TMI Blog2013 (7) TMI 380X X X X Extracts X X X X X X X X Extracts X X X X ..... e case of M/s Glaxo Smitkline Consumer Healthcare Ltd. (2012 (4) TMI 279 - ITAT CHANDIGARH). The figures mentioned at Placitum 'E' of the table are set aside back to the file of AO/TPO to decide the issue of AMP expenses by applying the proper comparables after hearing the assessee - grounds about TP adjustments in respect of AMP expenses are partly allowed for statistical purposes. Provision for warranty disallowed - Held that:- The assessee has been consistently following the 4 step method for quantifying the provision for warranty. The amount and procedure of provision for warranty in respective years and consumption of provision of warranty ranges between 99.99% to 62.08%. As in the case of Rotork Controls India (P) Ltd. (2009 (5) TMI 16 - SUPREME COURT OF INDIA) has clearly held that the provision for meeting warranty claims on the sales effected which are computed on the accrual basis by a scientific method and taking into account the past practice, is an allowable expenditure, thus in the present case the provision for warranty on accrual basis on the basis of sales is an allowable deduction. Unrealized subsidy - Held that:- It is a trite law that every receipt does n ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... taxation benefit claimed by the assessee as per Article 23 of Indo-Japan DTAA is justified and is to be allowed. This ground of the assessee is also allowed. Appeals filed by the assessee are partly allowed for statistical purposes. - ITA Nos. 4602/Del/ 2010, 5593/Del/2011 & 6086/Del/2012 - - - Dated:- 3-5-2013 - Shri R. P. Tolani And Shri Shamim Yahya,JJ. For the Appellant : Shri Mukesh Bhutani Adv. Shri Vishal Kalia Adv. Shri Rahul Yadav Adv.Shri Sanjiv Malhotra CA, Shri S.K. Aggarwal Adv. For the Respondent : Shri Peeyush Jain CIT (DR, TP) ORDER Per R. P. Tolani, J.M:- These are three appeals, filed by the assessee, against the respective orders of DRP passed u/s 143(3)/144C involving corporate additions as well as T.P. additions. 2. First we shall deal with issue of T.P. additions arising out of these appeals. Common grounds in respect of T.P. adjustments raised by the assessee, as under:- "1. The Learned Assessing officer ("AO" )has erred in law and on facts in upholding the adjustment to the transfer price made by the Learned Transfer Pricing Officer ("TPO") 2. The Learned AO /Dispute Resolution Panel ("DRP")/TPO has erred in law and on facts, in con ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... re incurred by the appellant. 11. The Learned AO / DRP/TPO have erred in law and on facts by including trade discount volume rebates as part of A P expenditure for the appellant while benchmarking the percentage of A P expenditure incurred by the appellant against the percentage of A P expenditure incurred by comparable companies. 12. The Learned AO / DRP/TPO have erred in law and on facts by excluding few companies from the set of comparables while benchmarking the percentage of A P expenditure incurred by the appellant against the percentage of A P expenditure incurred by comparable companies in an ad hoc manner. 13. The Learned AO / DRP/TPO have erred in law and on facts by not applying transactional net margin method in the manner prescribed under the law. 14. The Learned AO / DRP/TPO have erred in law and on facts by not considering that by treating A P expenditure as a separate line of activity and receiving a markup on the same, the learned AO / DRP/TPO would require the appellant to earn additional return over the distribution margin and that this would be non arm's length business behaviour. 15. The Learned AO / DRP/TPO have not placed correct reliance on OECD ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sides, assessee was also engaged in providing software development and related services to other Canon group companies. 3.2. The Transfer Pricing Officer ("TPO") completed the transfer pricing reports for respective years and all international transactions entered into by the assessee with its associated enterprises ("AEs") were found to be at arm's length by the TPO, except the issue of Advertisement, Marketing and Promotional expenditure ("AMP"). TPO held the AMP expenditure of the assessee to be excessive and benchmarked the same by comparing the said expenditure with that of the comparables, which according to him were best suited. TPO assumed that the part of expenditure incurred by the assessee on AMP was towards building the brand "Canon" and this part of AMP expenditure was attributable to building/ promotion of the Canon brand and thus corresponding benefit was passed on to the principal, which