TMI Blog2011 (10) TMI 666X X X X Extracts X X X X X X X X Extracts X X X X ..... lying with the appellant. That the lessor was claiming depreciation cannot be the ultimate test for ownership of the lessor. On the other hand the CIT(A) wrongly held that the ownership did not pass on to the lessee and thus the financial charges or lease rent should be allowed. This is wrongly found as the lessor might have sold the assets to the lessee or the user of the vehicle. Disallowance of provision for replacement guarantee - Held that:- The provisions are based on the previous years data and based on the sales and AO himself has allowed the provisions made by assessee in Assessement year 2004-05 while doing the assessment u/s 143 itself we are of the view that assessee is entitled to deduction of provisions. Disallowance of advances written off - Held that:- As in the interest of justice we consider it fit to restore this issue to the file of AO for fresh verification and decide the same as per law after giving a reasonable opportunity of being heard to assessee. - ITA No 1075/Kol/2009, ITA No.948/Kol/2009 - - - Dated:- 11-10-2011 - Shri B.R.Mittal, Judicial Member. and Shri C.D.Rao, Accountant Member For the Appellant: Shri B.B.Panigrahi,CIT For the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lines as in respect of the export of goods of CE division discussed earlier. Here, the contribution margin on exports was found to 27.5% as against overall margin of 33% in this unit. The transfer Pricing Officer applied 33% CM to exports, resulting in adjustment of ₹ 6,99,032/-. Considering that the volume of business here is insignificant compared to the overall business of the assessee and differential CM is also not very wide (as distinguished from the differential CM seen in support of goods from CE division), it is held that the adjustment should better be ignored. The purpose of transfer pricing legislation is not to make adjustments on the basis of mathematical formula but to neutralize the effect of shifting of profits from one jurisdiction to another in the course of related party transactions. In this case, it is also seen that the ETG unit at Kolkata was closed by the assessee and the assets thereof were being written off. Hence, the submission that the unsold stock was sold overseas in a situation of distress sale could be accepted without hair-splitting. Considering these facts and circumstances and also the smallness of amount involved, the addition is deleted. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng but fails to explain why, if all these products were similar in nature and were complementary to each other, the CM percentage in respect of monitors is only 3.40% while that in respect of other products ranges form 21.35% to 23.56% within the imported segment itself. Even within the locally manufactured segment, the CM percentage in respect of CTV and Audio was 14.95 and 25.94 respectively. As observed by the Assessing Officer, even though monitors and the rest of the products in this division are classified together by the Customs Authorities, they cater to different areas of consumer needs. Even if the assessee s contention that they formed a common group be accepted, it is difficult to accept the exceptionally low CM on monitors as compared to the other products within the same segment. The assessee adopted the average CM percentage on imported items (19.92%) and compared it with the average CM percentage with the locally manufactured items (19.97%) and concluded that its imports were priced at arms length. The Transfer Pricing Officer considered monitors separately and, since monitors were not manufactured locally by the assessee, he identified the CM of unrelated parties f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ts profit with the AE and, to that extent, some reduction in price may be justified. But, on the other hand, there is also a possibility that the price of these products in the importing country was substantially higher than the price in India and that the AE was in a position to earn its normal profit even after the assessee had sold the products to it after charging its normal profit. Such analysis is not available on record. In this situation, it is felt that there is no justification to interfere with the finding of the TPO/Assessing Officer. Consequently, the addition is confirmed. 4. At the time of hearing before us, the ld. Counsel appearing on behalf of the assessee has supported the orders of the ld. CIT(A) as far as deletion of export of ETG and payment of IT charges but however, the ld. Counsel for the assessee after discussing various criteria for computation of arms length price in respect of transactions with associated enterprises, he finally concluded that the Transfer Pricing Officer has not given sufficient opportunity to explain the case of the assessee. 5. The ld. DR appearing on behalf of the Revenue contended that the action of the ld. CIT(A) in deletin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... erein. Hence, this ground is rejected. 