TMI Blog2013 (8) TMI 409X X X X Extracts X X X X X X X X Extracts X X X X ..... riences suggests that warranty provisions are generally reversed if they remained unutilized at the end of the period prescribed in the warranty – Held that:- There is no finding with respect to the compliance of aforesaid guidelines of Apex Court by assessee in the order of AO or DRP - Matter needs to be examined in the light of the principles laid down by Hon'ble Apex Court – Matter remitted to the file of AO for deciding the issue afresh in the light of the decision of Hon'ble Apex Court in the case of Rotork Controls case. Acceptability of DRP Order for making assessment - DRP has not dealt with the objections raised by the assessee by giving any cogent reasons as to why these objections are not acceptable to them - DRP has simply approved the adjustments made by the TPO. This has resulted in DRP's order being non-speaking – Held that:- Ld. DR has tried very hard to meet these objections by referring to various relevant income tax rules and the case laws but this effort of Ld. DR is not arising out of the order of the DRP. Therefore assessment orders passed by assessing officer in consequence to the DRP's order have to be set aside relying upon the decision i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s loss depreciation the total taxable income under normal provisions of I.T. Act was shown at Rs. Nil. The case was selected for scrutiny. The international transactions of the assessee were referred for determination of Arm's Length Price (ALP) by the Assessing Officer (AO) to Transfer Pricing Officer (TPO). The TPO after assessment proceedings u/s 92(C) of the Act proposed the adjustment of Rs. 14,00,49,993/- in respect of some of the international transactions of some of the divisions of the assessee. The assessing officer issued the draft assessment order u/s. 143(3) r.w.s 144C vide order dated 29/12/2009 incorporated the adjustments made by the TPO. Against this draft assessment order, assessee made reference to Dispute Resolution Penal (DRP) u/s 144C(1) of the Act. DRP vide order dated 22/09/2010 issued directions u/s 144C(5). The adjustment made by the TPO and the outcome of the DRP directions can be summarized as under:- Particulars TPO (Amount in INR) DRP (Amount in INR) Power Controls Division (Manufacturing function) 3,59,55,689 3,59,55,689 Wind Energy Division (Distribution Segment) 9,55,21,944 9,55,2 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sponding provision made and offered to tax in the past years ought to be allowed in the respective years. 5. That the Ld. AO/DRP erred in disallowing the claim of expenditure for the purchase of business rights as revenue expenditure under section 37(1) of the Act. 6. That the Ld. AO/DRP erred in not allowing deduction on amount of utilization of Rs. 71,82,595 in the current year out of the provision for foreseeable losses created and disallowed in the prior years. 7. That the Ld. AO erred in not allowing depreciation @ 60 % on the written down value of software expenditure which was considered as capital expenditure in the assessment for Assessment Year 2005-06. 8.1 That the Ld. AO/DRP erred in not allowing deduction with regard to the Appellant's claim for write back of provision for customs duty of Rs. 7,76,673 u/s 43B of the Act. 8.2 That the Ld. AO/DRP erred in not allowing deduction with regard to the Appellant's claim for write back of provision for leave encashment of Rs. 5,67,853 u/s 43B of the Act. 9. That the Ld. AO/DRP erred in not allowing deduction with regard to Appellant's claim for doubtful advances of Rs. 16,93,926 written off against the provision acc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... herein confirming the TP adjustment even for the non associated enterprise transaction carried out by the Appellant. 17. That the Ld. AO and the Ld. DRP erred in upholding the adjustments of INR 2,34,84,807 in the Wind division of the Appellant by the Ld. TPO and in doing so erred in not excluding certain extraordinary expenses incurred by the Appellant relating to amortization of goodwill, provision of bad debts and extraordinary legal expenses. 18. That the Ld. AO and Ld. DRP erred in upholding the adjustment of INR 40,65,821 to the Transportation division of the Appellant by the Ld. TPO and doing so erred in not providing capacity adjustment on account of unutilized capacity of the employees and appropriate adjustment on account of higher import content. 