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TMI Blog2018 (7) TMI 224X X X X Extracts X X X X X X X X Extracts X X X X ..... the CIT(A) erred in not appreciating that reversal of substantial part of warranty provision in the succeeding year is no reason to conclude that the provision made was not reasonable more so because the year in question was first full year of operation of the Appellant. 2. That on the facts and in the circumstances of the case and in law, the CIT(A) erred in upholding disallowance of Rs. 1,34,98,850/- being the liquidated damages provided on account of delay in supply of machines. 2.1. That on the facts and in the circumstances of the case and in law, the CIT(A) erred in not appreciating that damages were provided in terms of specific contractual obligation, which cannot be termed as unilateral deduction by the customers. 3. That on the facts and in the circumstances of the case and in law, the CIT(A) erred in upholding addition of Rs. 1,99,98,194/- being the unutilized countervailing duty, under section 145A of the Act for the reason that the same ought to have been added to the value of closing inventoiy. 3.1. That on the facts and in the circumstances of the case and in law, the CIT(A) erred in not appreciating that the exclusive method being regularly followed by ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and circumstances of the case and in law, the Assessing Officer has erred in holding that expenditure of Rs. 8,50,077/- was not incurred wholly and exclusively for the purposes of business because the Appellant did not comply with time schedule for supply of machines and the banks did not suffer any loss on account of delayed supply. 3.2 That the reason recorded by the Assessing Officer for disallowance of liquidated damages of Rs. 8,50,077/- are contrary to the reasons recorded by the DRP. 4. That on the facts and circumstances of the case and in law, the Assessing Officer has erred in making addition of Rs. 28,15,543/- being the un-utilized MODVAT Credit comprising Countervailing Duty (CVD) and service tax allegedly for the reason that the method of accounting was not in accordance with the provisions of section 145A of the Act. 4.1. That on the facts and circumstances of the case and in law, the Assessing Officer has erred in not appreciating that the exclusive method for Cenvat Credit regularly followed by the Appellant was inconformity with guidance note issued by Institute of Chartered Accountant of India and had no impact on net profit as per profit & loss account. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e Act was sent to the Transfer Pricing Office having jurisdiction over assessee's case on 25.08.2009. The TPO vide order dated 22.10.2010 determined and suggested Transfer pricing adjustment at Rs. 52,16,996/-. The assessee was asked to show cause as to why an amount of Rs. 52,16,996/- should not be added to the returned income being the value of adjustment to Arms Length Price involved in the international transaction with Associate Enterprise. In response to the above assessee's representative did not make any submissions. In view of the above and, as per the provisions of section 92CA(4) r.w.s 92C(4) of the Act, it is mandatory for the Assessing Officer to tax the adjustment to Arms length Price as determined by the Transfer Pricing Officer as assessee's income for the year. Accordingly made an additions of Rs. 52,16,996/- to the returned income of the assessee. 5. The Assessing Officer made disallowance of provisions for warranty expenses amounting to Rs. 2,08,11,781/-. The Assessing Officer further made disallowance of Rs. 1,34,98,850/- for liquidated damages. As regards to adjustment made u/s 145A r.w.s. 145 (1) & 145(3) of the Act, the Assessing Officer disallowed an amount ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing the year. Accordingly, warranty provision was made of Rs. 20,811,781.This percentage was arrived at after considering various factors including the life of machines, the value of the machines, expected values of those warranty services during paid service periods and estimates of expenses to be incurred in providing these services. 8. The Ld. AR relied upon the decision of the Hon'ble Supreme Court in the case of Bharat Earth Movers vs CIT [2000] 245 ITR 428 wherein is held that if a business liability has arisen in an accounting year, the deduction should be allowed although the liability may have to be quantified and discharged at a future date. The Ld. AR also relied upon the decision of the Hon'ble Supreme Court in the case of Rotork Controls India (P) Ltd. v. CIT [2009] 314 ITR 62 wherein the Hon'ble Supreme Court has inter alia laid down the following criteria for determining the deductibility for provision of warranty: * An enterprise has an obligation as on the date of sale, if the past experience or past event so suggests; * There is probability that there will be an outflow of resource required, to settle the obligation; * Reliable estimate of the amount of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y and the rest was reversed. Thus, the CIT(A) held that it is considered fair and reasonable that warranty provision to the extent of 1.50% of the sales would justifiable and remaining provision needs to be added back. The contention of the Ld. AR that warranty obligation is inbuilt in the purchase order/agreement as mentioned in Clause 6 & Clause 3. Thus, the liability on account of warranty is integral part of the sales revenue. Since, the entire sales revenue is accounted as revenue by the assessee. Therefore, corresponding deduction for warrant provision who also be allowed. The Tribunal for A.Y. 2006-07 being ITA No.7056/Del/2010 order dated 02.02.2016 held as under: "6. We have considered the submissions of both the parties and perused the records of the case. We are in agreement with the reasoning given by Ld. CIT(A) for which he has given reasons in his order, enumerated above. Merely because the assessee had written back the provision in subsequent year cannot be a basis for disallowing the assessee's claim in the current year, particularly when assessee had given specific basis for making this warranty provision. Assessee's