9911796707
TMI Blog2022 (3) TMI 1511X X X X Extracts X X X X X X X X Extracts X X X X ..... n of the trading segment, the TPO did not give effect to the same. If the segmental margin as furnished by the Assessee is taken into consideration, in terms of which the margin of the Assessee stands at 2.18%, the Assessee s international transaction in this segment would be at arm s length. The transfer pricing adjustment in trading segment is set aside. The matter is restored to the files of A.O. / T.P.O. for fresh TP analysis taking into account the above mentioned mistake pointed out. TPO is directed to consider the assessee s reply dated 25.01.2013 vide which it had furnished the segmental details reconciled with the financials. It is ordered accordingly. Technical and marketing support services to the AEs in respect of their direct sales made by the AEs to customers in India - Bifurcation of this segment into ITES and MSS segment - TPO held that services under the technical and marketing services segment is essentially dissemination of information and the assessee is acting as communication channel between the customers and the AEs using IT medium - HELD THAT:- The functions performed by the assessee under this segment are prima facie identical for the concerned assessment y ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assessee and wherever the tax has been deducted, the claim of the assessee was to be allowed. The DRP also directed the A.O. to verify as to whether the extent of Rs.10,38,82,844 has been subjected to double disallowance - The above directions of the DRP, we are in consonance with and the entire issue raised in ground needs to be reexamined by the Assessing Officer taking into consideration the additional evidences now filed before the Tribunal. It is ordered accordingly. Difference between service income disclosed in the P L Account and amount disclosed in the service tax returns brought to tax as undisclosed income - HELD THAT:- The detailed submission of the assessee and the reconciliations are not seen considered by the A.O. nor the DRP. Therefore, for fresh adjudication of the issue raised in ground the matter is restored to the A.O. The A.O. is directed to afford a reasonable opportunity of hearing before a decision is taken on the issue. It is ordered accordingly. Disallowance of depreciation claimed on assets given on lease and taxation of future lease rentals - HELD THAT:- As per section 32 of the I.T.Act, for claiming depreciation, the assessee should be the owner of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t is ordered accordingly. Disallowance for expenditure on warranty - It is stated by AR that the assessee had filed the details along with the submissions dated 08.10.2013 for a further sum of Rs.24.41 crore before the DRP. However, the same was not taken note by the DRP. Accordingly, the issue of actual expenditure on warranty for the disallowance of Rs.24.76 crore is restored to the files of the A.O. The assessee shall cooperate with the A.O. and shall furnish necessary evidence for having incurred the warranty expenditure failing which the A.O. shall make necessary additions. The issue raised as regards the provision for warranty is allowed and the issue in respect of disallowance of warranty expenditure is allowed for statistical purposes. Addition u/s 69C - unexplained expenditure incurred towards freight inwards, outwards or towards other logistic services obtained - HELD THAT:- A.O. is not justified in stating that the assessee has not produced necessary evidence in support of its objections. The assessee had given objections and necessary evidence before the AO and the DRP.Therefore, in view of the directions of the DRP, which we are in consonance with, we direct the A.O. t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e before him, the DRP and the additional evidence filed before the Tribunal, shall take a decision in accordance with law after affording a reasonable opportunity of hearing to the assessee. It is ordered accordingly. Short credit of TDS - HELD THAT:- We direct the A.O. to give correct credit for TDS in accordance with law. Set-off of loss brought forward - HELD THAT:- We direct the A.O. to examine the issue whether the carry forward losses is to be set off or not. It is ordered accordingly. Disallowing in payment for Microsoft Licenses - HELD THAT:- The assessee s AE centrally procure licences from independent unrelated third party vendors on behalf of the Dell Group for their usage and for usage in the products sold. The cost incurred by the AE in this regard are allocated to each of the Dell group entities on the basis of usage of licences by them and are recovered from them at cost.The assessee had also paid Customs Duty on import of licences. The licences so procured by the assessee are used in the products sold by it. In absence of installing such licences, the product sold by the assessee cannot be utilized by the cutomers. Therefore, the usage of licences cannot be doubted. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... transactions as being at arm's length. During the year, the Assessee also recovered certain advertisement expenses from Intel USA ("Intel") and Microsoft USA ("Microsoft"). Since the transactions were with unrelated parties, the assessee did not benchmark the same. During the course of assessment proceedings, reference was made to the Transfer Pricing Officer (TPO). The TPO passed an order dated 29.01.2013 under Section 92CA of the Income-tax Act, 1961 ("the Act") determining a TP adjustment aggregating to Rs. 250,07,40,281/-, comprising of the following: A. Adjustment of Rs. 53,91,00,000/- determined in the trading segment by ignoring the segmental details along with reconciliation with the financials provided by the Assessee and completely ignoring the installation revenue which according to the assessee, was an integral component of the sales effected in the trading segment; B. TP adjustment determined by bifurcating the technical and marketing support services segment into ITES segment and MSS segment, and treating the recovery of expenses from Intel and Microsoft as part of the cost base for MSS segment and applying a mark-up. The adjustment determined in the ITES is of R ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the test of comparability and should be rejected. • Infosys BPO Ltd •Accentia Technologies Ltd •Cosmic Global Ltd • Eclerx Services Ltd d) The learned AO / learned TPO erred in the computation of mark-up for Allsec Technologies Limited. The learned TPO has erroneously considered the provision for bad and doubtful debts as non-operating in nature. e) Having accepted that the appellant is a limited risk contract support service provider, the learned AO / learned TPO erred in not providing appropriate adjustment towards the risk differential, when the com parables selected are full - fledged entrepreneurial companies. 