9911796707
TMI Blog2023 (1) TMI 1248X X X X Extracts X X X X X X X X Extracts X X X X ..... ke TP adjustment at entity level instead of restricting it to international transaction is not legally correct. In the case of CIT v. Phoenix Mecano (India) Pvt. Ltd.[ 2017 (6) TMI 1240 - BOMBAY HIGH COURT] had held that the determination of ALP ought to be restricted to the transaction with the AEs. The Special Leave Petition preferred by the Revenue [ 2018 (7) TMI 798 - SC ORDER] against Hon ble Mumbai High Court judgment was dismissed by the Hon ble Supreme Court (supra). The Bangalore Bench of the Tribunal in IKA India (P.) Ltd.[ 2018 (10) TMI 49 - ITAT BANGALORE] has also held that the transfer pricing adjustment should be only restricted to the AE related transaction of the assessee. The Tribunal in the said case, followed its earlier order in assessee s own case for assessment year 2012-2013. In the light of the aforesaid reasoning and the judicial pronouncements, cited supra, we direct the TPO to compute the TP adjustment restricting the same to the transaction with the AEs. Exclusion of certain companies from the comparable list - Exclusion of Smart Card IT Solutions Limited to AO / TPO to apply the test of functionality consistently. Sark Synertek Limited - We find that t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l [ 2012 (12) TMI 873 - CALCUTTA HIGH COURT ] - we delete the disallowance. Disallowance u/s 40(a)(ia) with regard to rebate given to the customers - HELD THAT:- Tribunal in assessee s own case for assessment year 2010-2011 [ 2023 (3) TMI 809 - ITAT BANGALORE ] had considered an identical issue and restored the same to the files of the A.O. The Tribunal directed the A.O. to consider various clauses of the distribution agreement entered by the assessee with its distributors and to determine whether the payments made is a rebate / discount on a principal to principal basis or whether it is a principal to agent basis. Thus in view of the above order of the Tribunal in assessee s own case (supra), we restore the issue raised. Addition of deferred revenue expenses - HELD THAT:- We find an identical issue was considered by the Tribunal in assessee s own case for assessment year 2010-2011 [ 2023 (3) TMI 809 - ITAT BANGALORE ] on perusal of the sample warranty agreements and following the Co-ordinate Bench order in the case of Schneider Electric IT Business India Pvt. Ltd. v. JCIT, LTU [ 2019 (4) TMI 1770 - ITAT BANGALOR ] deleted the addition on account of deferred revenue expenses - Thus ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... - assessee had not added back unpaid Central Sales Tax (Rajasthan) as per the provisions of section 43B and same was reflected under clause 21(1)(B)(b) to Form No.3CD - HELD THAT:- We find on identical issue the Tribunal in the case of Smt.Husna Parveen [ 2022 (8) TMI 1219 - ITAT VARANASI ] by following the judgment of Chowringhee Sales Bureau (P.) Ltd. [ 1972 (10) TMI 4 - SUPREME COURT ] had decided the issue against the assessee. Short credit of TDS - AR submitted that despite the directions of the DRP, the A.O. failed to verify the latest Form No.26AS and allow TDS credit - HELD THAT:- The issue raised is restored to the files of the A.O. The A.O. is directed to examine the issue afresh as per the directions of the DRP and grant due tax credit as per law. It is ordered accordingly. X X X X Extracts X X X X X X X X Extracts X X X X ..... 100,30,45,893 (v) Disallowance of claim u/s 40(a)(a) / 40(a)(ia) (51830340 +163279058) 21,51,09,398 (vi) Capital expenditure 2,67,16,286 (vii) Less : Depreciation on Capital Expenditure for A.Y. 2009-10 86,88,273 (viii) Less : Depreciation on Capital Expenditure for A.Y. 2012-13 38,26,423 (ix) Interest on delayed payments of TDS 26,349 (x) Central Sales-tax - Rajasthan 2,006 5. Aggrieved by the final assessment order, the assessee has preferred the present appeal before the Tribunal. The assessee has raised seven grounds under the transfer pricing segment and nine grounds under the corporate tax segment. The grounds raised read as follows:- "I. Transfer pricing 1. Order/ Directions bad in law and on facts * The order issued by the Additional Commissioner of Incometax (ACIT'), Large Tax Payers Unit CLTU'), Bangalore [(Assessing Officer') or (AO')], under section 143(3) read with section 144C (13), pursuant to the directions issued by the Hon'ble Dispute Resolution Panel ['Ld. DRP'], is bad in law and on facts and is in violation of the principles of natural justice. * Without prejudice to the generality of the above, the o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e made while doing the comparability analysis and that reasonably accurate adjustments are required to be made on factors that could materially affect the amount of net profit margin. The Ld. DRP erred in confirming the same. * The Ld. AO and Ld. TPO should have appropriately considered collating information in the absence of data available in public domain of companies selected as comparable companies, for their capacity utilization. * The Ld. AO and Ld. TPO erred in not following the directions of the Ld. DRP wherein the Ld. DRP had directed that the cherry picked comparables viz. Smart Card I T Solutions Ltd, Epitome Components Private Limited, Micropack Limited and Sark Synertek were ought to be rejected. * Without prejudices to ground no. 2.8 above, the Ld. AO j Ld. TPO and the Ld. Panel erred in concluding the aforesaid companies as comparable despite these companies being functionally dissimilar to the Appellant. * The Ld. AO and Ld. TPO erred in including Electronics Corporation of India Ltd. despite the company being functionally dissimilar to the Appellant. The Ld. DRP also erred in confirming the same. 3.Erroneous adjustment of Rs. 141.37 Crores as Warrant ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ia, differences in (i) accounting practices, (ii) marketing expenditure, (iii) research and development expenditure, (iv) working capital, (iv) risk profile and (v) capacity adjustment to account between the Appellant and the comparable companies. 6. Variation of 3% from the arithmetic mean * The Ld. AO and Ld. TPO erred in law in not granting the benefits of proviso to section 92C(2) of the Act available to the Appellant. 