9911796707
TMI Blog2016 (10) TMI 175X X X X Extracts X X X X X X X X Extracts X X X X ..... e assessment was completed u/s 143(3) at an assessed income of Rs. 75,43,775/-. Thereafter, ld. CIT passed an order dated 17.3.2009 u/s 263 setting aside the assessment on the limited issue for carrying out necessary verification and cross inquiry to determine true nature, correctness and allowability of the following issues: "i) The assessee had made a payment for AMC of Rs. 255.58 lacs on which no tax was deducted at source. Since these payments were made to the non residents, tax was required to be deducted at source on the same. ii) The assessee has claimed and was wrongly allowed expenditure of Rs. 1,54,02,000/- towards provision for warranty. Since this was an unascertained liability it should have been disallowed and added to the income of the assessee. 4.2. The AO, after considering the assesse's submissions, made following disallowances: a. Disallowance on account of non-deduction of TDS on AMC contract Rs. 2,55,57,990/- b. Addition on account of provision for warrantee Rs. 1,54,02,000/-. 4.3. Apropos non-deduction of TDS in respect of AMC payments, ld. CIT(A) held that the same was not taxable in the hands of non-resident payee, because that was business income ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... payment for AMC contract comprised payment for warranty charges and extended warranty charges, which are in the nature of repair/ replacement of equipments. Under the contract, equipments are sent outside India for any repair/ replacement and are reimported in India. 5.4. After considering the aforementioned submissions of assessee, the AO observed that in view of specific provisions laid down u/s 40(a)(i) of the I.T. Act, 1961, deduction could not be allowed as the payment had been made without TDS. He, accordingly, made a disallowance of Rs. 2,55,57,990/-. 5.5. Before ld. CIT(A) the assessee, inter alia, submitted as under: (a) AO has not analyzed the taxability of AMC payments under the provisions of the Act and Double Taxation Avoidance Agreements (hereinafter referred to as "DTAA"), entered between India and respective foreign country and summarily disallowed the entire AMC payments by merely stating that since these payments were made to the non-residents, tax was required to be deducted at source on the same. (b) The assessee referred to the agreement with Gillette Israel . Ld. CIT(A) in para 9 has noted the various services provided to assessee and has pointed out in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... DCIT (2004) 91 ITD 133 (Del.), wherein it was, inter alia, held that overall repairs involved routine maintenance repairs and, therefore, it could not be said that foreign company rendered any managerial, technical or consultancy service to the assessee. The assessee also made detailed submissions in regard to taxability under the provisions of relevant tax treaty/ Double Tax Avoidance Act and pointed out that since these services were in the nature of routine repairs and maintenance and did not make available any technical knowledge, skill, experience, know how etc. to the assessee or its employees, therefore, the services did not come within the purview of the technical services envisaged under Article 13 of the DTAA read with protocol thereof, meaning thereby that the payments towards any such services in the form of AMC were not taxable as FTS as defined under paragraph 3 of Article 13 of the DTAA between India and Israel and, therefore, there was no liability to with-hold tax u/s 195 of the Act. Similarly, submissions were made in respect of other contracts, which have been noted by ld. CIT(A) in detail in his order. 5.9. After considering all these submissions ld. CIT(A) co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... IF Tel Aviv), provided that if Gilat determines that such equipment is not defective, Buyer shall pay Gilat all costs of handling, transportation and labor at Gilat's then prevailing rates. 6.1. By referring to these covenants ld. CIT(DR) submitted that delivery is at CIF Mumbai. He, therefore, submitted that the amounts were taxable in India. 7. Ld. Sr. counsel for the assessee relied on the decision of CIT(A) and submitted that in view of the decision in the case of Gee Technologies the provisions of section 195 were not attracted. 8. We have considered rival submissions and have perused the record of the case. The extended maintenance agreement has been entered into with Gilat Satellite Networks Ltd., a Israel company, with the assessee for warranty granted to assessee for the equipment supplied by Gilat Satellite Networks Ltd. The second recital of the agreement reads as under: "Whereas, according to the terms and conditions of purchase thereof, the warrantee granted to buyer (assessee) for such equipment expired and buyer (assessee) has the right to purchase annual maintenance support services on the expiration thereof". 