8.1.2 Marketing Support Services a) The learned AO / learned TPO erred in arbitrarily arriving at segmental profit with respect of Marketing support services segment. b) The learned AO / learned TPO erred in adding a mark-up on the impugned marketing support services segment without appreciating the fact that the mark-up on cost is within the + /5% of the arithmetic mean of the comparable companies selected by the appellant and as accepted by the learned AO I learned TPO 9. Advertisement Cost a) The learned AO I learned TPO err ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 2-ITS -01-SC) 14. Disallowance of Provision for Warranty and Warranty expenses - Rs. 821,556,000 A. Disallowance of Provision for warranty - Rs. 57.40 crores •The learned AO has erred in not placing reliance on the decision of the Hon'ble Supreme Court in the case of Rotork Controls India (P) Ltd vs. Commissioner or Income Tax (SC) [2009] 80 Taxmann 422. B. Warranty Expenses - Rs.24.76 crores •The learned AO and the Hon'ble DRP erred in disallowing the warranty expenses of Rs.24.76 crores without considering the details submitted during DRP proceedings. 15. Unexplained expenditure A. Freight - Rs. 376,642,988 •The learned AO erred in invoking section 69C without appreciating that, provisions of section 69C is applicable only in case if no explanation offered on the source of income for the expenses under consideration. •The learned AO and the Hon'ble DRP have erred disallowing the freight expenses under section 69C without considering the detail submitted during DRP proceedings. B. Rent - Rs. 2,371,471 The learned AO erred In invoking section 69C without appreciating that provisions of section 69C is applicable only in cas ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... erbook-Vol.12), wherein the net mark up on cost was 2.23%. The details of the same are as follows:- Total Income Rs. 6,22,30,99,230/- Total Cost Rs. 6,08,74,11,808/- Profit Rs. 13,56,87,422/- Margin over cost 2.23% 6.2 The Comparison of the benchmarking approach adopted by the Assessee and TPO are as follows:- Particulars Assessee TPO Methodology adopted Transaction Net Margin Method ('TNMM') TPO accepted the method, the PLI and the comparables selected by the Assessee. (refer page 15 of the TP Order) Profit Level Indicator ('PLI') OP/OC Database used PROWESS and CAPITALINE Comparables selected 59 6.3 In trading segment, the dispute primarily arises as the TPO rejected the segmental details reconciled with the financials furnished by the Assessee and recast the same by ignoring the installation revenue. According to the assessee, installation revenue was integral to the sales effected in the segment, for which a composite price was charged and received from the customers. The TPO arrived at the operating margin in the following manner (refer pages 12-14 of the TP order): Particulars Amount in crores Basis for computation (page 5590) Opening stock Rs. 1.53 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ocated by the Assessee and directed the TPO to examine the same and adopt the correct value. 6.6 Pursuant to the DRP's directions, final assessment order was passed. Despite the directions issued by the DRP to have a relook at some of the items to arrive at the segmental margin, effect to the same was not given in the final assessment order and the adjustment originally made in the trading segment was sustained (refer pages 55-56 of the final assessment order). Aggrieved by the Final Assessment Order, the assessee has raised the issue before the Tribunal. The ground in the assesee's appeal pertaining to the trading segment is as follows:- "TPO erred in arbitrarily arriving at segmental profit/loss in respect to the trading segment (Ground No. 7.1)". 6.7 The learned AR has filed a brief written submission. The learned AR elaborately explained the each of issue raised vis-avis the financial of the assessee. The brief point raised by the learned AR are as follows:- "The TPO had proposed to recast the segmental details of the trading segment vide notice dated 11.01.2013. Since there were certain errors as regards the computation of the segmental margin in the TP study as well as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nufacturing Segment Marketing and Technical Support Segment Total Revenue Sale of traded items 5,44,72,87,852 24,51,54,28,430 29,96,27,16,282 Less: Duty (6,05,29,065) (1,98,09,13,045) (2,04,14,42,110) Net Sales 5,38,67,58,787 22,53,45,15,385 27,92,12,74,172 Installation and others - allocated 83,63,40,443 30,95,39,557 1,14,58,80,000 Income from support services 46,53,65,615 46,53,65,615 Income from lease financing 33,61,000 Total Revenue 6,22,30,99,230 22,84,40,54,942 46,53,65,615 29,53,58,80,787 Expenditure Cost of goods sold 4,70,06,96,259 18,81,52,22,000 - 23,51,59,18,259 Salaries bonus 18,61,70,520 84,18,47,475 17,57,39,795 1,20,37,57,790 Contribution to provident and other funds 1,44,61,522 6,13,30,594 1,29,56,671 8,87,48,787 Staff Welfare 20,16,540 1,03,98,228 21,22,306 1,45,37,074 Particulars Trading Segment Manufacturing Segment Marketing and Technical Support Segment Total Rent 1,20,50,950 4,82,69,679 1,03,11,818 7,06,32,447 Rates and taxes 16,63,237 34,87,669 8,80,548 60,31,454 Insurance 17,97,888 70,64,915 15,15,097 1,03,77,900 Power and fuel 1,85,01,686 3,14,93,056 85,46,607 5,85,41,349 Repairs ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... installation services reflected in the financials of Rs. 114.58 crores includes installation revenue pertaining to the trading segment of Rs. 83 crores and installation revenue pertaining to the manufacturing segment of Rs. 30.95 crores. This bifurcation was given in the segmental details furnished to the TPO vide submission dated 25.01.2013 (refer page 5566 of the paperbook-Vol.12) The TPO ignored the installation income as provided in the segmental details furnished to her, without assigning any reasons for doing so and more importantly when she had not disputed the functions of the Assessee in this segment or the methodology adopted for benchmarking the segment. Prima facie installation revenues are integral to the trading and manufacturing segments, and the price for the goods from customers is inclusive of the installation costs. It is only for the purposes of drawing the financial statements that the aggregate revenues from installation services is separately reflected under the head "services"- "installation and others". In support of the aforesaid contentions, the Assessee placed reliance on the additional evidence submitted before the Tribunal vide its applications dated 1 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is Rs. 1.39 crores as recorded in the financial statement at Note 12 on page 6281 of the paperbookVol.13. While the DRP observed that the TPO had agreed to correct this error, and directed the TPO to do so, effect to the direction was not given in the final assessment order. 