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Asstt. Commissioner of Income Tax Circle-16 (1) , New Delhi Versus M/s Timex Watches Ltd. and Vica-Versa

2016 (7) TMI 999 - ITAT DELHI

Addition on account of provision of liability regarding exchange rate fluctuation - Held that:- An identical issue has been decided in the case of CIT Vs Woodward Governor India P. Ltd. (2009 (4) TMI 4 - SUPREME COURT ) wherein held as “Loss” suffered by the assessee on account of fluctuation in the rate of foreign exchange as on the date of the balance-sheet is an item of expenditure under section 37(1) of the Income-tax Act, 1961. - Decided in favour of assessee - Addition on account of a .....

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in favour of assessee - Percentage of adjustment to international transaction - Held that:- In the present case, it is an admitted fact that the ld. CIT(A) directed the AO to make the proportionate adjustment of the expenses to the extent it is attributable to the international transactions. No valid ground to interfere with the findings of the ld. CIT(A). - Disallowance on account of excess claim of depreciation on computer peripherals - Held that:- Computer accessories and peripheral .....

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hat the ld. CIT(A) allowed the claim of the expenses on this basis that the assessee was following this accounting policy, consistently and claiming the expenses by creating the provisions for such expenses. In our opinion, this issue requires verification at the level of the AO, he should verify as to whether the expenses pertained to this year or not and that the claim of the assessee was allowed in earlier and subsequent year on similar basis. Accordingly, this issue is set aside to the file .....

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t years 2005-06 & 2006-07 are directed against the separate orders each dated 12.11.2011 of the ld. CIT(A)-XX, New Delhi. 2. Since the issues involved are common and the appeals were heard together so these are being disposed off by this consolidated order for the sake of convenience and brevity. 3. At the first instance we will take up appeal of the department in ITA No. 2769/Del/2012 for the assessment year 2004-05. Following grounds have been raised in this appeal: 1. "On the facts a .....

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lowing a relief of ₹ 77,90.000/- on this account." 2. "On the facts and in the circumstances of the case and in law the learned CIT(A) erred in deleting the addition of ₹ 8,25,000/- on account of advance written off without appreciating the fact that this was on account of amount fraudulently withdrawn by someone and the ratio of the case decision of M/s Badri Das Daga Vs. CIT (supra) squarely applicable to facts of the case." 3. ''On the facts and in the circu .....

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case the Ld. CIT(A) was not justified in directing proportionate adjustment to the international transaction as transactions other than international transaction are at arms' length. 4. "The appellant craves leave for reserving the right to amend, modify, alter add or forego any ground(s) of appeal at any time before or during the hearing of appeal." 4. Vide Ground Nos. 1 & 1.1, the grievance of the department relates to the deletion of addition of ₹ 77,90,000/- made by t .....

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es in respect of raw material purchased from them. The AO asked the assessee to explain the allowability of this provision. The assessee submitted that it was importing watches raw material and components from various parties on which the price was agreed in foreign currency and that at the end of the financial year, the assessee revalued its outstanding towards overseas supplier in foreign currency balance according to the rate of the foreign currency and correspondingly the difference was debi .....

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be Co. Ltd. Vs CIT 254 ITR 570 (Del) Atlas Cycle Ind. Ltd. Vs CIT 270 ITR 108 (P & H) CIT VS Paper Product Ltd. 271 ITR 472 (Del) CIT Vs Oil India Co. Ltd. 137 ITR 156 (Cal) CIT Vs International Combustion (I) Pvt. Ltd. 137 ITR (Cal) CIT Vs ES Dempo & Co. Ltd. 206 ITR 293 (Bom) State Bank of Travancore Vs CIT, Kerala 158 ITR 102 (SC) Telemachanique & Control India Ltd. Vs CIT 60 ITD 483 (ITAT, Del) 6. The AO, however, did not find merit in the submissions of the assessee and made the .....

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ubmitted that the allowability of foreign exchange fluctuation loss was no more res-integra and the issue was covered by the judgment of the Hon ble Apex Court in the case of CIT Vs Woodward Governor India P. Ltd. reported at 312 ITR 254. It was also stated that in the instant year there was foreign exchange fluctuation gain of ₹ 1,02,82,000/- which had been brought to tax as income and thus there was an inconsistent stand of the AO. 8. The ld. CIT(A) after considering the submissions of t .....

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utstanding balances. The underlying liability was on account of revenue transaction, income/loss on account of settlement of creditors/debtors. Therefore, the forex loss also takes the colour of revenue loss. The issue has been settled by the judgment of the Hon ble Supreme Court in the case of Woodward Governor (2009) 312 ITR 254 (SC). The case of the assessee squarely falls within the ambit of the decision of the Hon ble Supreme Court. In view of this, the AO is directed to delete the addition .....

