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TMI Blog2021 (11) TMI 967X X X X Extracts X X X X X X X X Extracts X X X X ..... te that no such disallowance has been made on the markup in the case of the assessee AY 2007-08 to 2012-13 and AY 2015-16. Hence, keeping in view, the entire facts and circumstances, the contention of the revenue that the AE invariably derives some benefit and hence no markup should be charged, cannot be accepted. Provision for warranty disallowance - assessee contended that the issue of warranty is a recurring provision made in the past several years - DRP for both the years in question directed the AO to modify the disallowance after verifying the provisions made in the earlier years, its actual utilization and writing back of unutilized provision for taxation - HELD THAT:- Since, the provision for warranties has been made @ 3% and the unutilized portion has been reversed at a regular intervals from year to year, the appellant has been consistently following the policy of making provision for warranty as per the terms of the contract, the ITAT for AY 2008-09, AY 2010-11, AY 2011-12, AY 2012-13 AY 2013-14 has allowed provision for warranty, the provision made during AY 2014-15 is on same basis as in earlier years is hereby allowed. Allowability of provision for liqui ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... A No. 8119/Del/2018 And ITA No. 475/Del/2021 - - - Dated:- 18-8-2021 - Ms. Suchitra Kamble, Judicial Member And Dr. B. R. R. Kumar, Accountant Member For the Assessee : Sh. Ajit Kumar Jain, CA For the Revenue : Sh. Surenderpal, CIT DR ORDER PER DR. B. R. R. KUMAR, ACCOUNTANT MEMBER: The present appeals have been filed by the assessee against the final assessment orders dated 31.10.2018 and 31.03.2021 for the AYs. 2014-15 and 2016-17 passed by the AO u/s 143(3) r.w.s. 144C of the Income Tax Act, 1961. Markup on Services availed: (A.Y. 2014-15 2016-17) 2. Humboldt Wedag India Private Limited ( Appellant or the Company or HW India ), incorporated in 1976, is a wholly owned subsidiary of KHD Humboldt Wedag International AG Cologne ( KHD AG ). KHD AG, through its subsidiaries is engaged in the business of process technology design, engineering, project management, the supply of technology and equipment, as well as supervising the erection and commissioning of cement plants and related equipment. It also provides customer services such as, supplying spare parts, optimization of cement plants, and training plant personnel round ou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oup also. But the primary beneficiary was definitely the assessee. Under these circumstances, it would not be proper to term the services rendered by the AE as stewardship activity. 3.3.3. Corning to the quantum of payment for the services, it is seen that from the total cost of services, cost of stewardship activity services/duplicate services is first removed. The remaining cost is allocated to different organizations of the group. The assessee pays the cost of services allocated to it plus ore-agreed mark up. In the course of hearing, the assessee was asked to justify the mark up. However, no detailed justification was provided in this regard. It was only stated that since the AE was providing the services, it was entitled to earn some margin on the same. However, as discussed earlier, while the primary beneficiary of the services is the assessed, there are also some incidental benefits accruing to the group. The parent company gets benefited by better synergies, scale of economy, better coordination and reporting. Considering this, the AE, in our opinion, was not justified in charging any mark up on the cost of services. The arm s length price of the services is therefor ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he equipment carry a warranty for a period of 12 months from completion of performance test or 18 months from the date of commissioning or 24 months from the date of last major delivery, whichever is earlier, against any material defect, design defect, manufacturing defect and/or failure of equipment to perform as stipulated. The spares shall carry a warranty period of 12 months from the date of their being put to use or maximum 24 months from the date of delivery whichever is earlier. The Performance Bank Guarantee submitted by the supplier will remain valid till the aforesaid warrantee period. Further, specific items as Gear Box for kith, girth gear, thrust rollers, will have latest defect liability period of 60 months from the date of delivery. 