6.9.3 The other anomaly of the TPO's order is that while computing the margin of the trading segment, the TPO has not excluded from the operating expenses an amount of Rs. 40.31 crores, which according to the assessee pertains to the MSS segment. This cost pertains to the MSS segment, is evident from the financial statements read with the notes thereto at pages 6281 and 6309 of the paperbook-Vol.13. The TPO's observation that total expenses are to be taken into consideration for computing the operating margin is incorrect as costs pertaining to a totally unrelated segment cannot be taken into consideration while computing the margin of the trading segment. In fact, on the cost of Rs. 40.31 crores incurred while rendering the technical and marketing support services, the Assessee has charged a mark-up of 5%. More importantly, the TPO has taken the very same costs of Rs. 40.31 crores while arriving at the margi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 2). (A summary of functions performed by the Assessee are available at page 5661 of the paper book- Vol.12). 7.1 The Net mark-up on cost earned by the Assessee (as per the TP study) are as follows:- Services revenue Rs. 24,84,09,000/- Allocable Cost Rs. 23,66,57,000/- Profit on allocable costs Rs. 1,17,52,000/- Margin over cost 4.97% 7.2 The Comparison of the benchmarking approach adopted by the Assessee and TPO are as follows:- Particulars Assessee TPO (ITES) TPO (MSS) Methodology adopted Transaction Net Margin Method ('TNMM') TNMM TNMM Profit Level Indicator ('PLI') OP/OC OP/OC OP/OC Database used PROWESS and CAPITALINE PROWESS &CAPITALINE PROWESS & CAPITALINE Comparables selected 5 8 7 7.3 The Comparables selected by the Assessee and their arithmetic mean are as follows:- Sl. No. Name of the Company NPI Concept Communication Ltd. 5.55% Needwise Advertising Pvt. Ltd. 2.33% New Age Entertainment Pvt. Ltd. 4.83% Rockman Advertising and Mktg. (India) Ltd. 35.45% Times Innovative Media Ltd. 1.97% Mean 9.24% 7.4 The TPO rejected the TP study of the assessee. The dispute arises in this segment as the TPO (i) bifurcated the segment into ITE ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ther technology would become an ITES, which is grossly erroneous. (iii) It is submitted that under the technical and marketing support services segment, the Assessee does not render any services in the nature of ITES. The services rendered are in the nature in the nature of marketing support services and incidental technical services. On the erroneous basis that what the Assessee does is merely dissemination of information using IT media, the TPO held that the services are in the nature of ITES. (iv) It is submitted that services cannot be termed as ITES merely because they are rendered using information technology. If that interpretation is accepted, then virtually every service rendered using a computer device or other technology would become an ITES, which is grossly erroneous. (v) In this regard, support may be drawn from the definition of ITES as defined in Rule 10TA(e) of the Income-tax Rules, 1962, which reads as under: "information technology enabled services" means the following business process outsourcing services provided mainly with the assistance or use of information technology, namely:- (i) back office operations; (ii) call centres or contact centre serv ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ting support services segment will be at arm's length. 7.7 The learned Departmental Representative supported the orders of the TPO and the DRP. 7.8 We have heard rival submissions and perused the material on record. The TPO held that services under the technical and marketing services segment is essentially dissemination of information and the assessee is acting as communication channel between the customers and the AEs using IT medium. According to the TPO, those services rendered by the assessee are to be considered as ITES. After holding so, the TPO bifurcated segment into IT segment and MSS segment and bench marked them separately. 7.8.1 In this context, it is pertinent to note that for assessment year 2013-2014, the DRP granted relief to the assessee by holding that services rendered are in the nature of marketing support services. Copy of the DRP's order for assessment year 2013-2014 is placed on record at page 770 Vol.4 of the case law compilation. The DRP has given the above directions at page 10. The relevant finding of the DRP in assessment year 2013-2014 reads as follows:- "Having considered the submissions, and on perusal of the details filed, we note that as per t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rections for assessment year 20132014. It is ordered accordingly. 7.8.3 Since assessee's main issue relating technical and marketing support segments raised in grounds 8 and 8.1 are restored to the AO / TPO for fresh consideration, the other subsidiary grounds in this segment also needs to be restored to the TPO for fresh adjudication (As the same would be relevant if TPO rejects the assessee's contentions in ground 8 and 8.1). Therefore, ground 8.1.1(a), 8.1.2(b) and 8.1.1(c), additional grounds 1, 9(a) and 9(b) are restored to the files of TPO for fresh adjudication. C. WARRANTY CHARGES RECEIVABLE determined by the TPO (TP ISSUE) 8. The brief facts in respect of the above issue are as follows:- It was stated that in respect of the goods manufactured and traded by the Assessee, the Assessee provides warranty services, for which it imports spares from its AEs and incurs other expenses. The cost incurred for discharging such warranty obligations was Rs. 211.41 crores (including provision for warranty of Rs. 57.39 crores), which is reflected at Schedule 13 to the accounts at page 6281 of the paperbook-Vol.13. In respect of the products sold by the AE directly to its customers in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er the Assessee had reduced the reimbursements from the costs or accounted for it separately, the DRP directed the TPO to verify the treatment and if accounted for separately or reduced from costs, that no adjustment is warranted. 8.3 The directions of the DRP was not given effect final assessment order and the adjustment originally made segment was sustained (refer pages 55-56 of the final assessment order). 