19. That the Ld. AO/Ld. DRP erred in upholding the adjustment of INR 4,92,379 to the Inspection division of the Appellant by the Ld. TPO. 20. The Ld. AO/Ld. DRP erred, in law and facts, in computing the arms length price without giving benefit of +/-5 percent under the proviso to section 92C of the Act. 21. That the Ld. AO erred in consequently levying interest under section 234B of the Act to the extent of Rs. 17,30,0 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... submissions and perused the material on record. The issue in the present ground is with respect of allowance of carry forward of loss on account of provisions of s. 79. We find that the issue of carry forward would depend upon the finality of order for earlier years as it would have bearing on the year under appeal. We therefore remit the issue to the file of AO to determine the carry forward losses based on the outcome to the decsion for the earlier years. Thus this ground is a allowed for statistical purposes. 11. Gr. No 3 and the sub grounds are with respect to warranty expenses: 12. AO noticed that assessee had debited Rs 2,43,96,674/- to Profit and Loss account under the head "warranty and replacement expenses". Assessee submitted that warranty cost were estimated by the management on the basis of technical evaluation and past experience and the amount was utilized to make good the amount on replacement of parts and accessories and other related expenses in the event of the failure of the product. AO did not accept the contentions of the assessee. He noted that his predecessor had examined the issue in AY 2005-06 and held it to be not an ascertained liability but to be a c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... le SC in the above referred case of Rotork Controls India (P) Ltd. reported in 314 ITR 62 as the Hon'ble SC has held that if warranty provisions are based on experience and historical trend(s) and if the working is robust then the question of reversal in the subsequent year(s), may not arise in a significant way. The warrantee obligation without any proper basis cannot be treated as actual crystallization of the liability. The Assessee in the present case has failed to substantiate the basis for making the provision for warranty. There is no doubt that in the case of the assessee, the provisions are made in excess without any basis which has resulted into large accumulation of the balance and hence the same cannot be allowed as ascertained liability. In view of the above, the proposed disallowance of Rs.2,43,96,674/- on account of provisions for warranty is confirmed." 13. Aggrieved by the order of DRP, the Assessee is now in appeal before us. 14. Before us, the Ld. A.R. submitted that provision is made for estimated liability in respect of warranty cost in the year of sale and is utilized to make good the amount in replacement of parts and accessories and other related expense ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... provisions made and the actual expenses incurred against it. On this basis a sensible estimate should be made. The warranty provision for the products should be based on the estimate at the year end of future warranty expenses. Such estimates need reassessment every year. As one reaches close to the end of the warranty period, the probability that the warranty expenses will be incurred is considerably reduced and that should be reflected in the estimation amount. Whether this should be done through a pro rata reversal or otherwise should require assessment of historical trend. If warranty provisions are based on experience and historical trend(s) and if the working is robust then the question of reversal in the subsequent two years, in the above example, may not arise in a significant way. It is important to note that the there are four important aspects of provisioning. They are-provisioning which relates to the present obligation, it arises out of obligating events, it involves outflow of resources and, lastly, it involves reliable estimation of obligation." 17. We find that in the present case there is no finding with respect to the compliance of aforesaid guidelines of Apex C ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ngly the claim in this respect is rejected." 21. Aggrieved by the order of DRP, assessee is now in appeal before us. Before us, the Ld. A.R. submitted that during the year under appeal no fresh provision has been created by the assessee. It was further submitted that the provision that was created in FY 2004-05 was disallowed by the AO. The amount of Rs 1,19,44,410 is reversal of the provision that was created in earlier year. Since the entire amount was disallowed in the earlier year, the disallowance made once again would amount to double disallowance. He therefore urged that the disallowance be deleted. 21. The Ld. DR on the other hand submitted that there is nothing on record to prove the claim of the assessee that the amount represents the reversal made out of the provision made in earlier year and which was disallowed. He therefore submitted that the matter be examined at the end of AO. 23. We have heard the rival submissions and perused the material on record. Before us, it is assessee's contention that the amount of disallowance (Rs 1,19,44,410/-) is out of the disallowance made in FY 2004-05 however there is nothing on record before us in support of the assessee's co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the necessary steps for rectification as per law. We thus allow this ground of assessee. 