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TMI Blog2024 (6) TMI 264X X X X Extracts X X X X X X X X Extracts X X X X ..... as well as ld.CIT-DR, these appeals are heard together and are disposed off by this common order. Since the facts and circumstances are exactly identical and grounds raised are also identically worded, we will take the facts and grounds from assessment year 2009-10 in ITA No.518/CHNY/2018 and will decide the issue. 3. The first common issue in these four appeals of assessee is as regards to the order of CIT(A) confirming the action of AO in disallowing the provision made for customer loyalty programs. The relevant ground No.2 raised by the assessee in assessment year 2009-10 reads as under:- 2. Disallowance of provision made for customer loyalty program((CLP) - Rs. 4,80,99,369 a. The Hon'ble CIT(A) has erred in disallowing the provision made against future claims under the CLP on the ground that the Appellant has not adopted any scientific method for applying the rate of provision. b. The Hon'ble CIT(A) has erred in stating that the expenditure, being unascertained and provision in nature, is not an allowable expenditure as per the Act. c. The Hon'ble CIT(A) failed to appreciate the fact that the Appellant had adopted scientific basis while providing for future ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the finding of fact given by the AO that the rate of redemption was at great variation viz-a-viz, the provision made is correct. Hence, he confirmed the action of the AO. Aggrieved, assessee came in appeal before the Tribunal. 3.3 Before us, the ld. counsel for the assessee made argument that the provision made towards customer loyalty program is an ascertained liability, created on a scientific basis and (i) it represents an obligation arising as a result of past event, (ii) it is probable that an outflow of resources will be required to settle the obligation, and (iii) a reliable estimate can be made of the amount of obligation. Therefore, he submitted that the provision is not a contingent liability but is in fact an ascertained liability. The ld. counsel further stated that in terms of Accounting Standard 29, a "contingent liability" is one where (i) it is not probable that an outflow of resources embodying the economic benefits will be required to settle the obligation; or (ii) a reliable estimate of the amount of obligation cannot be made. In the present case, the above conditions are not satisfied, and therefore the provision created is not a contingent liability Secondly, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tage of redemption after analyzing the trend of redemption cycle of the customers in the preceding four quarters on the total outstanding points available at the year end. This system adopted by the assessee is based on scientific method as propounded by the Hon'ble Supreme Court in the case of Rotork Controls India Pvt. Ltd., supra, wherein the Hon'ble Supreme Court has observed as under:- "17. At this stage, we once again reiterate that a liability is a present obligation arising from past events, the settlement of which is expected to result in an outflow of resources and in respect of which a reliable estimate is possible of the amount of obligation. As stated above, the case of Indian Molasses Co. (supra) is different from the present case. As stated above, in the present case we are concerned with an army of items of sophisticated (specialiased) goods manufactured and sold by the assessee whereas the case of Indian Molasses Co. (supra) was restricted to an individual retiree. On the other hand, the case of Metal Box Company of India (supra) pertained to an army of employees who were due to retire in future. In that case the company had estimated its liability under two grat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ove, we are of the view that the assessee is consistently following the same method and even creation of provision created based on the remedy percentage of redemption is on scientific basis. As regards to excess provision is concerned, the difference between the provisions created for a particular year and the actual expenditure incurred in the subsequent year, the difference is offered to tax. In such situation, we cannot say that the provision created based on estimated percentage of redemption is not scientific. Hence, according to us, this is an allowable deduction and we allow accordingly. 3.5 Since facts and circumstances are exactly identical in assessment years 2010-11, 2011-12 & 2012-13, taking a consistent view, we allow the assessee's claim of disallowance of provision made towards customer loyalty program. Accordingly, this issue of assessee in all these four assessment years i.e., AYs 2009-10 to 2012-13 is allowed. 4. The second common issue in these four appeals of assessee is as regards to the order of CIT(A) confirming the action of the AO in disallowing expenses relatable to exempt income u/s. 14A of the Act read with rule 8D(2) of the Income Tax Rules, 1962 (he ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e could not point out how the AO has reached to a conclusion that there are expenses relatable to exempt income and there is any satisfaction recorded qua that, he could not argue anything. 4.4 After hearing both the sides, we noted that the AO has not at all recorded satisfaction as regards to disallowance to be made or not. Once there is no satisfaction recorded, in our view, the decision of Hon'ble Supreme Court in the case of Maxopp Investments Ltd., supra squarely applies. This being a covered issue, we set aside the order of CIT(A) and that of the AO on this issue and allow this issue of assessee's appeal. Accordingly, this issue raised by assessee in all the four assessment years, 2009-10 to 2012-13 is allowed. 