9911796707
TMI Blog2023 (3) TMI 809X X X X Extracts X X X X X X X X Extracts X X X X ..... ion 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. Respectfully following the above decision we direct the TPO to re-examine the issue raised in ground afresh. It is ordered accordingly. This ground is allowed for statistical purposes. Accrual of income - Addition of deferred revenue - amount received towards warranty is not refundable even when the customer cancels the warranty agreement - main ground on which the DRP confirmed the order of AO is that the amount received towards warranty is not refundable even when the customer cancels the warranty agreement - HELD THAT:- We are of the view that claim of the assessee deserves to be accepted and the addition made by the AO as confirmed by the DRP is hereby deleted. This ground accordingly is allowed in favour of the assessee. Miscellaneous expenses - AO disallowed expenditure for want of evidence - DRP confirmed the disallowance - HELD THAT:- We notice that the reason for disallowance of the expenditure by the lower authorities is that the assessee has failed to produce any evidence supporting the claim. The assessee h ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... case for AY 2009-10 [ 2022 (3) TMI 1511 - ITAT BANGALORE] we direct the AO to allow the provision made towards warranty. TDS u/s 194H - Disallowance u/s 40(a)(ia) of rebates given to customers - HELD THAT:- The assessee is distributing the products under two models i.e. Sales through distributors who act as agents and gets compensated on a commission basis. The second model is where the products are sold to the distributor and the distributer get a rebate in the products purchased based on the business volume. When the relationship between the assessee and the distributor is on a principal to principal basis, the rebate /volume discount given by the assessee on the price of products sold to distributer cannot be characterized as commission in order to attract section 194H of the Act thereby there is no liability to deduct tax at source. In agreements with distributors require examination to verify the claim of the assessee. We therefore remit this issue to the AO for verification of the agreements which the assessee has entered into with the distributors in relation to discount/rebate transactions and decide the allowability based on the ratio laid down in Bharti Airtel Ltd [ 2014 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ue back to the AO to verify the ledger and general entries of the assessee for the year under consideration and allow the expenditure in accordance with law. The assessee may be given a reasonable opportunity of being heard in this matter. The appeal is allowed in favour of the assessee for the statistical purposes. Disallowance of expenditure repairs and maintenance - HELD THAT:- We notice that the assessee has submitted details pertaining to the amount disallowed by the AO and that the lower authorities have not examined the same. We therefore remit this issue to the AO with a direction to verify the evidence submitted in the form of agreements with Comsoft and the journal entries by the assessee and decide afresh in accordance with law. Short credit of TDS - AR submitted that in the final assessment order, the AO has given credit of TDS less as against reflected in Form 26AS - HELD THAT:- After hearing the rival submissions we are remitting the issue back to the AO with a direction to examine the relevant evidences and give appropriate TDS credit accordingly. Levy of interest u/s.234A - HELD THAT:- The levy of interest u/s.234A is towards the failure on the part of the assessee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hold that the DRP was right in directing deletion of the adjustment. Scrap sales considered for sales tax return - Assessee in the financials credits the scrap sales to cost of materials used and discharges the VAT on the same, the turnover disclosed in the VAT return is reduced shown as part of the reconciliation - As submitted that once the scrap sales are credited to the cost of material used, no further addition is warranted - DRP has accepted the submission of the assessee and we are therefore of the considered view that rightly directed deletion of the addition on this count. Counter Veiling Duty part of turnover for VAT - While the duties/taxes are included in the turnover for the purposes of the other laws, they are not revenue to the Assessee. Therefore, we uphold the decision of the DRP in accepting the contention that same are not to be considered as revenue in the financials. Export turnover not part of sales tax return - We notice that the invoice-wise listing for the same were produced before the DRP and the DRP after the perusal of the above supporting evidences has deleted the addition made in this regard. We therefore see no reason to interfere with the decision of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r>SHRI GEORGE GEORGE K., JUDICIAL MEMBER AND Ms. PADMAVATHY S, ACCOUNTANT MEMBER For the Revenue : Shri Praveen Karanth, CIT(DR)(ITAT), Bengaluru. For the Assessee : Shri T. Suryanarayana, Senior Advocate ORDER Per Padmavathy S., Accountant Member These cross appeals by the assessee and revenue are directed against final assessment order dated 29.01.2015 passed u/s 143(3) r.w.s. 144C of the Income-tax Act, 1961 [the Act]. The relevant assessment year is 2010-11. 