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TMI Blog2018 (10) TMI 1991X X X X Extracts X X X X X X X X Extracts X X X X ..... rust the mandate of registration of the same and mere non-registration of the same does not make the transaction ingenuine or sham. Hence the version of the revenue that IP should be certified by the government authority and it does not fall within the assets specified in IT Rules is without any basis and not tenable. Decided in favour of assessee. Disallowance of provision for stock obsolescence under normal provisions - HELD THAT:- As in assessee s own case by its consolidated order [ 2017 (9) TMI 1648 - ITAT KOLKATA] as held that provision made for obsolete stocks in the sum of Rs 10,00,472/- is squarely allowable as deduction as a business loss under normal provisions of the Act.Decided in favour of assessee. Disallowance of provision for warranty and allowability of actual warranty expenditure under normal provisions - HELD THAT:- As in assessee s own case by its consolidated order [ 2017 (9) TMI 1648 - ITAT KOLKATA] held that entire provision for warranty would be squarely allowed as deduction in the year under appeal under the normal provisions of the Act. Disallowance of provision for leave encashment - HELD THAT:- It is noted that the issue raised ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Per S.S. Viswanethra Ravi, JM This appeal by the assessee Asst Years 2012-13 of the Learned Dispute Resolution Panel (DRP) dated 08.12.2016 in which directions are given to the Learned AO u/s 144C(5) of the Income Tax Act, 1961 (hereinafter referred to as the Act ). 2. Ground No. 1 to 5 are relating to confirmation of transaction of payment of management services fees amounting to Rs. 5,03,65,604/-. 3. Heard both and perused the material available on record. It is noted that the issue raised in Ground No. 1 to 5 was decided by this Tribunal in assessee s own case by its consolidated order dated 03.08.2016 for A.Y. s 2007-08 and 2008-09. The relevant portion of which is reproduced herein below: 6.3.4. Payment of Management Service fees Manufacturing (Domestic) Segment The assessee submitted that it had received varied nature of management services under a Service Agreement entered into with its AE. For the purpose of compliance with the transfer pricing documentation requirements, the assessee documented in its transfer pricing study report and submitted in the course of assessment, the management services framework wherein the description of services ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... TPO/AO accordingly. Ground No. 1 to 5 raised by the assessee are allowed. 5. Ground No. 6 is relating to depreciation on intellectual property assets. 6. Heard both and perused the material available on record. It is noted that the issue raised in Ground No. 6 was decided by this Tribunal in assessee s own case by its consolidated order dated 03.08.2016 for A.Y. s 2007-08 and 2008-09. The relevant portion of which is reproduced herein below: 3.3. We have heard the rival submissions and perused the materials available on record including the paper book filed by the assessee comprising of relevant extracts of Central Electricity Authority (Installation and operation of meters) Regulations, 2006 (pages 47 to 66 of paper book) with regard to this issue. We find that the assessee had capitalized the following assets under intellectual properties:- a. Low cost single phase static meter IP for domestic segment. b. Low cost single phase static meter IP for South Asian market like Vietnam, etc. c. RF AMR Radio frequency accelerated meter reading IP d. Salem 3T Metering Module IP e. Salem 1G HVDS IP f. PL Comm Evaluation Modem IP 3.3.1. It ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he disclosure of information necessary to obtain patent protection could assist competitors in developing alternative solutions. Accordingly, an enterprise may, for sound business reasons, choose not to register patentable knowhow, which may nonetheless contribute substantially to the success of the enterprise. The confidential nature of knowhow and trade secrets may be protected to some degree by (i) unfair competition or similar laws, (ii) employment contracts, and (iii) economic and technological barriers to competition. Knowhow and trade secrets are intangibles. . Hence, it could be safely concluded that even OECD has laid down the principle that intellectual property in the form of knowhow is not required to be registered. 