7. Relief * The Appellant prays that the Ld. AO be directed to grant allsuch relief arising from the preceding grounds as also all relief consequential thereto II Corporate Tax 1. Disallowance under section 40(a)(ia) of the Act for short deduction of tax - Rs. 418,320 * The learned Assessing Officer ("AO") has erred in disallowing an amount of Rs. 418,320 under section 40(a)(ia) of the Act for short-deduction of taxes. * The Hon'ble DRP and learned AO erred in not appreciating that section 40(a)(ia) of the Act is attracted in cases of non-deduction of taxes or for non-payment of taxes after deduction within the specified time prescribed under the provisions of the Act. * The Hon'ble DRP and the learned AO fails to appr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e only during such period and not in current financial year. * The Hon'ble DRP .and learned AO has erred in not accepting the matching concept of accounting enunciated by the Generally Accepted Accounting Principles. * The Hon'ble DRP and learned AO fails to appreciate that the accounting policy followed by the Appellant Company is in line with the matching principles and has recognized the revenue in respect of contracts spanning over current financial year proportionately in the year of providing the services. Subsequently, following the matching concept, the cost in relation to providing such services has been recognized in the respective year. * The Hon'ble DRP and learned AO has erred in not considering the fact that, recognizing the entire consideration of the contract spanning more than one financial year, as income during the current year would tantamount to taxing the gross receipts and not the profits or gains arising from such sale. * The Hon'ble DRP and learned AO ought to have appreciated the fact that, what is sought to be taxed under the head "Profits and Gains of Business or profession" is 'profits and gains' and not ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d. Thus, the said expenditure is revenue-in-nature and deductible under section 37(1) of the Act. * The Hon'ble DRP and learned AO has erred in stating that the investment is one time and the life time of the assets is more than one year giving enduring benefit to the Appellant without appreciating that the expenditure incurred by the Appellant has not resulted in bringing into existence any such asset or advantage to the Appellant but only facilitates in running the business of the Appellant efficiently by maintaining uniform standards across all Dell franchise showrooms. * The Hon'ble DRP and the learned AO erred in not relying on the judicial precedents put forth by the Appellant in this regard. 6.Disallowance of interest under section 201(1A) on delayed payment of TDS - Rs. 26,349 * The Hon'ble DRP and learned AO has erred in disallowing interest under section 201(lA) of the Act on delayed payment of TDS amounting to Rs. 26,349 contending that the same has no connection with the business carried on by the Appellant. * The Hon'ble DRP and learned AO ought to have appreciated that such interest under section 201(lA) of the Act is compensatory in nat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Rs.453,42,62,785. One of the adjustments was with regard to the manufacturing segment amounting to Rs.307,69,14,132. The method adopted by the assessee was TNMM in the TP Study. The assessee had selected six comparables using data base of Prowess Capitaline Plus and arrived at the arithmetical mean of 2.36%. The TPO rejected the TP study of the assessee. The TPO adopted TNMM method as the most appropriate method and by applying certain filters, selected eleven comparables. (five comparables added by the TPO). The TPO reworked out the net margin on cost earned by the assessee at 0.87% by rejecting the adjustment made by the assessee towards under-utilized of capacity. The net mark up on cost earned by the assessee as computed by the TPO, the comparable selected by the TPO, computation of ALP and the TP adjustment made are detailed below:- Net mark-up on cost earned by the assessee as computed by the TPO Operating Income Rs.5434,19,06,540 Operating Cost Rs.5841,58,43,349 Operating Profit (Op. Income -Op.cost) (Rs.47,39,36,809) Operating / Net mark-up (OP/TC) -0.87%* Note : The assessee in the TP study had made an adjustment towards underutilized capacity, which the TPO rej ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 47,02,666 as the adjustment sought for the aforesaid under-utilized capacity. The TPO, however, rejected the assessee's claim for adjustment (refer page 7 to 11 of the TPO's order). The TPO held that it is an industrial phenomena and not affecting the assessee specific. The view taken by the TPO was confirmed by the DRP in its directions (refer page 5 to 7 of the DRP's directions). 9.1 Aggrieved, the assessee has raised this issue before the Tribunal. It was submitted that the grant of adjustment towards utilized capacity is recognized under the Act and the Rules. In this context, the learned AR relied on the order of the Bangalore Bench of the Tribunal in the case of IKA India (P.) Ltd. v. ACIT reported in (2019) 101 taxmann.com 276 (Bangalore-Trib.) and Continental Automotive Components India (P.) Ltd. v. DCIT reported in (2022) 137 taxmann.co 246 (Bangalore-Trib.). 9.2 The learned DR took us through the reasoning of the TPO for rejecting the assessee's claim. The learned DR submitted that the downslide in the business is industry specific and therefore, no adjustment can be granted on account of under-utilized capacity. 9.3 We have heard rival submissions and perused the mate ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... removed for capacity underutilization adjustment. It is beyond understanding how can costs like freight, commission, sub-contracting charges, rates & taxes etc can be considered for capacity under utilization adjustment. The approach of the assessee of taking all cost for adjustment is bereft of any merit. Further, adjustment cannot be made assuming 100% capacity of the comparables. 