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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 ..... ion 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 in the case of Rotork Controls India Pvt. Ltd. [ 2009 (5) TMI 16 - SUPREME COURT] Thus 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. Decided in favour of assessee. Disallowance u/s 14A r.w.r. 8D - expenses relatable to exempt income - assessee has made suo-motto disallowance - Mandation to record satisfaction - HELD THAT:- As noted that the AO has not at all recorded satisfaction as regards to disallowance t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ide the order of the AO and that of the CIT(A). The AO will verify the facts in regard to these two heads and then after verification of facts, will consider allowance of expenses. Accordingly, this issue of assessee s appeal is allowed for statistical purposes. Deduction u/s. 80IC - allocation of common expenses on the basis of turnover for the purpose of claim of deduction - HELD THAT:- As 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. Deduction u/s. 80IC on allocation of expenditure on trade mark qua the units - HELD THAT:-Depreciation on trademark has been set aside by the Tribunal in assessee s own case in assessment year [ 2022 (10) TMI 251 - ITAT CHENNAI] , whereby the Tribunal considering the earlier decision of Tribunal in assessment year 2007- 08 [ 2022 (10) TMI 182 - ITAT CHENNAI] has remitted the issue back to the file of the AO. Taking a consistent view, we also set aside this issue to the file of the AO fo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d 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 claims that may arise on account of redemption of reward points. d. The Hon'ble CIT(A) ought to have observed that the p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e 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, the ld. counsel submitted that the provision is created based on the estimated percentage of redemption arrived at after analyzing the trend ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 gratuity schemes and the amount of liability was deducted from the gross receipts in the profit and loss account. The company had worked out its estimated liability on actuarial valuation. It had made provision for such liability spread over to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ence 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 (hereinafter the Rules ). For this, assessee has raised various grounds, which are factual and argumentative and hence, need not be reproduced. 4.1 Briefly stated facts are that the assessee earned dividend income of Rs. 2,56,791/- during assessment year ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ll 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. Disallowance of professional and consultancy expenditure under section 40(a) (i) of the Act - Rs. 2,64,86,006 a. The Hon'ble CIT(A) has erred in disallowing the payments made to foreign agent as Professional and Consultancy Services on the ground that taxes has not ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l 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 Act by observing as under:- It is an undisputed fact that all these services fall under the nomenclature of fee for technical services and the only question being whether the payments made are liable for tax in India. As far as payments made to KNS Consulting LLC, I find that the payment has been made for product development-amongst others-which involves deve ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 utilized within India, but should also be rendered in India or should have such a live link with India. Thereafter, an Explanation was inserted to Section 9(2) of the Act, vide Finance Act, 2007, to clarify that where the income is deemed to accrue or arise in India under clauses (v), (vi), (vii) of sub-section (1), such income shall be included in the total income o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 evaluation; deduction for provision should be allowable while computing the taxable income. d. The Hon'ble CIT(A) ought to have noted that the aforesaid expenditure does not result in enduring benefit nor does it lead to creation of capital asset in the hands of the appellant. 6.1 Brief facts are that the AO noted that the assessee has closed two Tanishq boutiques run in the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s 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 demonstrated before the AO and therefore, these needs verification. We agree with the argument of ld.CIT-DR that principally these amounts i.e., slow moving and non-moving inventory and other winding up costs are in the nature of revenue but factual aspect, it needs to be verified. Hence, we remit this issue back to the file of the AO for verification purpose only by setting aside the order of the AO and that of the CIT(A). The AO will verify the f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 preferred appeal before CIT(A). 