2. The brief facts of the case are that the Assessee is engaged in the manufacture and trading of IT hardware products and provides technical and marketing support services to its Associate Enterprises (AEs). For the relevant assessment year 2010-11, the assessee had certain international transactions inter alia being purchase of stock in trade (trading segment), provision of technical and marketing support services to its AEs, reimbursement and recovery of expenses to/from its AEs. We shall discuss the functions performed under each of the segments while discussing the adjustment determined by the TPO. 3. In the TP study maintained for the year under consideration, the Assessee treated all the international tra ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ned TPO erred in not following the directions given by the Hon'ble DRP while passing the final assessment order. 16. The learned AO / learned TPO / Hon'ble DRP erred in rejecting the Transfer Pricing (`TP') documentation maintained by the Appellant on invoking provisions of sub-section (3) of 92C of the Act contending that the information or data used in the computation of the arm's length price is not reliable or correct. 17. The learned AO / learned TPO / Hon'ble DRP erred in ignoring the analysis demonstrating the arm's length nature of international transactions entered into by the Appellant in the Transfer pricing documentation and in the submission made before the TPO from time to time. 18. The learned AO / learned TPO / Hon'ble DRP erred in not considering the multiple year prior year financial data of comparable companies while determining the arm's length price. 19. The learned AO / learned TPO / Hon'ble DRP erred in not considering provision of doubtful debts as non-operating item. 20. The learned AO / learned TPO / Hon'ble DRP erred in using data as at the time of assessment proceedings, instead of that available as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ting Supt Services 23.1 The learned AO / learned TPO / Hon'ble DRP erred in arbitrarily arriving at segmental profit with respect of marketing support services segment. 23.2 The learned AO / learned TPO / Hon'ble DRP erred in not considering the directions of the DRP and ignoring the limited risk nature of the contractual services provided by the Appellant and in not providing an appropriate adjustment towards the risk differential, even when the full- fledged entrepreneurial companies are selected as Comparable companies. 23.3 The learned AO / learned TPO / Hon'ble DRP erred in including companies that do not satisfy the test of comparability. Specifically, the Appellant believes that the following companies selected as comparable by the learned AO/ learned TPO should be rejected: • Asian Business Exhibition & Conferences Limited; • HCCA Business Services Private Limited • Priya International Limited Housing Co. Ltd. 23.4 Without prejudice, the learned AO / learned TPO / Hon'ble DRP erred in excluding companies are functionally comparable to the assessee. Specifically, the Appellant believes that the IT(TP)A Nos.400 & 562/Bang/20 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... T medium. Thus, the services rendered by the Assessee are to be considered as ITES. Upon holding so, the TPO bifurcated the segment into ITES segment and MSS segment and benchmarked them separately. In arriving at this conclusion, the TPO relied on the order passed in the Assessee's case for the assessment year 2009-10. The DRP confirmed the TPO's order. Aggrieved the assessee is in appeal before the Tribunal. 11. The ld.AR 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. The ld AR also submitted that even if the services rendered are considered to be ITES, the services that are being classified as ITES are rendered by the Assessee to third party customers of the AE on behalf of the AE. Since the so called ITES are being rendered to third parties, it cannot be subject matter of TP assessment. The ld AR also submi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nsidered 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 the Services Agreement entered between the assessee and Dell Global BV (Singapore branch) dated 01.01.2009, the assessee is required to prove certain technical support to the customers who purchase products from the assessee, to provide logistics support to ensure delivery of products and services to the customers and also provide marketing support and Sales promotion services. The technical services are provided to the customers of products, and as such cannot be compared to the function of provision of ITES ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d no. 21 is restored to the AO / TPO for fresh consideration, the other grounds in this segment also are restored to the TPO for fresh adjudication (as the same would be relevant if TPO rejects the assessee's contentions in ground 21). The grounds 21 to 23 are allowed for statistical purposes. Adjustment determined in respect of warranty cost 17. The relevant grounds are reproduced above. The Assessee provides telephonic support services for standard problems to the customers who purchase the products sold by DGBV in India. The technical support services include services in relation to products sold by DGBV which are under warranty period. In relation to warranty services, the cost of third party service provider and spares are borne by the Assessee, and recovered from DGBV. The warranty obligation as regards the sales made by the AEs directly in India is wholly on the AEs and the Assessee only provides co-ordination 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 r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... h. It is ordered accordingly." 