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TMI Blog2014 (10) TMI 429X X X X Extracts X X X X X X X X Extracts X X X X ..... der and are in accordance with the ITAT Rules. Ld. A.R. submitted that though in the original cross objections, these grounds were taken but the wording was not appropriate, therefore, to be more specific, the assessee intends to take additional grounds which read as under: "1. That having regard to the facts and circumstances of the case, Ld. CIT(A) has erred in law in confirming the action of the Assessing Officer in assuming jurisdiction u/s 147 of the Act more so when there was no escapement of any income. 2. That having regard to the facts and circumstances of the case, assuming the jurisdiction u/s 147 of the Act by the Assessing Officer is bad in law and against the facts and circumstances of the case." 3. Ld. D.R. did not object to the admission of additional grounds, therefore, the same were admitted. 4. Ld. A.R. further submitted that the reassessment in this case was initiated by recording reasons as placed in paper book page 93 and we were taken to paper book page 93. Ld. A.R. submitted that from the reasons recorded as placed at paper book page 93, it is apparent that the Assessing Officer recorded the reasons from the report of statutory auditors in Form 3CD where ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lief that income had escaped assessment, then he can legally reopen the case as it has to be considered as fresh material as intimation u/s 143(1) is not an assessment order. Arguing upon Revenue's appeal on merits in respect of 1st ground in assessment year 2003-04 and 2004-05, Ld. D.R. submitted that the mould expenses allowed by Ld. CIT(A) were not verifiable. It was submitted that assessee was provided a number of opportunities but it did not submit the relevant documents as asked for by the Assessing Officer and, therefore, expenses itself could not be substantiated and were rightly disallowed by the Assessing Officer. Inviting our attention to Ld. CIT(A)'s findings in assessment year 2003-04, Ld. D.R. submitted that the order passed by him is a non-speaking order. Ld. D.R. submitted that assessee was not a manufacturer and therefore, mould expenses were not expenses which were incurred for the purpose of business and further he heavily relied upon the findings of the Assessing Officer. It was further submitted that tax was not deducted at source and therefore, Assessing Officer keeping in view all facts and circumstances had made the addition. 6. In respect of ground No.2, L ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... puters. Ld. A.R. submitted that the payment for purchase of computers was made through cheques and Assessing Officer disallowed depreciation only because the assessee was not able to provide asset register and original bills of purchase. Ld. A.R. submitted that the assessee is ready to provide all the information to the Assessing Officer, therefore, it was prayed that this ground may be allowed for readjudication. 8. As regards 2nd ground, regarding warranty expenses, Ld. A.R. submitted that in assessee's own case, in assessment year 1999-2000, the Tribunal vide its order dated 25.08.2006 has decided the issue against assessee. In this respect, he invited our attention to page 297 of paper book where relevant findings of the Tribunal were placed. Ld. A.R. submitted that the Tribunal had held that claim for expenses be allowed on actual basis and therefore, it was argued that Assessing Officer be directed to allow the claim on actual basis. 9. Ld. D.R. on the other hand submitted that the Tribunal has already dismissed the similar ground in assessment year 1999-2000 and it has held that claim of the assessee can be allowed only on the basis of actual claims whereas the amount debi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... gible material to justify the conclusion that there is escapement of income. In the present case the note forming part of the return clearly mentioned and described the nature of the receipt under a non-compete agreement. The reasons for the notice under section t47 nowhere mentioned that the revenue came up with any other fresh material warranting reopening of assessment. In these circumstances, the Court is of the opinion that mere conclusion of the proceedings under section 143( I) ipso facto does not bring invocation of powers for reopening the assessment. We are satisfied that the Tribunals reasons are justified and do not call for any interference." 11. Similarly, in the case law of CIT Vs Smt. Jyoti Devi 218 CTR 264 the Hon'ble High Court of Rajasthan has held as under: "12. The precise question, therefore is, as to whether in the present case, any subsequent information, or material have come to the notice of the AO, to enable him to form a requisite belief, that any particular income has escaped assessment, which was liable to be assessed, and apart from the fact, that as found by the learned CIT(A), and the learned Tribunal, that there was no subsequent information, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the Revenue is dismissed for assessment year 2003-04. 14. Now, coming to assessment year 2004-05, it is observed that the 1st issue raised by the Revenue is regarding disallowance of moulds expenses. We find that this issue taken as firsts ground is squarely covered in favour of the assessee by the order of the Tribunal dated 14.03.2014 in I.T.A.Nos. 137 & 2012/Del/2011 and 2608/Del/2012 for the assessment years 2007-08 and 2008-09. The Tribunal has dealt with the similar issue in para 10-16. For the sake of convenience, the same is reproduced below: "10. We have heard both the counsel and perused the records. Ld. Departmental Representative placed reliance upon the order of the AO. He reiterated that assessee has adopted a colorable device. He submitted that the nature of transaction between the assessee and the contract manufacturer was that all purchasers and seller. Hence, there was no question of payment of moulds rentals by the assessee who is a purchaser. He further submitted that in excise proceedings the matter has gone to the Settlement Commission and excise liability in this regard fastened on the contract manufacturers. Hence, he submitted that the Ld. CIT's infere ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed by Tupperware for the specific purpose of manufacture of products and accordingly, the manufacturer shall return the moulds to Tupperware immediately upon the manufacturer of ordered quantities as stated in the relevant order within the time specified therein." 13. Thus, it is clear that mould rentals was payable by the assessee under a contractual obligation with contract manufacturer. The contract manufacturer have also given a certificate to the extent that mould rentals was to be borne by the assessee pursuant to the agreement. Hence, the expenditure in question cannot be said to be not allowable. 