9.3.3 The assessee has relied on the decisions in the case of IKA India Private Limited v. ACIT (supra). The assessee in that case was in third year of operation. In the case on hand, the assessee is incorporated in 2003 and year under consideration is A.Y. 2013-2014. The decision of Continental Automotive Components India Pvt. Ltd. v. DCIT reported in (2022) 137 taxman.com 246 followed the decision in the case of IKA India Private Limited v. ACIT (supra) and remanded the case back to AO / TPO. In the instant case, the assessee is not in the initial year of operation and therefore, adjustment cannot be granted without analyzing additional factors. In the case of IKA India Private Limited v. ACIT (supra), the Tribunal observed as follows:- "33. The assessee has under-utilized capacity during the subj ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he segmental working are as under:- Break-up of Revenue Particulars Amount in INR In % to total sales Domestic manufacturing segment 4611,68,12,978 87% Sales made to AEs segment i.e. the international transaction 675,36,79,232 13% Total 5240,08,57,506 100% Segmental workings: Particulars Domestic manufacturing Sales made to AEs Total manufacturing Operating revenue 4758,82,27,308 675,36,79,232 5354,19,06,540 Operating cost 4547,19,46,530 662,56,48,497 5209,75,95,027 Operating profit 211,62,80,778 12,80,30,735 224,43,11,513 Profit margin 4.45% 1.93% (OP/OC) 10.3 In terms of section 92CA of the I.T.Act, the A.O. can refer the matter to the TPO for computation of ALP in relation to the international transaction and the TPO had empowered compute the ALP only in respect of the international transaction. No adjustment can be made in respect of transaction entered into with non-AEs. Therefore, the action of the TPO to make TP adjustment at entity level instead of restricting it to international transaction is not legally correct. The Hon'ble Bombay High Court in the case of CIT v. Phoenix Mecano (India) Pvt. Ltd. (supra) had held that the determinatio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oth the assessee and the TPO. There cannot be cherry picking by either of them. Discussing the contention of the assessee, the TPO at page 12 of his order, had stated that even the assessee had considered comparables like BLG Electronics, Circuit Systems and Fine Line Circuits Limited, which are engaged in the business of manufacture of printed circuit boards and assessee has not objected to these companies as they have low profits. Therefore, we deem it fit to remand the issue of exclusion of Smart Card IT Solutions Limited to AO / TPO to apply the test of functionality consistently. (ii) Sark Synertek Limited 12. It is submitted that this company is engaged in manufacturing of printed circuit boards, trading of switch gear and rendering of services. It is stated that the segmental details as regards these diverse services are unavailable, and therefore, the company cannot be selected as a comparable. 12.1 The learned DR supported the order of the TPO and the DRP. 12.2 We have heard rival submissions and perused the material on record. The annual report of the above company is placed on record from pages 186 to 223 of the index of Annual Report. On perusal of the financials o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... krupp Industries India (P.) Ltd. v. Addl.CIT (supra). Though the assessee had taken this company as a comparable in its TP study, the assessee can raise objections to the comparability of the said company before the TPO or before the appellate forums. In this context, we rely on the judgment of the Hon'ble Bombay High Court in the case of CIT v. Tata Power Solar Systems Limited reported in (2017) 77 taxmann.com 326 (Bombay) and the Special Bench of the Tribunal order in the case of DCIT v. Quark Systems Pvt. Ltd. reported in (2010) 4 ITR (Trib.) 606 (ITAT-Chd.). Adjustment determined in respect of warranty cost [Ground I(3)] 14. It is claimed that the assessee provides telephonic support services for standard problems to the customers who purchase the products sold by Dell Global B.V. (DGBV) in India. It is submitted that the technical support services include services in relation to products sold by DGBV which are under warranty period. It is stated that in relation to warranty services, the cost of third party service provider and spares are borne by the assessee, and recovered from DGBV. It is submitted that the warranty obligation as regards the sales made by the AEs directl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d for separately. The DRP in fact directed that since the services in relation to the warranty obligations are provided by third party service providers and the assessee is only coordinated for the same, no mark up is warranted. The relevant finding of the DRP in this regard reads as follows:- "6.6.6 The assessee is directed to demonstrate to the TPO that the above reimbursement has either been reduced from the costs or accounted for separately. In absence of such demonstration, the TPO can take the above to be a part of the warranty costs debited 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ete the disallowance of Rs.4,18,320. It is ordered accordingly. 15.5 In the result ground II(1) is allowed. Disallowance u/s 40(a)(ia) of the I.T.Act with regard to rebate given to the customers [Ground II(2)] 16. The A.O. during the course of assessment proceedings called for the details of tax deducted at source on various payments. For the details called for, payments amounting to Rs.52,42,23,354 was also sought. The A.O. submitted that the payments were in the nature of rebate given to the distributors on which tax were not liable to be deducted at source. The A.O., however, rejected the contention of the assessee and held the transaction was between principal and agent and not principal to principal basis. Therefore, the A.O. concluded that the assessee was obliged to deduct tax at source u/s 194H of the I.T.Act and since no tax was deducted at source, the said amount was disallowed u/s 40(a)(ia) of the I.T.Act. The DRP rejected the objections of the assessee and upheld the view taken by the A.O. 16.1 The learned AR reiterated the submissions that a sum of Rs.52.42 crore represents rebate payment to distributors on which the provisions of TDS are not applicable. The learn ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ource on such commission paid to the distributors under bill to order model. B. Stock and Sell (SNS) In this model the distributors purchase final products from the Assessee at its own risk and in turn sell the same to the ultimate customer or a sub distributor at a predetermined price. The title in the goods is passed on to the distributor upon delivery of goods subsequent to sale by the Assessee. It is the responsibility of the distributor thereafter to sell such goods to the consumers and any unsold goods would not be returned back to the Assessee. Further, the distributor shall make the payments in relation to such purchases, within the time prescribed in the agreement irrespective of whether the same is sold by him or not. Further, upon achieving certain predetermined targets as set out by the Assessee, the distributors are eligible for rebate / volume discount at a predetermined rate. Therefore the nature of relationship between the Assessee and the distributors is that of a principal-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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... It is the Channel Partner and the Distributor who have to insure the products and the godowns at their cost. They are even prevented from making any representation to the retailers unless authorized by the assessee. What is given by the assessee to its Distributor/ Channel Partner is a trade discount. It is not commission." 