21. Respectfully following the above decision we direct the TPO to re-examine the issue raised in ground no.24 afresh. It is ordered accordingly. This ground is allowed for statistical purposes. CORPORATE TAX ISSUES Addition of deferred revenue - Ground No.1 22. Ground No.1 is extracted below :- Deferred revenue-- Rs. 1,248,869,986 Accrual of income • The learned Assessing Officer ("AO") has erred in disallowing an amount of Rs. 1,248,869,986 contending that income has accrued to the assessee during the current financial year and hence, should be assessed to tax during the current year. • The learned AO ought to have appreciated that as the contracts extend beyond the current year, the revenue accrues over the period of time which obligates the Company to render services. No cost incurred The learned AO has erred in contending that, the Company has deferred only revenue and no corresponding cost has been deferred. The learned AO ought to have appreciated the fact that the outflow of cost/resources would occur only in subsequent period when the actual service are rendered and no cost would be incurred in t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... iated against future use of services. On this basis, the DRP held that the Assessee acquired the right to utilize the amount and the income crystallizes as soon as the customer makes the payment. The DRP placed reliance on the directions issued by the DRP in the Assessee's case for the assessment year 2009-10. The Assessee filed an application for rectification of the mistake in holding that the amounts received are not refundable, which was also rejected. In the final assessment order, the AO confirmed the addition. 26. Ld AR submitted that - • "The learned AO has erred in disallowing an amount of Rs. 1,248,869,986 contending the income has been accrued to the assessee during the current financial year and hence should be assessed to tax during the current year. • The learned AO ought to have appreciated the submission of the assessee that, contracts for services extending beyond the current financial year, only the proportionate revenue pertaining to the current year can be assessed to tax. The portion of revenue in relation to the services to be provided in future. the income would accrue only during such period and not in current financial year. • The ab ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... failed to appreciate the fact that, the obligation to provide the services is not during the current period only. Thus the outflow of resources would occur only during subsequent period when the actual service takes place. When there is no cost incurred during the year for the remaining period of the service contract, question of deferring the cost for that part of contract does not arise. • The learned AO has also alleged that, the liability created in respect of the deferred revenue is not disclosed in a transparent manner in the balance sheet and has been camouflaged under the head sundry creditors. The learned AO ought to have appreciated the fact that, the financial statements disclosures are guided by the provision as per Schedule VI of Companies Act 1956. The Company has followed the disclosure requirement as per the prescribed provision of Schedule VI to Companies Act 1956 prevailing, at the time of finalization of financial statements for FY 09-10. • Notwithstanding our above contention, we submit that should the said deferred revenue be taxed in the current year, corresponding relief ought to be provided in the future years where the same is offered to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng the service being offered by assessee, the unutilized balance was not refundable. Thus, the amount paid was for outright purchase of services and not an advance to be appropriated against future use of the service. The assessee acquires the absolute right to utilize the amount so received. Thus, the income crystallizes as soon as a customer makes payment. The right to receive the income vests with the assessee as soon as the services are purchased by customers. Since, the assessee employed mercantile system of accounting, income would accrue with receipt and it cannot be considered as advance income, which could be deferred for tax purpose." 