was to be accordingly factored into the calculation of AMP into arm's length price ("ALP"). Post determination of ALP by factoring excessive and arbitrary AMP expenses, huge transfer pricing adjustments were carried out on this account in these assessment years, which are under ap ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of manufacture, sale and distribution of electronic products and electrical appliances. Under a contractual arrangement with its parent company LG India was permitted to use the brand name and trade name owned by its parent company, accordingly AMP adjustments were carried out in L.G. India case. However, it is emphasized by ld. Counsel that there is lot of difference in facts involved in classification and quantification of AMP expenses in the case of Canon India i.e. assessee and LG case. Assessee is claimed to be a full risk distributor and not a manufacturer as in the case of L.G. India. 4.2. Ld. Counsel for the assessee contends that the Special Bench order can be divided into two parts - (i) legal issues about retrospective application of Sec. 92CA(2B), by which the TPO's powers were enhanced along with the scope of international transactions; and (ii) The scope, classification and quantification of various expenses i.e. relatable to sale or advertisement and brand promotion etc. 4.3. Apropos legal issues, Special Bench has held that the inclusion of domestic transactions in respect of AMP expenses as amended by Section 92CA(2B) are retrospectively applicable and TP h ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on or not was based on facts of LG s case. Therefore, the judgment, cannot, in our respectful submissions, be applied uniformly to the instant case de-hors appreciation of the relevant facts involved herein 3. International transaction Branding building recognized as international transaction covered within the expression in the nature of provision of service u/s 92B paras 14.1 to 14.21 at pgs. 60 to 75 This issue has to be decided in light of the finding of the Hon ble Bench as per the issue at S. No. 2. Whether a transaction or not ,. As stated supra, the same has been decided basis LG India s facts and hence, inthe instant case before your Honours conclusion/ directions should be made based on facts of Canon India. 4. Cost/ Value of transaction Bright line considered as a tool to determine cost of international transaction paras 15.7 and 15.10 at pgs. 79 to 82. Section 92C of the act provides that arm s length price in relation to an international transaction shall be determined by any of the prescribed methods, being the most appropriate method, having regard to the nature or class of transaction or class of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ngements, product life cycles, choice of comparables, etc. Category 3 - Legal issues before the Special Bench, such as validity of TPO jurisdiction, qualification as transaction/ international transaction, use of bright line approach, etc. 4.5. Ld. Counsel then adverted to the relevant paras from pages 103 to 107 of the Special Bench order, relevant extract is as under:- Scope of AMP Expenses:- 18.1. The ld. counsel for the assessee and some of the interveners contended that the TPO has included selling expenses in the total AMP expenses for the purposes of determining the ALP. It was submitted that selling expenses cannot constitute part of AMP expenses. Our attention was drawn towards the erstwhile sections 37(3A) and 37(3B), in which disallowance u/s 37(3A) was prescribed in respect of expenses referred to in sub-sec. (3A), which, inter alia, included "advertisement, publicity and sales' promotion". It was submitted that various courts have held that the selling expenses cannot be included within the scope of sec. 37(3B). 18.2. The learned Departmental Representative opposed this contention by stating that there is no logic in the contention of the learned AR-that the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in sec. 37. 18.5. We do not find any force in the contention of the learned DR made in this regard. The logic in the exercise of finding out the AMP expenses towards creation of marketing intangibles for the. foreign AE starts with the expenses which are otherwise in the nature of advertisement, marketing and promotion. If an expenditure itself is not in the nature of advertising, marketing or promotion, that ought to be excluded at the very outset. We, therefore, reject this contention raised by the learned DR. 18.6. As 'we are presently considering the term 'advertisement marketing and promotion . expenses, which is analogous to, if not lesser in scope than the term 'advertisement, publicity and sales promotion' as employed in the erstwhile sub-sec. (3B) of sec. 37, all the judgments rendered in the context of sub-sec. (3A) (3B) of sec. 37 will squarely apply to the interpretation of the scope of AMP expenses. We, therefore, hold that the expenses in connection with the sales which do not lead to brand promotion cannot be brought within the ambit of "advertisement, marketing and promotion expenses" for determining the cost/value of the international transaction. 