58. It is the contention of the assessee that the clauses of the agreement with its distributors demonstrate that the transactions in relation to rebate/discount are on a principal-to-principal basis not attracting the provisions of section 194H. We are of the view that the 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 by the Hon'ble High Court after giving reasonable opportunity of being heard to the assessee. This ground is allowed for statistical purposes." 16.4 In view of the above order of the Tribunal in assessee's own case for assessment year 2010-2011 (supra), we restore the issue ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... warranty terms and conditions at pages 2041-2047 in Volume 3 of Paperbook. * In terms of Section 5 of the Act, the total income of any previous year of a person who is a resident includes all income from whatever source derived which is received or is deemed to be received in India in such year, accrues or arises or is deemed to accrue or arise to him in India during such year. It is submitted that during the year under consideration, to the extent of Rs. 100,30,45,893/-, no income "accrued" to the Assessee. * In the Assessee's case, as the obligation to provide the warranty services which could involve outflow of resources like goods(spares) and services are yet to occur and hence, in line with the generally accepted accounting principles, revenue is recognized on a straight-line basis over the period of contract. Any portion of consideration for which invoices have been raised but, some portion of the contract period pertains to subsequent year would be classified under "other liabilities" and the same would be recognized as revenue in the year in which obligation to provide the services arise. * To illustrate, say the Company sells a laptop in December 2011 along with war ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sessee's own case for the assessment year 2011-12 [order dated 11.11.2022 passed by this Hon'ble Tribunal in IT(TP)A Nos. 641 & 642/Bang/2016] at paras 29-36 and 2012-13 [order dated 11.11.2022 passed by this Hon'ble Tribunal in IT(TP)A No. 2834/Bang/2017] at paras 28-35 where the assessee's ground of appeal was allowed, accepting the above contentions and the addition deleted. 17.4 The learned DR supported the order of the AO / TPO. 17.5 We have heard rival submissions and perused the material on record. We find an identical issue was considered by the Tribunal in assessee's own case for assessment year 2010-2011. The Tribunal on perusal of the sample warranty agreements and following the Co-ordinate Bench order in the case of Schneider Electric IT Business India Pvt. Ltd. v. JCIT, LTU in ITA Nos.299/Bang/2014 and 218/Bang/2014 (order dated 30.04.2019), deleted the addition on account of deferred revenue expenses. The relevant finding of the Tribunal in this regard reads as follows:- 31. We heard the rival submissions and perused the materials on record. The main ground on which the DRP confirmed the order of AO is that the amount received towards warranty is not refundable ev ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... vice in accordance with the invoice terms; Customer refuses to cooperate with the assisting analyst or on-site technician; or Customer fails to abide by all of the terms and conditions set forth in this Service Description. If Dell cancels this Service, Dell will send Customer written notice of cancellation at the address indicated on Customer's invoice. The notice will include the reason for cancellation and the effective date of cancellation, which will be not less than me 0-01 days from the date Dell sends notice of cancellation to Customer, unless state law requires other cancellation provisions that may not by varied by agreement. IF DELL CANCELS THIS SERVICE PURSUANT TO THIS PARAGRAPH, CUSTOMER SHALL NOT BE ENTITLED TO ANY REFUND OF FEES PAID OR DUE TO DELL." 33. The assessee recognizes that portion of consideration for which invoices have been raised pertaining to the year under consideration and the balance portion of the contract period that pertains to subsequent year is classified under "other liabilities". The revenue thus deferred is recognized in the year in which obligation to provide the services arise. In Assessee's case, as the obligation to provid ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hat deferral of income, though it has accrued to an Assessee, is possible. The principal question therefore that needs to be addressed is regarding whether deferring revenue is permissible under the mercantile system of accounting followed by the Assessee where income that accrues or arises to an Assessee has to be regarded as income. 92. The learned counsel for the Assessee in his rejoinder submitted that the decision of the Tribunal rendered in the case of Optum Health & Technology (India) (P.) Ltd. (supra) is clearly distinguishable because in that case not only was the revenue received but also services were rendered and still the Assessee chose to defer revenue recognition and it was in those circumstances, the Tribunal held that deferring revenue was not proper and had to be regarded as income of the relevant year. 93. We have given a very careful consideration to the rival submissions. Similar issue had arisen for consideration in the case of Punjab Tractors Co-op. Multipurpose Society Ltd. (supra) before the Hon'ble Punjab & Haryana High Court. In that case the facts were that the assessee was engaged in the purchase and sale of tractors, motor cycles, etc., and d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n it becomes eligible to tax. What is relevant to determine whether money received is income or simply an advance, is the initial character of the receipt and not the head under which the amount is credited in the books of account. If no income has resulted, it cannot be said that income accrued merely on the ground that the assessee has been following the mercantile system of accounting." The Hon'ble Court accordingly upheld the stand of the Assessee. Holding that the Assessee did not become owner of the money received unless the services are rendered and was not entitled to appropriate the same till service was rendered in lieu of which the same was received in advance. 