32. However it is submitted that upon cancellation of the contract, the Assessee has to refund the entire consideration less cost of services already rendered. On perusal of a sample warranty terms (pages 2527- 2540, relevant page 2537, Volume 6 of the paperbook) we notice that the assessee would refund the money upon premature cancellation of warranty service. The extract of the clause in the agreement is reproduced below for reference:- "Cancellation. Subject to the applicable product and services return policy for Customer's geogr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o make the payment. Further in relation to contracts for services extending beyond the financial year 2009-10 under consideration, the Assessee is under a contractual obligation to render the service to the customer in the subsequent years and the same would involve outflow of cost/resources for the Assessee. It is also important to note that, in case the contract is cancelled, the Assessee is liable to refund the consideration received originally, less cost of services already rendered. From the detailed working and sample invoices submitted before the DRP (pages 2294 and 2541 to 3192 of Volume 6 of the paperbook) that the when the services are rendered in a particular year, the revenue deferred to such year is recognized as revenue during such year (amortised) and offered to tax and therefore it is clear that the Assessee has been recognizing the revenue periodically on the basis of accrual and offered them to tax. 34. The coordinate bench of the Tribunal in the case in Schneider Electric IT Business India Pvt. Ltd. v. JCIT, LTU [ITA Nos. 299/Bang/2014 and 218/Bang/2014) dated 30.04.2019] has considered a similar issue and held that - "91. We have carefully considered the riva ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he quarter in which the work of repairs and services was done, and included the amount so adjusted as income of the relevant year. Out of the aggregate amount shown in PWS Advances Account, the Assessing Officer treated proportionate sum for the period covered as the assessee's income for the assessment year in question. The Commissioner invoked section 263 and held that the entire amounts received in the previous year towards PWS Advances were trading receipts of the year directly connected with the business of servicing and repairs of tractors. He, accordingly, set aside the assessment. On appeal, the Tribunal upheld the Assessing Officer's action disagreeing with the finding of the Commissioner. On reference, the Hon'ble Punjab & Haryana High Court held as follows: "The taxability of income normally depends upon the system of accounting followed by the assessee. Even in the case of an assessee following the mercantile system of accounting, a mere claim, by the assessee in respect of an amount without the right to claim cannot form the basis for taxability. Where the assessee follows the cash system of accounting, the taxability is to be based on receipt basis ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... equired. So, it is highly uncertain as to whether it would at all remain as income of the assessee. Only when the service is done the assessee has a right over the amount that was deposited. Till then, he has no right over the same. It is in that sense till then, it cannot be considered as an income of the assessee and is not eligible to tax. 95. The Mumbai ITAT in the case of IOT Infrastructure & Energy Services Ltd. (supra) had to deal with identical case. The facts of that case were that the Assessee had not offered for tax an amount being difference between progress billing as on 31-3- 2007 and cumulative revenue booked as per accounts as on 31-3- 2007 in respect of three contracts. The assessee explained to Assessing Officer that progress billing was inclusive of advances received from customers which amount did not reflect work performance. It was also explained that progress billing was done not only for amount of work done but also for mobilisation and other advances receivable by it as per terms of relevant contract and that mobilisation and other advances received by assessee by raising progress billings did not represent income of assessee at time of raising progress ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... routine business expenses miscellaneous in nature. Despite huge data involved, the assessee has provided details for a substantial amount on sample basis of the financial statements and the lower authorities ought to have allowed the deduction for entire miscellaneous expenses. The ld AR also submitted that the DRP failed to take into consideration the details of expenditure to the extent of Rs.6,10,32,535 (at pages 2277-2279 & 8935-8937 Vol. 6 & 12 of PB). The ld AR further submitted that the supporting documents for the balance amount is submitted before the Tribunal in the form of additional evidence and prayed for the admission of the same. 38. The ld. DR supported the order of the lower authorities and objected to the admission of additional evidence. 39. We have considered the rival submissions and perused the material on record. We notice that the reason for disallowance of the expenditure by the lower authorities is that the assessee has failed to produce any evidence supporting the claim. The assessee has now submitted the additional evidence substantiating the claim of the expenditure which goes the root of the issue. For a proper adjudication of the issue and for subst ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... re "Advances written off" in the books of accounts of proceeded on the mistaken basis that the amounts written off were in the nature of debts written off, when in fact it was never the case of the Assessee that the advances were in the nature of debts. The ld AR further submitted that the advances written off in assessee's case is in the nature of a business loss which is incurred in the normal course of business 43. The ld. DR supported the orders of the DRP. 44. We have considered the rival submissions and perused