2023 (4) TMI 202 - HC - Income Tax

Provision of obsolescence of inventory - Tribunal concluded that the assessee has made scientific calculation for making provision based on commercially acceptable methods and valuation of the cost to be in accordance with AS-2 issued by the ICAI being one of the standards recognised u/s 145(2) wherein the closing stock is to be value at lower of cost or not realizable value - HELD THAT - Tribunal took note of the decision of CIT vs. Hotline Teletube Components Ltd 2008 (8) TMI 6 - HIGH COURT DELHI wherein the Court took note of the more or less identical factual circumstances and dismissed the appeal filed by the revenue on the ground of no substantial question of law arises for consideration as the Tribunal has returned the finding of fact. Tribunal having examined the factual position and rendered a decision we are of the view that no substantial questions of law arises for consideration in so far as substantial questions of law as suggested by the revenue and accordingly the same are rejected. Provision for warranty - Tribunal has examined the relevant clause in the terms and conditions and found that the warranty clause is in-built in the guarantee clause itself as the assessee in the event of any defective supply within a period of 5-1/2 years has to replace the meters and in the event of the meters not getting replaced the assessee has to pay twice the cost of meters. Tribunal on facts concluded that the assessee had agreed for both warranty (i.e. replacement of defective meters) as well as the guarantee (paying twice the cost of meters if meters are not replaced). Thus the learned Tribunal was convinced on facts that the clause in the terms and conditions has an in-built warranty clause. No substantial question of law arises on the said issue as the Tribunal has decided in favour of the assessee by returning finding of fact .

Issues involved:
The judgment involves the following Issues:
1. Determination of payment under the head of management support service at Arm's Length Price.
2. Allowance of depreciation on Intellectual property rights.
3. Treatment of provision of obsolescence of inventory or ascertained liability.
4. Adjustment in Transfer Pricing in respect of International Transactions.
5. Depreciation on Intellectual property Assets.
6. Provision on obsolescence of inventory.
7. Provision for Warranty.

Issue 1 - Management support service at Arm's Length Price:
The appeal was filed by the revenue under Section 260A of the Income Tax Act, 1961 against the order passed by the Income Tax Appellate Tribunal. The Tribunal had determined the payment under the head of management support service at Arm's Length Price. The Tribunal's decision was based on the provisions of Section 92C of the Income Tax Act, 1961, and Rule 10B & Rule 10C of the Income Tax Rules, 1962. The Tribunal had allowed for "Reliable and accurate adjustment" to account for the difference between the intonated transaction and comparable uncontrolled transactions. The Court upheld the Tribunal's decision based on previous rulings in favor of the assessee for the same issue in earlier assessment years.

Issue 2 - Depreciation on Intellectual property rights:
The Tribunal had allowed depreciation on Intellectual property rights under Section 32 of the Income Tax Act, 1961, considering Intellectual property Rights as technically known. This decision was consistent with previous rulings in favor of the assessee for the same issue in earlier assessment years, and the Court found no distinguishing feature to warrant interference.

Issue 3 - Provision of obsolescence of inventory or ascertained liability:
The Tribunal examined the provision of obsolescence of inventory. The assessee had made a scientific calculation for making provision based on commercially acceptable methods. The Tribunal found the valuation of the cost to be in accordance with accounting standards and referred to a decision of the Delhi High Court in a similar case. The Court held that no substantial questions of law arose for consideration in this matter.

Issue 4 - Adjustment in Transfer Pricing:
The Tribunal granted relief to the assessee on the issue of "Adjustment in Transfer Pricing in respect of International Transactions" by relying on previous decisions in the assessee's own case for other assessment years. The Court upheld the Tribunal's decision, citing consistency in granting relief to the assessee.

Issue 5 - Depreciation on Intellectual property Assets:
Similar to the second issue, the Tribunal granted relief to the assessee on the issue of "Depreciation on Intellectual property Assets" based on previous rulings in favor of the assessee for the same issue in earlier assessment years. The Court found no reason to interfere with the Tribunal's decision.

Issue 6 - Provision on obsolescence of inventory:
The Tribunal examined the provision on obsolescence of inventory and found that the assessee had made a scientifically calculated provision based on acceptable methods. The Court held that no substantial questions of law arose for consideration in this matter.

Issue 7 - Provision for Warranty:
The Tribunal allowed the provision for warranty after examining the relevant clauses in the terms and conditions of the agreement. The Court agreed with the Tribunal's finding that the warranty clause was in-built in the guarantee clause itself. The Court held that no substantial question of law arose on this issue as the Tribunal had decided in favor of the assessee based on factual findings.

In conclusion, the Court dismissed the appeal and the connected application for stay, upholding the Tribunal's decisions on the various issues raised by the revenue.

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