14. The provision for warranty has been made on a scientific and reasonable basis that the assessee makes a provision for warranty @3% of the contract value upon the completion of the deliveries based upon the historical trend. The following table provides a reconciliation of provisions for warranty for various years i.e. provision created in preceding years, actual expenditure during the year, earlier provision utilized, the balance ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n supply and services, in case if there is any demand from the purchaser. The terms of agreement clearly provides that assessee has to take effective steps; for rejection or modify or replace or remove the defect or deficiency or in case of damage of equipment; assessee shall do the needful and for this purpose it has been making provision for making such guarantee. The Id. CIT(A) has also taken note of the actual expenses incurred on warranty by the assessee in earlier years and also calculated the percentage of such expenditure (as noted by us herein above). If based on such actual expenditure incurred on warranty, assessee has made the provision for warranty, then ostensibly it can be held that, not only assessee has made the provision as per past experience but there was a certain degree of certainty while making such estimate. The ratio laid down by the Hon ble Apex Court in the case of Rotork Controls India (P) Ltd Vs. CIT (supra) is squarely applicable... 15. The observations and finding of the Id. CIT(A) is not only in accordance with the facts and material on record, but also in conformity with the principle laid down by the Hon ble Supreme Court, hence ther ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... wing the policy of making provision for warranty as per the terms of the contract, the ITAT for AY 2008-09, AY 2010-11, AY 2011-12, AY 2012-13 AY 2013-14 has allowed provision for warranty, the provision made during AY 2014-15 is on same basis as in earlier years is hereby allowed. Provision for anticipated losses: :(A.Y. 2016-17) 19. The anticipated loss claimed by the assessee with regard to Shri Cements Ltd. has been disallowed by the AO. The ld. DRP held that the details furnished by the assessee in this regard do not contradict the view taken by the AO. Liquidated Damages :(A.Y. 2014-15) 20. The assessee is engaged in the business of industrial plant engineering and supply of equipment for cement and mineral plants, entered into various contracts with customers for supplies and engineering services ranging from 2 to 4 years. The contracts contain clause for payment of liquidated damages for default of delivery as per the agreed terms entered in the contract agreements. The ld. DRP directed the AO to verify the provisions made in the earlier years, actual utilization and writing back of unutilized provision to taxation. 21. The table below pr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sessee. Whence a provision is arising out of a contractual obligation and the basis of providing the provision is based on past experience and such a reasonable basis of estimation has been regularly followed by the assessee in the past, then ostensibly it cannot be held that the basis of estimation or working of the provision is not correct. Further, once it is brought on record that assessee on the year of reversal has paid taxes on excess provision and similar feature appeared in the earlier years and assessee had payments for liquidated damages on delay in delay of deliverables, then no adverse view can be taken, because it is not the charge of the Assessing Officer that assessee has made some kind of excessive provision in this year in relation to past. The finding and observations of the Id. CIT(A), are based on correct appreciation of facts and law, hence we confirm the order of CIT(A) on this score and accordingly, ground No. 1 by the Revenue is dismissed. 24. Since, the provision for liquidated damages has been made regularly and allowed in P L account and since the unutilized portion has been reversed at a regular intervals from year to year, since, the ITAT for AY ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tices might not always be appropriate for determining final tax liability. The primary goal of financial accounting is to provide useful information to management, shareholders, creditors, and others properly interested; the major responsibility of the accountant is to protect these parties from being misled. The primary goal of the income tax system, in contrast, is the equitable collection of revenue, the major responsibility of the state is to protect the public finance. Hence, any presumptive equivalency between tax and financial accounting would be unacceptable. 32. Furthermore, there are other reasons why taxation might deviate from accounting concepts of income. While the most obvious purpose of taxation is to finance public expenditure, the extent and magnitude of taxation in modern economies also makes it a powerful instrument of government economic and social policy in its own right. While it is true that some taxation measures might be introduced to improve economic decision making, others are implemented for very different reasons. The concept of tax expenditures ably describes the situation that those provisions of the income tax containing special exemptions, ded ..... X X X X Extracts X X X X X X X X Extracts X X X X
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