5. The next common issue in these three appeals of assessee for assessment years 2009-10, 2011-12 & 2012-13 in ITA Nos.518, 506 & 507/CHNY/2020 is as regards to the order of CIT(A) confirming the action of the AO in disallowing expenditure on account of professional and consultancy for non-deduction of TDS and thereby invoking the provisions of section 40(a)(i) of the Act. For this, assessee has raised the following ground No.3 in assessment year 2009-10:- 3. Disa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 6047.81 - 3546047.81 Reimbursement of expenses Tata Ltd 1508599.59 - 1508599.59 Reimbursement of expenses Titan International (Middle East)F 10187106.72 - 10187106.72 Reimbursement of expenses Total 26486006.8 26486006.8 According to AO, these services rendered by the above said persons are specialized technical services which require specialized provision of technical knowhow, expertise, skill knowhow. Hence, he held that the source from which the assessee has earned income was from India as the income earning activity is situated in India. He also held that payments to non-resident have been made for consultancy services for earning income from ultimate source in India and these are in the nature of technical services. Hence, said payment to foreign agent companies was disallowed by invoking the provisions of section 40(a)(i) of the Act. Aggrieved, assessee preferred appeal before CIT(A). 5.2 The CIT(A) also confirmed the action of the AO by holding that these services fall under the head 'fee for technical services' and the payment made are liable to tax in India. Hence, he confirmed the disallowance made by AO u/s. 40(a)(i) of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in India accrued/arose to the non-residents, and therefore there is no requirement to deduct tax at source. He further stated the disallowance under section 40(a)(i) of the Act is wholly unwarranted. Moreover, the services rendered also do not satisfy the test of 'make available' under the India-US/ India-UK DTAA and therefore the payments are not taxable. The ld. counsel placed reliance on the decision of the Hon'ble High Court of Karnataka in the case of CIT V. De Beers India Minerals (P.) Ltd. (reported in [2012] 21 taxmann.com 214 (Kar.)) 5.5 Without prejudice and in any event, he submitted that for the financial year 2008-09 relevant to the assessment year 2009-10, no disallowance can be made in view of the legal position as it stood at that point. The ld. counsel stated that until amendment of Section 9(2) of the Act by inserting an explanation thereto, the legal position as laid down by the decision of the Hon'ble Supreme Court in the case of Ishikawajma-Harima Heavy Industries Ltd. v. DIT reported in [2007] 288 ITR 408 (SC), was that for section 9(1)(vi) to be applicable, it is necessary that services provided by a non-resident assessee should not only be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... be made and we held so. As regards to assessment years 2011-12 & 2012- 13, the amendment brought out by Finance Act, whereby Explanation to section 9(2) of the Act is to be pressed and accordingly, facts are to be examined. Therefore, we set aside this issue for these two assessment years 2011-12 and 2012-13 to the file of the AO. 6. The next issue raised by the assessee in assessment year 2009-10 is as regards to the order of CIT(A) confirming the action of the AO in disallowing loss on closure of boutique in United States. For this, assessee has raised following ground No.4:- 4. Disallowance of loss on closure of Boutique in United States (US)-Rs. 6,00,00,000 a. The Hon'ble CIT(A) has erred in ignoring the fact that the amount paid as other winding up cost does not give rise to any enduring benefit nor does it lead to creation of a capital asset. b. The Hon'ble CIT(A) has not appreciated the fact that the Appellant has estimated the provision for slow moving inventory on the basis of technical evaluation and consumptions forecasts. c. The Hon'ble CIT(A) has not appreciated the fact that where any provision is made based on scientific method and with technical ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... wed partly." Aggrieved, assessee is in appeal before the Tribunal. 6.3 We have heard rival contentions and gone through facts and circumstances of the case. The ld. counsel for the assessee before us argued that the slow moving / non-moving inventory and other winding up costs are in the nature of revenue expenditure and the write off of slow moving inventory and costs in the nature of employee expenses, rent, maintenance and other miscellaneous overheads cannot be called as capital in nature. He argued that slow moving inventory could not be sold in US market and were brought back to India on closure of boutique and write off of 25% was done to sell them in the Indian market. Therefore, he relying on the decision of Hon'ble Karnataka High Court in the case of CIT vs. IBM India Ltd., reported in [2015] 55 taxmann.com 515 (Kar) and Hon'ble Bombay High Court in the case of CIT vs. Indian Rare Earths Ltd., reported in [2015] 57 taxmann.com 393 (Bom) submitted that the above two expenditure should have been considered as revenue expenditure. We noted that as argued by ld.CIT-DR that the very nature of slow moving / non-moving inventory and other winding up costs were not factually de ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hes and it is not possible, at the time of transfer, to identify the final watch variant into which these components would be assembled and thus it is not possible or practical to allocate these expenses based on the value of the watch. e. The Hon'ble CIT(A) ought to have appreciated that the Appellant has allocated the expenses based on the business requirements of each unit and the appellant's allocation is the closest approximation to the actual expenditure allocable to the unit. 7.1 Brief facts are that the AO noted during the course of assessment proceedings that in addition to main manufacturing unit at Hosur, apart from this, the assessee company is having three units located at Dehradun, Roorkee and Baddi. He noted that the jewellery division, the assessee company is having unit at Dehradun and assessee has claimed deduction u/s. 80IC of the Act on certain units. According to AO, the method of allocation adopted by assessee for claiming of deduction u/s. 80IC of the Act on these three units is not acceptable and hence, apportioned the overhead corporate head office expenses and thereby recomputed the claim of deduction u/s. 80IC of the Act. Aggrieved, assessee pr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... trade marks as acquired in earlier years. The trademarks were stated to be related towatch division as well as jewellery division. The units availing deduction u/s 80-IC were watch division. The entire deprecation was allocated by assessee to noneligible unit, which in the opinion of Ld.AO, was to be allocated to eligible units also. 7.3 Accordingly, adjusting the allocation of overhead and depreciation as above, Ld. AO reduced deduction by Rs. 18.02 Crores. Aggrieved, the assessee is in further appeal before us. 7.4 We find that similar issue has been adjudicated by us in ITANo. 1913/Chny/2011 for AY 2007-08 as under: - "4.2 We find that all the other overhead expenses have been allocated by the assessee on the basis of turnover. Only design and development cost and assembly share of common facilities have been allocated on the basis of number of watches produced. The Ld. AO has apportioned the same on the basis of turnover. In our considered opinion, design and development cost and assembly share of common facilities are not proportional to the number of watches produced. The expenditure is largely salary expenditure of the two departments. It could not be said that the ex ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... allowed for statistical purposes." Hence, taking a consistent view, we confirm the disallowance of claim of deduction u/s. 80IC of the Act, as regards to apportionment of head office expenses. Since facts are identical in other three assessment years, taking a consistent view, this issue raised by the assessee in all these assessment years is dismissed. 8. The next common issue in these four appeals of assessee is as regards to the order of CIT(A) confirming the action of the AO in disallowing the claim of deduction u/s. 80IC of the Act on allocation of expenditure on trade mark qua the units which are claiming deduction u/s. 80IC of the Act. Since the facts and circumstances are exactly identical and grounds raised are also identically worded grounds, we will take the facts and ground from assessment year 2009-10 in ITA No.518/CHNY/2018 and will decide the issue. For this, assessee has raised the following Ground No.6 in assessment year 2009-10:- 6. Allocation of depreciation on Trademarks to units claiming deduction under section 80IC - Rs. 5,63,00,000 a. The Hon'ble CIT(A) has erred in allocating the depreciation on Trademarks to the units claiming deduction under sec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ts of the appellant-company on turnover basis. The appellant objects to the same stating that the trademark expenditure was incurred on exports, and therefore, the entire depreciation claimed was debited to the Hosur Unit since the 80IC Units cater to domestic market. This issue came up in appeal before the Dispute Resolution Panel(DRP), Chennai, and the Hon'ble DRP in its order in DRP/Chennai/44/2012 dated 31.08,2012 issued directions in this regard as follows: "Based on the submissions and details filed by the Eligible Assessee, the Assessing Authority did the apportionment of common expenses and depreciation on the basis of turnover for purposes of deduction u/s. 80IC of the Income Tax Act. There is therefore no anomalous position taken by the Assessing Authority in the given context. There is no need for any interference in this regard." Respectfully following the view endorsed by the Hon'ble DRP, the apportionment of depreciation on trademarks made by the Assessing Officer is sustained. The appellant fails on this ground. Aggrieved, assessee came in appeal before the Tribunal. 8.2 At the outset, the ld. counsel for the assessee stated that the depreciation on trade ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dy been disallowed by the Appellant in its ROI for past years. 