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Joint Commissioner of Income-tax (LTU) , Bangalore Versus M/s. Hewlett Packard India Sales P. Ltd

2015 (11) TMI 543 - ITAT BANGALORE

Disallowance of expenditure incurred by the assessee on repairs, maintenance and miscellaneous expenditure - CIT(A) scaled disallowance down to 15% - Held that:- As find from the remand report is that AO with regard to the repair charges stated that assessee’s claim appeared to be in order except for the differences mentioned by him at para 3 of the remand report. Same opinion has been given by him with respect to other repairs also. Very same view has been taken by him with regard to the miscel .....

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s above, and the quantum of variation pointed out therein, we are of the opinion that the disallowance of 15% sustained by the CIT (A) was reasonable. - Decided against revenue.

Disallowance of depreciation on assets given by assessee under finance lease - CIT(A) allowed the claim - Held that:- AO himself has stated in the assessment order that though assessee termed the lease as financial lease, the terms of the lease did not provide for transfer of ownership to the lessee automatica .....

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assessee. Assessee was the owner and held the title of the assets. Giving an equipment on lease by itself can be considered as a business. We are of the opinion that by virtue of the decision of Hon’ble Apex Court in I. C. D. S (2013 (1) TMI 344 - SUPREME COURT), assessee having capitalised the assets in its books was eligible for claiming depreciation thereon.- Decided against revenue.

Disallowance of warranty provisioning done by the assessee - CIT(A) allowed the claim - Held that:- .....

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essee was in accordance with the law laid down by the Hon’ble Apex Court in the case of Rotork Controls India P. Ltd (supra), where assessee was also a party. We are of the opinion that this issue requires a fresh look by the AO. We set aside the orders of authorities below and remit the issue back to the file of the AO for consideration in accordance with law declared by the Hon’ble Apex Court in the case of Rotork Controls India P. Ltd (2009 (5) TMI 16 - SUPREME COURT OF INDIA). - Decided in f .....

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f the opinion that CIT (A) was justified giving relief to the assessee. - Decided against revenue. - I.T.A No.1136/Bang/2014, I.T.A No.1134/Bang/2014 - Dated:- 30-10-2015 - SMT. ASHA VIJAYARAGHAVAN, JUDICIAL MEMBER AND SHRI. ABRAHAM P. GEORGE, ACCOUNTANT MEMBER For The Assessee : Shri. K. P. Kumar, Sr. Counsel For The Revenue : Shri. I. P. S. Bindra, CIT-DR-I ORDER PER ABRAHAM P. GEORGE, ACCOUNTANT MEMBER : These are appeals filed by Revenue and Assessee respectively, directed against an order d .....

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f which was as under : Machinery ₹ 40,64,233 Others Rs.2,68,82,282 Rs.3,09,46,505 Assessee has also claimed miscellaneous expenditure of ₹ 1,34,54,426/-. It seems during the course of assessment proceedings, assessee was unable to produce evidence in support of the above claim. He disallowed the above claim of expenditure totalling to ₹ 4,44,00,931/-. Aggrieved, assessee moved in appeal before the CIT (A). 04. Argument of the assessee before the CIT (A) was that it had all supp .....

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nly to the extent of ₹ 1,56,122/-, whereas the relevant entry was for ₹ 2,01,524/-. Similarly for other repairs also, there was an entry for ₹ 2,49,166/-, but the primary documents were available only for ₹ 2,48,142/-. Further, as per the AO, there were a number of bills / invoices which related to the preceding accounting year. CIT (A) after considering the submissions of the assessee and the remand report of the AO held that there were some gaps in evidence produced by .....

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s as per the Ld. DR assessee was unable to discharge the onus resting on it to prove the expenditure. Ld. DR submitted that disallowance made by the AO had to be reinstated. 06. Per contra, Ld. AR supported the orders of CIT (A). 07. We have perused the orders and heard the rival contentions. Remand report furnished by the AO to the CIT (A), is reproduced here under : 2. In this case the assessment was completed under section 143(3) r.w.s 147 on 31.12.2007. The additions/ disallowances made were .....