19. In th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... termination of the arm's length price of the AMP has eventually lead to distorted, excessive and arbitrary TP adjustments in the name of AMP. 4.8. The Special Bench has categorically laid down a divider to distinguish expenses incurred with respect to promotion of sales and expenses incurred in connection with the sales. It has been held by the Special Bench that the expenses in connection with sales are incurred post occurrence of sales and such expenses reduces the cost of goods sold and are directly linked to sales. Therefore, such expenses cannot be held as sales promotion expenses and by no parameter it can be held that such expenditure helps in building/ promoting Canon brand. 4.9. The over emphasis of the TPO has been that the appellant by incurring excessive expenditure in the form of AMP has led to brand building for its foreign AE in India. Thus in effect it has never been the case of the lower authorities to disallow expenditure which had direct nexus with sales as against brand building. 4.10. It is submitted that following the past accounting practice, some of the sale related expenses, which do not fall in the scope of AMP expenses, were inadvertently debited in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s is evident from the relevant details placed on record which are referred by ld. counsel before us for respective years during his arguments. It is emphasized that principles laid down by Special Bench decision in the case of LG India, hold that expenses having direct correlation with sales cannot be brought within the ambit of AMP for determining the cost/ value of the international transaction. 4.15. The Special Bench (Para 17.4 at pg 100) has categorically suggested factors for determination of cost/ value of international transaction. The factors enumerated by Special Bench as compared with appellant's facts are as under:- Criteria s / Factors suggested by Special Bench (Para 19) Appellant s facts FAR of the tax payer Terms of arrangement/ agreements between tax payer and AE Use and existence of brand name Royalty payment for brand Launch of products during the year Use of technical know-how Receipt of subsidy Entry level strategy Use of proper comparables domestic comparables using foreign brands not correct Provision for suitable adjustments Canon India is a full-risk distributor and the same is docume ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... re. The subsidy has been specifically received in the form of advertising support as has been envisaged in the Distribution agreement. Clause 9.4 of the Distribution agreement reads as under:- "The Company shall, from time to time, provide reasonable advertisement support to CIPL for the promotion and sale of Products in India." 4.18. During the respective assessment year(s), the amount of such AMP subsidy received from Canon Singapore is as under:- AY 2006-07 - INR 12,10,48,124 AY 2007-08 - INR 271,087,594 AY 2008-09 - INR 501,613,022 4.19. As already mentioned, there is no dispute in relation to the quantum of subsidy received and the nature / purpose of subsidy. The aforesaid amount of subsidy including the break up has been recorded by the TPO in his respective orders for AY 2007-08 and 2008-09. 4.20. It is pertinently mentioned that while benchmarking the AMP, TPO has himself deducted the amount of subsidy received after computing the TP adjustment and the same is reflected in the paper books for respective years: 4.21. It is pleaded that the Special Bench of the Tribunal in its judgment has laid down certain key principles/ criteria with regard to determinatio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 2,06,76,094 - 51,49,784 E Total AMP expenditure to be considered for purpose of comparison in light of Special Bench Order 9,70,90,073 15,40,05,865 25,47,70,503 4.24. Thus, it is pleaded that figures at placitum 'E' shall be expenses liable for AMP related T.P. adjustments. 