claim is fortified by the decision relied upon ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ability/ loss suffered during the year. The Ld. AR further submitted that the entry for LDs is not a provision made on an ad-hoc basis but is made in a systematic manner based on the delay in the delivery of the machines to the banks and incurred as per contractual obligation and hence allowable as deduction. Since the customers are mainly Public Sector Banks and the orders are accepted via tender contracts, there is no scope for negotiation with them on the conditions of the contract including delivery of the products. The Ld. AR further submitted that in any case the disallowance of accrued liability as per terms of contract cannot be disallowed on irrelevant considerations. Many of the machines are required to be delivered to various branches of the banks at various remote areas / interiors of the country. Accordingly, adhering to the time lines gets tough leading to delays on several occasions. As can be seen from the sample agreements, the average rate of LDs is 1 % per week of delay upto maximum of 8% of the sale price beyond which the bank has the right to cancel the sales order. Accordingly the banks on delay beyond 8 weeks continue with the contract and levy LD at the rate ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... al) * K.C.P. Ltd Vs. ITO, [1990] 34 ITD 50 (Hyderbad Tribunal Special Bench) 13. The Ld. DR relied upon the orders of the TPO/AO and the CIT(A). 14. We have heard both the parties and perused all the relevant records. Ground No. 2 and 2.1 is regarding disallowance of Rs. 1,34,98,850/- being the liquidated damages provided on account of delay and supply of machines. It is pertinent to note that as per the purchase orders agreements, the company is liable to pay liquidated damages for the failure to supply the machines to the banks as per the agreed delivery schedule. During the present Assessment Year the assessee company had debited liquidated damages amounting to Rs. 1,34,98,850/- in its profit and loss account for delay in supply of machines to banks. During the course of assessment proceedings, the assessee company has submitted party wise details of liquidated damages incurred along with sample purchase orders/agreements containing the liquidated damages clause and also sample copies of correspondences received by the company from banks on levy of liquidated damages all these documents were produced before the Assessing Officer but the same was not properly verified by the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , the CIT(A) in its order directed to reduce the value of opening CVD (Rs. 3,808,198) as on 01.04.2006 from the value of the closing balance as on 31.03.2007 (Rs. 23,806,392). The CIT(A) thus allowed partial relief of Rs. 3,808,198 to the Company. The Ld. AR submitted that the Company is a trader of machines/ goods and not a manufacturing concern. It pays custom duty at the time of import of goods and collects sales tax on sale of goods. The custom duty consists of Basic Custom Duty, Countervailing Duty and Additional Custom duty. Basic Custom Duty and additional Custom Duty not being eligible for set-off against any taxes/ duties payable by the Company are debited to the Profit and Loss account and also added to the value of the closing inventory. Countervailing Duty is eligible for set-off against taxes / duties payable such as service tax payable and hence not debited to the Profit and Loss account but debited to MODVAT credit under the head "Loans and Advances" in the Balance to be set off against the service tax liability if any. At the time of import, the Countervailing on which Cenvat credit is available for set off against service tax liability is directly transferred to th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... The Ld. AR submitted that under the net/ exclusive method, customs duty creditable CVD paid on purchase of traded goods is debited to a separate account. As and when CENVAT credit is actually utilized against other taxes payable, an appropriate accounting entry is made to adjust the duty paid out of the separate account. Therefore, the purchase cost of the traded goods is net of CVD in the books of account. Accordingly, the traded goods are reflected in the books of account on the basis of purchase cost accounted net of CVD. Further, the Ld. AR submitted that if the element of CENVAT credit is added to the value of closing stock in the books of account, it will distort the profits of the Company as the purchases would be exclusive of CENVAT in the books of account and the closing stock would be inclusive of CENVAT credit in the books of account. The Ld. AR submitted that inclusion of tax, duty, etc. in the purchase, sale and inventory as per provisions of section 145 A of the Act does not require any adjustment in the books of account of the Company. Thus, even if outside the books of account and in compliance with section 145A of the Act, CENVAT credit is added to the value of cl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rvice tax CENVAT credit (Rs. 787,181) forming part of "Loans and Advances" under the Balance Sheet. Even if it is alleged that unutilized MODV AT credit should be added to the total income of the Company, then it is submitted that the addition should be restricted only to the extent of MODVAT credit available on closing stock of goods and not the entire MODVAT balance as at the end of the year. Consequential relief be given to the opening stock of AY 2008-09 of the Company on account of addition made to the closing stock of the Company on account of CVD and Service Tax credit and the taxable income for AY 2008-09 be reduced by that extent. 17. The Ld. DR relied upon the order of the TPO/ AO and the CIT(A). 