TMI Blog2018 (7) TMI 224X X X X Extracts X X X X X X X X Extracts X X X X ..... sessment Year i.e. 2008-09 the same has to be verified at the level of the Assessing Officer. Therefore, we direct the Assessing Officer to verify all these documents along with the claim of set off of this claim in the year 2008- 09. Therefore, this issue is restored to the file of the Assessing Officer. Needless to say, the Assessing Officer has to give proper opportunity of hearing to the assessee by following principles of natural justice. Therefore, Ground No. 2 and 2.1 is partly allowed for statistical purpose. Adjustment made u/s 145A - Unutilized Countervailing duty - Held that:- Assessing Officer as well as the CIT(A) has not taken the cognizance of the actual calculation relating to the counter valley duty and service tax paid by the assessee. Therefore this needs to be examine at the level of the Assessing Officer. We direct the Assessing Officer to look into this aspect as per the provisions of Section 145A as well as in the light of the provisions of given under the Income Tax Act and decide this issue afresh. Needless to say, the assessee be given opportunity of hearing by following principles of natural justice. Addition of Countervailing Duty paid on imported ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... with the same. Ground dismissed. - I.T.A .No. 5017/DEL/2012 And I.T.A .No. 2671/DEL/2013 - - - Dated:- 3-7-2018 - SHRI R. K. PANDA, ACCOUNTANT MEMBER AND MS SUCHITRA KAMBLE, JUDICIAL MEMBER For The Appellant : Sh. Rohit Tiwari, ADv Respondent by Sh. Sanjay Kumar Yadav, Sr. DR ORDER PER SUCHITRA KAMBLE, JM These two appeals are filed by the assessee against the order dated 15/5/2012 passed by the CIT(A)-15, Mumbai for Assessment Year 2007-08 Assessment Order dated 28/02/2013 passed by ACIT Circle-1(1), Gurgaon for Assessment Year 2008-09. 2. The grounds of appeal are as under:- I.T.A .No. 5017/DEL/2012 (A.Y 2007-08) 1. That on the facts and in the circumstances of the case and in law, the Commissioner of Income Tax (Appeals)-15, Mumbai [herein referred to as the CIT(A) ] erred in upholding disallowance of ₹ 1,76,90,014/- on account of warranty provision, which was estimated at 10% of the sales. 1.1 That on the facts and in the circumstances of the case and in law, the CIT(A) erred in not appreciating that reversal of substantial part of warranty provision in the succeeding year is no reason to conclude that the provision ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... essing Officer has erred in making addition of ₹ 4,10,274/- on account of arm s length price for support services of employees deputed to associated enterprises. 2.1 That on the facts and circumstances of the case and in law, the Assessing Officer erred in not appreciating that mark-up of 5% was uncalled for because the Appellant in respect of support services had already charged more than the mark-up proposed by the Transfer Pricing Officer. 2.2 Without prejudice, the addition of ₹ 4,10,274/- was made without application of mind inasmuch as the adjustment has been made on the basis of reasoning for proposed adjustment towards management charges, which was not agreed to by the DRP. 3. That on the facts and circumstances of the case and in law, the Assessing Officer has erred in disallowing provision of liquidated damages of ₹ 8,50,077/- being 1% to 3% of sale price of desk top note sorting out machines, for delay in supply of machines to the banks, which liability was provided on the basis of terms of purchase orders agreed upon by the Appellant. 3.1. That on the facts and circumstances of the case and in law, the Assessing Officer has erre ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... we are taking up facts for Assessment Year 2007-08 3. The assessee is engaged in the business of Trading and Servicing of Automatic Bank Note Sorting Machines. The e-return of income declaring total income of ₹ 5,92,628/- was filed on 31/10/2007. The return was processed u/s 143(1) of the Act. The case was selected for scrutiny and notice u/s 143(2) was issued on 17/09/2008 and duly served on the assessee on 18.09.2008. Subsequently notices u/s 142(1) along with detailed questionnaire was issued on various dates requiring the assessee to file details and produce evidence in support of the claims made in the return. In response to the said notices issued, subsequently, the assessee s representative C.A attended and filed details and explanations. 