2.2 Disallowance of MTM loss due to hedging exposures related to commitments on sales and purchases - Rs. 33,91,426 a. The Hon'ble CIT(A) has erred in not appreciating the fact that the total MTM losses debited to the profit and loss account Rs. 33,91,426 is inclusive of MTM gain on ECB loan amounting to Rs. 51,23,274 and MTM loss due to hedging exposures related to commitments on sales and purchases amounting to Rs. 85,14,700. b. The Hon'ble CIT(A) has erred in disallowing the MTM losses incurred on forward contract relating to gold price hedging on the ground that the same is a notional loss and not allowable as business loss. c. The Hon 'ble CIT(A) has erred in not accepting that the MTM losses arise on account of a fall in value of the underlying derivative contract as on the reporting date. The same represents a loss on an onerous contract existing as on the reporting date, albeit to be discharged / settled on future date. Hence, Such MTM losses are not notional or contingent but have accrued as on the balance sheet date. d. The learned CIT(A) has also erred in not observing that the Appellant ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... actions can be held to be nonspeculative loss but the notional loss incurred on derivatives i.e., restatement of gain / loss, which is not incurred by actual settlement cannot be allowed to be set off against the profit of business. The AO tried to distinguish the case law of Hon'ble Supreme Court in the case of CIT vs. Woodward Governor India (P.) Ltd., reported in [2009] 179 Taxman 326 by holding that this case law does not deal with derivative loss and hence, does not applicable to the facts of the assessee's case. He noted that in assessee's case, the assessee is a manufacturer of watches and jewellery involving engineering industry but apparently, assessee is making use of forward contract for effective use of ECB payments and import credits which are in the nature of capital account transactions and if at all, these are to be considered on revenue account, the same are unascertained liability. Therefore, he held that this being speculative loss, is covered by the provisions of section 43(5)(d) of the Act and hence, not allowable. Accordingly, the AO disallowed the marked to market loss claimed by assessee at Rs. 2,17,16,894/-. Aggrieved, assessee preferred appeal before CIT(A ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is not notional or contingent but have accrued as on the balance sheet date. He further explained that the marked to market gain on ECB loan is capital in nature and assessee has reduced the gain on restatement of ECB loan in each year since the same is capital in nature. He argued that in the previous assessment years, the assessee had disallowed the loss arisen on restatement of ECB loan and consequently, in the current year, the gain cannot be taxed. 9.4 On the other hand, the ld.CIT-DR relied on the assessment order and that of the CIT(A). 9.5 We have heard rival contentions and gone through facts and circumstances of the case. We noted that the assessee company has outstanding swap to hedge its foreign currency and interest rate exposure relating to foreign currency loan i.e., ECB loan of USD 2.22 million outstanding as on 31.03.2012. In addition to this, the assessee has also hedged its exposure relating to sales and purchases. Therefore, due to fluctuation in foreign currency as on the last date of financial year, there is a loss of Rs. 33.92 lakhs. The assessee claimed that foreign exchange loss arising on restatement of foreign contracts and it is neither notional nor co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ice whichever is lower." As the Assessee is consistently adopting the policy as and when loses arises, the same is disclosed as loss earned and is a claimed deduction. Hence, we allow the claim of the Assessee. Since we have allowed the claim of the Assessee on merits on regular assessment, similar to the decision on computing the book-profit u/s. 115JB of the Act, the appeal of the Assessee is partly allowed. In the present case before us also, the assessee has disclosed the gain as and when it is gain and claimed the loss as and when loss arises. Hence, we are of the view that this is allowable loss and we direct the AO accordingly. 10. The next issue raised by assessee in assessment year 2012-13 is as regards to disallowance of excess depreciation claimed on UPS at the rate of 60% as against which, the AO & CIT(A) allowed only 50%. For this, assessee has raised the following grounds:- 6. Disallowance of excess depreciation claimed on UPS - Rs. 332,513 a. The Hon'ble CIT(A) erred in reclassifying UPS as plant and machinery eligible for depreciation at the rate of 15%. b. The Hon'ble CIT(A) ought to have observed that since the term computer is not defined in the Income- ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es for consideration is whether the printing machinery, namely printer and scanner, should be treated as an integral part of computer and eligible for 60% depreciation as against 25% as indicated by the Department. There is no dispute on the fact that the printer and scanner is used as an office equipment in business and that is part and parcel of the computer system as decided by the Tribunal in all the subsequent assessment years viz., 2003-04, 2004-05 and 2005-06. The Commissioner of Income Tax (Appeals) as well as the Tribunal have consistently taken the view that the printer and scanner should be treated as an integral part of the system and cannot be used without a computer and depreciation at 60% should be allowed. 5. We find that this material fact has been consistently followed by the first Appellate Authority and the Tribunal in the assessee's own case and we find no material or reason to differ from the said finding of fact. Further more, we find that this issue is a pure question of fact and no question of law arises for consideration in this Tax Case (Appeal). Accordingly, this Tax Case (Appeal) stands dismissed. No costs" 8. From the aforementioned decision, w ..... 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