the material on record. The advances written off are towards fixed deposits which are no longer recoverable and the service tax not recoverable. We notice that the assessee has made submissions before the lower authorities in this regard. The contention of the AO / DRP treating this write off as bad debts is not right as these amounts are paid in the normal course of business and written off as it is no longer recoverable. In our considered view these are losses incurred in the normal course of business and cannot be termed as debts written off. Further the submission of the ld AR that the service tax amount as and when recovered is offered to tax has merits. It is s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ,72,66,403/- Add: Provision for warranty created during the year (B) 171,64,60,288/- Less: Actual expenses incurred during the year(C) (138,11,78,860/-) Closing balance of provision for warranty (D) =A+B-C 129,25,47,831/- (ii) The methodology followed by the assessee in estimating the warranty cost and tracking the related expenses is briefly explained as under:- a. The assessee has a specialized warranty accounting team which tracks the incidents reported and associated cost of providing warranty services for each of the product; b. The total sales are divided into various categories of IT hardware products based on the warranty period attached to each such product. The faults are tracked on the basis of a unique identification number attached to each IT hardware so as to identify cases of faults; c. Thus, the warranty cost is nothing but the product of number of incidents reported and cost involved in servicing each unit under various categories of products; d. The system of tracking the faults and related warranty costs is extremely scientific with minimal margin of error as it is based on actual faults reported and costs incurred in servicing them. e. The ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d with Volumes 8, 9 and 10), and prayed therefore that to that extent the deduction ought to be allowed. 50. The ld. DR supported the order of the DRP. 51. We have considered the rival submissions and perused the material on record. We notice that issue of allowability of warranty expenses was considered by the Tribunal in assessee's own case for AY 2009-10 (supra) where it was held that - "12.5 We have heard rival submissions and perused the material on record. As regards the provision for warranty, the learned AR explained that the methodology followed by the assessee for estimating warranty cost is on a scientific basis and it is based on past years experience. The detailed explanation of the learned AR is recorded in para 12.2 (supra), hence, the same is not reiterated. The Tribunal in assessee's own case for assessment year 2002- 2003, 2003-2004 and 2005-2006 had dismissed the appeal of the Revenue and held that the provision of warranty claimed is based on scientific basis and held that it is entitled for deduction. The relevant finding of the Tribunal in assessee's own case Dell International Services India (P.) Ltd. v. Dy. CIT [2018] 89 taxmann.com 44 (Bang. - T ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d 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 view has been held by the Tribunal in assessee's own case for assessment year 2002-2003 and 2003-2004 in ITA Nos.362 & 363/Bang/2007 (order dated 18-3-2016,). The relevant finding of the Tribunal reads as follows:-- '5. Learned AR of the assessee submitted that in the earlier order, though the Hon'ble Tribunal held that provision for warranty was made following scientific method and the past history, still the matter was remanded to the AO for verification. He submitted that when the entire material is on record, it is not in the fitness of things, to remand the matter to the file of the AO. Our attention was drawn to the material on record wherein the methodology and basis of estimating warranty provision was made out which reads as under: "5. Warranty provisioning policy - Methodology and basis of estimating warranty cost: The company has submitted a detailed methodology of estimating the warra ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... riod 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 adjusted with the provision required to be created in the subsequent years, it, in effect, leads to the same being credited to the profit and loss account in the subsequent year. In view of the parity of basis of provision for warranty for assessment years 2002-2003, 2003- 2004, 2005-2006 and the relevant assessment year, the ruling of the Tribunal in assessment years 2002-2003, 2003-2004, 2005- 2006 is squarely applicable for this assessment year also. 12.5.3 We noticed in the final assessment order, the A.O. had commented that the ITAT order in assessee's group case, namely, CIT v. Dell International Services India (P.) Ltd. (wrongly mentioned as assessee's group company) has been set aside by the Hon'ble High Court and restored to the Tribunal with a direction to examine the claim of warranty. In this background, it is necessary to recapitulate the background of the Tribunal ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ergone change and is consistent with what is described in para 12.5.2 of the above order. Respectfully following the decision of the coordinate bench in assessee's own case we direct