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verification, following facts emerge. Repair Charges: 3. Plant and Machinery: As mentioned above, entire amount of expenditure under this head amounting to ₹ 40,64,233/- was disallowed. As the number of items totaling to this: amount was substantial, the evidence, was verified on a test check basis. Perusal of the records also showed that in the ledger, ledger, each line entry in turn relates to a bunch of bills/invoices involving several transactions. Therefore the assessee was again aske .....

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6,122/-. During the course of the hearing, it was argued for the assessee that it is due to the efflux of time that it is not possible to furnish copies of all the bills/invoices. Thus to the extent of verification made and subject to the difference as mentioned above, the assessee s claim appears to be in order. 3.1 Othe r Repai r s : The amount di sal lowed unde r thi s head i s ₹ 2,68,82,282/- As in the case of plant and machinery, there was a-small gap in the bills / invoices produced. .....

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d above, the assessee s claim appears to be in order. 3.2 Miscellaneous Expenses : ₹ 1,34,54,426/- was disallowed under this head. The details of Foreign currency tt charges & commission dated 28.06.2001 were called for. Against the amount debited, ₹ 2,02,200/- , the assessee produced copies of bills/invoices amounting to ₹ 1,99,250/- Explanation for the difference was same as in the case of other expenses. Therefore to the extent of verification made and subject to the dif .....

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nched together and the expenditures are booked on a later, convenient date. As the assessee follows mercantile system of accounting, these expenditures should have been booked in the earlier year itself. The assessee argues that this is the practice consistently followed by it. 5. Considering the facts of the case as narrated above, especially in Para 4, the ass6ssee's appeal may kindly be decided on merits. 08. What we find from the remand report is that AO with regard to the repair charges .....

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entries and the supporting bills and found that difference varied between 1 to 23%. He therefore considered that an addition of 15% would be sufficient to address the deficiencies pointed out by the AO. In the face of the remand report of the AO, reproduced by us above, and the quantum of variation pointed out therein, we are of the opinion that the disallowance of 15% sustained by the CIT (A) was reasonable. We do not find any reason to interfere in the order of CIT (A) in this regard. Ground .....

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nt received from lessees were credited to the profit and loss account. Nevertheless while filing its return, assessee relying on CBDT circular No.2, dt.09.02.2001, claimed depreciation. In other words, assessee capitalised the assets given on lease for tax purposes. AO was of the opinion that the lease being financial in nature, depreciation could not be allowed to the assessee. As per the AO, after termination of the lease, ownership of the assets got transferred to the lessee. However, assesse .....

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of the asset was entitled to depreciation only if the asset was used in the business. As per the AO, there were certain features in the agreement which showed that the transactions were only financial lease. According to him, the period of the lease was almost on par with the life of the asset. At the end of the lease period there was an option with the lessee to continue the lease with a nominal rent. Thus according to the AO these were pure financial transactions and assessee could not claim .....

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reciation on assets which were not in its business. 13. Per contra, Ld. AR supported the order of CIT (A). 14. We have perused the orders and heard the rival submissions. AO himself has stated in the assessment order that though assessee termed the lease as financial lease, the terms of the lease did not provide for transfer of ownership to the lessee automatically at the end of the lease. Only reason why the lease was considered to be financial in nature was that the lease period was more or le .....

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s. We are of the opinion that by virtue of the decision of Hon ble Apex Court in I. C. D. S (supra), assessee having capitalised the assets in ITA.1136 & 1134/Bang/2014 Page - 10 its books was eligible for claiming depreciation thereon. We do not find any reason to interfere. Ground.2 of the Revenue stands dismissed. 15. Vide its ground 3, grievance is that CIT (A) directed the AO to allow the warranty provisioning done by the assessee. 16. Facts apropos are that assessee had debited a sum o .....