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epartment has accepted the claim of the assessee for the assessment years 2000-01, 2002-03 and 2005-06. Therefore, on the principle of consistency also the disallowance made by the AO was not justified. The reliance was placed on the following case laws: CIT Vs Excel Industries Ltd. 358 ITR 295 (SC) Radha Saomi Satsang Vs CIT 193 ITR 321 (SC) CIT Vs J. K. Charitable Trust 308 ITR 161 (SC) 11. We have considered the submissions of both the parties and carefully gone through the material available .....

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l appeal in assessee s own case for the assessment year 1998-99 in ITA No. 3561/Del/2003 wherein vide order dated 09.12.2005 the relevant findings have been given as under: 14. The ground No. 4 of the department is related to the loss of ₹ 16,25,000/- due to exchange rates fluctuations. Assessing Officer observed that the said amount was debited to profit and loss account on account of fluctuation and made the addition. But CIT(A) has deleted the said amount after examining the bank certif .....

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at that date a gain of ₹ 43 lakhs accrued to the assessee and the same was offered to tax and actually taxed by the department. 16. By considering the totality of the facts and circumstances of the case we agree with the order of the CIT(A) for the reason that the liability was incurred on account of raw material components etc. and hence it was revenue loss. Since the additional liability had arisen during the current year, the loss incurred by the assessee was "fate accompli'&q .....

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related to this issue in brief are that the AO during the course of assessment proceedings noticed that the assessee had written off a sum of ₹ 8,25,000/- towards the amount fraudulently withdrawn by someone and subsequently investigations by the police and assessees own efforts, could not yield any result. According to the AO the aforesaid fact remained unsubstantiated and was found to be of capital in nature. He, therefore, made the addition of ₹ 8,25,000/-. 16. Being aggrieved the .....

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wing case laws: Mohan Meakin Ltd. Vs CIT 59 DTR 401 (Del) CIT Vs Mysore Sugar Co. Ltd. 46 ITR 649 (SC) 17. It was stated before the ld. CIT(A) that the amount had been fraudulently withdrawn by anonymous person, the assessee thought prudent to write off the loss though suit had been filed for recovery of the same and that the loss was suffered by the assessee of ₹ 8,25,000/- in regular course of business be allowed as a deduction u/s 37(1) of the Act and in the alternative, it was to be al .....

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thdrawn from the accounts of the assessee who made out efforts to money back by filing the suit against the bank and that the account from which the money was withdrawn fraudulently was a Current Account used by the assessee for carrying out regular business activities. Therefore, it was an incidental event which had happened in the course of business of the assessee and was an allowable expenditure while computing the income of the assessee u/s 37 of the Act. 19. Being aggrieved the department .....

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; 8,25,000/- was fraudulently withdrawn from the assessee s bank account with Citi Bank by forging the signature of the assessee who had filed a suit against the bank, but no progress had yet been made. Therefore, it is clear that the incidental events happened in the regular course of business of the assessee, so it was an allowable expenditure u/s 37 of the Act and the ld. CIT(A) rightly held so. We do not see any infirmity in the findings of the ld. CIT(A) on this issue. 22. The next issue vi .....

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Ltd. withdrew from the joint venture and was replaced by Titan Watches Ltd. and the name of Company was then changed to Timex Watches Ltd. in 1991. During 1999-2000, Titan also withdrew from the joint venture and sold its stake to TWN and name of the Company was further changed to Timex Group India Ltd. The assessee is engaged in the business of manufacturing, marketing and selling of wristwatches and their spare parts and also provides after sales services of those products. The assessee as a .....

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6,422,068 2 Sale of components 1,796,932 3 Purchase of finished watches 24,175,721 4 Sale of finished watches 2,953,091 5 Royalty 964,196 6 Service Income 7,333,655 Total 63,645,663 24. The assessee had used Transactional Net Margin Method (TNMM) as the most appropriate method and OP/Sales was chosen as Profit Level Indicator (PLI). The assessee clubbed the international transaction except for the service income and benchmarked together. The assessee had carved out the manufacturing segment from .....

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puted the income of the assessee by making an upward adjustment of ₹ 3,10,96,895/- by observing at page nos. 17 & 18 as under: Thus, it could be seen that while applying TNMM the net profit margin of the tested party has to be computed as it is. Similarly, under clause (ii) the net profit margins of the comparables are also computed. Further, clause (iii) permits adjustments to the net profit margins computed in accordance with clause (ii) i.e. the margins of the comparables to take in .....