the AO to allow the provision made towards warranty. Since we have directed the AO to allow the entire provision made towards warranty, the alternate claim of the ld AR to consider the amount actually spent substantiated by evidences has become academic and does not warrant adjudication. Disallowance under section 40(a)(ia) of rebates given to customers (Ground No. 5) 53. During the assessment proceedings, the AO called for details of taxes deducted at source on various payments including an amount of Rs. 20,37,71,038/- was in the nature of rebate given to distributors. The assessee submitted before the AO that taxes were not liable to be deducted at source on the rebate given to distributors. The AO made an overall disallowance of Rs. 41,56,91,891/- (including the above amount of Rs. 20,37,71,038/- towards rebate) for want of evidence, and on the ground that Section 40(a)(ia) of the Act is applicable on the payments. On the assessee's submission that out of the amount of Rs. 41,56,91,891/-, an amou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cipal-to-principal and therefore there is no tax is liable to be deducted at source. This is evident from a reading of the agreement at page 2063 of Volume 5. 55. The ld AR drew our attention to the various clauses of the agreement to substantiate that the transaction of the Assessee with its distributors in relation to rebate / discount is on principal-to-principal basis and hence the provisions of 194H are not applicable. Further the ld. AR relied on the following case laws in this regard - - Harihar Cotton Pressing Factory v. CIT (Reported in [1960] 39 ITR 594 (Bombay) - Ahmedabad Stamp Vendors Association v. UOI (Reported in [2002] 124 Taxman 628 (Gujarat)) - CIT v. Ahmedabad Stamp Vendors Association (Reported in [2012] 25 taxmann.com 201 (SC - Bharti Airtel Ltd. v. DCIT (Reported in [2014] 52 taxmann.com 31 (Karnataka) - CIT v. United Breweries Ltd. (Reported in [2017] 80 taxmann.com 123 (Andhra Pradesh and Telangana) - CIT v. Intervet India (P.) Ltd. (Reported in [2014] 49 taxmann.com 14 (Bombay - ACIT v. Acer India (P.) Ltd. (Order dated 05.10.2018 passed by this Hon'ble Tribunal in ITA No. 1940/Bang/2018) 56. The ld. DR relied on the orders of the l ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssessee. This ground is allowed for statistical purposes. Disallowance of future lease rentals (Ground No. 6 ) 59. The Assessee is inter alia engaged in the business of giving computer systems on finance lease. In terms of Accounting Standard AS-19 dealing with the accounting for lease transactions, the principal amount of lease instalments to be received over the entire lease period was shown as sales made during the year in the financial statements. Further, the cost relating to such sales was debited to the Profit and Loss account in the year of such sale. Therefore, in accordance with the requirements of the said accounting standard, the company had recognized the entire principal amount of lease instalments as sales income and debited the cost incurred towards the same as cost of goods sold. 60. For the purpose of Income Tax, the principal amount of lease rental was offered to tax as and when the same accrued. Therefore, portion of principal amount of lease rentals which will accrue only in the subsequent years was reduced in the computation of income of the current year. 61. The AO concluded that the Assessee has acquired assets on finance lease and that the Assessee has ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o-op Multipurpose Society Ltd. (supra) and the judgment of the Hon'ble Madras High Court in the case of Coral Electronics (P) Ltd. (supra). The learned AR, on directions from the Bench, had furnished primary entries for leasing. However, there is no clarity on the same. It is not clear how the A.O. has arrived at the figure of Rs. 5,89,52,591 to be disallowed in the current year and how it pertains to the future lease rentals. Therefore, in the interest of justice and equity, we restore the issue of taxation of future lease rentals (also raised in the ground 13), to the files of the A.O." 65. During the course of hearing the ld AR submitted the details of lease rentals (principal and interest) for the year under consideration along with scheme of entries in the books of accounts pertaining to lease rentals. On perusal of the details it is noticed that the said amount of Rs.7,58,53,797 relates to principal portion of the lease rentals, that relate to future years from FY 2010-11 onwards. Respectfully following the ratio laid down by the coordinate bench of the Tribunal in assessee's own case (supra), that the entire lease rental income does not accrue in the first year as the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ent year, ought to be allowed as a deduction during the year under consideration, on its reversal/incurring of the expenditure on which taxes were deducted at source. 68. The ld AR also submitted additional evidence with the breakup of the provisions and the subsequent payments / reversals along with the listing of invoices and the tax deducted at source. The ld AR prayed for the admission of the additional evidence. 69. The ld. DR supported the orders of the lower authorities. The ld DR submitted that the additional evidences should not be admitted as the assessee had sufficient opportunity to submit the supporting evidence to substantiate the claim of deduction which the assessee failed to furnish and therefore prayed that the additional evidences should not be accepted. 