94. The Hon'ble Madras High Court in the case of Coral Electronics (P.) Ltd. (supra) also dealt with similar case. The assessee is a private limited company carrying on business in television sets. In the previous year ending 31st March, 1983, and 31st March, 1988 corresponding to the assessment years 1983-84 and 1988-89, respectively, the assessee had collected service charges, which were bifurcated into two items, one as pertaining to year and another pertaining to the subsequent assessment ye ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ntended by the learned counsel for the Assessee the facts were that the sums were received in advance and in respect of the sums received services were also performed but still the Assessee did not recognize revenue but postponed recognition based on the bills raised on the clients for services performed. Though there are observations in the order of the Tribunal that postponement of recognition of income is not possible on the basis of AS- 9 of ICAI when income accrues or arises under the mercantile system of accounting, those observations have to be confined as decision on the facts of that case. In the light of the decision of the Hon'ble High Courts of Punjab & Haryana and the Hon'ble Madras High Court, we are of the view that the claim made by the Assessee deserves to be accepted. Accordingly the addition made by the AO and confirmed by the DRP is directed to be deleted. Gr.No.19 is accordingly allowed." 35. In the light of the decision of the coordinate bench of the Tribunal and considering the facts of the case as discussed above, 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... would be withheld. In view of the above accounting and tax treatment, it is submitted that a deduction for the entire amount shall be allowed in AY 2013-14. * Out of the total provision of expenses disallowed of Rs. 158,25,21,633/-, the assessee while providing complete break up, has provided evidence of TDS done/ TDS not applicable for substantial sum of Rs. 153,06,91,293/-. However, for certain expenses as listed below, considering the volume of transactions, the assessee had not submitted the details of TDS in respect of some of the following, as indicated: Particulars of Payment Amount disallowed u/s 40(a)(ia) (INR) Evidence for TDS given (INR) Difference (INR) Freight 31,56,15,532/- 39,75,65,546/- (1,63,31,923/-) Contract - Others 9,82,81,937/- Advertisement 16,46,61,955/- 37,06,35,583/- (3,42,48,397/-)* Repairs & Maintenance 2,32,67,228/- Staff Welfare 1,17,75,882/- Travelling and Conveyance 58,30,101/- Legal and Professional 9,57,01,235/- Warranty 10,36,47,579/- Accounting & Audit fee 72,73,030/- 75,97,261/- 3,24,231/- Royalty payment 35,02,23,675/- 34,86,49,424/- There is no short deduction. The difference is on account of exchange rate ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng the course of hearing the AO called on the assessee to furnish the details of tax deducted at source on the amount claimed as deduction. Since the assessee was able to furnish evidences of tax deducted at source to the extent of Rs. 16,69,09,884/- out of Rs. 22,05,17,807/-, the AO made a disallowance of Rs.5,09,07,923/- for want of evidence, on the ground that under Section 40(a)(ia) of the Act deduction of the amount was allowable only if tax was deducted at source. 67. Before us, the ld. AR submitted that the impugned deduction is claimed not on the basis of subsequent tax deduction, but on the basis that entries are reversed in the current year and taxing the same would amount to double disallowance. The ld. AR therefore submitted that the amount claimed needs to be allowed as a deduction for tax computation purposes. The ld AR also submitted that the assessee, based on mercantile system of accounting, makes a provision for various expenses that have accrued at the end of the year but for which invoices are not received at the end of the year. The ld. AR further submitted that the provisions created was not only offered to tax during the year of creation, but in the AY 201 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nancial year. The assessee disallowed the provision made on 31st March of 2009 in the computation of income for the assessment year 2009-10. The same amount is claimed as a deduction in the subsequent in the computation of income as the year end provisions are reversed on 1st April 2009. The contention of the assessee that the deduction claimed if not allowed will result in double disallowance has merits. The expenses disallowed is eligible for deduction u/s.40(a)(ia) of the Act as and when the tax is deducted at source on such expenses. The reversal of provisions done on 1st April 2009, would go to nullify the impact of the expenses claimed by way of debit to the profit and loss account on which tax is deducted at the time of the payment. Therefore the reversal of provisions disallowed in the computation of assessment year 2009-10 is to be claimed as a deduction in the assessment year 2010-11 so that the expenses eligible for deduction u/s.40(a)(ia) is rightly claimed in the computation. However the most important fact that needs to be verified in this regard is whether the provision made on 31st March 2009 to the tune of Rs. Rs. 22,05,17,807 is reversed on 1st April 2009 and that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of Rs.2,90,47,055 being expenditure incurred towards fixtures and stores interiors as a revenue expenditure. It is submitted that the said expenditure was incurred by the assessee for maintaining uniformity in franchisee stores and the assessee not being the owner nor it derives any enduring benefit on such expenditure, the same ought to be allowed as revenue in nature. 19.1 The A.O. classified the expenditure as capital in nature for the reason that (i) Form 3CD filed for the assessment year 2013-2014 noted the said expenditure aggregating to Rs.2,90,47,055 as capital expenditure debited to profit and loss account; (ii) it was incurred towards purchase / acquiring of assets; and (iii) it is one time investment by the assessee and lifetime of the assets are more than one year giving enduring benefit to the assessee. The A.O., however, accepted the alternative claim of the assessee to allow depreciation (worked out to Rs.23,30,769) and accordingly made a disallowance of the expenditure to the extent of Rs.2,67,16,286. 19.2 The DRP rejected the objections raised by the assessee. 