3.3.2. We find that the assessee had filed a copy of the Business Transfer Agreement (BTA) entered into with Mr. Gandhi as an additional evidence. It was submitted by the ld AR that the said agreement was never called for by the lower authorities and hence there was no occasion for the assessee to file the same and it was also submitted that the acquisition of business from Mr Gandhi by the assessee was never a subject matter of debate. In ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... namely L T , Genus, HPL Socomec etc apart from doing work for other overseas clients. We find that the assessee in order to migrate into the new lucrative business of manufacturing static meters was looking for partner which could help it out in its new venture. Therefore, after a detailed study and informed business decision, the assessee decided to buy out the entire unit of TECRES along with its specialized research engineers who had enormous experience and domain knowledge in respect of static meters which the assessee could leverage in developing new marketable products. Therefore, in essence what the assessee has acquired is knowhow in developing new type of meters which were digital meters with anti-tampering and other communication facilities. We find that the reliance placed by the ld AR on the Co-ordinate bench decision of Pune Tribunal in the case of Modular Infotech P Ltd vs DCIT reported in 131 TTJ 243 (Pune) is well founded. In the said case, the assessee company was engaged in the business of software development and also licensing of software. It had taken over the business of a firm namely M/s Modular Systems and claimed depreciation @ 25% on an amount of Rs. 4, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he domain of the assessee and it only offers protection to the assessee from preventing other parties to use the same. The revenue cannot thrust the mandate of registration of the same and mere non-registration of the same does not make the transaction ingenuine or sham. Hence the version of the revenue that IP should be certified by the government authority and it does not fall within the assets specified in IT Rules is without any basis and not tenable. 3.3.5. In view of the aforesaid findings and respectfully following the judicial precedent relied upon hereinabove, we allow the grounds 2(a) to 2(d) raised by the assessee for the Asst Year 2007-08 and grounds 12(1) to 12(c ) raised for the Asst Year 2008-09. The ld AO is also directed to rework the opening WDV of this asset in the subsequent year and rework the allowability of depreciation on the same pursuant to this order. In view of this decision, we are not inclined to entertain the alternative claim of the assessee vide ground no. 1(a) that the consideration so paid in the sum of Rs. 4,92,00,000/- has to be construed as Goodwill and depreciation has to be granted accordingly. 7. In view of the above, we direct TP ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 181-360 days - 25% provision Rs 2,83,815.18 361-540 days - 50% provision Rs 7,970.69 541-720 days - 75% provision Rs 1,75,572.98 720 days 100% provision Rs 5,33,113.50 Total Provision Rs 10,00,472.35 We find from the said workings , the assessee had clearly mentioned the item code, description of item available in the inventories, date of last transaction, quantity, rate per unit and the value together with the time periods from the date of sale to decide the relevant provision percentage. Hence it could be safely concluded that the assessee had made a scientific calculation for making provisions based on commercially acceptable method. We find that the valuation of the stocks in accordance with AS-2 issued by the ICAI is one of the standards recognized u/s 145(2) of the Act, wherein the closing stock is to be valued at lower of cost or net realizable value. 33.3.1. We find that this issue is dire ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 6. In the circumstances, we are of the view that no substantial question of law arises for our consideration. 7. Accordingly, the appeal is dismissed. 33.3.2. In view of our aforesaid findings and respectfully following the judicial precedent relied upon hereinabove, we hold that the provison made for obsolete stocks in the sum of Rs 10,00,472/- is squarely allowable as deduction as a business loss under normal provisions of the Act. Accordingly, the Ground No. 10 raised by the assessee for the Asst Year 2011-12 is allowed. 10. In view of the above, we direct TPO/AO accordingly. Ground No. 7 raised by the assessee are allowed. 11. Ground No. 8 relating to disallowance of provision for warranty and allowability of actual warranty expenditure under normal provisions. 12 Heard both and perused the material available on record. It is noted that the issue raised in Ground No. 8 was decided by this Tribunal in assessee s own case by its consolidated order dated 13.09.2017 for A.Y. s 2010-11 and 2011-12. The relevant portion of which is reproduced herein below: 32.2.4. When the assessee sells his goods, the warranty clause is part of the sale transaction and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Ltd vs CIT reported in 314 ITR 62 (SC) had held as under:- 11. Liability is defined as a present obligation arising from past events, the settlement of which is expected to result in an outflow from the enterprise of resources embodying economic benefits. 