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TMI Blog2023 (9) TMI 1453X X X X Extracts X X X X X X X X Extracts X X X X ..... made by Ld. CIT(A) clearly shows that substantial interest free funds were available with the assessee far in excess of the investment made in Capital Work in Progress. In the case of Amod Stamping (P.) Ltd [ 2014 (7) TMI 753 - GUJARAT HIGH COURT] held that where assessee had sufficient interest free fund available with it to be invested in mutual funds, deduction of interest expenditure on borrowed fund could not be disallowed under section 36(1)(iii) of the Act. In the case of Gujarat State Fertilizers Chemicals Ltd. [ 2013 (7) TMI 701 - GUJARAT HIGH COURT] held that where assessee's own funds exceeded investment made to earn exempted income, and borrowed funds had not been used for investments, disallowance of 10 per cent of dividend income was impermissible. In the case of Beekons Industries Ltd. [ 2023 (3) TMI 323 - PUNJAB AND HARYANA HIGH COURT] it is held that where assessee-company had given loan to a directors' relative without charging interest and it also claimed deduction under section 36(1)(iii) of interest paid on loan taken from bank, since loan to director's relative was financed by assessee from self sources without any cost, disallowance of interest pa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tion taken by the Department. Second, it is observed that in some cases, the goods supplied by the assessee carry a warranty period of upto eight years. It is for this specific reason, as observed that CIT(A) that the assessee has made a provision for warranty for a period of five years from the date of sale. Thirdly, after the period the warranty period is over i.e. after five years, the assessee has suo moto offered the unutilized portion of the provision for warranty expenses and offered the same to tax in the return of income. Therefore, the provision for warranty is a Revenue neutral exercise and after the period when the warranty is over, the assessee suo moto offers the same to tax in its return of income. This fact has also been specifically taken note of by Ld. CIT(A) while allowing the appeal of the assessee on this issue. Fourthly, the assessee has given a reasonable basis as to why a provision of warranty @ 5% of net sales has been booked, which is for the reason that the assessee has provided a bank guarantee of Rs. 10.42 cores to its clients which can be forfeited in the event of default in providing any after sales application. CIT(A) has observed that the assessee i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... made on A.Y. 2012-13 the matter is being restored to the file of the Assessing Officer for carrying out necessary verification, since the Department did not have the opportunity of analyzing the necessary agreements etc. which have been placed on record before us for the first time. Ground of the Department's appeal is allowed for statistical purposes. - HON'BLE JUDGES WASEEM AHMED, MEMBER (A) AND SIDDHARTHA NAUTIYAL, MEMBER (J) For the Appellant : M.J. Shah, Jimi Patel and Rushin Patel, A.Rs. For the Respondent : Ashok Kumar Suthar, Sr. D.R. ORDER SIDDHARTHA NAUTIYAL, MEMBER (J) 1. All these four appeals have been filed by the Department and Cross Objection filed by the assessee (for A.Y. 2012-13) against the orders passed by the Ld. Commissioner of Income Tax (Appeals)-2 (in short Ld. CIT(A) ), Ahmedabad vide different orders dated 24.08.2015, 06.11.2017 and 04.07.2018 passed for the different Assessment Years i.e. A.Ys. 2012-13 to 2015-16. Since common issues are involved for all the years under consideration, all the appeals are being disposed of by way of a common order. We shall first discuss the Department's appeal for A.Y. 2012-13 (ITA No. 3235/Ahd/2015) and a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l Work in Progress (CWIP). 4. The brief facts of the case are that the assessee is engaged in the business of Manufacturing and Trading of Rubber Fender and its accessories for offshore and marine engineering industry. During the course of assessment, the assessee was asked to furnish details of secured and unsecured loans taken during the year under consideration, alongwith the purpose of taking such loans and its utilization. Further, the assessee was also asked to explain whether any interest was capitalised towards the capital assets acquired from borrowed funds during the year up to the date of put to use of assets or towards CWIP. The Assessing Officer observed that the assessee did not furnish any details pertaining to funds flow movement to prove that only surplus funds available with the assessee were utilized for the purpose of purchase of various items grouped under the head CWIP. Further, the assessee was not able prove that there was no diversion of interest bearing funds and that the interest free funds available with the assessee which were utilized for making investment in Capital Work in Progress. Accordingly, the Assessing Officer added back a sum of Rs. 20,18,037 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... form of share capital, reserve and surplus of Rs.18.12 crore as on 31/03/2012, as against Rs.16.61 crores as on 31/03/2011. While, there were the work in progress of Rs.0.50 crore on 31/03/2012 and Rs.4.05 crore as on 31/03/2011. Hence, the availability of interest free funds were much higher than the investment as capital work in progress. Thus'' it cannot, be said that the borrowed funds have been utilized for the purpose of capital work in progress. The AO has not established any nexus of such utilization with ,the borrowed funds. 