19.3 Aggrieved, the assessee has raised this issue before the Tribunal. The learned AR submitted that t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 5,15,813/- towards fixture and stores interiors expenses. The expenditure was claimed as being revenue in nature and deductible under Section 37(1) of the Act for the reason that the said expenditure was incurred for maintaining uniformity in the franchisee stores and the Assessee neither owns nor derives any enduring benefit on such expenditure. 37. The AO classified the expenditure as capital in nature for the reasons that (i) the Form 3CD filed for AY 2012-13 noted the said expenditure aggregating Rs. 4,25,15,813/- as capital expenditure debited to profit and loss account; (ii) it was incurred towards purchase / acquiring of assets; and (iii) it is one time investment by the Assessee and lifetime of the assets are more than one year giving enduring benefit to the Assessee. 38. The AO accepted the alternative claim of the Assessee to allow depreciation on the said amount (worked out to Rs. 42,51,581/-) and accordingly made a disallowance of the expenditure to the extent of Rs. 3,82,64,232/-. 39. The CIT(A) confirmed the order of the AO. 40. The ld. AR submitted that for an expenditure to be treated as capital in nature, the asset must be owned by the Assessee, used by ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... egarded as revenue expenses as they endure for a longer period of time. The AO also made a reference to clause 12 of the agreement whereby the franchisee has to bear the insurance of goods and fixtures supplied by the assessee. Considering all these aspects, the AO concluded that the expenditure as a capital expenditure and he accordingly disallowed the claim of the assessee for deduction. The DRP agreed with the conclusions of the AO. 33. The learned Counsel for the assessee submitted that expenses are purely revenue in nature and the intention was to ensure that the franchisee showrooms confirmed to certain standards. It was submitted that the expenses do not add any value to existing assets and they are revenue in nature. Alternatively, it was claimed that the assessee should be allowed depreciation in the event the expenditure is treated as capital in nature. Learned Counsel for the assessee placed reliance on the decision of the ITAT, Bengaluru Bench, in the case of Emdee Apparel IT(TP)A Nos.2834/B/17 & 134/Bang/2018 Page 34 of 37 in ITA Nos.576, 577/Bang/2007, order dated 21.09.2012. In the aforesaid case, the question arose in the context of identical expenditure incurred ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pparels (supra) is applicable. Consequently, the claim made by the assessee is directed to be accepted and the relevant grounds of appeal are allowed." 43. The Assessee is primarily engaged in the manufacturing and trading of Dell brand Computer hardware and peripheral products. The sale of all these products in India are also carried out under a Franchise model. Under the said model, third party contractors would act as a Franchisee for the Assessee in India, where the said Franchise would open exclusive shops/ stores for sale of its products. To maintain the set standards and to ensure all the Franchise stores provides the customers an environment where these products are sold in Dell exclusive stores, the Franchisees are required to furnish the interiors as per the set standards of the Assessee, which include specific type of glow sign board towards use of the Assessee's name, logo and trademarks on the stores, fixtures, etc. In order to facilitate the above objective, the Assessee incurs such expenses on behalf of the Franchisees which are neither recoverable nor give the Assessee any kind of ownership towards the same. The ld AR submitted a sample copy of franchisee agreeme ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... i) Total Environment Building Systems Pvt. Ltd. v. DCIT in ITA Nos. 45 & 46/Bang/2017 (order dated 29.06.2022). (ii) Resolve Salvage & Fire India (P.) Ltd. v. DCIT reported in (2022) 139 txmann.com 196 (Mum-Trib.) 20.3 We have heard rival submissions and perused the material on record. We find on identical facts, the Bangalore Bench of the Tribunal in the case of Velankani Information Systems Ltd. v. DCIT reported in (2018) 97 taxmann.com 599 (Bangalore-Tribunal) had decided the issue against the assessee. The relevant finding of the Tribunal reads as follows:- "21. As far as delay in remittance of tax deducted at source u/s. 201(1A) of the Act is concerned, we find that the Hon'ble Madras High Court in the case of CIT v. Chennai Properties & Investment Ltd. (1999) 239 ITR 435 (Mad) has taken a view that interest paid u/s. 201(1A) is also in the nature of tax and notwithstanding the fact that it is not the tax liability of the assessee, the same cannot be allowed as a deduction. The following were the relevant observations of the Hon'ble Madras High Court:-- "14. As already noticed the payment of interest takes colour from the nature of the levy with ref ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Madras High Court. Though the decision of the Tribunal is later in point of time, judicial discipline demands that the decision of the Hon'ble Madras High Court is to be followed. It is also worthwhile to mention that the Kolkata Bench of Tribunal in the case of Narayani Ispat (P.) Ltd. (supra), which was cited by the ld. counsel for the assessee, did not consider or did not have an occasion to consider the decision of the Hon'ble Madras High Court in the case of Chennai Properties and Investment Ltd. (supra). In these circumstances, we follow the decision of the Hon'ble Madras High Court & uphold the order of the CIT(A) insofar as it relates to disallowance of interest on delayed remittance of tax deducted at source u/s. 201(1A) of the Act." 20.4 Following the above decision of the Tribunal, we hold that the interest on delayed payment of TDS is not an allowable deduction. 