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TMI Blog2017 (7) TMI 358X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 of assessee is dismissed. Eligibility for deduction u/s.35D - Held that:- The assessee is entitled for amortization of expenses incurred before the commencement of business and after commencement of business for 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he 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 ₹ 559.73 crores for the A.Y 2005-06 and ₹ 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 Components and Service parts 3831469511 3 Import of Cars 15932771 4 Fusion Technical Service Publication 4502764 5 Development cost of ba ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... similar exercise was carried out. In the case of Ford company apart from its own domestic market, in case of other markets, the vehicles are sold to Ford affiliates 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 segmen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 8.46% 4 Tata Motors Ltd. 6.52% and worked out the average margin of 5.01% of the comparables against the assessee s operating margin of (-)1.27%. Hence, the AO worked out the difference in ALP to ₹ 122.62 Cr. In addition to the ALP difference the TPO proposed to make separate adjustment on account of brand building activities, advertisement expenses 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 ₹ 1,744.24 Cr. and for the adjustment of ₹ 122.62 Cr towards the ALP transactions for the AY 2005-06 as per the details given below: Operating Income 16216171090 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... brand development and product development expenses and directed the TPO to exclude the entity level adjustment. Accordingly, the TPO has passed Modification Order No.F/101/TPO/1/AY 2005-06/RAV dated 16.10.2012 proposing to make the adjustment of ₹ 79.12 Cr. as under: AMP 52.32 Cr. Brand development 16.32 Cr. Product development 10.57 Cr. However, TPO has specified a condition that in the event of deletion and addition of the above three adjustments, the margin adjustment of ₹ 33.91 Cr. at the entity level will stay. Accordingly, the AO passed the orders u/s u/s.143(3) r.w.s.144C and 147 of Income Tax Act on 29.10.2012 incorporating the adjustment of ₹ 79.12 Cr. on account of transfer pricing and other corporate additions. Against the order of the AO, the assessee is in appeal before us. 4.0 The assessee has raised 12 grounds in total in this appeal. Ground No.1 to 8 are related to the transfer pricing adjustments. In the transfer pricing the assessee raised the issues regarding, Global TP policy and segmentation, Comparability analys ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... be computed by appropriately using the revised values of the 3 adjustments. The AO passed the Assessment order on 29/102012 making the additions as suggested by the TPO and incorporating the caveat / condition imposed by the TPO. 5.1 From the above it is clear that the DRP has remitted the matter back to the file of TPO to make fresh assessment/determination of Transfer Pricing issues which was executed by the TPO and communicated to AO instead of referring the matter back to the DRP to give appropriate directions to the AO. As per the provisions of Section 144C of IT act the DRP has no power o set side the issue or the remit the matter back to the file of TPO/AO. The ld DRP has to decide the issue and issue directions to the AO. For ready reference we extract the relevant provisions of section 144C of IT act as under: [ Reference to dispute resolution panel. 3 144C. (1) The Assessing Officer shall, notwithstanding anything to the contrary contained in this Act, in the first instance, forward3a a draft of the proposed order of assessment (hereafter in this section referred to as the draft order) to the eligible assessee if he proposes to make, on or after t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sessee s appeal on transfer pricing issues for the A.Y 2005-06 and 2008-09 stands disposed off and allowed for statistical purposes. 6.0 Ground No.9 of the assess s appeal for the A.Y 2005-06 is on obsolete stock: The AO proposed for addition of ₹ 2,21,08,585/- on account of provisions made by the assessee for obsolete stocks. The assessee filed objections before the DRP and the DRP confirmed proposal of the addition made by the AO holding that the liability is contingent in nature. 