3.8. Further, it is noticed that during the year, the CWIP was reduced to the large extent. The balance in CWIP account as on 31/03/2011 at Rs.4.05 crore was reduced to Rs.0.50 crore as on 31/03/2012 which means that the substantial CWIP amount has been capitalized in the asset account for the purpose of the assets ready for use. There is no finding of the AO that those capitalized assets have not been used for the purpose of business in the year under consideration. 3.9. Further, the additions in the CWIP were on account of electric installation at Rs. 17.36 lacs, factory building at Rs.48.74 lacs, furniture at Rs.2.78 lacs and plant and machi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ard to circumstances of case. In the case of PCIT v. Shapoorji Pallonji and Co. Ltd 141 taxmann.com 509 (SC), the Hon'ble Supreme Court dismissed SLP filed by the Department against the order of High Court which held that that where assessee had not utilized interest bearing borrowed funds for making interest-free advances as assessee had its own interest-free fund far in excess of interest-free advance, interest on borrowed capital could not be disallowed. In the case of CIT v. Reliance Industries Ltd. 102 taxmann.com 52 (SC), the Hon'ble Supreme Court held that where Assessing Officer rejected assessee's claim under section 36(1)(iii) taking a view that interest would not have been payable to banks if funds were not provided to subsidiaries, in view of fact that interest free funds were available to assessee which were sufficient to meet its investment in subsidiaries, appellate authorities were justified in allowing assessee's claim for deduction. In the case of E City Investments And Holdings Company (P.) Ltd. 117 taxmann.com 124 (SC), the Hon'ble Supreme Court held that where High Court upheld Tribunal's order allowing assessee's claim for deduction ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... und that the assessee could not prove by way of submitting funds flow statement that there was no diversion of interest bearing funds and that the interest free funds were available were at the time when loans and advances were given. 12. In appeal, the Ld. CIT(A) observed that during the year under consideration, the assessee had net profits before depreciation and after tax at Rs. 4.82 crores which were much more than the advances given to the sister concern. Further, the Assessing Officer has not established any nexus to prove that interest bearing loans have been utilized for the purpose of aforesaid advances to the sister concerns. On the contrary, the assessee has provided a copy of the bank statement establishing that the advances were given out of sale proceeds of the business and not from any borrowings. Accordingly, the Ld. CIT(A) directed that the addition of Rs. 84,000/- under Section 36(1)(iii) of the Act may be deleted. 13. On going through the facts of the instant case and the detailed discussion while discussing Ground No. 1 of the Department's appeal, where similar disallowance was made under Section 36(1)(iii) of the Act, we are of the considered view that Ld. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e payment evidences along with bank payment details, company payment advice, debit note from overseas brokers. Thus, it was submitted that the payment of commission to overseas brokers was part of export of products and an important mediatory channel to book the export orders and obtaining the consultancy for supply of the goods. Thus, the commission payment was genuine and paid through banking channels on export orders procured. The same were made for the purpose of business in prudent way to increase export and increase customer base in foreign countries. 6.6. With regard to the provisions of section 9(1)(i), it was submitted that the overseas brokers were not doing any business in India. This fact was even noticed on the face of the debit notes / bills received from foreign brokers. They were merely providing export orders to facilitate appellant. Further, the overseas brokers did not have any business connection in India. It was further claimed that there is no income deemed to accrue or arise in India in view of the explanations to the provisions of section 9(1)(i) of the I. T. Act as the overseas brokers had rendered services outside India and the commission was also paid to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in respect of all commission payments and therefore, considering the overall facts and circumstances the payment made to the agents is taken as genuine. Accordingly, in my considered opinion the appellant has given satisfactory evidences regarding the services rendered by the agents and the genuineness of payment of commission. The similar payments have been allowed in the past year by the AO. 6.18. The AO has also placed reliance on the decision of Hon'ble Authority of Advance Rulings in the case of SKF Boilers and Driers (P.) Ltd. (2012) 18 Taxmann 325 and Rajiv Malhotra (2006) 284 ITR 564 (Delhi). The judgements are not applicable to the present facts as there are several other decisions which hold that such kind of commission is not taxable in India and accordingly no liability to deduct tax was there. Further the decision of honourable Supreme Court of India in the case of CIT vs. Toshoku Limited 125 ITR 525, still prevails as on date and is the law of the land as regards applicability of TDS provisions to commission paid to overseas/non-resident agents by Indian Exporters. 