7.2 The CIT(A) also confirmed the action of the AO by observing in para 4.4 as under:- 4.4. Allocation of corporate overheads on the basis of turnover for purposes of deduction u/s 80IC The Assessing Officer observes that with regard to the watch division the appellant has main manufacturing unit at Hosur apart from three units at Dehradun, Roorkee and Baddi. The appellant apportioned common overheads like corporate office expenditure, sales ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 expenditure would be directly proportional to the number of watches produced. Rather, such expenditures would largely depend upon the decision of the management to decide as to how much expenditure was to be incurred to design / develop new products and the same may vary to a great extent in different periods. In such a case, the quantum of expenditure would have no relation with the number of watches and allocating the same on such basis would give absurd results as held by lower authorities. The ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... aim 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 section 80IC as these Trademarks are applicable for sale of Titan products in countries other than India whereas the production from units claiming deduction under section 80IC of the Act are sold in India only. b. The Hon'ble CIT(A) has erred in not considering the fact that this registration of trademark is required to sell products in 75 other countries where-in the trademark is registered. c. The Hon'ble CIT(A) has erred in not considering the fact that the trademark is required to be registered fo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... igible 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 trademark has been set aside by the Tribunal in assessee s own case in assessment year 2008-09 vide order dated 09.09.2022 in ITA No.2239/CHNY/2012, whereby the Tribunal considering the earlier decision of Tribunal in assessment year 2007- 08 in ITA No.1913/CHNY/2011 has remitted the issue back to the file of the AO. Taking a consistent view, we also set aside this issue to the file of the AO for re-adjudicating the issue as directed by Tribunal in assessment year 2008-09. This issue of assessee s appeal is allowed for statistical p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n 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 has recognized the aforesaid loss in accordance with the provisions of the Indian Generally Accepted Accounting Principles and Income Computation and Disclosure Standards and hence, ought to be allowed as a revenue expenditure. 9.1 Brief facts related to the issue of claim of loss of Rs. 2,17,16,894/- are that the assessee has made claim of loss for a sum of Rs. 1,83,25,468/- in the computation of income filed with the return of income being Marked to Market (MTM) loss relating to foreign exchange derivatives, forward contracts, etc. It also claimed a sum of Rs. 33,91,426/- on ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er 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). 9.2 The CIT(A) simpliciter dismissed the ground of assessee by observing that no evidence were filed by assessee before the AO during the assessment proceedings or before him in appellate proceedings. For this, he observed in para 4.8 as under:- 4.8 Disallowance of Marked to Market losses (A.Ys. 2009-10 2012-13) The Assessing Officer observes that Marked to Market losses of Rs. 52,00,000/- Rs. 2,17,16,894/- claimed as business expenditure for the A.Ys 2009-10 2012-13 respectively are not allowable since the same constitutes a notional loss in the hands of the appellant. They f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 contingent in nature allowable in term of decision of Hon ble Supreme court in the case of Woodward Governor India (P.) Ltd., supra. We noted that the provision made for estimated loss on forward contract is made on the reasonable estimate based on the mercantile system of accounting regularly following for the preparation of books of accounts. We noted that the assessee company has considered the net marked to market loss / gain on ECB loan i.e considered as gain amounting to Rs. 1,83,25,468/- and that has come out of net of reversal of earlier year loss amounting to Rs. 1,32,02,194/- at the beginning of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ct 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-tax Act, 1961 it has to be construed in common parlance. c. The Hon'ble CIT(A) ought to have observed that a computer refers to any electronic or other high speed data processing device which performs logical, arithmetic and memory functions on data and includes all input and output devices. d. The Hon'ble CIT(A) ought to have observed that UPS are computer peripherals and hence form essential part of computer. e. The Hon'ble CIT(A) erred in disregarding the judicial precedents relied upon by the Appellant stating that UPS is essentially a part of computer and accordingly eligible for depreciation @ 60%.f. The Hon& ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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, we find, the Division Bench noted the decision of the Commissioner of Income Tax (Appeals) for the assessment years 2003-04 and 2004-05, which was affirmed by the Tribunal and the orders passed by the Tribunal are challenged in the appeals before us. Therefore, we deem it fit and appropriate to consider the submission of the learned counsel for the Revenue. The decision in the case of Bimetal Bearings Ltd. (supra) explains as to how an entry has to be interpreted in a taxation statute. Since the issue is covered by Hon ble Jurisdictional High Court decision, we direct the AO to allow depreciation on UPS at 60%. This issue of assessee s appeal is all ..... X X X X Extracts X X X X X X X X Extracts X X X X
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