70. With regard to the disallowance made towards the provisions made the additional evidences now produced goes the root of the issue and the core reason for not allowing the deduction by the lower authorities. For a proper adjudication of the issue and for substantial cause, the additional evidence is admitted and taken on record 71. We heard the rival submission and perused the materials on record. The char ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... The assessee has erroneously submitted before the CIT(A) / AO that the deduction is claimed u/s.40(a)(i) and hence the authorities disallowed the claim as the assessee did not produce the details of tax deducted. However the deduction as per the ld AR is done based on the fact that the provisions which are already disallowed in the previous assessment year is reversed and to avoid double disallowance the same is claimed as deduction in the computation. This fact has not been properly presented before the lower authorities. The lower authorities have to examine whether the year-end provision made on 31st March 2009 is fully reversed on 1st April 2009 and the expenses against which the provision was created is debited to the profit and loss account on payment after deducting TDS. This verification need to be carried out based on the journal entries and ledger copies produced by the assessee for the year under consideration which are submitted now in the form of additional evidence. If the accounting practice of the assessee to reverse the expenses on the 1st day of April of the year under consideration is substantiated by the evidences submitted by the assessee whereby it is demonstr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ance charges under prepaid expenses and had been amortizing such expenses on the basis of accrual on a periodical basis. The workings arrived from the payments agreed as per the schedule in the agreement for the purpose of amortization along with the ledger extract for the said line items showing the USD as well as INR amount of amortization was submitted to the DRP as well. (Page 2331 of Volume 6 read with pages 4255 to 4257 of Volume 8). The ld AR therefore submitted that the amount debited to repairs & maintenance represents payment made towards Software Support and Maintenance services which is revenue in nature ought to be allowed as a deduction. 76. In connection with the line item in Sl.No. 4 of the table, the ld. AR submitted that the said entry had been passed for reclassifying the amount from Advertisement account and the corresponding entry passed in the advertisement ledger account was furnished before the DRP vide submission dated 12.11.2014 (at Page 2331 of Volume 6 read with pages 4259 of Volume 8) and should be allowed. 77. The ld. AR further submitted that the DRP has accepted that software license and support services from Dell Global was revenue in nature while ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... separate adjudication. IT(TP)A No.400/Bang/2015 (Revenue's appeal) 83. We will now take up the appeal of the revenue. The revenue raised 6 grounds against the order of the CIT(A). 84. Ground No.1 raised by the revenue reads as follows 1. The ld DRP has erred in directing the AO to delete the additions made on account of suppression of income of sale of goods and services as under * Credit notes not considered * Standard warranty spares replacement * Goods in transit * Other items taxable both for service tax and sales tax * Internal consumption as per sales register and * Scrap sales considered for sales tax return 85. During the assessment proceedings, the Assessee was asked to submit the copies of Sales Tax and Service Tax returns for the purpose of comparing the revenue as per the sales tax/service tax return and revenue disclosed as per the financials. The assessee submitted the following statement reconciling in this regard. Sl.No. Disallowance Amount (in Rs.) 1. Credit notes not considered in VAT return 53,97,13,043 2. Standard warranty replacement 39,45,43,757 3. Smart debits deferred revenue account 124,88,69,986 4. Goods in transit (GIT) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ths from the date of sale. The contention of the AO, that the credit notes pertaining to the sales made in earlier years cannot be claimed as deduction against the sales made during FY 2009-10 is not tenable. Hence we see no reason to interfere with the decision of the DRP that the Assessee's contentions cannot be brushed aside basis VAT and sales tax returns, and the value of goods returned by customers ought to be reduced from the value of sales irrespective of the date of the original sale. Standard warranty replacement 91. Dell Global BV - Singapore Branch (DGBV) sells its products to its customers in India under standard warranty terms. As per the terms of warranty DGBV would have to supply goods/spare parts free of cost to its customers in India. Though on import of goods there is no VAT liability, when spares are issued under warranty at free of cost in India, the sales tax law requires discharge of VAT on such issue of spares. The warranty services to DGBV customers in India are provided by the Assessee and the VAT liability