6.19. Further, reliance is placed on the following decisions / judgments:- ACIT Vs. Modern Insulator ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a substantial increase in foreign commission expenses during the year under consideration and the Department i.e. both the Assessing Officer and Ld. CIT(A) did not have opportunity to examine the foreign commission expenses in absence of copies of Agreements which have not been furnished at any stage of the proceedings. In our considered view, in order to decide on the nature / genuineness of services which have been rendered by the broker / agents and whether TDS is required to be deducted on such payments, it is important that the Department should analyze the details including copies of Agreements, which have been furnished before us on sample basis for the first time. Accordingly, in the interest of justice this issue is being restored to the file of Assessing Officer for denovo consideration, after giving the opportunity of hearing to the assessee. 18. In the result, Ground No. 3 of the Department's appeal is allowed for statistical purposes. Ground No.4:- Ld. CIT(A) erred in deleting disallowance of Rs. 2,96,84,828/- made on account of warranty liability. 19. The brief facts in relation to this ground of appeal are that during the course of assessment, the Assessing Offic ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... laim expenses. 20. In appeal, assessee submitted that items sold by the assessee have long life cycle and are generally capital goods for the purchasers. Therefore, these products carry manufacturer's warranty for 5 years i.e. the fault in the products within the warranty period have to be rectified by the assessee free of cost. Further, the assessee provided bank guarantee to its customer covering 2% to 10% of the contract price towards performance guarantee. In case the assessee does not fulfill the warranty obligations, the customers can invoke the bank guarantee. The Ld. CIT(A) observed that in some of the cases the warranty period was 8 years and therefore, the period of warranty for which the provision has been made i.e. 5 years by the assessee was fair and does not warrant any interference. Further, Ld. CIT(A) observed that even the bank guarantee @ 10% of sale amount of the contract value has been provided to the customers as is evident from the details provided by the assessee during the course of appellate proceedings. Further, Ld. CIT(A) observe that the assessee has written back the provision after the expiry of warranty period i.e. 5 years and offered the amount at ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t events, settlement of which is expected to result in an outflow of resources and in respect of which a reliable estimate of amount of obligation is possible. Further, the Hon'ble Supreme Court held that if historical trend indicates that in past large number of sophisticated goods were being manufactured and defects existed in some of items manufactured and sold, then provision made for warranty in respect of army of such sophisticated goods would be entitled to deduction from gross receipts under section 37(1) of the Act. In the instant facts, the Assessing Officer has pointed that in the past assessment years the assessee has incurred NIL expenses towards actual warranty claims for the past five assessment years. In the instant case, certain facts are noteworthy. Firstly, on identical set of facts, the Department has allowed the appeal of the assessee for the past years as well. The Department has not pointed out to any specific circumstances which would necessitate a change in the position taken by the Department. Second, it is observed that in some cases, the goods supplied by the assessee carry a warranty period of upto eight years. It is for this specific reason, as obs ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e assessment proceedings were conducted under section 143(3) of the Act. The learned counsel for the assessee informed the Bench that during AY 2010-11, warranty provision was disallowed by the AO but subsequently allowed by the CIT(A) and Tribunal dismissed the appeal of Revenue on account of low tax effect. We also find that the assessee also follows reversal method of accounting wherein, the provision utilized is reduced from the provision for warranty lying in the books of accounts assessee. In such circumstances, we have to go through the decision of Hon'ble Supreme Court in the case of Rotork Controls India Private Limited vs. CIT (314 ITR 62) (SC), wherein Hon'ble Supreme Court has observed as under: - 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 section 37 of the said Act. However, when there is manufacture ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 422/314 ITR 62 (SC) and Bharat Earth Movers v. CIT [2000] 112 Taxman 61/245 ITR 428 and observed that the provision for the warranty was estimated by the assessing officer by scientific basis and was therefore allowable. 5. In the result, Tax Appeal is dismissed. 25. Accordingly, in view of the facts of the assessee's case the observations made by Ld. CIT(A) in the appellate order and the judicial precedents as applicable to the assessee's set of facts, we find no infirmity in the order of Ld. CIT(A) so as to call for any interference. 