8.4 Aggrieved by the TP adjustment of Rs.16.11 crore in the final assessment order, the assessee has raised this issue in ground 10, which reads as follows :- "The AO / TPO erred in arbitrarily imposing a mark-up on warrant." (ground No.10) 8.5 The submission of the learned AR in brief are as follows:- (i) The warranty obligation as regards the sales made by the AEs directly in India is wholly on the AEs and the Assessee only provides coordination and support services as regards the same, for which it is compensated on cost plus 5%. The co-ordination and support services includes call centre support, cost for third party services for assistance to customers of the AEs, etc. The cost of spares and parts to be replaced under the warranty are borne by the AEs. (ii) Durin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to the P&L account and effect suitable adjustment. Since the services related to warranty are being handled by a third party and the assessee is being used only as a medium, the TPO is not correct in charging a markup on this amount. Hence, the objection relating to markup on the warranty cost is upheld. The TPO cannot charge a markup on warranty amount as such services are not rendered by the assessee to its AE." 8.7.1 In the light of the above directions of the DRP, which we are in consonance with the TPO, is directed to reexamine the issue raised in ground 10 afresh. It is ordered accordingly. 8.7.2 Hence, ground 10 is allowed for statistical purposes. CORPORATE TAX ISSUES Disallowance of expenditure under section 40(a)(ia) (Ground No. 11) 9. The brief facts in relation to the above issue are as follows:- The Assessing Officer during the relevant assessment year had called for details of taxes deducted on source on various payments in the nature of repairs and maintenance, legal and professional charges, communication, commission and rebate, advertisements, and travelling and conveyance. The assessee submitted details for a substantial amount (upto 80 percent). The AO b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... al details for an amount of approximately Rs. 24.10 crores has been submitted along with ledger extracts along with details of TDS wherever applicable. It was submitted that on consideration of the additional evidence together with the details submitted to the AO, it is clear that on all the amounts debited to the P&L Account, either tax has been deducted at source or the amounts are of a nature which do not require tax deduction at source. 9.3 The learned Departmental Representative supported the order of the A.O. 9.4 We have heard rival submissions and perused the material on record. The A.O. brought to tax the difference between the amount debited to the profit and loss account and the amount for which the details of tax deducted at source was furnished, holding that taxes has not been deducted on the difference and thus made a disallowance of Rs.55,30,36,094 invoking section 40(a)(ia) of the I.T.Act. It was submitted that to the extent of Rs.10,38,82,844, the assessee had already disallowed the same in its computation of income, and therefore, there is double disallowance to that extent. This fact has been noticed by the DRP and the DRP in its order had specifically directed ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ,500 Less : Amount on which TDS is not applicable, details of which was filed before DRP but not considered in order (IV) 62,11,652 Less : Additional evidence filed before this Hon'ble Tribunal on 05.11.2018 on which TDS is not applicable (V) 68,06,111 Balance for which details not filed (VI) = III-IV-V 32,737 9.4.2 The above reconciliation submitted needs to be verified by the TPO. The DRP in its order directed the A.O. to verify the details submitted by the assessee and wherever the tax has been deducted, the claim of the assessee was to be allowed. The DRP also directed the A.O. to verify as to whether the extent of Rs.10,38,82,844 has been subjected to double disallowance. The relevant directions of the DRP reads as follows:- "11.2 The panel is of the opinion that this aspect has not been verified by the assessing officer in the draft order. Since the AO has not verified the same, AO is directed to verify the above factual contentions of the assessee and if TDS has been deducted then the claim of the assessee is to be allowed to that extent. The AO is also directed to verify the claim that the assessee had already disallowed an amount of Rs.103,882,844 under section 40 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (refer page 41 to 44) the AO disregarded the explanation furnished by the Assessee as regards the difference and brought to tax the difference between the income reflected in the P&L Account of Rs. 116,80,40,000/- and the amount reflected in the service tax return of Rs. 189,78,40,682/- i.e., an amount of Rs.72,98,00,682/- to tax as undisclosed income. 10.2 Aggrieved, the assessee filed objection before the DRP (refer page 35 to 40). Before the DRP the assessee submitted a detailed reconciliation. It was explained that out of Rs. 72.98 crores, Rs. 54.82 crores represented an amount on which the assessee had paid tax on reverse charge mechanism and thus, the same could not be construed as its income. As regards the balance, although initially it was submitted that the same was on account of deferment of revenue, vide an additional submission, a reconciliation was given. The DRP while directing the AO to verify the contention as regards payment on account of reverse charge mechanism, failed to appreciate the additional submission filed by the assessee. In the final assessment order, the AO did not consider any of the details submitted by the assessee (at page 56) holding that the le ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ned DR supported the findings of the A.O. and the DRP. 10.5 We have heard rival submissions and perused the material on record. The Assessing Officer in the draft assessment order brought to tax as undisclosed income, the difference reflected in the profit and loss account of Rs.116,80,40,000 and the amount reflected in the service tax return of Rs.189,78,40,682, i.e, the amount of Rs.72,98,00,682. The DRP in its order though directed the A.O. to verify the contentions as regards the payment on account of reverse charge mechanism did not consider the additional submission and the reconciliation. In the final assessment order, the A.O. sustained the addition made in the draft assessment order stating that ledger account extracts has not been submitted. The assessee had provided detailed reconciliation between service tax return and income in the profit and loss account in its additional submission dated 08.10.2013 before the DRP (refer page 263 Vol.2 of the paper book). Out of the total addition of Rs.72,92,00,682, it was submitted that a sum of Rs.54,81,88,597 was paid on reverse charge basis, which cannot be construed to be income of the assessee. During the relevant assessment y ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... .2 The break-up on which the service tax is paid is as under:- Description Amount (in Rs.) Management, Maintenance or Repair Services 13,15,38,280 Erection, Commissioning or Installation Services 41,94,88,681 Information Technology Software Service 44,85,01,689 Information Technology Software Service (ITSS) - Reverse Charge 54,81,88,597 Technical Support Service 11,59,80,626 Marketing Support Service 23,41,42,809 Total 189,78,40,682 10.5.3 Therefore, prima facie, the different of two, i.e., Rs.72,98,00,682, which is brought to tax by the Assessing Officer. Rs.54.81 crore represents payment subjected to reverse charges as stated above. 