5. In reply, ld. CIT (DR) contends that though as per the Special Bench order it has been held that volume and cash rebates are not covered in the scope of AMP expenses and also subsidy recovered to meet AMP expenditure, however, Ld CIT (DR) pleads that:- (i) Issues about such rebates may be set aside and restored back to AO/ TPO to verify the nature of such rebates. (ii) By reducing subsidy from the amount of AMP the appellant may get double deduction as some part of the subsidy may have been received in respect of trade discounts and incentives provided to dealers, which has to be reduced from AMP expenditure. 6. Ld. counsel in rejoinder submitted that the contentions raised by the Ld DR for set aside are contrary to the facts of the instant case and are untenable as- i) It is submitted that the spirit and intention of the directions issued by th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 5 to 358 (para 4.4) of PB-2. book-2 AY 2008-09 - page no 47 to 48 (para 4.4) of PB-1. iv. It is submitted that the directions of the Special Bench of the Tribunal to exclude the expenditure in relation to sales, such as trade discount, volume rebate, etc. was due to the character of such expenses as the same do not lead to brand building. The Special Bench has succinctly explained at para 18 that selling expenses stand on a different footing than AMP expenses. Selling expenses, having regard to their nature, cannot be treated akin to the expenditure for brand building and accordingly, ought to be taken out of the ambit of AMP expenditure for the purpose of benchmarking. v. It was never the case of the AO/ TPO that reduction of subsidy and trade discounts/ dealer commission etc from the amount of AMP before benchmarking would lead to double deduction. It is pleaded that assessee has filed these details before three lower authorities i.e. AO/ TPO DRP. No objections or adverse comments are raised in the classification, quantification of these expenses, which are selling expenses. The subsidy received from Singapore has been held to be for meeting the AMP expenses. With all the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of assessing officer to make such reference and the powers of TPO to furnish report in this behalf and all other related issues. The Special Bench in the case of LG Electronics India (supra) adjudicated such issues as is evident in para 6 of the order:- "6. Though both the questions referred to this special bench are inter-linked, still we are taking up question no. 1 first. The ld. Counsel for the assessee ahs assailed the impugned order on various legal and factual issues. In so far as the first question is concerned, we have divided such submissions into seven broader parts for the sake of convenience, which will be dealt with one by one. I. JURISDICTION OF TPO II. RULE 29 III. TRANSACTION IV. INTERNATIONAL TRANSACTION V. COST/ VALUE OF TRANSACTION VI. METHODS FOR DETERMINATION OF ALO OF INTERNATIONAL TRANSACTION VII. MARUTI SUZUKI'S CASE" 7.2. In the wake of these criterias the Special Bench proceeded to decide various issues by a very lengthy order, which is conveniently reproduced for the sake of brevity. The issue of retrospective application, jurisdiction, AO/TPO's powers etc. etc. have been decided in favour of revenue and against the assessee in L.G. El ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that the TPO gets power under sub-sections (2A) and (2B) to determine ALP in respect of non- referred international transactions as well. In the absence of any such reference under sub-section (1), the TPO cannot suo motu undertake the determination of ALP in respect of other international transactions not referred to him. It is a different matter that the reference by the AO may be for one international transaction and the TPO while determining . ALP in respect of that one international transaction, also comes across certain. other international transactions requiring determination of ALP. Thus, reference by the AO to the TPO for at least one international transaction. is a necessary stipulation to assume power for determining ALP in respect of other transactions. 7.21. Another point urged by the ld. counsel for the appellant was that sub-sec. (I) requires making a reference by the AO with the previous approval of the Commissioner. It was contended that insofar as suo motu exercise of power by the TPO on other international transactions is concerned, the requirement of seeking approval from the CIT will be lacking, rendering the assumption of jurisdiction by the TPO over such o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dered opinion, the rule of harmonious construction can be applied instantly by excluding the cases in which the assessee has not furnished report in respect of international transactions, whether or not it is- an international transaction as per the assessee's view point, from the ambit of