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require adjustment to the net operating margins, the adjustment invariably is to be made to the comparables. Therefore, a close examination of the functions performed by comparables is a must in this regard. Any functional difference between the comparables and the tested party which could have a bearing on the net profit margin and adjustment needs to be made to account for the difference has not been demonstrated by the assessee or by the tax consulting firm who has conducted the TP study. Wi .....

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E segment as computed by the assessee (Rs. 23,36,859) Less: Unabsorbed overheads due to under uti lization Rs.1,81,53,977 Less: Extra depr eciation on account of under utilization Rs.55,79,736 Net Loss under the AE segment (Rs.2,60,70,572) Total Income under the AE segment Rs.13,92,33,342 NCP Margin (-) 18.72% Computation of Arm's length price of international transaction Total Income ₹ 13,92,33,342 NCP Margin (-) 18.72% Arm's length NCP 3.61% Net Profit at Arm's length margin .....

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ccepted three comparables selected by the assessee. However, objected to the calculation made by the assessee who had taken out unabsorbed overheads and extra depreciation on account of unutilized machines while calculating the margin of manufacturing segment involving transaction with the AE. The TPO did not considered one of the comparable, namely, Artfield Group Ltd. because the data during the TP study was available only for six months and subsequently, the full year data was available which .....

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er submitted before the TPO who had already considered the contention of the assessee in this regard and had computed/advised the addition. Therefore, the contention/objection of the assessee were rejected. The AO accordingly made the addition of ₹ 3,10,96,895/- being an adjustment on account of Arm s Length Price of international transaction. 27. Being aggrieved the assessee carried the matter to the ld. CIT(A) and submitted as under: "Without prejudice to the above contention of the .....

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ble and submitted the same vide submission dated 8 November 2006. However, the TPO has erred on two points: • The TPO has not considered this fact that the operating margin of 1.41% as mentioned in the TP Report was arrived at after considering the financial data for 6 months ended 30 September 2003 for the said comparable since at the time of preparing the TP Report, the data for only 6 months was available. • However, at the request of the TPO, an updation of the operating margins of .....

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on done for the Artfield Group, please find attached as Annexure 22 (pages 229- 232), the back-up computation and a copy of the financial data as available in the OneSource.com database." 28. The ld. CIT(A) after considering the submissions of the assessee observed that the TPO had no objection in accepting the comparable Artfield Group. Therefore, it was only reasonable to take the full financial year data of the accepted comparables for benchmarking purpose. The ld. CIT(A), therefore, hel .....

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he ld. CIT(A) observed that the single year data has to be considered unless the assessee demonstrated that prior year s data had an influence on the setting of transfer price of international transaction either at the time of setting them or by way of adjusting them subsequent to entering into the international transaction to align them to the arm s length price. The reliance was placed on the following case laws: AZTEC Software 107 ITD (AT) 141 (SB) (Bang) Mentor Graphic 109 ITD 101 (Del) Hone .....

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tion in the proportion of 5.63/13.92 which came up 40.44% by observing as under: The appellant placed reliance on the rulings pronounced by the Hon'ble Delhi Bench of the ITAT in the case of IL Jin Electronics (I) Pvt. Ltd. [2010 36 SOT 227], and by the Hon ble Bangalore Bench in the case of Genisys Integrating Systems (India) Pvt. Ltd. (IT 1231 / Bang-2010). In the said ruling the Hon ble Delhi Bench of the ITAT has held that the adjustment made to the transfer prices of the taxpayer should .....

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ch comes to 40.44%. TPO/ AO is directed to restrict the adjustment to the international transaction only to this proportion. 31. Now the department is in appeal. The ld. DR reiterated the observations made by the TPO and the AO and strongly supported the assessment order passed by the AO. 32. In his rival submissions the ld. Counsel for the assessee reiterated the submission made before the authorities below and strongly supported the impugned order passed by the ld. CIT(A). It was further submi .....

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ics (I) (P) Ltd. Vs ACIT in ITA No. 438/Del/2008 order dated 06.11.2009 (ITAT Delhi) 33. We have considered the submissions of both the parties and carefully gone through the material available on the record. In the present case, it is an admitted fact that the ld. CIT(A) directed the AO to make the proportionate adjustment of the expenses to the extent it is attributable to the international transactions. 34. On a similar issue the Hon ble Jurisdictional High Court in the case of CIT Vs Keihin .....

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ar 2003-04 relating to the Assessment year 2004-05, the Assessee had reported an operating income of ₹ 72,24,22,000/-. The total expenses for the said period amounted to ₹ 68,00,88,000/-. Admittedly, the international transactions in question amounted to ₹ 15,90,66,935/- which were only 23.38% in value of the total expenses. The TPO had determined the PLI (Operating Profit over Total Cost) of comparable cases at 8.29% against 6.22% as declared by the Assessee. Applying the PLI .....