8.1. Thus, it is evident that primarily this agre ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d. CIT examined the assessment records of assessee from which it transpired that the assessee had written off Rs. 458.13 lacs on account of cost of goods of more than 365 days on notional basis as a policy on the ground of their having nil market value at the end of that period. 10.2. Ld. CIT observed that since the loss claimed was only notional loss, not based on any actual valuation, therefore, should have been disallowed and added back to the income of the assessee. This mistake resulted in under-assessment of Rs. 458.13 lacs involving tax effect of Rs. 205.09 lacs including interest. Ld. CIT observed that these aspects were never considered by the AO while framing the assessment order. He further observed that no inquiry/ investigation appeared to have been carried out with regard to this aspect. Thus, he observed that it was a case of lack of inquiry/ investigation, apart from the under assessment of income. Thus, the order of the AO was erroneous as well as prejudicial to the interests of revenue. Ld. CIT issued show cause notice in response to which assessee's representative filed the written submissions. However, since the same was found to be inadequate, therefore, ld. C ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... @ 25% only reduced from carrying value to the realizable value, the view taken by the AO was possible view. The assessee had placed reliance, inter alia, o the decision of Hon'ble Supreme Court in the case of Malabar Industries Vs. CIT 243 ITR 83. Ld. CIT after considering the assessee's submission did not accept the same for the following reasons: (a) Although AO collected the details from the assessee during the course of assessment proceedings but did not record that he examined the matter on the issue of allowability of the amount as claimed. He pointed out that AO did not critically examined the same with reference to the appropriate legal provision and, therefore, the assessment order was erroneous in the eyes of law. (b) As regards the assessee's claim that AO had taken one possible view, ld. CIT pointed out that since the issues were never considered by the AO during the course of assessment proceedings, there was no question of AO's taking any view on that issue. (c) It is essential for the parties to know the reasons that had weighed with the adjudicating authorities in coming to a conclusion. The order passed by the AO should be self contained order, giving the re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... count of the above, the hardware ,software and other components unsold for more than 365 days are subject to write off's on account of their being rendered obsolete due to technology and market change and on account of their having nil market value at the end of that period. This policy of write off's has been followed year after year by the company and has been accepted by the A.O in the assessment of the earlier years. The breakup of the region wise write off's is as per Annexure No 8 to this note". 11.2. Ld. counsel further referred to the copy of audited accounts, contained at pages 68 to 91 of the PB and referred to Schedule 16 to P&L A/c of the cost of goods and services wherein note in regard to loss on writing of inventories to net realizable value was given. Ld. counsel further submitted that on merits also the issue is covered in favour of assessee. In this regard he referred to the order of Delhi Bench of the Tribunal in the case of Hughes Network Systems India Ltd. Vs. DCIT rendered in ITA nos. 4611 and 4595/Del/2010 dated 26.12.2011, contained at pages 105 to 127 of PB. Ld. counsel pointed out that Hughes Network Systems India Ltd. was engaged in the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ts for that year automatically gets neutralized when the same figure of closing stock is taken as the opening stock of the succeeding year. What is, therefore, more important to be seen is whether the same method of valuation of stock is followed consistently by the assessee so that there is no distortion of profit. 11.4. With reference to these decisions, ld. counsel submitted that the assessment order cannot be said to be erroneous since the same is in consonance with the judicial precedents. In this regard ld. counsel relied on the decision in the case of K.N. Agrawal Vs. CIT 189 ITR 769, wherein it was, inter alia, held that ITO is bound to follow the order of appellate authority and, therefore, the said order cannot be held to be erroneous empowering Commissioner to revise the same. He also relied on the decision of Hon'ble Calcutta High Court in the case of Russel Properties Pvt. Ltd. Vs. A. Choudry Addl. CIT 109 ITR 229for the same proposition. 