20.5 In the result, ground II(6) is dismissed. Disallowance of unpaid Central Sales Tax (CST) [Ground II(7)] 21. For the assessment year 2013-2014, the assessee had not added back unpaid Central Sales Tax (Rajasthan) amounting to Rs.2,006 as per the provisions of section 43B of the I.T.Ac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... unting standards which are notified in the official gazette from time to time as per section 145 of the Act. The method of accounting is required to be regularly followed by the assessee. Even as per the provisions of section 145A, the valuation of the purchase and sales of goods and services and sale of inventory shall be adjusted to include the amount of duty, cess or fee actually paid or incurred by the assessee. Hence, the contention of the assessee that it has not claimed any deduction on account of GST by taking the same directly to the balance-sheet and not taking through the profit and loss account is not acceptable. The assessee cannot be permitted to adopt a modus operandi and giving an accounting treatment to the GST without passing through the profit and loss account to circumvent the provisions of section 43B. The CIT(A) has considered this issue in paras 5 to 6.3 as under:-- '5. FINDINGS AND DETERMINATION: I have carefully gone through the Grounds of appeal, the findings of AO on each such Grounds of appeal raised by the assessee and the written submissions uploaded by the assessee in support of the Grounds of appeal. 6. All the Grounds involve only one s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is debited in profit and loss account at time of depositing the GST to the Central Govt A/c. According to the assessee, since no debit entries on account of GST are at all passed in the P & L A/c, this means that the assessee has not claimed any GST expenses allowable to it consequently no disallowance u/s 43(b) should be made. In support of these arguments, the assessee has placed its reliance in the case of CIT v. Associated Pigments Ltd. (1973) 71 Taxman 244 (Cal), wherein according to the assessee, it was decided that where the assessee had credited sales tax collection and debited sale tax payment in a separate sales tax account that would not rendered the provision of section 43(b), hence the aforesaid section is inapplicable. The assessee has also relied on the judgments in the case of S. Govind Raja Reddiar v. ITO (1986) 19 TTD (Coch) 177 and also Sri Kakollu subba Rao & Co. v. Union of India (1988) 71 CTR (AP) 34. 6.3. DECISION: (I) On identical facts, as are involved in the present appeal, Hon'ble ITAT, COCHIN BENCH, COCHIN, in the case of "M/s. Kunnel Engineers & Contractors (P) Ltd." decided in I.T.A. No. 653/Coch/2019 & 04/Coch/2020 vide its judgem ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ;outstanding liability'. Being queried, it was explained that it had not preferred any claim for deduction and, thus, it was argued, the question of disallowance tr/s 43B of the Act does not arise. The AO took a view that even though the assessee had not claimed the same in its P & L account as an expenditure and, therefore, section 43B has no application. However, he was of the view that the fact remains that service tax collected by the assessee but not paid to the Government account up-to the end of the financial year or even up-to the date of filing of the return of income and, thus, by not including this amount in its service, it had clearly made a claim indirectly. As rightly highlighted by the CIT(A), the assessee's plea that sales-tax was different from service tax cannot be accepted in the present circumstance as what the assessee was a firm of Chartered Accountants is selling is services and not goods, so the tax applicable is service tax which stands on the same bracket as sales tax in terms of services rendered as sales tax holds for goods sold. We have also observed that the AO had pointed out that the said amount has been included as business receipts in its T ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... be made and the same has been correctly deleted by the CIT(Appeals)". However, in the instant case, as admitted by the assessee, service tax has been collected but not paid to the Government account either up-to the end of the financial year or even up-to the date of filing of the return of income. Thus, the case law relied on by the assessee is distinguishable and cannot come to the rescue of the assessee. (ii) CIT v. Noble and Hewitt India (P.) Ltd. (Del) 7.2.2 The Hon'ble Delhi High Court was predominantly concerned with the disallowance of deduction by invoking the provisions of section 43B of the Act. The Hon'ble Delhi High Court was not considering the issue whether the service tax collected and the remaining unpaid till the due date of furnishing of the return forms the part of the total income for the current year. (iii) DCIT v. Manish M Chheda 29 SOT 138 - Mumbai ITAT 7.2.3 In the above case, the Hon'ble Mumbai Tribunal was considering the applicability of section 28(iv) of the I T Act. In the instant case, it is an admitted fact that during the course of assessee's profession, a sum of Rs. 29,60,000/- was realised/collected as service t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the Act, it is provided that notwithstanding anything to the contrary contained in clause(a) to section 145, the valuation of purchase and sale of goods and inventory, for the purpose of determining the income chargeable under the head profits and gains of business or profession, shall be (i) in accordance with method of accounting regularly employed by the assessee; and (ii) further adjusted to include the amount of any tax, duties, cess or fees, by whatever name called, actually paid or incurred by the assessee, to bring the goods to the place of its location and condition, as on the date of valuation. As per the explanation under the said clause, it is pointed out that for the purpose of this section, any tax, duties, cess or fees, by whatever name called, under any law for the time being in force, shall include all such payments, notwithstanding any right arising as a consequence to such payments. Sub-clause (b) talks of interest received by the assessee on compensation or enhanced compensation, which is not relatable to the issue before us. The aforesaid provisions of section 145A of the Act have been substituted by the Finance (No.2) Act, 2009 w.e.f. 1-4- 2010. Prior to i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es, 2004 as well as section 43B of the IT Act. 7. Section 43B(a) is as under: 43B. Notwithstanding anything contained in any other provision of this Act, a deduction otherwise allowable under this Act in respect of-- (a) any sum payable by the assessee by way of tax, duty, cess or fee, by whatever name called, under any law for the time being in force, or 8. Rule 4 of the CENVAT Credit Rules, 2004 reads as under: Rule 4. Conditions for allowing CENVAT credit. (1) The CENVAT credit in respect of inputs may be taken immediately on receipt of the inputs in the factory of the manufacturer or in the premises of the provider of output service: Provided that in respect of final products, namely, articles of jewellery falling under heading 7113 of the First Schedule to the Excise Tariff Act, the CENVAT credit of duty paid on inputs may be