10. At the time of hearing before us the ld. Counsel appearing on behalf of the assessee by narrating the provisions of section 92C(2) of the IT Act and by placing reliance on the following case laws : a) Development Consultants Pvt.Ltd. vs DCIT, Circle-11, Kolkata (2008) 115 TTJ 577 b) Tata Tea Limited vs ACIT, Circle-4, Kolkata c) Sony India (P) Ltd vs DCIT (2008) 114 ITD 448 (Delhi) d) Skoda Auto India Pvt Ltd. Vs ACIT, Circle-1, Aurangabad (ITAT,Pune)122 TTJ 699. He contended that AO should have given plus or minus 5% adjustment as per section 92C(2) of the IT Act. 11. On the other hand, the ld. DR has submitted that since in this case the provision of Section 92C(2) of the IT Act will not be applicable since the TPO has adopted the only one method i.e. most appropriate method and the provision of Section 92C(2) of the IT Act is applicable when there are more than one price adopted by the TPO. In view of this no adjustment as required u/s 92C(2) of the IT Act is required. Therefore he requested to upheld the action of the ld. CIT(A). 12. After hearing the rival submissions and on careful consideration of the materi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ; 70 lakhs by the assessee to Leaseplan India Ltd as the same was not revenue expenditure according to him. He failed to take his own finding to the logical conclusion because, if the assessee is the real owners of the cars, depreciation has to be allowed to it. In addition, the interest component of payment to Leaseplan India Ltd would also have to be allowed. Hence, the decision of the officer, as it is, can not be sustained. If the decision of the Assessing Officer is taken to its logical conclusion, there will be another related consequence to that. As per certificate submitted by the assessee from Leaseplan India Ltd the latter is claiming and getting depreciation in respect of the same vehicles. It is obvious that two persons cannot be granted depreciation allowance simultaneously in respect of the same asset at the same time. Hence, if the logic of the Assessing Officer is taken forward it will lead to consequences affecting the assessment of Leaseplan India Ltd as well. In the considered opinion of the undersigned, the facts on record are not sufficient to justify an adverse decision of such far-reaching consequences. Considering the totality of the facts and circumstances, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ned the Form 35 is signed and accordingly a No - objection is given by Lessor that they have no objection is deleting their name and transfering the name to a new owner along with insurance cover. (Page 148 of papaer book).At the time of termination of agreement, the Lessor issues Form 35 categorically declaring that agreement of Hire Purchase/Lease/Hypothecation entered into between us has been terminated. We, therefore, request that the note endorsed in the certificate of Registration Vehicle No . in respect of the said agreement between us, be cancelled . ( refer pg 149 of the paper book).The word terminated indicates that the Lessee has discharged all the obligations mentioned in Lease agreement which includes return of car by the appellant and payment of all the dues. Further, the Lessor issues NOC in favour of RTO agreeing for removal of their name in the Registration Certificate and transfer of same in the name of new owner. 16.2. In the Event of Default in respect of lease rental by lessee, the main Remedies lies with the lessor is to take the leased asset back from the lessee. It clearly indicates that the ownership of the asset is with lessor only. (Page 144 145 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r 2/2001 dated 09-02-2001 has clarified that AS-19 which requires capitalization of the asset by the lessees in financial lease transaction, by itself, will have no implication on the allowance of depreciation on assets under the provisions of the Income-tax Act. The ownership of the asset is required to be determined by the terms of contract between the lessor and the lessee. The A/R submitted that in the instant case it is the lessor who had remained the owner and even at the end the vehicles are returned to him by the appellant company. 16.5. On the basis of above, the A/R submitted before the Bench that the CIT(A) has rightly directed the AO in deleting the disallowance and allowing the lease rental of ₹ 7,000,000/- and the same may be upheld. He further pointed out that this is the only year in which such issue arose as in the subsequent years as late as AY 2006-07 AY 2007-08 the issue was consistently allowed by the AO. 17. After hearing the rival submissions and on perusal of the page numbers of the paper book referred by assessee as well as AO we are of the view that the action of the Assessing Officer is quite justifiable in the facts and circumstances of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f free replacement during the warranty period. Therefore, he finally contended that after the decision of Hon ble Apex Court in the case or Rotork Controls (India) Pvt. Limited vs CIT 180 Taxman 422 (SC) wherein it is held that provision for warranty is allowable deduction provided it is ascertained on a scientific basis and with reasonable accuracy. Therefore he requested to allow the claim of assessee. 