29. Ground No 7 is not pressed and therefore is dismissed. 30. Ground No 8 is with respect to assets written off of Rs. 24,68,840/-: 31. Assessee had debited to Profit and Loss account Rs. 7,32,01,710/- on account of assets written off. Assessee had sou moto added 78,51,331 in the computation and thus the balance of Rs 24,68,840 was claimed as expenses. It was submitted that the loss was on account of difference in General ledger and subsidiary ledgers arising out of posting error at the time of upgradation of ERP database and the same was allowable u/s 29. AO did not accept the contention as he was of the view that the loss was hypothetical and notional because posting error cannot create any loss more so when the tangible assets were still in existence. Aggrieved by the order of AO, assessee carried the matter before DRP who also upheld the order of AO. The assessee is therefore now in appeal before us. 32. Before us, the Ld. A R. reiterated the submissions made before AO and DRP. The Ld. D.R. on the other hand supported the order of AO. 33. We have heard the rival submissions and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... led legal position that business loss can be allowable only in the year of such loss and not in any other succeeding year. Further, if any expense is governed by any specific or special provisions of the Act, then the allowability of the same has to be decided in that particular special provisions and not under general provision, since the special provisions overrides the general provisions. The maxim of generalia specialibus non derogant and generalia specialia derogant i.e. if a special provision is made on a certain matter that matter is excluded from the general provisions well settled in India and the same is also applicable to Income Tax provisions." With respect to irrecoverable advances AO noticed that an amount of Rs 1,25,97,968/- was claimed as actual loss on account of irrecoverable advances from the provision account. It was further submitted that the provision for the aforesaid amount was offered to tax in the past years i.e. in the year in which the provision were created and therefore the loss incurred during the year and written off directly through provision account should be allowed as deduction in current year u/s 29. This issue was not discussed in the draft a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n does not in any way relate to the power of the Assessing officer to entertain a claim for deduction otherwise than by filing a revised return. In the circumstances of the case, we dismiss the civil appeal. However, we make it clear that the issue in this case is limited to the power of assessing authority and does not impinge on the power of the Income-tax Appellate Tribunal under Section 254 of the Income-tax Act, 1961. There shall be no order as to costs." 21.8 In view of above it is held that the AO had rightly held that any claim which has not been made in return of income or revised return of income, can not be entertained by the AO. Further, the AO has rightly submitted that the assessee is not eligible to file any objection on any issue before the DRP, it AO has not proposed any variation in the returned income on such issue. Even, otherwise also, similar claim of assessee made in respect of 'Advances written off has been rejected by us on merits far the reasons mentioned in Para 10 of this order. Accordingly the assessee's clam on this issue is rejected." 35. Aggrieved by the order of DRP on the aforesaid issues, assessee is now in appeal before us. Before us, with re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... AO noticed that the claim of the assessee was not fully accepted and the Surveyor report had estimated liability of Rs. 5.25 crores. He further noted that the compensation granted to the assessee was to the extent of Rs. 5,89,46,450/- against the net loss of Rs.6,40,52,491/- claimed by the assessee. The AO was thus of the view that since the loss of Rs. 51,05,951/-( Rs. 6,40,52,491-5,89,46,450) was not entertained by insurance companies, the same was not allowable. He accordingly disallowed it. 40. Aggrieved by the order of AO assessee carried the matter before DRP. DRP after considering the submissions of the assessee upheld the order of AO by holding as under:- "18.6 The assessee's arguments have been considered carefully and the same are found not acceptable. During the year under consideration, an amount of Rs. 6,40,52,401/- has been debited to the profit and loss account on account of loss of stock due to floods. The same was claimed in the return of income as the loss incurred in normal course of business and allowable as deduction while computing business income under section 29. The AO has observed that on perusal of the claim of the assesses before the insurance