10.5.4 As regards the technical and marketing support services are concerned, the assessee is remunerated at cost plus 5%. While in the service tax return, the entire amount of Rs.35,01,23,435 is reflected in the financial statement. Whereas under Income tax the cost is netted off with the expenses and only, the mark up portion of Rs.2,21,60,000 is reflected. This is evidenced by the profit and loss account and the disclosure in the notes of the account (refer page 433 and 434 of Vol.2 of the paper book). If the revenue from technica ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of income-tax, the assessee being the owner of the asset, the principal amount of lease rental which had accrued during the year was offered to tax and thus, Rs. 2,93,13,022/- pertaining to future years was reduced from the income. Depreciation allowance was claimed under section 32 on the cost of the leased assets. 11.1 In the draft assessment order, it was held as follows (refer page 50 to 53) (a) As per certain clauses of the lease agreement, the lessee is the owner of the asset. The lessee has chosen the equipment to be leased. (b) The Supreme Court in the case of ABB v. IFCI([2006] 154 Taxman 512 (SC)), the Special Bench of the ITAT in Indus Ind Bank v. Additional CIT, and the Bangalore Bench of the ITAT in Hewlett Packard India Sales Pvt. Ltd. held that in the case of finance lease, the lessee is the owner of the asset and is entitled to depreciation. (c) The decision of the Supreme Court in ICDS Ltd. v. CIT [2013] 350 ITR 527 (SC) ("ICDS") is contradictory to the decision in ABB. Since ICDS was in the context of motor vehicles the same is inapplicable to the assessee. (d) The assessee should not have reduced the sale value of Rs. 5,89,52,591/- by adding the cost of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or. Also, the costs incurred which are recurring in nature and incidental to operating the asset, it is the responsibility of the lessee to bear (cost incurred in normal course of usage). * The detailed submissions in this regard made before the AO in the submissions dated 18.12.2012 (At page 1693 of Volume 5) and 20.02.2013 (at page 4277 of Volume 9) and also before the DRP vide submission dated 08.10.2013 (Pages 243-259 of Volume 2 of the paperbook) 11.3 As regards fixation of future lease rentals are concerned, the submission of the learned AR are as follows:- * The AO has brought to tax the entire principal portion of lease rentals amounting to Rs. 5,89,52,591 in the current year although the entire lease rental income does not accrue in the first year and the same ought to be taxed as and when they accrue over the lease period. * The lease is a cancellable lease at the option of the lessee (see clause 21). Hence, considering the entire lease rental as income accrued for the year and taxing the same in the current year is incorrect. * The AO has accepted that the interest component of the lease would accrue as and when the same is due, the same ought to apply for the p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ct, for claiming depreciation, the assessee should be the owner of the asset and must have used the said asset for the purpose of its business. We find that the there is no distinction between an operating lease and finance lease for the purpose of the Act. The CBDT Circular No.2 dated 09.02.2001 provides that "AS 19 requiring capitalization of the asset by the lessees in a finance lease transaction will have no implication on the allowance of depreciation on assets under the Income-tax Act. 11.5.2 As mentioned earlier, the assessee-company had entered into a master lease agreement dated 14.11.2006 with General Motors India Private Limited (the lessee). Copy of the same is placed at page 1727 of Vol.5 of the paper book submitted by the assessee. On perusal of the same, prima facie, the following clauses demonstrate that the assessee is the owner of the asset, namely, i. Clause 10 - Right to inspect ii. Clause 13 - Right of assignment by lessor iii. Clause 17 - Damaged units to be replaced by lessee which shall be the property of the lessor iv. Clause 20 - Right to return of equipment v. Clause 21 - Cancellable at the option of lessee - early termination vi. Clause 25- ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assets leased (a similar finding was rendered in the case of ICDS (supra) - refer para 26 of the judgment). Further, the A.O. shall render a finding whether the assessee, apart from the business of manufacture of computers, is also in the business of leasing of computer equipments. With the above said directions, we restore to the files of the A.O. the question as to whether the assessee / lessor is entitled to depreciation on the leased assets. Before concluding, it is to be mentioned that the judgment of the Hon'ble Apex Court relied on by the A.O. and the DRP in the case of ABB (supra) does not have application to the instant case. In the case of ABB, the issue involved was relating to "offences relating to transactions in securities" and not connected to Income-tax Act and the claim of depreciation, whereas, the facts in the case of ICDS (supra) is more similar to the facts of the instant case. Moreover, CBDT Circular No.2 dated 09.02.2001 has clearly mentioned that the claim of depreciation is dependant on the test of ownership. The test of ownership is discernible only on interpretation of various clauses in the lease agreement. 11.5.5 As regards the taxation of future leas ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e ground that it is not scientific and also disallowed expenses towards utilization of warranty amounting to Rs. 24,76,00,000/- crores on the ground that no evidence was submitted in support of such warranty expenses. 12.1 Aggrieved by the Draft assessment order, the assessee preferred objections before the DRP. The DRP confirmed the disallowance of actual expenses incurred towards warranty to the extent of Rs. 24,76,00,000/- on the basis that no evidence was submitted. Further, the DRP confirmed the disallowance of provision for warranty of Rs. 57,39,66,000/- on the ground that the scientific nature of the creation of the provision was not established. Pursuant to the DRP's directions, final assessment order was passed. 