sub-sec. (2A) and including them in sub- section (2B) of section 92CA. It is relevant to note that sub-see. (2A) is a general provision on the issue of" the TPO suo motu taking up an . international transaction not referred by the AO, whereas sub-sec. (2B) is a special provision .limited in its scope only to such international transactions - in respect of which the assessee did not furnish report u/s 92E. We have thoroughly discussed elsewhere in this order that when there is special provision governing a particular types of cases, then such cases stand excluded from the general provision governing all the cases. As such we are of the considered opinion that the scope of sub-sec. (2B) covers all types of international transactions in respect of which the assessee has not furnished report, whether or not these are international transactions as per the assessee's version. The contention of the ld. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... et the AMP expenses. No dispute or adverse comments have been offered by any of the lower authorities i.e. AO/ TPO DRP. The details thereof are given in para 4.23 hereinabove. The assessee's contention is to the effect that the figures mentioned at placitum 'E' i.e. Rs. 9,70,90,073 for AY 2006-07; Rs. 15,40,05,865/- for AY 2007-08; and Rs. 25,47,70,503/- for AY 2008-09 shall only be reconsidered by assessing officer for the purpose of ALP by applying suitable comparables afresh to decide the TP adjustments in this behalf in accordance with law. Per contra ld. CIT(DR) contends that the entire issue of expenditure shall be set aside, restored back to the file of assessing officer. The assessee counters the CIT(DR)'s contention that all the details are on record and were produced before every lower authorities. In the absence of any objection or adverse comment it will amount to harassment of the assessee to face second round of proceedings for no fault of it. Ld. CIT(DR) also could not offer any adverse comment on the segregation and details of sales related expenses i.e. trade discount, volume rebate, cash discount, commission etc. So also, no adverse comments were offered in resp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ction. The assessee vide ground no. 4 had raised the issue against disallowance of consumer market research expenses of Rs. 567.49 lacs. In view of our decisions in allowing the claim of the assessee being relatable to sales promotion expenses, this ground of appeal is thus allowed." 7.7. In these facts, circumstances and arguments, we find merit in the argument of ld. counsel for the assessee. There being no objection or adverse comment in respect thereof coming from any of the lower authorities i.e. AO/ TPO, DRP and also ld. CIT(DR), there is no justification in setting aside these expenses for verification again to AO/TPO. Our view is supported by the Chandigarh Bench judgment in the case of M/s Glaxo Smitkline Consumer Healthcare Ltd. (supra). Consequently, the figures mentioned at Placitum 'E' of the table, reproduced in para 4.23 above, are set aside back to the file of AO/TPO to decide the issue of AMP expenses by applying the proper comparables after hearing the assessee and keeping in view the Special Bench directions in this behalf. Thus, the grounds about TP adjustments in respect of AMP expenses are partly allowed for statistical purposes. 8. Following is the summar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... "12. A past event that leads to a present obligation is called as an obligating event. The obligating event is an event that creates an obligation which results in an outflow of resources. It is only those obligations arising from past events existing independently of the future conduct of the business of the enterprise that is recognized as provision. For a liability to qualify for recognition there must be not only present obligation but also the probability of an outflow of resources to settle that obligation. 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 and sale of an army of items running into thousands of units of sophisticated goods, the past event of defects being detected in some of such items leads to a present obligation which results in an enterpri ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... months. The relevant workings in relation to such computation of percentage of warranty for each different product are placed on paper book. Step 2 Computation of warranty provision for current year is computed by applying percentages of warranty arrived at as per Step 1 above to sales made for each product during the year. The computation of current year warranty provision is placed on paper book. Step 3 The