4. During the year under consideration, the assessee entered into an international transaction with its Associate Enterprise M/s. De La Rue Cash System Group of companies based at Hong Kong, USA, Malaysia, Switzerland, UAE and UK. The assessee filed form No.3CEB reporting therein the details of such transactions which are valued at ₹ 20,20,13,747/-. During the assessment proceedings a reference u/s.92CA(1) of the Act was ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion is inbuilt in the purchase order/ agreement as per Clause 6 3 and the liability on account of warranty is integral part of the sales revenue. Since the entire sales revenue is accounted as revenue, therefore, corresponding deduction for warranty provision should also be allowable. The Ld. AR submitted that Warranty provision is not a contingent liability and it is quite certain that expenses would be incurred in meeting the warranty obligation linked to the sales of the current year in the following year. Also such provision is not an adhoc provision but is made in a systematic and scientific manner. On the basis of sound accounting principles, all matching liabilities for the matching revenues have to be provided for. Thus, to reflect fair profits of the business, warranty provision is required to be made. AY 2007-08 being virtually the first full year of operations (AY 2006-07 only had about six months of operations), there were no historical trends to rely on for the purposes of making warranty provision. The Company based on a careful estimate by the management and their experience in the industry considered that the provision required to be made should be 10% of the sale ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... vident that expenses incurred on providing warranty services is more than the provision made by the Company. The CIT(A) in his order based on the CIT(A) order passed for AY 2006-07 has only allowed 1.5% of the sales as warranty provision whereas the actual expenses incurred is more than the warranty provision. The Ld. AR pointed out that the ITAT, Delhi on this issue in the Company s own case for AY 2006-07 has ruled in favour of the Company. Therefore, in view of the above facts, case laws and ITAT s order in Company s own case, the Ld. AR it is submitted that the provision is not arbitrary, ad-hoc and is based on management s best estimated and hence be allowed as a deduction u/s 37(1) of the Act. 9. The Ld. DR relied upon the orders of the TPO/AO and the CIT(A). 10. We have heard both the parties and perused all the records. Ground No. 1 and 1.1 is relating to disallowance of ₹ 1,76,90,14/- on account of warranty provisions which was estimated at 10% of sales. It is settled position that provisions for warranty is a business necessity and such provision is an allowable expenses. The CIT(A) in 2006-07 held that the warranty provision provided at 10% of sales was actua ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing the year the Company had debited LD amounting to ₹ 13,498,850 in its P L A/c for delay in supply of machines to banks. During the course of assessment proceedings, the AO disallowed Company s claim for LD. The Ld. AR submitted that the Company enters into contract for sale of machines with the customers who are mainly Public Sector Banks. A detailed order is received from the customer clearly indicating the date on which the goods should be delivered. In case, there is a delay in delivery of machines by the Company, then LD can be levied by the banks as per the terms of the agreement. Such damages are levied at the rate of 0.5% to 1% per week of the contract price of the machine and in case where the delay is beyond eight weeks, the banks have the right to cancel the contract. The Assessee submitted party-wise details of liquidated damages incurred, Sample purchase orders/ agreements containing the liquidated damages clause as well as Sample copies of correspondences received by the Company from banks on levy of LD to the Assessing Officer. The Ld. AR submitted that LD is provided for based on the actual details received from the sales team and as per the terms of contrac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion that the LD were unilaterally deducted by the customers. He has failed to appreciate that LD incurred by the Company and accordingly deducted by the customers from payment of sale proceeds is as per the agreed terms of the contract and hence not unilateral. The amount of LD incurred and deducted by the customers have been accepted by both the customers and the Company as the same is as per terms of agreed contract. Therefore, the LD is an allowable deduction. 12. The Ld. AR submitted that LD is an allowable expense under section 37(1) of the Act as it was as per the contractual agreements between the parties; it was wholly and exclusively incurred for the Company s business; it was incurred out of commercial expediency and in the normal course of business; it was not incurred for any purpose which was infraction of law; and it did not related to any statutory breach of contract. In this regard, the Ld. AR relied upon the following case laws wherein liquidated damages have been allowed as deduction: CIT(A) Vs. Ahmedabad Cotton Mfg. Co. Ltd., [1994] 205 ITR 163 (S.C). FL Simdth Mineral (P) Ltd. [20130] 36 taxmann. Com 72 (Madras Hon'ble High Court) Huber + S ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he assessee by following principles of natural justice. Therefore, Ground No. 2 and 2.1 is partly allowed for statistical purpose. 