Compa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ited to Profit and Loss account by the assessee and have been offered to tax. He further placed reliance on the decision in the case of Prabhat Chandar Paul vs. ACIT 70 TTJ 934 He thus urged that the loss incurred by the assessee be allowed. Ld. D.R. on the other hand submitted that some items of stocks which were lost in the floods were not covered by the insurance policy and, therefore the same is not allowable as a business loss. He thus supported the order of AO. 43. We have heard the rival submissions and perused the material available on record. It is an undisputed fact that the assessee has incurred loss due to flood. It is also a fact that entire claim of the assessee was not accepted and the reason for non-acceptance by the insurance company was on account of exclusion clause. It is not the case of the Revenue that the goods have not been lost in floods or the claim of the assessee was found to be bogus. In the case of Motamal Jethumal vs.CIT 15 ITR 155 the Hon'ble High Court has held that the loss due the accidental fire of a particular stock in trade of an assessee is a trading loss and he is therefore entitled to claim a deduction of the value of goods destroyed. In v ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... with the provisions of section 40(a) of the Act. The AO has rightly held that the Tax Audit report, being a statutory report and a report of a professional, is an important piece of evidence and the same can not be brushed aside. In the present case the assessee neither before the AO nor before us has submitted the revised report from the Auditor certifying that his earlier report was not correct and the above referred sum is not disallowable u/s 40(a) of the Act. In view of the above the proposed disallowance of Rs. 32,60,325/- u/s 40(a) of the Act is confirmed." 46. Aggrieved by the aforesaid order of DRP the assessee is now in appeal before us. 47 Before us the Ld. AR submitted that the amount represented management fees paid by the assessee to a branch office of General Electric International (INC) USA in Japan. It was submitted that the management fee was for various management support services, executive support service, quality improvement, market and sales support etc provided by General Electric International to assessee. The said services were not technical or consultancy in nature and were in the nature of managerial services and did not fall within the preview of " ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rade loss had occurred during the year under consideration and has also failed to prove justification for claiming such deduction. He also noticed that some of the parties involved were Government Companies/organizations or big concerns having good financial base. He also noticed that with respect to liquidated damages written off no details with respect to payment sought as liquidated damages etc was made available. He thus concluded that the assessee has failed to prove as to why the amount can be treated as bad debts, more so, when it was adjusted against the provision account instead of debiting it to the Profit and Loss account. He therefore held that the claim of assessee was not allowable. DRP also has confirmed the action of AO in disallowance of the claim. 50. Aggrieved by order of AO assessee carried the matter before DRP. DRP upheld the action of AO by holding as under: 10.3 The assessee's submissions have been considered carefully, but the same are found not acceptable. The assessee in the revised computation of income had claimed deduction of Rs. 28,00,52,402/- on account of bad and doubtful debts written off directly against the provision account. The AO had obser ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sessee has not controverted the actual finding of the AO given in the draft assessment order that in most of the cases, the assessee has not submitted the details of the parties. the nature of debts, why said debts have been considered as bad and the evidence that the said debts have been actually written off as irrecoverable in its accounts. Even before us the assessee has not submitted any details in this regard. 