18. We have heard both the parties and perused all the records. As related to Ground No. 3 & 3.1 regarding addition of Rs. 1,99,98,194/- being the unutilized Countervailing duty u/s 145A of the Act for the reason that the same duty to have been added to the value of closing inventory. The Ld. AR submitted that the accounting and the valuation of the closing stock has to be done in accordance with the provisions of Section 145A of the Income Tax Act. The Company is a trader of m ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... submitted that custom duty on purchase of imported goods consists of Basic Customs Duty, Add. Custom Duty and Countervailing Duty. The Company under the belief that Countervailing Duty is creditable against other duties/ taxes payable did not claim deduction of Countervailing Duty of Rs. 2,278,207/- and Rs. 18,425,285/- paid in AY 2006-07 and AY 2007-08 respectively. The same was treated as an 'asset' and was accordingly reflected in the Balance Sheet. The Ld. AR submitted that during AY 2008-09, the Company had internal discussions/ deliberations and ultimately wrote off the entire amount of Countervailing Duty reflected as asset in the Balance Sheet to the extent it was not eligible for credit against service tax liability. In this regard, the Company had consulted with a Tax Consultant and confirmed its understanding that Countervailing Duty would be creditable only for that portion of Countervailing Duty paid on the goods which are actually used to provide services and not on all the goods imported and sold. The asset written off i.e. Countervailing Duty of Rs. 35,000,000/- comprised of following: (i) Assessment Year 2006-07 Rs. 2,278,207/- (ii) Assessment Year 2007-08- Rs ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r authorities at any stage. Therefore, this is a factual ground which cannot be entertained at this stage and therefore, the additional ground is rejected. 22. In result, the appeal of the assessee being ITA No. 5017/Del/2012 for A.Y. 2007-08 is partly allowed for statistical purpose. 23. Now we take up the appeal for A.Y. 2008-09. The e-return of income of Rs. 2,04,83,810/- was filed on 15.01.2009. The return was processed u/s 143(1) of the Act on 15.07.2009. The case was selected for scrutiny and notice u/s 143(2) was issued on 11.09.2009 and duly served on the assessee. Subsequently notices u/s 143(1) along with detailed questionnaire were issued on various dates requiring the assessee to file details and produce evidence in support of the claims made in the return. In response to the said notices, the Assessee's Representatives attended the proceedings and filed the details and explanations. During the year under consideration the assessee entered into an International Transaction with its Associate Enterprise M/s. De La Rue Cash System Group of companies based at Hong Kong, USA, Malaysia, Switzerland, UAE and UK. The assessee filed form No. 3CEB reporting therein the details ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e DRP further held that despite submitting various documents, the Company failed to establish that by incurring these expenses, the Company did not render any services to its AEs. The Ld. AR further submitted that the amount charged in respect of the support services were much higher than the cost incurred by the Company. The DRP ignored the cost break up and the hourly rate at which the amount is cross charged from AEs. The cost incurred in respect of the said recovery was Rs. 25,23,692/- and the break-up of the total amount was given the lower authorities. The Ld. AR further submitted that recovery of expenses such as travel, telephone expenditure of Rs. 2,54,531 are third party costs and hence no mark up is required. Further, 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. Thus, based on the above analysis, the Ld. AR submitted that the Company has earned a high mark up over the salary cost paid by the Company to its employees. 26. The Ld. DR relied upon the orders of the TPO/AO and the directions of the DRP. 27. We ha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ciples of natural justice. Thus, Ground No. 4 to 4.2 are partly allowed for statistical purpose. 32. As regards the Ground Nos. 5 and 5.1, the Ld. AR submitted that the disallowance of Rs. 1,08,930/- being the custom duty on leased machine is not proper on behalf of the Assessing Officer. The Ld. AR submitted that during the year under consideration, the assessee company sold one machine on installment basis to UCO bank, Kolkata. The machine was sold at Rs. 6,21,990 over 18 installments. In the books of accounts, the purchase of the machine inclusive of custom duty was capitalized at Rs. 5,28,788 by the assessee and depreciation was claimed thereon. The assessee company recognized revenue in the books to the extent of the installments received during the relevant year i.e. A.Y. 2008-09 for Rs. 2,07,330/-. However, at the time of audit, the auditors qualified the audit report by stating that the sale should be treated as a regular sale in the books of accounts. Therefore, while filing the return the assessee company stated that income erroneously declared in excess by the company in the return to the extent of Rs. 1,14,128/-. The Ld. AR submitted that the DRP has observed that if t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t be allowed as deduction in the computing the total income of the subject year. The Ld. AR submitted that the DRP upheld the order of the Assessing Officer that the expenditures were of prior period were undisputed and accordingly, following basic principles of taxation, the expenditures could not be allowed during the present year. The Ld. AR submitted that custom duty on purchase of imported goods consists of BCD, ACD and CVD. The Company under a bonafide belief that CVD was creditable against other duties/ taxes payable did not claim deduction of CVD of Rs. 2,278,207/- and Rs. 18,425,285/- paid in AY 2006-07 and AY 2007-08 respectively. The same was treated as an 'asset' and was accordingly reflected in the Balance Sheet. The Ld. AR further submitted that during AY 2008-09, the Company had internal discussions/ deliberations and ultimately wrote off the entire amount of CVD reflected as asset in the Balance Sheet to the extent it was not eligible for credit against service tax liability. In this regard, the Company had consulted with a Tax Consultant and confirmed its understanding that CVD would be creditable only for that portion of CVD paid on the goods which are actually us ..... X X X X Extracts X X X X X X X X Extracts X X X X
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