taken immediately on receipt of such inputs in the registered premises of the person who get such final products manufactured on his behalf, on job work basis, subject to the condition that the inputs are used in the manufacture of such final product by the job worker. (2) (a) The CENVAT credit in respect of capital goods received ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... manufacturer, provider of output service even if the capital goods are acquired by him on lease, hire purchase or loan agreement, from a financing company. (4) The CENVAT credit in respect of capital goods shall not be allowed in respect of that part of the value of capital goods which represents the amount of duty on such capital goods, which the manufacturer or provider of output service claims as depreciation under section 32 of the Income-tax Act, 1961 (43 of 1961). (5) (a) The CENVAT credit shall be allowed even if any inputs or capital goods as such or after being partially processed are sent to a job worker for further processing, testing, repair, re-conditioning, or for the manufacture of intermediate goods necessary for the manufacture of final products or any other purpose, and it is established from the records, challans or memos or any other document produced by the manufacturer or provider of output service taking the CENVAT credit that the goods are received back in the factory within one hundred and eighty days of their being sent to a job worker and if the inputs or the capital goods are not received back within one hundred eighty days, the manufacturer or pro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the service tax is not payable. 11. As per section 173A of the Service Tax Act, in case, the service tax is collected, the provision is as under: 173A. Service Tax collected from any person to be deposited with Central Government.--(1) Any person who is liable to pay service tax under the provisions of this Chapter or the rules made thereunder, and has collected any amount in excess of the service tax assessed or determined and paid on any taxable service under the provisions of this Chapter or the rules made there under from the recipient of taxable service in any manner as representing service tax, shall forthwith pay the amount so collected to the credit of the Central Government. (2) Where any person who has collected any amount, which is not required to be collected, from any other person, in any manner as representing service tax, such person shall forthwith pay the amount so collected to the credit of the Central Government. (3) Where any amount is required to be paid to the credit of the Central Government under sub-section (1) or sub-section (2) and the same has not been so paid, the Central Excise Officer shall serve, on the person liable to pay such amount, a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... vent in terms of a contract, which requires the receiver of service to make any payment to service. provider, the date of completion of each such event as specified in the contract shall be deemed to be the date of completion of provision of service; (ii) wherever the provider of taxable service receives a payment up to rupees one thousand in excess of the amount indicated in the invoice, the point of taxation to the extent of such excess amount, at the option of the provider of taxable service, shall be determined in accordance with the provisions of clause (a). Explanation--For the purpose of this rule, wherever any advance by whatever name known, is received by the service provider towards the provision of taxable service, the point of taxation shall be the date of receipt of each such advance." 13. After considering the above provisions, it is clear that the assessee has to pay service tax within due date as set out under the above provisions either by way of cash/cheque or by way of availing CENVAT credit as per Rules as stated above, but the assessee did not do so. The liability of service tax had also arisen as per the point of Taxation Rules, as stated above. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ecedents, we are of the view that the service tax collected by the assessee and not paid to the Government exchequer before the due date of filing of return, is to be disallowed, though it was not charged to the profit and loss account and it attracts the provisions of section 438 of the Act and the present provisions of section 145A of the Act cannot be applied in view of non obstante clause in section 438 of the Act. Thus, this ground of appeals of the Revenue for both the assessment years is allowed. (ii) In the above referred decision of Hon'ble ITAT, Cochin Bench, Cochin, in the case of M/s. Kunnel Engineers & Contractors (P) Ltd, the assessee has collected an amount of Rs. Rs. 3.52,69,463/- for the assessment year 2012-13 and Rs. 2.42,72,852/-for the assessment year 2014-15 as service tax and not remitted the same to the Government exchequer, before the due date of filing of the return of income. Hon'ble ITAT first examined the applicability of provisions of s.43B on service tax and observed that the said issue was considered by the co-ordinate Bench of the ITAT, Hyderabad Benches in the case of M/s. Bartronics India Ltd. v. ACIT [ITA No. 2188 and 2189/Hyd/2011 vid ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d such treatment by the assessee is not decisive. Consequently, in view of judgement of Hon'ble ITAT, Cochin Bench, Cochin in the case of "M/s. Kunnel Engineers & Contractors (P) Ltd as referred above, the non-payment of GST liability into the Govt A/c on or before the due date of filing ITR u/s 139(1) clearly attracted disallowances u/s 43B, irrespective whether the GST component of the sales was credited/debited or not credited/debited to the P&L A/c. In the case laws relied on by the assessee in the written submissions, none of the judgments are of jurisdictional ITAT or High Court (Assessee being resident of Uttar Pradesh). Besides, the judgment relied upon by the assessee, delivered by ITAT, Cochin Bench, in the case of S. Govind Raja Reddiar v. ITO, reported in 19 TTD (Coch.) 177, the said judgment was delivered in 1986. Besides the copy of any of the judgements have also not been provided by the assessee. As against it, judgment of Hon'ble ITAT, Cochin Bench, Cochin in the case of "M/s. Kunnel Engineers & Contractors (P) Ltd as referred above, was delivered only very recently in year 2020 (judgment dated 19-5-2020). The said view of Hon'ble ITAT, ..... X X X X Extracts X X X X X X X X Extracts X X X X
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