estimate for warranty provision for the unexpired period of warranty at the close of accounting year based on above mentioned percentage of warranty, which is arrived at by computing warranty provision relatable to unexpired warranty period, which is an accrued liability to be discharged over the unexpired warranty period. This amount is taken as the closing balance of provision in the current year. The computation of closing balance of warranty provision for each year is placed on paper book. Step 4 The provision for warranty is created on the basis of opening balance of provision, actual expenses/ claim of warranty incurred during the year and closing balance of the provision required and therefore the provision made is net of opening balance of the provision. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... c in nature as is based on accepted past practice and is further supported by the judgment of Hon'ble Supreme Court in the case of Rotork Controls India (P) Ltd. (supra). Thus, the warranty provision deserves to be allowed. 8.12. Without prejudice to the above, it is submitted that in case it is held that the provision for warranty should be allowed on payment basis, then the appellant prays that a direction may be given to allow a deduction for the actual utilization/ payments made during the year by the appellant towards warranty expense as detailed below: AY 2006-07 - Rs. 2,65,18,173/- AY 2007-08 - Rs. 1,14,97,684/- AY 2008-09 - Rs. 2,78,01,790/- 9. Issue 2 - Unutilized Subsidy:- 9.1. The AO had made an addition on account of unutilized subsidy by holding that the amount of subsidy received in advance for meeting specific advertisement and sales promotion expenditure, but not utilized within the previous year is taxable as revenue receipt. Assessee has taken relevant grounds of appeal in AY 2007-08 and 2008-09. 9.2. It is pleaded by assessee that:- (i) During the assessment year 2007-08 and 2008-09, the appellant received an amount of Rs. 27,10,87,594/- and Rs. 5 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... be incurred. (c) Thereafter, CSPL remits the advance in lump sum with a specific direction that such money is to be spent only for the specified purposes and any amount of subsidy remaining unspent/ unutilized shall be held by the assessee in trust for and on behalf of CSPL and the same shall not be utilized by the assessee for any other purpose. (d) Copy of confirmation given by CSPL regarding the above facts and confirming that till the time subsidy money remitted to the appellant in advance by them and remained unspent by the appellant, the appellant held this money in trust for and on their behalf and did not accrue the utilized subsidy as its income and the appellant shall have no right whatsoever on such unutilized subsidy money. 9.4. A statement showing the flow/ utilization of subsidy for the AY 2007- 08 and 2008-09 is as follows:- S. No. Description Amount (in Rs.) AY 2007-08 1. Total amount of subsidy received for advertisement/ sales promotional activities during the AY 2007-08 271,087,594 2. Less: Amount utilized/ paid towards specific advertisement and sales promotion activitie ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sales promotion subsidy as on 31 March 2007 and 31 March 2008, it is submitted that the assessee received these subsidy amounts specifically earmarked towards certain sales promotional effort and the same is in no way in the nature of its income. 9.8. In view of the above, it is pleaded that the unutilized subsidy is not in the nature of income of the assessee. The assessee gets the right over the subsidy only when the expenditure on the advertisement or sales promotion activities has been incurred/ paid in this regard and not anytime before that. As and when the subsidy is received by the assessee, the same is shown under the head current liabilities till the time it is spent by the assessee. Post December 2006, the corresponding expenditure incurred by the assessee in this behalf is also debited directly to the current liabilities account only. The assessee does not claim any deduction for this expense in its Profit Loss account. 9.9. CSPL remits the money towards such reimbursement to the assessee with a specific direction that such money is to be spent only for the specified purposes and any reimbursement of expenditure remaining unspent/ unutilized shall be held by the a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... appellant in AY 2006-07. 