14. The product being dealt by the assessee had to meet international quality and specification of Tupperware world wide which requires use of high quality and specific type of moulds, as the design of products are patent design. The moulds used by manufacturer of products are not available in the open market. Therefore, the company had to import these molds from overseas group company on hire basis and provide the same to contract manufacturers to enable them to manufacture the products. Once the contract manufacturer completes the order placed by the assessee, the molds are ret ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... has subcontracted the manufacturing activity to contract manufacturers. The moulds required to manufacture the products are leased in by the appellant from the AEs and thereafter supplied to contract manufacturers. Moulds are used to press plastic into form and are an essential embodiment of the product design. It was pointed that these moulds are proprietary in nature and are developed and owned by the overseas group entities. It was submitted that the appellant does not add value to the products and carries out the functions of a pure reseller. It merely procures the moulds from the AEs and supplies them to contract manufacturers for use in production. Thereafter, it procures finished goods from the contract manufacturers and sells them in the Indian market without adding any value thereon. According to the appellant, there is a very strong co-relation and interdependence between the transaction of payment of mould lease rentals and the core activity of the appellant, which is that of distribution, i.e., purchase and resale (without adding value), of plastic food storage and serving containers. Without access to these proprietary moulds, the appellant would not have been able to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he computation of its operating profit. Further, even in the case of Honeywell Automation India Ltd. (2009-TIOL-104- ITATPUNE), the Pune Bench of ITAT has held that an item of receipt or expenditure, which has no direct connection/ nexus with operating profit should be ignored. The appellant has given the following calculation by stating that nonoperating/extraordinary items should be excluded from the computation of the appellant's operating loss percentage. Table 2: Particulars F.Y.2003-04 Sales 564,764,554 Cost of Sales 318,840,248 Service fee 4,794,553 Employee Remuneration & benefits 54,176,687 Administration Expenses 73,323,119 Selling & Distribution expenses 104,993,775 Depreciation 14,640,476 Total Cost (T.C.) 569,626,964 Operating Profit (O.P.) 4,862,410 OP/Sales -0.86% Particulars FY 2003-04 Reconciliation Add:Non-Operating/ Extraordinary Income Other Income 5,387,133 Less:Non-Operating/ Extraordinary Expenses: Obsolete stock written off 14,083,604 Financial & other charges 1,469,325 Fixed assets written off 81,630 Prior period expenses 1,141,894 Profit After Tax (16,251,730) Reason ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... % 2 Adam Comsof Ltd. 19.05% 3 Blow Plast Ltd. (Merged) 34.61% 4 Positive Electronics Ltd. 11.67% 5 Redington (India) Ltd. Data not available 6 Uniport Computers Ltd. 25.00% 7 Usha International Ltd. 27.21% Average 20.66% Therefore, the international transaction of the appellant is at arm's length. 2. Excluding the non operating income and non operating expenditure the PLI of the appellant calculated is at -0.86% in table- 2. Based on the ratio of IL Jin Electronics (I) Pvt. Ltd. (supra) calculation of the proportionate adjustment and + /-5% is as follows: Table 4: Correct O.P./Sales Computation of the appellant Operating Income of the appellant (sales) A 564,764,554 Operating Cost of the appellant B 569,626,964 Operating Loss of the appellant C=A-B 4,862,410 Operating loss percentage of the appellant D 0.86% Aarm's Length operating profit % as determined by TPO E 1.28% Arm's Length Operating Profit as determined by TPO F=E*A 7,228,968 Shortfall in operating profit of the appellant Computation of adjustment by applying principles enunciated in the IL Jin Ruling G=F-C 12,091,396 Purchase of finished g ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... set register was also not updated at the end of the financial year relevant to the assessment year 2004- 05. The responsibility of the AO to satisfy himself of the claim made by the appellant in the return of income is not encumbered by any restriction. It is the duty of the AO to satisfy himself about the correctness of the entries made in the books of accounts. In order to do that the AO has asked for the original invoices. Even during the appellate proceedings, the appellant has not produced the original invoices. The other alternative of verifying from the fixed asset register did not materialized before the AO. Therefore, I am of the opinion that the appellant failed to discharge its obligations. For the allowability of depreciation, the two necessary conditions are the ownership of the asset and the date on which the asset was 'put to use'. The existence of the asset can be confirmed from the tax audit reports filed in form no. 3CD. However, since the auditors themselves have qualified in the audit report about the fixed asset register, the AO was not satisfied with the tax audit report. In view of the above circumstances, I hold that the disallowance of the expenses ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f warranty claim which were written off on actual basis. In Schedule 13 as placed in paper book page 34, the assessee has debited an amount of Rs. 55,64,448/- on account of warranty, which amounts to 0.985% of the turnover which is equal to almost 1% of turnover and which necessarily represents the provision amount as per the policy of company. Therefore, from the above figures, it is apparent that the assessee has not claimed any amount of warranty expenses on actual basis and, Assessing Officer has not disallowed any amount claimed on actual basis. therefore, following the Tribunal order in assessment year 1999-2000 in the case of assessee itself, ground No.2 of the C.O. is dismissed. 23. In view of above, the revenue's appeal for assessment year 2004-05 is dismissed whereas C.O. of the assessee is partly allowed for statistical purposes. 24. In nutshell, the C.O. of the assessee in assessment year 2003-04 is allowed, whereas Revenue's appeal in assessment year 2003-04 is dismissed as infructuous. Revenue's appeal in assessment year 2004-05 is also dismissed whereas C.O. of the assessee is partly allowed for statistical purposes. 25. Order pronounced in the open court on 29th ..... X X X X Extracts X X X X X X X X Extracts X X X X
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