12. A past event that leads to a present obligation is called as an obligating event. The obligating event is an event that creates an obligation which results in an outflow of resources. It is only those obligations arising from past events existing independently of the future conduct of the business of the enterprise that is recognized as provision. For a liability to qualify for recognition there must be not only present obligation but also the probability of an outflow of resources to settle that obligation. Where there are a number of obligations (e.g., product warranties or similar contracts) the probability that an outflow will be required in settlement, is determined by considering the said obligations as a whole. In this connection, it may be noted that in the case of a manufacture and sale of one single item the provision for warranty could constitute a contingent liability not entitled to deduction under sec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... liability incurred in the past 10 years . The said workings were very much filed before the lower authorities. Hence we hold that the said sum represents ascertained liability during the year under appeal, although the actual quantification of the same would arise in future. It is well settled that if the assessee is following mercantile system of accounting, if the business liability has definitely arisen in accounting year, deduction should be allowed although liability may have to be quantified and discharged at a future date but what should be definite is incurring of liability. It is not in dispute that the assessee is following mercantile system of accounting. This principle has been endorsed by the Hon ble Supreme Court in the case of Bharat Earth Movers vs CIT reported in 245 ITR 428 (SC). Hence we hold that this liability of Rs 12,79,000/- is an ascertained liability in the year under appeal based on the systematic historical data of the past wherein warranty liabilities had occurred to the assessee. Reliance in this regard is again placed on yet another finding of the Hon ble Supreme Court in the case of Rotork Controls India (P) Ltd vs CIT reported in 314 ITR 62 (SC) wh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the 1961 Act. It would all depend on the data systematically maintained by the assessee. It may be noted that in all the impugned judgments before us the assessee(s) has succeeded except in the case of Civil Appeal Nos. 3506-3524 of 2009 - Arising out of S.L.P.(C) Nos. 14178-14182 of 2007 - Rotork Controls India (P.) Ltd. v. CIT, in which the Madras High Court has overruled the decision of the Tribunal allowing deduction under section 37 of the 1961 Act. However, the High Court has failed to notice the reversal which constituted part of the data systematically maintained by the assessee over last decade. (UNDERLINING IS PROVIDED BY US) 32.2.7. Accordingly we hold that the entire provision for warranty in the sum of Rs 206.68 lakhs would be squarely allowed as deduction in the year under appeal under the normal provisions of the Act. 13. In view of the above, we direct TPO/AO accordingly. Ground No. 8 raised by the assessee are allowed. 14. Ground No. 9 is relating to disallowance of provision for leave encashment. 15. Heard both and perused the material available on record. It is noted that the issue raised in Ground No. 9 was decided by this Tribunal i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... wn case by its consolidated order dated 13.09.2017 for A.Y. s 2010-11 and 2011-12. The relevant portion of which is reproduced herein below: 34. The last issue to be decided in this appeal is as to whether the ld DRP was justified in upholding the addition made on account of provision for interest on MSMED in the sum of Rs 29,21,911/- in the facts and circumstances of the case. 34.1. The ld AO observed that assessee had made provision for interest to the tune of Rs 29,21,911/- for making delayed payment to its suppliers who are registered under The Micro , Small and Medium Enterprises Development Act, 2006 . This provision for interest in the sum of Rs 29,21,911/- was voluntarily disallowed by the assessee in the return of income under normal provisions of the Act but deduction was claimed under computation of book profits u/s 115JB of the Act. The ld AO treated the same as an unascertained liability and added back the same while computing the book profits u/s 115JB of the Act. This action of the ld AO was upheld by the ld DRP. Aggrieved, the assessee is in appeal before us vide Ground No. 14. 