26. In the result, Ground No. 4 of the Department's appeal is dismissed. Ground No. 5:- Ld. CIT(A) erred in deleting disallowance of Rs. 31,96,800/- out of interest expenses claimed on business advances under Section 36(1)(iii) of the Act. 27. The brief facts in relation to the ground of appeal are that the assessee had given advances of Rs. 2,66,40,000/- for the purchase of office to M/s. Shivalik Reality Pvt. Ltd. in F.Y. 2010-11 i.e. A.Y. 2011-12. The said purchase was completed in F.Y. 2014-15 i.e. A.Y. 2015-16. 28. During the course of assessment, the Assessing Officer observed that the assessee has not given any documentary evidence ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... preceding Assessment Year 2011-12, no disallowances was made by the Assessing Officer in respect of such advances. Accordingly, looking into the facts of the instant case we find no infirmity in the order of Ld. CIT(A), while allowing the appeal of the assessee. 31. In the result, Ground No. 5 of the Department's appeal is dismissed. Ground No.6 of Department's appeal and Ground No. 1 of the assessee's Cross Objection:- Ld. CIT(A) erred in confirming addition of Rs. 1,95,599/- out of total addition made of Rs. 3,95,014/- under Section 14A of the Act. 32. Before us, at the outset, the Counsel for the assessee submitted that he shall not to be pressing for the Cross Objection and accordingly, the matter may be decided in accordance with law. Further, with respect to Cross Objection Ground No. 2 filed by the assessee (Non-grant of TDS of Rs. 2,800/-), the matter is being set-aside to the file of the Assessing Officer to carry out necessary verification and grant credit of the same as per law. 33. Now coming to the Department's appeal, we observe that during the course of assessment, the Assessing Officer had made disallowances under Section 14A of the Act amounting to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e Department's appeal is dismissed. 36. In the combined result, the appeal of the Department in ITA No. 3235/Ahd/2015 for A.Y. 2012-13 is partly allowed for statistical purposes. ITA No. 356/Ahd/2018 (A.Y. 2013-14):- 37. The Department has raised the following grounds of appeal:- 1. The Ld. CIT(A) has erred in law and on facts in deleting the part of disallowance of interest u/s. 36(1)(iii) of the IT Act 1.1 The Ld CIT(A) has failed to appreciate that the assessee could not establish that such interest free advances made to the related concerns were out of business expediency. 1.2 The Ld CIT(A) failed to appreciate that it was for the assessee to lead evidence to prove the business expediency test. 2. The Ld. CIT(A) has erred in law and on facts in deleting the disallowance amounting to Rs. 11071224/- paid on the alleged export handling charges. 2.1 The Ld. CIT(A) has erred in law and on facts in deleting the disallowance of commission to foreign agents amounting to Rs. 11071224/- without properly appreciating the facts that the assessee was unable to lead evidences to prove the genuineness of such expenditure and also the factum of actual rendering of services by such recipien ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e Ld CIT(A) has failed to appreciate that the assessee could not establish that such interest free advances made to the related concerns were out of business expediency. 1.2 The Ld CIT(A) failed to appreciate that it was for the assessee to lead evidence to prove the business expediency test. 2. The Ld. CIT(A) has erred in law and on facts in deleting the disallowance amounting to Rs. 6512709/- paid on the alleged export handling charges. 2.1 The Ld. CIT(A) has erred in law and on facts in deleting the disallowance of commission to foreign agents amounting to Rs. 6512709/- paid without properly appreciating the facts that the assessee was unable to lead evidences to prove the genuineness of such expenditure and also the factum of actual rendering of services by such recipients. Reference in. this regard is made to the decision of Hon'ble Supreme Court in the case of Premier Breweries Ltd vs. CIT Cochin 2015 56 Taxmann.com 361 (SC). 2.2 Without prejudice to the above, the Ld. CIT(A) has erred in law on facts in deleting the disallowance u/s. 40(a)(ia) of the I.T. Act on export commission payments made to the Non- resident Agents solely relying on the decision of the Hon'ble ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t been computed on a scientific basis and therefore the order of the CIT(A) is liable to be set aside. 4. The appellant craves leave to amend alter any ground or add a new ground, which may be necessary Ground Nos. 1 2:- Ld. CIT(A) erred in deleting disallowance on export commission made to non-resident agents. 50. In light of our observations made for A.Y. 2012-13, wherein we observe that the assessee has placed on record copies of Agreements, invoices and other supporting documents, which have not been analyzed by the Department at any prior stage of the proceedings, the matter is being restored to the file of the Assessing Officer for carrying out the necessary verification as per law. 51. In the result, Ground Nos. 1 2 of the Department's appeal are allowed for statistical purposes. Ground No.3: Ld. CIT(A) erred in allowing the appeal of the assessee with respect to provision for warranty. 52. In light of our observation made for A.Y. 2012-13 wherein this issue has been dealt in detailed, Ground No. 3 of the Department's appeal is dismissed. 53. In the result, the appeal of the Department is partly allowed for statistical purposes. 54. In the combined result, all the ap ..... X X X X Extracts X X X X X X X X Extracts X X X X
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