6.1 Aggrieved by the Order of the AO/ DRP, the assessee is in appeal before us. The Ld.AR of the assessee vehemently argued opposing the addition and also submitted the written submissions as under: The Appellant had created a provision for stock obsolescence amounting to INR 22,108,585/- during AY 2005-06. AO disallowed provision for stock obsolescence treating it as a contingent liability as the same was made on a provisional basis and could not be considered as liability accrued during the year. The AO placed reliance on the decision of the Supreme Court in the case of Indian Molasses Co. Ltd. v. CIT [ 959] 37 ITR 66 (SC). The Appellant submits that pursua ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... furnished any evidence to prove that the expenditure was ascertained and accrued for the year ending 31.03.2005 for the relevant year. The AO in assessment order given a finding that the assessee has made the provision for obsolete stock on provisional basis. The assessee relied on the decision of the Hon ble Delhi Court where in Hon ble High court decided the issue in favour of the assessee. In the cited case Hon ble High court relied on the reasoning of the tribunal as under: The assessee is in the business of pharmaceutical products where strict supervision of the quality has to be ensured and these products are mostly surgical needles and medical consumable and if such fast moving items are not sold for a considerably lengthy period. It can be safely said that they have lost their consumable acceptability over a period of time, may be due to advent of new products. After all, as long as the assessee acted in a bona fide manner and has appreciated the business realities in which he is placed, the same should be accepted. The assessee has a foolproof method of identification of slow moving or dead stock and has put the realizable value for the purpose of valuing the same. In ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . It is common knowledge that the cars sold carry a warranty in favour of the buyer as per the contractual agreement between the Appellant and buyer in terms of warranty guide provided to the customer at the time of sale to a minimum period of 1 year and may extend up to 4 years. By virtue of this agreement the Appellant binds itself to rectify the contracted defects arising if any during the contract period, free of any cost to the buyer. The Appellant submits that the provision has been created on a scientific and systematic basis backed by in-depth and precise analysis and calculations according to the procedures and principles laid down by the policy of the Appellant. The historic trend summary of the provisions created and related payments made have been enclosed in Page 757 of the Supplementary Paper book. Further reliance is placed on the favourable decision of the Hon ble Chennai Income-tax Appellate Tribunal in the Appellant s own case for AY 1999-00 and AY 2004-05 (enclosed in case law paperbook) wherein provision for warranty has been finally allowed as a deduction. The Hon ble Tribunal observed that the issue was covered in favour of the Appellan ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... penses as deduction under section 35D of the Act every year from AY 1997-98 and the subject assessment year is the ninth year of claim. The AO disallowed the given claim on the premise that the expenditure incurred is not related to the expansion of the industrial undertaking. The Appellant submits that the AO had erroneously construed that the expenditure had arisen subsequent to commencement of business and that he has failed to appreciate that the same had been incurred at the time when the business was not set-up . The Appellant had submitted that the AO has wrongly examined the preliminary expenses under section 35D (1)(ii) and not section 35D(1)(i), as is applicable in the instant case. Additionally, it is submitted that the claim has not been disallowed during any of the previous years. Given that the expenditure had been incurred before the commencement of business, the Appellant submits that there is no requirement for the expenditure to correlate with expansion of the undertaking to validate deductibility under the Act. The breakup of the preliminary expenses incurred by the Appellant during AY 1996- 97 has been provided below: ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssment year 1999-00 : Rs.8,27,63,426 As per provisions of sec.32(2) of the Act, as applicable for the above assessment years, unabsorbed depreciation can be carried forward only for a period of subsequent 8 assessment years and can be set off only against business income of subsequent years. Only with effect from asst