10.3. Ld. counsel pleads that: (i) the issue is covered in favour of the appellant by the judgment of the Hon'ble Supreme Court rendered in case of United Glass MGF Co. Ltd [Civil Appeal No. 6447 of 2012 arising out of SLP (C) No. 30146 of 2008] wherein the Hon'ble Supreme Court has held that club membership fees incurred by the assessee is a pure business expenditure and is allowable under Section 37 of the Income-tax Act, 1961. (ii) Further reliance is placed upon the following decisions rendered by the jurisdictional High Court wherein it has been held that club expenses incurred for marketing and networking of the assessee's directors are incurred wholly and exclusively for the purpose of the assessee's business:- CIT vs. Samtel Colour Ltd: 180 Taxman 82 (Del) CIT vs. Nestle India Limited: 296 ITR 682 (Del) (iii) In case of AY 2007-08, Hon'ble DRP had given directions vide order dated 2 August 2011 deleting the proposed addition on club expenses in the draft assessment order for the AY 2008-09. 10.4. In view of the above, it is pleaded that the aforesaid disallowance should be deleted. 11. Issue 4 - Allowing depreciation in respect o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Particulars relating to STP unit Particulars relating to non-STP unit (subcontractors) Software sales made to Canon Inc 7,05,66,637/- 6,72,09,984/- Withholding tax @ 10% of the software sales as referred to above 70,56,663/- 67,20,998/- Foreign tax credit claimed as per Article 23(2) of the India-Japan DTAA NIL 24,44,934/- 12.4. Accordingly, in respect of software developed through Non-STPI unit, the assessee computed its double taxation benefit by computing doubly taxed income in accordance with the provisions of India-Japan DTAA. For this purpose, the sale proceeds of software exports through sub-contracted projects were taken and out of the same, costs incurred on such sub- contracted software was deducted in the following manner:- Sales consideration of Sub-contracted projects: Rs. 6,72,09,984 Less: Direct cost of sub-contracted projects: Rs. 5,98,16,886 Less: Indirect costs estimated: Rs. 2,00,000 Doubly taxed income on which tax deducted in Japan: Rs. 71,93,098 Tax deducted in Japan: Rs. 42,76,065 Available tax credit limited @ 33.99% Rs. 24,44,934 12.5. As per the tax withheld by ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... igible foreign tax credit on Rs. 58,00,222 @ 33.99% Rs. 19,71,495 12.11. The profit margins of 8.63% on export of software by STPI unit has been accepted by the ld. TPO. Accordingly, it is submitted that the appellant's claim for foreign tax credit as per the return of income be allowed. 12.12. Alternatively, even if assuming that the same cannot be allowed, it is submitted that the foreign tax credit be allowed based on the profitability of the STP unit, which works out to Rs. 19,71,495 as shown above. 12.13. Ld. CIT(DR) Shri Peeyush Jain relied on the orders of assessing officer and DRP for these corporate issues. After hearing the parties and perusing the record, the corporate grounds are decided as under: 13. Apropos the issue about provision for warranty, the relevant facts and arguments have been detailed above. The assessee has been consistently following the 4 step method for quantifying the provision for warranty. The amount and procedure of provision for warranty in respective years is mentioned above and consumption of provision of warranty ranges between 99.99% to 62.08%. Hon'ble Supreme Court in the case of Rotork Controls India (P) Ltd. (supra) has clearly hel ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that computers including peripherals and accessories are eligible for depreciation rate of 60%. In view thereof, we hold that assessee is eligible to claim depreciation @ 60% on these computers, accessories and peripherals. This ground of the assessee is allowed. 17. Apropos the claim of double taxation relief in respect of deduction of tax in Japan for A.Y. 2008-09, the tax withheld by Canon Japan comes to Rs. 42,76,065/- against which the assessee has claimed foreign tax credit amounting 24,44,934/- in accordance with Article 23 of Indo-Japan DTAA. The assessing officer in order to arrive at the income figure has applied profit margin of 3.35% as against 8.63% which relates mainly to trading account of foreign income for purposes of income of the foreign tax credit unit given to assessee. Per contra assessee has demonstrated that TPO himself has accepted the software export profits on STPI at 8.63% and accordingly worked out the tax credit eligible double taxation profit withheld by Japan. In our considered view when the eligible income from STPI is sought to be determined and the relevant facts and figures are available, in such circumstances, the income from software develop ..... X X X X Extracts X X X X X X X X Extracts X X X X
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