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attributed to the international transactions in question. The same was accepted by the CIT(A) as well as the Tribunal. We do not find any infirmity with their decision. 35. In the present case also the ld. CIT(A) directed the AO to make the adjustment of the expenses in the proportion which the international transaction had to the total turnover. Therefore, the view taken by the ld. CIT(A) is inconsonance with the ratio laid down by the Hon ble Jurisdictional High Court. We, therefore, do not s .....

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n ITA No. 258/Del/2013 for the assessment year 2005- 06, the grounds raised by the department read as under: 1. "On the facts and in the circumstances of the case and in law the learned CIT(A) erred in deleting the addition of ₹ 3,16,43,179/- made by the AO on account of Arms Length Price." 2. "On the facts and in the circumstances of the case and in law the learned CIT(A) erred in deleting the addition of ₹ 5,66,270/- made by the AO on account of advances written off. .....

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aves for reserving the right to amend, modify, alter, add or forego any ground(s) of appeal at any time before or during the hearing of appeal". 39. As regards to the Ground No. 1, the common contention of both the parties was that the issue is similar to the Ground Nos. 3 to 3.2 in ITA No. 2769/Del/2012 for the assessment year 2004-05. Therefore, our findings given in the former part of this order shall apply mutatis mutandis. 40. Regarding Ground No. 2 relating to advances written off. It .....

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s claim of depreciation on computer peripherals. 42. Facts related to this issue in brief are that the AO during the course of assessment proceedings noticed that the assessee had included Video Conferencing Machine, Inverter, Ethernet, Switches, Routers, Printer, UPS & Scanner in block of computers instead of Plant & Machinery and claimed the depreciation @ 60% instead of 15%. He made the disallowance of ₹ 5,65,648/- by making the following calculation and observations: "Name .....

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of ₹ 5,65,648/- is being disallowed as being excessive depreciation debited to the P/L account. (Addition of ₹ 5,65,648) 43. Being aggrieved the assessee carried the matter to the ld. CIT(A) and submitted as under: In the instant case, the depreciation has been claimed on computer, printers, scanners and UPS as would be evident from the details placed in the Paper Book. It is thus submitted that, in light of the above evidences, it be held that the assessee is entitled to depreciati .....

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oration of India Limited (2009-TIOL-195-ITAT-DEL) -Delhi ITAT Expeditors International India (P) Ltd. vs. Addl. CIT (118 TTJ 652) (Delhi Tribunal) ACIT, Circle 3(1), New Delhi vs. Cincom System India Pvt. Ltd. (Delhi Tribunal in ITA No. 1534/Del/2008) ACIT, Circle 3(1), New Delhi vs. Continental Carriers Pvt. Ltd. (Delhi Tribunal in ITA No. 2137/Del/2008) ITO vs. Samiran Majumdar (280ITR (AT) 74 Kolkata Tribunal)" 45. The ld. CIT(A) after considering the submissions of the assessee deleted .....

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er the head computers. The AO is directed to allow the depreciation accordingly. 46. Now the department is in appeal. The ld. DR although supported the order of the AO but could not controvert the findings given by the ld. CIT(A). 47. In his rival submissions the ld. Counsel for the assessee reiterated the submissions made before the authorities below and strongly supported the impugned order. 48. We have considered the submissions of both the parties and carefully gone through the material avai .....

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of 60 per cent. 49. Since the ld. CIT(A) has decided this issue by following the judgment of the Hon ble Jurisdictional High Court. We, therefore, do not see any merit in this ground of the departmental appeal. 50. The last issue vide Ground No. 4 in this appeal relates to the deletion of addition of ₹ 1,22,952/- made by the AO on account unascertained liability. 51. The facts related to this issue in brief are that the assessee had debited ₹ 6,00,000/- towards provision for legal &a .....

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sion reversed and, actual expenditure is debited/credited by the appellant company since the liability is in respect of difference crystallized in the instant year. It is also submitted that, this method has been accepted by the revenue consistently. It is thus submitted that, applying the rules of consistency too no disallowance is warranted. 53. The ld. CIT(A) after considering the submissions of the assessee deleted the addition by observing in para 7.2 of the impugned order as under: 7.2 The .....

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tently followed by the assessee, there is no justification to interfere with the accounting policy. The AO is directed to delete the addition made in this regard. 54. Now the department is in appeal. The ld. DR submitted that the assessee did not furnish the relevant bills for incurring the expenses. Therefore, the AO was justified in making the disallowance. 55. In his rival submissions the ld. Counsel for the assessee reiterated the submission made before the authorities below and supported th .....

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