving and dead stock and ascertained the liability as per the consistent reliable system. Therefore, the facts of the case relied upon by the assessee are not applicable and the addition made by the AO is confirmed and this ground of appeal is dismissed. 7.0 Ground No.10 of the A.Y.2005-06 is related to the warranty: During the course of assessment proceedings, the AO found that the assessee has debited a sum of Rs. 16,58,15,554/- towards the provisions for warranty expenses. The assessee explained that the cars sold by company carry a warranty in favour of the buyer as per the contractual agreement between the company and the buyer in terms of warranty guide provided to the customer at the time of sale. By virtue of agreement company binds itself to rectify the defects arising out of any mechanical failure, free ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rinciple/Ruling Bharat Earth Movers v. CIT [2000] 245 ITR 428 (SC) It was held that the provision created by the assessee for meeting the liability incurred by it under leave encashment scheme proportionate to the entitlement earned by the employees was entitled to deduction out of the gross receipts for the accounting year during which the provision was made for the liability and it will not tantamount to contingent liability on account of reasonable quantification of the same. 7.2 Per contra the Ld.DR relied on the lower authorities orders. 7.3 We heard both the parties and perused the material placed on record. On similar facts, ITAT Chennai 'D' Bench in ITA No.2976 to 2979/Mds/2014 for the A.Ys 1998-99, 2001-02 to 2004-05 dated 26.06.2015 allowed the appeal of the assessee placing reliance on the decision of Hon'ble Supreme Court in 223 CTR 425. Respectfully following the aforesaid decision of this Tribunal we allow the assessee's appeal. 8.0 Ground No.11 for the A.Y. 2005-06 is related to the disallowance u/s.35D amount to Rs. 10,01,086/- In the draft assessment order, the AO proposed to disallow the expenditure amortized u/s.35D of IT Act. The Ld.DRP agreed with ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or extension or in connection with the setting up of new unit. In this case, the assessee has incurred the expenditure before setting up of the unit as evidenced from the details and nature of expenditure referred above and as stated by the assessee the expenditure was incurred in 1996-97 relevant to the AY 1997-98. The assessee has made the claim from AY 1997-98 onwards and no disallowance was made during any of the previous years. The AO has not brought on record any evidence controvert the submissions made by the assessee. No new fact has been brought on record to disallow the expenditure in the year under consideration to make the disallowance, having allowed in the earlier Assessment years. Therefore, we hold that the assessee is eligible for deduction u/s.35D and accordingly the appeal of the assessee on this issue is allowed. 9.0 The next issue is carry forward and set off of unabsorbed depreciation for the AY 1997-98,1998-99 and 1999-2000. This issues is involved in both the AYs 2005-06 & 2008-09. The AO in the Assessment Order, did not allow the carry forward and set off unabsorbed depreciation losses loss for the AY 1997-98 as per the following reasons: In the statemen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ld that the interregnum restriction of limiting the claim for an eight-year period does not take away the right of an assessee to claim the balance of unabsorbed depreciation, forever. Further, by virtue of the amendment bought out by the Finance Act 2001, the unabsorbed depreciation for the interregnum period (AY 1997-98 to AY 2001-02) would revive back into life and become eligible for carry forward and set off for an indefinite period. Further, in the case of Best & Crompton Engineering Ltd. [2014] 30 ITR(T) 638 (Chennai Tribunal), the Hon'ble Chennai Tribunal placed reliance on the decision of the Gujarat High Court in the case of General Motors India (P.) Ltd. v. Deputy Commissioner of Income-tax [2012] 354 ITR 244 and held that, the unabsorbed depreciation prior to AY 2002-03 i.e. from AY 1999-2000 to AY 2001-02 would be available for carry forward and set off against income of subsequent years without any time limit in view of the section 32(2) as amended by Finance Act, 2001. The observations made by the Gujarat High Court in the case of General Motors India (P.) Ltd (supra) and followed by the Chennai Tribunal in the case of Best & Crompton Engineering Ltd. (supra) are e ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... essee cannot be denied. * However, Circular No.14 of 2001 had clarified that under section 32(2), in computing the profits and gains of business or profession for any previous year, deduction of depreciation under section 32 shall be mandatory. Therefore, the provisions of section 32(2) as amended by Finance Act, 2001 would allow the unabsorbed depreciation allowance available in the AYs 1997-98, 1999-2000, 2000-01 and 2001-02 to be carried forward to the succeeding years, and if any unabsorbed depreciation or part thereof could not be set off till the AY 2002-03 then it would be carried forward till the time it is set off against the profits and gains of subsequent years. * It is held that any unabsorbed depreciation available to an assessee on 1st day of April, 2002 (A.Y 2002-03) will be dealt with in accordance with the provisions of section 32(2) as amended by Finance Act, 2001. And once the Circular No.14 of 2001 clarified that the restriction of 8 years for carry forward and set off of unabsorbed depreciation had been dispensed with, the unabsorbed depreciation from AY 1997-98 up to the AY 2001-02 got carried forward to the AY 2002-03 and became part thereof, it came to b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... se indefinitely by clubbing with the current depreciation allowance." In light of the above jurisdictional decisions, the Appellant had submitted that the brought forward unabsorbed depreciation of AY 1997-98, 1998-99 and 1999-2000, to the extent not set-off against the income of AY 2005-06, be allowed to be carried forward to the future years for an indefinite period. 9.2 We heard the rival submissions and perused the material placed on record. The Ld.AR relied on the decision of this Tribunal in of DCIT V. Tamil Nadu State Transport Corporation (Villupuram) Limited [2012] I.T.A. No. 1713/Mds/2011 Circular No.14 of 2001 and jurisdictional High Court of Madras cited supra. This issue is squarely covered by the decision of this Tribunal and the case law relied upon by the assessee cited supra. 9.3 Respectfully following the order of this Tribunal in the cited case we direct the AO to allow the unabsorbed depreciation of AY 1997-98, 1998-99, 1999-2000 to the extent not set off against the income of the AY 2005-06 for future years. The appeals of the assessee on this issue for the AY 2005-06 & 2008-09 are allowed. 10.0 The next ground for the AY 2008-09 was depreciation on UPS: T ..... X X X X Extracts X X X X X X X X Extracts X X X X
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