12. Per contra, ld. CIT(DR) submitted that here is not a case of trading stock but of service stock. He submitted that the basis adopted by assessee for determining the net realizable value is not correct because market does not flu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ower of cost and net realizable value. The cost is calculated on the basis of weighted average price method and includes share of allocable overheads. The net realizable value is determined with reference to selling prices of goods. The comparison of cost and net realizable value is made on an item by item basis." 13.1. He further referred to the tax audit report contained at page 36 of the PB, wherein at serial no. 11, it is stated as under: 11. a) Method of accounting employed in previous year. Mercantile basis of Accounting. b) Whether there has been any change in the method of accounting employed vis-à-vis the method employed in the immediately preceding previous year. There has been no change in the method of accounting as compared to the method of accounting employed in the immediately preceding previous year. c) If answer to (b) above is in the affirmative, give details of such change and the effect thereof on the profit or loss. Not applicable d) Details of deviation, if any, in the method of accounting employed in the previous year from accounting standards prescribed under section 145 and the effect thereof on the profit or loss. T ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lost of consistent method being followed by assessee. 14. We have considered the rival submissions and have perused the record of the case. It is well settled law that if there is no application of mind by AO in respect of an issue, then non-application of mind makes the order erroneous. There is no gain saying that mere erroneous order does not empower ld. CIT to exercise his powers u/s 263 unless the order is also prejudicial to the interests of revenue. 14.1. In the present case the assessee's reply dated 3.12.2008 is contained at pages 28 to 30, the contents from which, in regard to justification for writing off of stock as per the books of a/c, have been reproduced earlier. From the said reply it is evident that assessee in its note had pointed out that amount of Rs. 5.61 crores represented the write off of spares and accessories required to service the main equipment that had been installed at Customers sites across India. These stores and spares were purchased in bulk and kept in the stores and the company followed a policy of writing off 25% of the costs of these spares on a YOY basis. It was further stated in the note that since these spares had already been depreciated ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mmunication India Ltd., Hon'ble Delhi High Court in para 4 has, inter alia, noted that the claim was made on the footing that the net realizable value of the stock had fallen below even the cost price and in respect of the valuation the assessee submitted the basis of the estimate which was prepared by its technical department. Certain details were also submitted regarding certain items of stock together with their realizable rate as on 31.3.2003 and 31.3.2004. Therefore, this decision is also not applicable to the present set of facts. Accordingly, the assessment order was erroneous on account of nonapplication of mind to relevant aspect of arriving at net realizable value. 14.3. Now coming to the issue regarding assessment order being prejudicial to the interest of revenue or not. Assessee's plea is that the whole exercise is revenue neutral because the closing stock of one year will be the opening stock of subsequent year, therefore neutralizing the effect of addition in one year by increasing the cost in subsequent year. It is well settled law that the method of accounting employed by an assessee should be such from which true profits of an year can be deduced. Merely because t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ide, was regarding writing down of inventories of Rs. 458.14 lakhs by assessee, which was on the basis of impairment in the value of inventory by 25% of the cost of spares and accessories. The AO, after detailed discussion, disallowed the assessee's entire claim of Rs. 458.13 lakhs. In brief the reasons recorded by AO were as under: i. The assessee was not contesting the issue that the writting off had not been done on the basis of estimation and actually the goods were functional and operating. The assessee was also not disputing the fact that all the goods were in use during the year and as a matter of fact these goods had not been deleted from the actual stock. ii. The assessee was following regular policy to delete 1/4th of such functional goods from its stock and claiming expenditure in the P&L A/c under the head "goods written off". The contention of assessee, thus was that he was regularly following a method of accounting in which goods were written off on presumptive basis. The contention of assessee was that since section 144 provided that the method of accounting regularly employed u/s 145 shall be allowed to the assessee continuously, therefore, the assessee's claim ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mated cost necessary to make the same. (iv) The assessee had followed this method consistently. The assessee operated in a highly sophisticated and technological place wherein, owing to rapid technical advances, the obsolescence was very high and the value of spares of a few year ago, were rendered worthless because of technological changes. (v) No fault could be found with the method adopted by the assessee which was an accepted practice in the industry to value the inventory of net realizable value. (vi) As per the proviso of section 145(3) as substituted by the Finance Act, 1995 w.e.f. 1.4.1997, there were two options available to the AO, either to accept the books of a/c maintained by the assessee or alternatively to reject the books of a/c maintained by assessee if the case of the assessee falls within the eventuality as envisaged in sub-section (3) of section 145 of the Act and do the best judgment assessment u/s 144. (vii) The AO could not reject the valuation of these inventories and otherwise accept the book results declared by assessee. This is permissible in law, in support of which he referred to the judgment of the Hon'ble Madras High Court in the case of CIT V ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 5898 (Assessee's appeal for AY 2009-10): 22. This appeal, preferred by the assessee, arises out of CIT(A)-XIII, New Delhi's order dated 17.09.2012 in appeal no. 232/11-12, relating to AY 2009-10. 23. Brief facts of the case are that during the year the assessee company carried on the same business as was in earlier year. Assessee had filed return of income declaring income of Rs. 19,31,49,431/- including short term and long term capital gains of Rs. 3,86,61,878/- and Rs. 1,58,29,030/- respectively. AO noticed that assessee had earned tax free income and for the purpose, the company had made investment of Rs. 109,71,54,427/-. He further noticed that company had paid interest amounting to Rs. 4,52,44,722/-. He show caused the assessee to explain as to why disallowance u/s 14A not made. 23.1. After considering the assessee's submissions, the AO computed the disallowance under Rule 8D at Rs. 1,06,61,713/-. Apart from this, the AO also disallowed the assessee's claim of loss of Rs. 4,72,76,410/- on account of writing off of inventory. 23.2. Ld. CIT(A) while partly allowing the assessee's appeal, deleted the disallowance on account of write down of inventories and partly allowing th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ly as the same cannot exceed the dividend income, which is exempt u/s 10(34). 26. Having heard both the parties we find that in view of the decision of Hon'ble Delhi High Court in the case of Joint Investments P. Ltd. Vs. CIT, rendered in ITA no. 117/2015 dated 25.2.2015, disallowance is to be restricted to Rs. 4,10,000/-. In the result, assessee's appeal is partly allowed. 6142/Del/2012 (Department's appeal for AY 2009-10): 27. The department has taken following grounds of appeal: 1. On the facts and circumstances of the case and in law, the Ld. CIT(A) has erred in deleting the addition of Rs. 4,n, 76,410/- made by the AO. in respect of loss claimed by the assessee on a/c of write down of inventories to net realizable value i.e. @ 25% on estimated basis despite the fact that the said items were in use during the year. 2. On the facts and circumstances of the case and in law, the learned CIT(A) has filed to appreciation the facts that the spares of the value of Rs. 152.29 lacs which are meant to be used in connection with the VSAT equipments and are sold to customers on outright basis, have been written off only on the basis that if the spares remains unsold beyond a period ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is not warranted to be considered for the purpose of making any disallowance u/s 14A of the Act. Details of the Loans outstanding as on 31.3.2008 and 31.03.2009 along with the sample relevant Loan Agreements are enclosed as "ANNEXURE-2" II Short Term Foreign Currency Loan taken from HSBC and Societe Generale 4,799.29 NIL 52.48 These loans were taken in foreign currency and the same, being in the nature of buyers' credit, were utilized for the business purpose. As a result, no part of interest cost associated with these loans can be deemed to have been incurred in connection with exempt dividend income. Details of the Loans outstanding as on 31.03.2008 and 31.03.2009 are enclosed as "ANNEXURE-2" III Interest free loan taken from the Holding Company (i.e. HCL Comnet Systems & Services Limited) 9,085.44 18,4111.84 No interest cost was incurred by the appellant in respect of this loan and as such, it is not liable to be considered. IV Finance Lease Obligations 34.52 25.47 3.20 Since the loan was taken and utilized exclusively for he purpose of purchasing the vehicles, interest cost associated with these lease obligation cannot be considered for the pu ..... X X X X Extracts X X X X X X X X Extracts X X X X
|