year 2002-03, sec.32(2) has been amended to the effect that unabsorbed depreciation losses would be merged with subsequent years depreciation and deemed to be part of that allowance. This amendment is applicable only from asst year 2002-03 and for the above years, viz., 1997-98 to 1999-2000, as per provisions of sec.32(2), the unabsorbed depreciation is allowed to be carried forward and set off against business profits of subsequent 8 asst years. Out of the unabsorbed depreciation of ₹ 4,05,34,542/- of A.Y.1997-98, an amount of Rs,1,85,57,771/- is now set off against profits of A.Y.2005-06, as shown above. The balance unabsorbed depreciation of ₹ 2,19,76,771/- pertaining to A.Y.1997-98 cannot be carried forward beyond asst year 2005-06 as per the provisions of sec.32(2) of the Act applicable for ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ction became allowance of the immediately succeeding year. The Finance Act No.2 of 1996 restricted the carry forward of unabsorbed depreciation and set-off to a limit of 8 years, from the AY 1997-98. CBDT Circular No.762, dated 18 February 1998, in the form of Explanatory Notes categorically provided, that the unabsorbed depreciation allowance for any previous year to which full effect cannot be given in that previous year shall be carried forward and added to the depreciation allowance of the next year and be deemed to be part thereof. So, the unabsorbed depreciation allowance of AY 1996-97 would be added to the allowance of AY 1997-98 and the limitation of 8 years for the carry-forward and set-off of such unabsorbed depreciation would start from AY 1997-98. The provision of section 32(2) was introduced by Finance (No. 2) Act, 1996 and further amended by the Finance Act, 2000. The provision introduced by Finance (No. 2) Act, 1996 was clarified by the Finance Minister to be applicable with prospective effect. This amendment has become applicable from AY 2002-03 and subsequent years meaning that any unabsorbed depreciation available to an assessee on 1st day of April, 2002 (AY ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... equent years, without any limit whatsoever. The aforesaid principles have been reiterated and relied on by the following judicial precedents - CIT v. Gujarat Themis Biosyn Ltd. [2014] 228 taxman 359 (Gujarat High Court) Arc Fine Chemicals Private Limited v. ACIT [PTA No. 2414/2415/2012] (Mumbai Tribunal) Confidence Petroleum India Ltd v. OCIT [PTA No. 1937/ 2012] (Mumbai Tribunal) DCIT v. Bajaj Hindustan Ltd. [2014] 149 ITD 709 (Mumbai Tribunal) Smith Nephew Healthcare (P.) Ltd. v. DCIT [2014] 32 ITR(T) 208 (Mumbai Tribunal) Hindustan Unilever Ltd. v. ACIT [2012] 22 ITR(T) 737 (Mumbai Tribunal) In addition to the above, the jurisdictional Madras High Court in the case of CIT V. S S Power Switchgear Ltd. [2009] (218 CTR 701) (Madras) had upheld the principle that that the unabsorbed depreciation allowance of one year shall be added to the depreciation allowance of the next year and will be deemed to be the allowance of that year. Furthermore, the Hon ble Chennai Tribunal in the case of DCIT V. Tamil Nadu State Transport Corporation (Villupuram) Limited [2012] I.T.A. No. 1713/Mds/2011 had placed reliance on Circular 762 (supra) and the afore ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the depreciation @60% treating the UPS as a part of computer. The Hon ble ITAT C Bench, Chennai in ITA N.o1774/Mds/2012 in the case of Sundaram Asset Management Co. Ltd vs DCIT held that UPS is an integral part of computer and eligible for Depreciation @60%. Respectfully following the decision of this tribunal in case cited (Supra) we direct the AO to allow the Depreciation on computer @60%. In the result, the assessee s appeal is allowed. 11.0 The next issue in Ground No.9 for AY 2008-09 is disallowance of ₹ 44,11,27,098/- relating to the reversal of the provision for nondeduction of tax at source. The Ld.AR submitted during the hearing that the AO has passed necessary rectification order on 16.10.2014 on application filed by the assessee. Therefore, this ground is dismissed as infructuous. 12.0 Ground No.10 for the AY 2008-09 is credit for tax withheld at source amounting to ₹ 74674/- The AO is directed to allow the credit for the tax withheld after making due verification.This ground of appeal is allowed for statistical purposes. 13.0 Ground No.12 is related to the refund due to the company on withholding tax. The AO allowed the interest on refund due ..... X X X X Extracts X X X X X X X X Extracts X X X X
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