15. Ground No. 3 and 3.1 are relating to adjustment made u/s 145A of the AC amounting to ₹ 19,998,194/-. The Ld. AR submitted that during the course of assessment proceedings, the Company was asked to explain why the accumulated balance of unutilized MODVAT credit amounting to ₹ 23,806,391 (shown as Balance with custom and excise authorities under the head Loans and advances recoverable in the Balance Sheet) be not included in the valuation of closing stock and why the same should not be treated as income for the subject year. The AO did not accept the Company s submissions and added the unutilized MODVAT credit of ₹ 23,806,391 appearing in the Balance Sheet to the income of the Company by adding the whole of amount to the value of closing stock by referring to section 145 A of the Act. The CIT(A) upholding the order of the AO held that whether the Company follows inclusive or exclusive method of accounting, the valuation of the closing stock has to be done in accordance with the provisions of section 145 A of the Act. However, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . The Service Tax paid on input services can be adjusted against service tax liability on maintenance services being provided by the Company. In view of the above facts, the Ld. AR submits that Section 145A of the Act provides that the valuation of purchase and sale of goods and inventory for the purpose of computation of income from business or profession shall be made on the basis of the method of accounting regularly employed by the Company but this shall be subject to certain adjustments. These adjustments are as follows: - Any tax, duty, cess or fee actually paid or incurred on inputs should be added to the cost of inputs (raw-materials, stores, etc.), if not already added in the books of account. - Any tax, duty, cess or fee actually paid or incurred on sale of goods should be added to the sales, if not already added in the books of account. Any tax, duty, cess or fee actually paid or incurred on the inventory (finished goods, work- in-progress, raw materials, etc.) should be added to the inventories, if not already added while valuing the inventory in the accounts. Net/ exclusive method of accounting for CENVAT credit is followed by the Company as recommended by the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ting Standards issued by the ICAI must be followed has been upheld by various appellate authorities including the Hon ble Supreme Court in the case of CIT v. Woodward Governor India P. Ltd. [2009] 312 ITR 254 (SC). In view of the above facts and submissions, the Company submits that the addition made by the Ld. AO to the closing stock of the Company on account of CVD and Service Tax credit u/s 145A of the Act amounting to ₹ 23,806,391/- is unwarranted and merits to be deleted. * CIT(A) Vs. Indo Nippon Chemicals Co. Ltd [2003] 130 Taxmann 179 (S.C) * Aditya Birla Nuvo Ltd. Vs. ACIT, [2015] 56 taxmann.com 168 (Mumbai Tribunal) * CIT V. Avery Cycle Inds Ltd. [2015] 56 taxman.. com 459 (Punjab Haryana H.C) * Westd Coast Paper Mills Ltd. Vs. ACIT [2014] 52 taxmann. Com 268 (Mumbai Tribunal) 16. Without prejudice to the above submissions, the Ld. AR submitted that the provisions of section 145A of the Act are not applicable to service tax input services. The Ld. AR submitted that the provisions of section 145A of the Act are applicable only to transactions involving purchases, sale and stock of inventory such as raw materials, finished goods. This does not apply to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oods and inventory for the purpose of computation of income from business or profession shall be made on the basis of the method of accounting regularly employed by the company but this shall be subject to certain adjustment. After going through the contention of the Ld. AR on the provisions of Section 145A, it is found that the Assessing Officer as well as the CIT(A) has not taken the cognizance of the actual calculation relating to the counter valley duty and service tax paid by the assessee. Therefore this needs to be examine at the level of the Assessing Officer. We direct the Assessing Officer to look into this aspect as per the provisions of Section 145A as well as in the light of the provisions of given under the Income Tax Act and decide this issue afresh. Needless to say, the assessee be given opportunity of hearing by following principles of natural justice. Thus, Ground No. 3 and 3.1 are partly allowed for statistical purpose. 19. As regards additional Ground regarding addition of Countervailing Duty paid on imported goods amounting to ₹ 18,425,285/-, the Ld. AR submitted that the Assessing Officer while completing the assessment proceedings for the immediately ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the assessee to claim that he was not liable to tax cannot be denied for the tax can be levied and collected only in accordance with law. The Courts have repeatedly held that even if an assessee declares an income in the return, the Assessing Officer cannot assess it merely on that basis and that he has to consider its taxability in the light of other circumstances de hors the admission made in the return. Reference is made to SR Kosti v. CIT [2005] 276 ITR 165 (Gujarat HC) and CIT v. Bharat General Reinsurance Co. Ltd, [1971] 81 ITR 303 (Delhi HC). The Ld. AR submitted that since Countervailing Duty of ₹ 18,425,285/- is legitimate deduction in computing the total income for A.Y. 2007-08 therefore, the same deserves to be allowed. The issue whether CVD of ₹ 18,425,285/- paid on imported machinery is an allowable deduction is not in doubt because deduction of similar duty paid in Assessment Year 2008-09 was allowed by the Assessing Officer. 