of these spares is discharged by the Assessee which is recovered as expense on cost to cost basis from DGBV in addition to the business support serv ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the sales made in cases where the proof of delivery is not received as on 31st March 2010. Before the DRP, the Assessee submitted sample invoice copies and sample delivery challan/other documents evidencing the delivery of goods to the customers post 31st March 2010 for few sample orders under GIT (Please see page 2298-2300 of Volume 6 of the paperbook read with 3193-3656 of Volume 7 of the paperbook). As the above adjustment is in accordance with the accounting policy regularly followed by the Company, the same should be allowed for tax purpose also. Further, the cost related to such sales would also not be charged off to profit and loss account. An entry is passed on 31st March 2010 reversing the corresponding cost from the Cost of Materials and sales from the sales account. The ledger extract showing the accounting entry for GIT in 2009-10 and reversal of the same in 2010-11 has been submitted. (Please see submission dated 14.02.2014 at page 2033- 2034 read with pages 2055-2063 Volume 5 of the paper book). With regard to reversal of cost relating to GIT, generally two ways of disclosure can be followed: Option 1 : The closing balance of GIT can be directly reduced from the amo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sales are credited to the cost of material used, no further addition is warranted. The Assessee submitted party wise details submitted for an amount of Rs.67,35,114 vide submission dated 4.2.2014 at pages 1671-1677 of Volume 4 of the paperbook. The DRP has accepted the submission of the assessee and we are therefore of the considered view that rightly directed deletion of the addition on this count Other items taxable both for service tax and sales tax: 96. The items considered under this head are as under: - Counter Veiling Duty part of turnover for VAT - Export turnover not part of sales tax return - Rejection of VAT refund claimed as deduction Counter Veiling Duty part of turnover for VAT 97. The Assessee operated inter alia out of a unit in SEZ at Sriperambadur where computer hardware is manufactured and generally sold in the Domestic Tariff Area (DTA) which attracts CVD/SAD and also VAT. For VAT purposes, the price inclusive of CVD/SAD is considered as taxable turnover whereas in the financials, the CVD/SAD is not an income as the same is a duty collected from customers and deposited with appropriate taxing authority. Few sample copies of invoices were produced ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oss account towards travelling & conveyance. Party-wise details of gross amount paid or payable towards travelling & conveyance expenses and taxes withheld thereon along with sample TDS certificates were submitted to the AO for an amount of Rs. 13,49,73,565. 103. The AO disallowed the expenditure to the extent of Rs. 15,56,565/-, being excess over the amount debited to the profit and loss account as being unexplained expenditure under section 69C. 104. The DRP accepted the Assessee's contention that the gross amount debited to profit and loss account towards travelling and conveyance is Rs. 13,34,17,000/- and Rs. 15,56,565/- represents the amount grouped under other heads of expense which was subsequently reversed. The DRP directed deletion of the addition. Aggrieved, the revenue is in appeal before the Tribunal. 105. The ld. DR submitted that during the assessment proceedings, the AO noted that expenditure incurred on account of travelling and conveyance was Rs. 13,49,73,565, whereas the amount debited to P&L account was Rs. 13,34,17,000 which resulted in excess payment of Rs. 15,56,565/-. The assessee failed to furnish any satisfactory explanation for the difference. Hence thi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... accounting policy being consistently followed by the Assessee. According to the assessee, thus, the entire exchange loss has arisen on settlement/re-statement of foreign currency receivable and payable balances. Further, there were some forward contracts entered by the assessee to hedge the risk against the volatility of foreign currency. Such hedge has resulted in a gain of Rs. 9,10,11,994/- which has been offered to tax. 109. The AO proposed a disallowance of forex loss of Rs. 24,59,80,821/- on the ground that no evidence was provided to substantiate the same. The DRP, relying on the directions issued in the Assessee's own case for the assessment year 2009-10, allowed the Assessee's objections. Aggrieved, the revenue is in appeal before the Tribunal. 110. The ld. DR submitted that the DRP directed the AO to consider the foreign exchange fluctuation on revenue account in respect of the assessee as well as the comparable companies as operating in nature, while determining the margin in the case of assessee. He submitted that the DRP ignored the provisions of Rule 10B(2)(d) that net profit margin realised by the taxpayer in the international transaction shall alone be computed und ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... net forex loss arising after set-off of the said gain on forward contract is as under: 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; ➢ volum ..... X X X X Extracts X X X X X X X X Extracts X X X X
|