10.5 Similarly in the Draft assessment order the AO has given factual finding that on perusal of the details filed it is found that the amounts involved are mostly in the nature liquidated damages and not the bad debts in its true sense perse, the assessee has not made any submission on the said finding of the AO and hence it is presumed that the assessee has nothing to say on the said finding of the AO. The AO has rightly held that the year in which any liability is to be allowed in case of such liquidated damages are very much relevant. In case of liquidated damages the relevant issue is to examine the nature of dispute, the year in which the customer deducted the amount payable to the assessee. The reasons for deduction are also relevant. In case the assessee has fa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lish that the debt has become bad and it would suffice if the debts are merely written off in the books as bad, and hence not recoverable. He also placed reliance on the decision of Apex Court in the case of TRF Ltd vs. (Civil Appeal No. 5293 of 2003) Ld. AR also relied on the decision of Gujarat High Court in the case of Torrent Cable on the matter of liquidated damages. Ld. DR on the other had submitted that the bad debts were not written off in the Profit and Loss account. He further submitted that the party-wise details, nature of debts, when the same was offered to tax was not submitted by the assessee. In case of liquidated damages, the nature of dispute, the year in which the customer deducted the amount, the reason for deduction were also not submitted by the assessee, and thus he supported the order of AO DRP. 53. We have heard the rival submissions and perused the material on record. From the details placed on record it is seen that bad debts written off also includes liquidated damages like nature of dispute, the year in which the customer deducted the amount, reasons for deduction etc. Before us the Ld DR has stated that the details of liquidated damages have not be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... even though the same was made during the course of assessment proceedings. The AO in his comments have rightly submitted that entertaining of any claim made during the course of assessment proceedings, beyond the period u/s 139(5) of the Act will be violation of provisions of section 139(5) of the Act. This view has been confirmed by the Hon'ble SC in the case of Goetze (India) Ltd. Vs. CIT (2006) 284 ITR 323(SC) as already discussed in para 22.5 above. 22.7 In view of above, it is held that the AO had rightly disallowed the claim which has not been made in return of income or revised return of income. Further, the AO has rightly submitted that the assessee is not eligible to file any objection on any issue before the DRP, if AO has not proposed any variation in the returned income on such issue. Even, otherwise also similar claim of assessee made in respect of 'Provision of foreseeable losses' has been rejected by us on merits for the reasons mentioned in Para 6 of this order. Accordingly the assessee's claim on this issue is rejected." 56. Aggrieved by the order of DRP, assessee is now in appeal before us. 57. Before us, The Ld. A.R. reiterated the submissions made before D ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ntions that the net profit is to be increased by the amount or amounts set aside as provision for diminution in the value of any asset. Undoubtedly, the debts and the advances given by the assessee were assets for the assessee and the provision for doubtful debts or advances are nothing but provision for diminution in the value of the asset and hence the same is required to be added back while computing the book profit. Hence the action of the AO in adding back the same for computation of 'Book profit' is confirmed. 19.8 In the computation of 'Book Profit' the assessee has not added back the provisions for foreseeable losses at Rs. 2,34,18,769/- provision for claims at Rs. 41,42,302/- and provision for import duty at Rs. 2,97,06,000/-, though the same were debited to the P L account. The assessee itself has added back these sums in computation of income, while computing taxable income and the same conclusively proves that these are unascertained liability. Further in clause 17(K) of the Tax Audit Report', the Auditor has also certified the same as 'liability of contingent nature'. Since these provisions were made for meeting liabilities other than ascertained liabilities so as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d the following adjustments namely:- Sr. No. Description Amt (Rs.) 1 Downward adjustment in the related party transaction in GE Power Control Division 3,59,55,689 2 Upward adjustment to the sale price of re-export of equipment to the AE 9,55,21,944 3 Upward adjustment on cost in respect of the transactions of marketing support services in the Power Control Division 10,90,196 4 Upward adjustment on cost in respect of the transactions of marketing support services in the Lighting Division 63,623 5 Upward adjustment on cost in respect of the transactions of training and administrative services in the training division. 74,18,541 Total 14,00,49,993 66. The AO included the aforesaid additions in the draft assessment order passed u/s 144C(1) of the Act against which the assessee filed objections before the Dispute Resolution Panel (DRP). DRP vide directions dated 22.9.2010 confirmed the adjustments suggested by TPO in respect of the above three divisions. 67. Further aggrieved the assessee is now in appeal before us. 68. ..... X X X X Extracts X X X X X X X X Extracts X X X X
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