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nsidering the actual warranty expenses incurred by it. AO was however not impressed. According to him, there was a sudden jump in the warranty provisioning from 0.85 crores to 23.75 crores. For this, assessee stated that it was following a new methodology for computing warranty costs. As per the assessee, earlier, only standard cost of parts consumed were considered for ascertaining the warranty, whereas for the impugned assessment year it had also considered other related costs like customs dut .....

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the nature of contingent liability. Disallowance of ₹ 23,72,84,914/- was made. 17. Aggrieved, assessee moved in appeal before the CIT (A). Argument of the assessee before the CIT (A) was that by virtue of judgment of Hon ble Apex Court in the case of Rotork Controls India P. Ltd [314 ITR 62], claim had to be allowed. As per the assessee, it was also a party in the above case before the Hon ble Apex Court and was tagged along with Rotork Controls India P. Ltd . CIT (A) was of the opinion t .....

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ic basis. Though the assessee was reiterating that it was done on a scientific basis, it had never furnished the particulars before the AO. Therefore according to him the matter required a fresh look by the AO. 19. Per contra, Ld. AR strongly supporting the order of CIT (A) submitted that during the course of assessment proceedings, assessee had given a detailed work out of the provisioning done. According to him, the cost of spare parts and cost of labour involved in the warranty was scientific .....

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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 are 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) .....

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ing detected in some of such items leads to a present obligation which results in an enterprise having no alternative to settling that obligation. In the present case, the appellant has been manufacturing and selling valve actuators. They are in the business from the assessment years 1983-84 onwards. Valve actuators are sophisticated goods. Over the years the appellant has been manufacturing valve actuators in a large numbers. The statistical data indicates that every year some of these manufact .....

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own as obligating events. In the present case, therefore, the warranty provision needs to be recognized because the appellant is an enterprise having a present obligation as a result of past events resulting in an outflow of resources. Lastly, a reliable estimate can be made of the amount of the obligation. In short, all the three conditions for recognition of a provision are satisfied in this case. 21. Three important aspects which are to be satisfied for a scientific warranty provisioning are .....

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at there was change in methodology in computing the warranty cost. Relevant part of this letter is reproduced here under : 5.4 Further, there has been a change in the methodology of computing the warranty cost, which has been explained below. In the earlier years, warranty cost ratio was computed only on the basis of the standard cost of the spare parts consumed. In the current year, the cost component has been enlarged to include other elements of cost such as warranty related labour cost, cust .....

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graph 5.4 above) b) Statistical /Scientific method of computation, as explained in paragraph 5.2 above For the reasons stated in our earlier submissions, and relying on the specific judicial precedence on this issue, we wish to reiterate that the provision for warranty expenses computed, based on statistical information /scientific basis indicated in the earlier paragraphs, should be allowed as a deductible expenditure while computing the profits and gains derived by the assessee from its busine .....

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sue back to the file of the AO for consideration in accordance with law declared by the Hon ble Apex Court in the case of Rotork Controls India P. Ltd (supra). Ground 3 of the Revenue is treated as allowed for statistical purpose. 24. Vide its ground 4, grievance of the Revenue is that CIT (A) held assessee to be not liable for default in depositing the tax deducted at source. 25. Facts apropos are that AO from the audit report in Form 3CD filed by the assessee noted that tax deducted by the ass .....

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e on the payments made to nonresidents and made a disallowance of ₹ 5,26,17,446/-. In its appeal before the CIT (A) argument of the assessee was that Section 40(a)(i) was amended w.e.f.01.04.2004. As per the assessee, prior to that date the requirement for both deduction and deposit of tax deducted was not there. According to the assessee, prior to 01.04.2004 it was sufficient if the deduction was effected before the due date. CIT (A) appreciated these contentions. Relying on the judgment .....

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mount on which such tax was deducted, while computing its income under the head profit and gains of income or profession. 27. Ld. AR supported the order of CIT (A). 28. We have perused the orders and heard the rival contentions. The impugned assessment year being 2002-03, the law as it stood prior to the substitution of the said sub-section through Finance (No.2) Act, 2004 applied. The said provision as it applied at the relevant point of time read as under : (a) in the case of any assessee- (i) .....

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