20. The Ld. DR relied upon the orders of the TPO/A.O and the CIT(A). 21. We have heard both the parties and perused all the relevant records. As regards the additional ground regarding Countervailing Duty of ₹ 1,84,25,285 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 1,08,930/-. The Assessing Officer also made disallowance on account of doubtful advances written off of ₹ 3,50,00,000 . The Assessing Officer reduced ₹ 1,77,84,027 being warranty provisions already disallowed during the A.Y. 2007-08. 24. Being aggrieved by the Assessment Order, the assessee is before us. 25. The Ld. AR submitted that Ground No. 1 is general in nature. Ground No. 2 to 2.2 are relating to addition on Transfer pricing adjustment regarding addition of ₹ 4,10,274 on account of arms length price for support services of employees deputed to associated enterprises. The Ld. AR submitted that during F.Y. 2007-08, the Company incurred certain expenses on behalf of its Associated Enterprises ( AEs ) which were subsequently cross charted to AEs. These expenses include salary cost of dedicated employees, salary cost of adhoc support staff, travel and telephone expenses incurred by the Company on behalf of the AEs. The Ld. AR further submitted that the TPO contended that there was an element of service involved in the above mentioned services and the amount has been recovered on cost to cost basis proposed a mark-up of 5% on the value of such services of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Ground No. 2 and 2.1 of the Assessment Year 2007-08. The Ld. DR relied upon the orders of the TPO/AO and directions of the DRP. 29. We have heard both the parties and perused all the records. The issue is identical with the Ground No. 2 and 2.1 for the A.Y. 2007-08, we therefore give same directions in the present appeal as well. We direct the Assessing Officer to verify all these documents along with the claim of set off of this claim in the year 2008-09. Therefore, this issue is restored to the file of the Assessing Officer. Needless to say, the Assessing Officer has to give proper opportunity of hearing to the assessee by following principles of natural justice. Thus, Ground No. 3 to 3.2 are partly allowed for statistical purpose. 30. As regards Ground No. 4 to 4.1, the Ld. AR submitted that these grounds are identical to the Ground Nos. 3 to 3.1 for the Assessment Year 2007-08. The Ld. DR relied upon the orders of the TPO/AO and directions of the DRP. 31. We have heard both the parties and perused all the records. The issue is identical with the Ground No. 3 and 3.1 for the A.Y. 2007-08, we therefore give same directions in the present appeal as well. We direct th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... proper on behalf of the Assessing Officer. Therefore, Ground No. 5 and 5.1 are allowed. 35. Ground No. 6 is relating to the disallowance of countervailing Duty paid in earlier years and shown as assets in the balance sheet in this year as written off for ₹ 2,07,03,492. The Ld. AR submitted that the assessee company during the year under consideration had written off custom duty amounting to ₹ 3,50,00,000. The amount written off comprised of following: i) A.Y. 2006-07 - ₹ 22,78,207 ii) A.Y. 2007-08 - Rs.1,84,25,285 iii) A.Y. 2008-09 - Rs.1,42,96,507 The Ld. AR submitted that in the assessment order passed though deduction of ₹ 14,296,507/- was allowed, however the Assessing Officer disallowed the amounts (i.e. ₹ 20,703,492) pertaining to A.Y. 2006- 07 and A.Y. 2007-08. The reasons given by the Ld. AO for making the disallowance were that the Company had contended that the expense crystallized during the subject year and thus ne ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the assessee to claim that he was not liable to tax cannot be denied for the reason that tax can be levied and collected only in accordance with law. The Courts have repeatedly held that even if an assessee declares an income in the return, the Assessing Officer cannot assess it merely on that basis and that he has to consider its taxability in the light of other circumstances de hors the admission made in the return. The Ld. AR relied upon the decisions in cases of SR Kosti v. CIT [2005] 276 ITR 165 (Gujarat HC) and CIT v. Bharat General Reinsurance Co. Ltd, [1971] 81 ITR 303 (Delhi HC). 36. The Ld. DR relied upon the order of the TPO/AO and direction of the DRP. 37. We have heard both the parties and perused all the relevant material on records. It is pertinent to note that the Ld. AR made the submissions before us that the Company was under a bonafide belief that countervailing duty was creditable against other duties/ taxes payable did not claim deduction of countervailing duty of ₹ 2,278,207/- and ₹ 18,425,285/- paid in AY 2006- 07 and AY 2007-08 respectively. The same was treated as an asset and was accordingly reflected in the Balance Sheet. During AY ..... X X X X Extracts X X X X X X X X Extracts X X X X
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