12.2 Aggrieved by the final assessment order, the assessee has raised this ground before the ITAT. The submission of the learned AR as regards provisions for warranty are as follows:- a. The methodology followed by the assessee in estimating the warranty cost and tracking the relating expenses is briefly explained as under: (i) The assessee has a specialized warranty accounting team which tracks the incidents reported and associated cost of providing warranty ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in the submissions dated 07.11.2012 (at pages 1001 to 1011 of Volume 4 of the paperbook) and the submission dated 18.12.2012 (At page 1715 of Volume 5) and also before the DRP vide submission dated 08.10.2013 (Pages 537-551 of Volume 2 of the paperbook) 12.3 The submission of the learned AR as regards disallowance of Rs.24.76 crore (expenditure on warranty) are as follows:- (a) Out of the total warranty expenses of Rs. 154.02 crores, the assessee had provided evidences for purchase of spare parts, technical support, labor and logistics support amounting to Rs. 129.26 crores. (b) Thus, details regarding approximately 85 % of the total expenses was furnished. Ignoring the fact that the data is voluminous and furnishing of 100 percent evidences was not possible, the AO has disallowed the difference amount of Rs. 24.76 crores. (c) In any event, details to the extent of Rs. 24,41,26,267/- was filed before the DRP vide submission dated 08.10.2013. The said expense pertains to freight payments incurred towards transportation of spare parts for warranty replacements. Details of the partywise payments made along with details of tax deducted at source is available at pages 541, 547 to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... was identical in AYs 2002-03 & 2003-04 as well as in AY 2005-06. The Tribunal has in the appeal for the AYs 2002-03 & 2003- 04 after considering the method of providing for warranty liability by way of a provision, specified that the provision made was based on past history and was on scientific method of estimating liability on account of warranty claims. It is clear from the chart which has been extracted in the order of assessment that as and when the period of warranty expires, the assessee writes back the provision made in the books of account to the extent it relates to the warranty liability which the assessee does not incur and which was already provided by way of a provision and allowed as deduction in the past. It appears to us that the provision made by the assessee is scientific and is based on past history. We are also of the view that in view of the parity of basis of provision of warranty in AYs 2002-03 & 2003-04 and AY 2005-06, the ruling of the Tribunal in AYs 2002-03 & 2003-04 is squarely applicable to AY 2005-06 also. For the reasons stated above, we do not find any merit in ground No.3 raised by the revenue and accordingly the same is dismissed." 12.5.1 Similar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he provision of warranty was made in assessment year 20022003, 2003-2004 and 2005-2006 as well as in the relevant assessment year is identical. The Tribunal in the above mentioned orders for assessment year 2002-2003, 2003-2004 and 2005-2006 after considering the method of providing for warranty liability by way of a provision, specified that the provisions made was based on past history and was a scientific method of estimating liabilities on account of warranty claims. For the relevant assessment year also, there are automatic reversals of the provision when products goes out of warranty period. For the purpose of estimating the warranty provision, the assessee takes into account only those units in respect of which the warranty period has not expired as on the date of estimation of provision. Accordingly, the system would automatically exclude those products for which the warranty period has expired and include only those products (i.e. products sold in past for which warranty period has not expired and products sold during the year with a warranty commitment) for which warranty period has not expired. Thus, based on the above accounting methodology, as the reversals get adjuste ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e's appeal (finding reproduced supra at para 12.5). In the appeal filed by the Revenue before the Hon'ble High Court of Karnataka against the said order, the Revenue did not raise any ground on provision for warranty (copy of Hon'ble High Court judgment dated 09.11.2018 in ITA No.236/2018 is placed on record). In view of the aforesaid reasoning and following the orders of the Tribunal in assessee's own case for assessment years 2002-2003, 2003-2004 and 2005-2006, we direct the A.O. to allow provision for warranty as a deduction. It is ordered accordingly. 12.5.5 As regards the disallowance of Rs.24.76 crore (expenditure on warranty) is concerned, we noticed that out of the total warranty expenditure of Rs.154.02 crore, the assessee had provided evidence only for a sum of Rs.129.26 crore before the A.O. Accordingly, the balance sum of Rs.24.76 crore has been disallowed for want of evidence. It is stated by the learned AR that the assessee had filed the details along with the submissions dated 08.10.2013 for a further sum of Rs.24.41 crore before the DRP. However, the same was not taken note by the DRP. Accordingly, the issue of actual expenditure on warranty for the disallowance of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Freight inwards - classified under cost of goods sold; Sale of goods i.e. freight outwards - grouped under "Operating and other expenses" in the Profit and Loss account; and Warranty services - classified under warranty expenses (ii) Certain expenses were debited under other heads like cost of goods sold, warranty etc. For instance, freight expenses incurred for purchase of goods forms part of cost of purchases and hence the same would be debited under cost of goods sold. Please see submission dated 22.01.2013 point 14 (page 4745 of Volume 10 of paperbook). Similarly, logistics/freight expenses incurred towards warranty spares would be part of expenses towards warranty utilization. (iii) It is submitted that out of Rs. 37,66,42,988/-, Rs. 9,95,36,401/- pertains to payments made towards freight inwards and accounted under "Cost of materials". The party-wise details of the said Freight inwards along with the details of TDS deducted on them were produced before the DRP which is available at page 641 of Volume 2 of paperbook. (iv) Further, the freight and other logistics costs of Rs. 24,41,26,267/- incurred for transportation of spare parts procured for servicing products un ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d also amount debited under other heads of profit and loss account. 