21. On the other hand, the ld. DR appearing on behalf of the Revenue contended that in this case assessee has not proved how the provision has been calculated and whether this is scientifically proved or not. However, AO has already allowed the actual amount of expenditure incurred against the warranty. Therefore, no provision is to be allowed. 22. After hearing the rival submissions and on careful perusal of materials available on record, keeping in view of the statement filed by assessee and on careful perusal of the provisions created as well as the expenditure incurred on account of warranty, we are of the view that the provisions are based on the previous years data and based on the sales and AO himself has allowed the provisions made by assessee in Assessement year 2004 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... wholly and exclusively for the purpose of the business is allowable as a deduction. But the Section applies only to expenditure not being in the nature of capital expenditure . As mentioned above, trade advances cannot be called revenue expenditure and, hence, allowance of the same is specifically excluded from the purview of Section 37 of the Income-tax Act also. As mentioned by the Hon ble Supreme Court in the case of Badridas Daga referred to above, a loss which arises directly from the carrying on the business and is incidental to it should be allowed as deduction provided that there is no provision against it, expressed or implied, in the Act. As mentioned above, the section under which the deduction could be considered contains an express provision prohibiting deduction of capital expenditure. Hence, it is held that the deduction in respect of the amount of ₹ 52,67,000/- representing advances written off, cannot be allowed as a deduction. Consequently the addition is reduced to ₹ 52,67,000/-. 25.2. Further aggrieved by this the assessee is in appeal before us. 26. At the time of hearing against the above allegations the ld. AR appearing on behalf of th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... had given by an appellant in the normal course and for the purpose of its business, other than on capital account, did not squarely fall under section 10(2)(xi) of the Indian Income Tax Act, 1922 [corresponding to section 36(1)(vii) of the Act of 1961] or for that matter any of the enumerated classes of allowances, the said amount would nonetheless be allowed as deduction while computing the business profits. 26.1. The AR further submitted that it is not the case of the appellant that the sums written off amounting to ₹ 52.67 lakhs are to be allowed as deductions under section 36(1)(vii) read with section 36(2) of the Act. Undisputedly, one of the conditions precedent for the allowability of deduction under section 36(1)(vii) of the Act, read with section 36(2) of the Act, with respect to bad debt written off, is that the debt in question must have been previously assessed to tax or the same must have been advanced by an appellant in the course of its usual money lending business. The aforesaid conditions are admittedly not satisfied in the instant case of the appellant. There is no dispute regarding the fact that the said advances given by the appellant to various suppli ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the CIT(A) is absolutely baseless that such an amount is capital in nature. He submitted that the CIT(A) has merely made a presumption that an advance with respect to normal business is in the nature of capital. In view of the above submissions he requested the Bench to delete the disallowance. 27. The ld.DR on behalf of the Revenue objected to the submissions and held that the expenses were never offered to tax earlier and hence cannot be allowed. However if such advances are properly made against revenue items it cannot be termed as capital receipts. The Ld DR submitted that he relied on the decision of the CIT(A) who had categorically held that it was not for trade. The appellant could not also submit any documents which could prove that such advances were from transaction of trading items and the same can only be restored to the file of the AO if such documents are submitted. Otherwise, the additions confirmed by the CIT(A) may be upheld. 28. After hearing the rival submissions and keeping in view of the arguments made by the ld. Counsel on behalf of assessee, we are of the view that these submissions require fresh verification. Therefore, in the interest of justice we co ..... X X X X Extracts X X X X X X X X Extracts X X X X
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