34.2. We have heard the rival submissions. We find that as per the provis ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... self contained code in itself and starts with a non-obstante clause creating a legal fiction regarding the total income of the assessee. The provisions of section 115JB of the Act have been introduced in the statute book with effect from 1.4.2001. The MSMED Act, 2006 received the assent of the Hon ble President of India on 16.6.2006. The Provisions of Section 23 of MSMED Act , 2006 are reproduced hereinbelow for the sake of convenience:- 23. Interest not to be allowed as deduction from income Notwithstanding anything contained in the Income Tax Act, 1961 (43 of 1961), the amount of interest payable or paid by any buyer, under or in accordance with the provisions of this Act, shall not, for the purposes of computation of income under the Income-Tax Act, 1961, be allowed as deduction. 34.2.3. The Provisions of section 23 of MSMED Act, 2006 also starts with non-obstante clause by stating Notwithstanding anything contained in the Income Tax Act, 1961 . In this regard, it was argued by the ld DR that the wisdom of the legislators need to be accepted that the Parliament ought to have considered the provisions of the earlier Act while legislating the new Act. Obvio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ial liability towards interest within the end of the previous year and unless the liability had crystallized, no assessee would come forward to make payment of the same. Hence we hold that it is only an ascertained liability as on 31.3.2011. 34.2.5. We find that the provisions of section 115JB of the Act stipulates that Book Profits shall be deemed to be the total income of the assessee. The expression Book Profits is defined in Explanation 1 to section 115JB of the Act which states as under:- For the purposes of this section, book profit means the net profit as shown in the profit and loss account for the relevant previous year prepared under sub-section(2) , as increased by (a) to (k) If any amount referred to in clauses (a) to (i) is debited to the profit and loss account or if any amount referred to in clause (j) is not credited to the profit and loss account, and as reduced by , - . Once the expression Book Profits is defined in section 115JB of the Act, we cannot travel beyond what is defined therein and we cannot impute any other words or provisions therein unless otherwise specified by the statute . Reliance in thi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... extend to the provisions of section 115JB of the Act which is a deeming fiction, wherein the book profits shall be deemed to be the total income of the assessee. The expression total income as used in section 115JB of the Act cannot be equated with computation of income used in section 23 of MSMED Act, 2006.. It can be appropriately used only in the context of provisions of section 29 and section 57 of the Act. Thus while computing the income under normal provisions under various heads alone, the provisions of section 23 of MSMED Act, 2006 would assume relevance and significance. Hence we hold that the interest payable under MSMED Act, 2006 need not be added back to the net profits while computing book profits u/s 115JB of the Act. Moreover, the ld AR also placed the scrutiny assessment orders of the assessee on record for the Asst Year 2014-15 u/s 143(3) of the Act dated 26.12.2016, wherein this aspect has been duly examined by the ld AO in the assessment and deduction was duly granted by him in the assessment. In view of these facts and findings, we hold that the provision for interest payable to suppliers registered under MSMED Act, 2006 in the sum of Rs 29,21,911/- is on ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and the said workings were also filed before the lower authorities. Hence it could be safely concluded that the said provision for warranty is not made based on ad hoc provision. Rather it has got a sound basis and judgment on the part of the assessee creating an obligating event on the assessee as a result of past events. We find that this provision would also not tantamount to provision made for diminution in value of assets. 32.2.9. We would like to place reliance on the decision of the Hon ble Delhi High Court in the case of CIT vs Becton Dickinson India (P) Ltd reported in (2013) 29 taxmann.com 80 (Delhi) dated 19.11.2012 wherein it was held as under:- 6. In the facts of the present case too this Court is of the opinion that the reasoning adopted by the Tribunal cannot be found fault with. The considerations which weighed with the Supreme Court in Rotork Controls India (P.) Ltd.'s case (supra) in concluding such warranty provisions were not contingent liabilities would apply with greater force to negate the claim by the revenue that such provisions are made for diminution in the value of any asset, so as to be covered by Explanation 1(i) to section 115JB of the ..... X X X X Extracts X X X X X X X X Extracts X X X X
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