12.2 The panel is of the option that this aspect has not been verified by the assessing officer in the draft order. Since the AO has not verified the same, AO is directed to verify the same and if the contention of the assessee is found correct, then the claim of the assessee is to be allowed. The assessee will produce all the necessary documents to show that tax has been deducted on all the expenses on which deduction of tax is required as per the Income Tax Act, 1961 and Rs.376,642,988 represents amount subsequently reimbursed and credited to freight account and also amount debited under other heads of profit and loss account. If the assessee fails to do so, the addition will survive to the extent of non-furnishing of evidence." 13.4.1 The A.O. in the final assessment order confirmed the draft assessment order by observing as under:- 14.7 Unexplained expenditure u/s 69C - Freight : At paragraph 7 of the draft assessment order a sum of Rs.37,66,42,988/· was added as unexplained expenditure u/s 69C of the IT Act. The assessee company has raised a grounds of objection that party wise list of TDS detail ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on before the AO - dated 26.11.2012 - pages 5141, 5211 of volume 11 of the paperbook. 13.4.3 Therefore, in view of the directions of the DRP, which we are in consonance with, we direct the A.O. to re-examine the issue raised in ground 15 afresh. It is ordered accordingly. 13.4.4 In the result, ground 15 is allowed for statistical purposes. Addition of VAT refund offered to tax in other assessment years (Ground No. 16) 14. The brief facts in relation to the issue raised in ground 16 are as follows:- The assessee had set up a manufacturing unit at Sriperumbudur Hi-Tech Special Economic Zone on a land allotted by State Industries Promotion Corporation of Tamil Nadu Limited (SIPCOT). Pursuant to a Memorandum of Understanding (MOU) entered with State Government of Tamil Nadu, the assessee was entitled to receive refund of VAT on manufactured items sold from the facility at SIPCOT. During the relevant assessment year, the assessee had recognized an amount of Rs.93,70,89,776/- as income from VAT refund. The AO called for details of disbursements from the Joint Commissioner of Commercial Taxes, Chennai, according to whom an amount of Rs.94,14,66,995/- had been disbursed. The AO broug ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s the same should not be considered as undisclosed income for the current year. (f) Even if the assessee were to revise its return of income and offer the same to tax for AY 2009-10, it had sufficient losses to setoff such income. Hence, there is no loss to revenue on account of the same not being offered to tax during AY 2009-10. (g) Without prejudice, if the aforesaid VAT refund of Rs. 43,77,219/- is being brought to tax in the current year, then the learned AO should give consequential benefit for the same in AYs 2008-09 and 2010-11 where the same has been offered to tax. 14.3 The learned Departmental Representative supported the orders of the Income Tax Authorities. 14.4 We have heard rival submissions and perused the material on record. During the relevant assessment year, the assessee had recognized an amount of Rs.93,70,89,776 as income from VAT refund. The assessee called for details of disbursement from the Joint Commissioner of Commercial Taxes, Chennai, according to whom the amount of Rs.94,14,66,995 had been disbursed. The A.O. brought to tax the difference between Rs.94,14,66,995 and Rs.93,70,89,776 of Rs.43,77,219 as undisclosed income in the draft assessment or ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... deduction of the same on the basis that it was capital expenditure. The nature of the payments was explained as under: (i) Sobha Developers - Rs. 11,58,28,028/- The amount pertains to payment made to Sobha Developers towards Civil construction undertaken at the assessee's Chennai factory. Though the amount was initially debited to the repairs and maintenance account, the same has been subsequently reversed and capitalized and thus no deduction has been claimed for the same. (ii) Firepro - Rs. 52,69,401/- The said payment pertains to payment towards installation of firefighting system in the factory at Chennai. Though the entries were initially debited to repairs and maintenance account, subsequently these were reversed and capitalised under buildings. The vendor subsequently, based on the negotiations, provided a discount of Rs.30,47,655/- to the assessee, which also the assessee recognized by reducing the capitalised value of buildings and recognizing a net fixed asset of Rs. 22,21,746/- only as buildings. (iii) Deva Interiors - Rs. 63,71,722/- The said amount pertains to payments made towards interior decoration for the factory at Chennai. The same was capitalized as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n should be given thereon. (ii) Firepro - Rs. 52,69,401/- Though the expenses were initially debited to repairs and maintenance account, subsequently these were reversed and capitalized under buildings. Ledger extract of repairs and maintenance showing the debit as well as the subsequent credit entries for Rs.52,69,401/- and Rs.5,49,672/- respectively are available at page 4881 and 4882 of Volume 10. The vendor subsequently provided a discount of Rs.30,47,655/- to the assessee and accordingly the assessee reduced the capitalized value of building by recognizing the net fixed asset of Rs. 2,21,746/- as buildings. (Additions made during the year to Buildings available at page 5001 of Volume 10 of the paperbook) The AO has erred in stating that the discount entry passed in the repairs and maintenance has been immediately reversed and thus the net effect is nil. The AO has failed to appreciate that since the original amount has been reversed and capitalized, the discount amount also ought to be reversed and reduced from the capitalized amount and thus the net amount of Rs.22,21,746 has been capitalized as buildings in the fixed asset schedule. The AO proceeded on the basis th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of capital expenditure: In the draft assessment order a sum of Rs.11,91,80,698/- was disallowed as capital expenditure in paragraph 2. In this connection a detailed discussion has been made in the draft assessment order. The enquiries conducted, evidences gathered, show cause noticed given, reply of the assessee company and analysis of the assessee company were discussed elaborately in the draft assessment order. The DRP has considered the grounds of appeal of the assessee company at paragraph 13 of its direction. The assessee company has once again contended before DRP that such expenditure was already capitalized and not claimed as revenue expenditure. The DRP has considered their objection and directed to verify the claim. It is pertinent to mention here that all the ledger accounts and other evidences collected during the course of assessment proceedings was thoroughly examined during the course of assessment proceedings and drawn specific inference that the assessee company has debited the capital expenditure into P&L account. Hence, it cannot said that it was not verified. Accordingly, the addition of Rs.11,91,80,698/- made in the draft assessment order is retained." ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d this issue before the ITAT. The submission of the learned AR are as follows:- (a) The break-up of Rs. 9,14,02,219/- which was disallowed under section 40(a)(ia) in AY 2008-09 is as under: Sl No Particulars Amount disallowed under section 40(a) 1 Advertising 4,31,43,941/- 2 Contractor 1,77,46,263/- 3 Legal and professional 1,69,70,280/- 4 Freight Outwards 1,14,20,521/- 5 Repairs and maintenance - others 21,21,214/- (b) The assessee, based on mercantile system of accounting, makes a provision for various expenses which have accrued at the end of the year but where invoices are not received at the end of the year. Such provision for expenses is reversed upon receipt of invoices. Reversal entries are passed by crediting the respective expenditure accounts which is in effect crediting the Profit and Loss account, thereby resulting in higher income for the year. (c) The AO having agreed that the reversal entries were submitted to him, erred in concluding that such reversal entries should have been credited to the P&L account instead of the respective expenses accounts. (d) Section 41(1) has no application as there is no cessation of any liability for which the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tails of subsequent payments made to vendors and Purchase Orders Written-off in relation to Contractor payments amounting to INR 17,337,851 along with details of TDS, wherever applicable. Also, enclosing sample copies of invoices in relation to the same. (c) Details of subsequent payments made to vendors and Purchase Orders Written-off in relation to legal and professional expense amounting to INR 15,453,163 along with details of TDS, wherever applicable. (d) Details of subsequent payments made to vendors in relation to Freight Outwards expense amounting to INR 12,139,326 along with details of TDS, wherever applicable. Also, enclosing sample copies of invoices in relation to the same. (e) Details of subsequent payments made to vendors in relation to Repair and maintenance - Others expense amounting to INR 2,089,863, along with details of TDS, wherever applicable." 16.3.3 It was submitted that the additional evidence now produced goes to the root of the issue and for collecting details of the same from the vendors etc. it required time and same could not be produced before the A.O. nor the DRP. The additional evidence now submitted gives the details of the tax deducted at sou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f the tax payer relating to mark up on the warranty cost. 5. Whether the Hon'ble DRP is correct in deleting the disallowance of Forex loss of Rs.111,09,53,000/-." We shall adjudicate the above grounds as under. Ground 2 20. In ground 2, the Revenue challenges the DRP's direction to adopt the figure of R.2.99 crore as depreciation cost in trading segment. It is to be mentioned that in the final assessment order, the A.O. did not give effect to the above directions of the DRP. Therefore, ground 2 raised in the Revenue's appeal is misconceived. However, ground 2 is connected with the assessee's ground 7.1 and since ground 7.1 of the assessee's appeal is restored to the files of the AO/TPO (vide our findings in para 6.9 to 6.9.5), we restore ground 2 also to the files of the AO/TPO. 20.1 Hence, ground 2 is allowed for statistical purposes. Ground 3 21. Brief facts in relation to the issue raised in ground 3 are as follows: It was submitted that assessee's AE centrally procures licenses from independent unrelated third party vendors, on behalf of the Dell Group, for their usage and for usage in the products sold. It was stated that the cost incurred by the AE in this regard a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . In absence of any material, the TPO cannot determine an adjustment on the basis of mere conjecture and surmises. In any event, in an adhoc manner ALP cannot be determined at Nil. Moreover, the above transactions are undertaken by the assessee on a year to year basis and have not been questioned in any of the subsequent years by the TPO. For the aforesaid reasons, we reject ground 3. It is ordered accordingly. 21.5 In the result, ground 3 is dismissed. Ground 4 22. In ground 4, Revenue questions the DRP's action in upholding the objections of the assessee relating to mark up of warranty cost. It is to be noted that the DRP's direction was not given effect to and therefore, ground 4 is misconceived. However, this issue is connected with ground 10 raised in assessee's appeal. Since we have directed the AO / TPO to reexamine ground 10 of the assessee's appeal (see para 8.7 to 8.7.2), ground 4 raised in Revenue's appeal is also restored to the files of the AO / TPO. 22.1 In the result, ground 4 is allowed for statistical purposes. Ground 5 23. The brief facts in relation to the above ground are as follows: Assessee's business includes trading and manufacturing of computer ha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Nature of forex loss Amount (in Rs.) Gain on forward exchange contracts (5,26,74,967) Realised and unrealized forex loss (Net) - on settlement/re-statement of forex transaction 116,36,27,892 Amount claimed as deduction 111,09,52,925 23.5.1 The AO's observation that the assessee had not offered any gain to tax is ex facie incorrect. AS-11 requires a foreign currency transaction to be initially recognized using the exchange rate as on the date of the transaction. However, at each balance sheet date, the foreign currency monetary items would be required to be reported using the closing rate. Such exchange loss accrued as at the year-end is in accordance with the method of accounting regularly adopted by the assessee and is not notional or contingent in nature. Before the AO, the assessee had submitted the following: ledger extracts showing the accounting entries for forex gain/loss for the financial year 2008-09; Sample invoices the process adopted in accounting the forex gain/loss for each of the foreign currency transaction; voluminous back-up workings including monthly Foreign Currency Trial Balance substantiating the net forex gain or loss booked in the forex ledge ..... X X X X Extracts X X X X X X X X Extracts X X X X
|
