TMI Blog2016 (10) TMI 175X X X X Extracts X X X X X X X X Extracts X X X X ..... a. Further, we are in agreement with the detailed analysis carried out by ld. CIT(A) in holding that no technical services were provided to the assessee and the services were in the nature of normal maintenance/ repairs/ replacement etc., performed outside India. Therefore, such payments did not fall within the purview of Explanation 2 to section 9(1)(vii) of the Act. Further, we are in agreement with ld. CIT(A)’s conclusion regarding taxability under the provisions of relevant tax treaty/ DTAA, wherein after elaborate discussion he has concluded that no technical knowledge was made available to assessee. From the above it is clear that the amount paid by the assessee to non-resident was not chargeable to tax in terms of the provisions of the Act or DTAA. - Decided in favour of assessee. Revision u/s 263 - justification for writing off of stock as per the books of a/c - Held that:- It cannot be said that by adopting an ad hoc method of arriving at net realizable value by impairing the value of service stock by 25%, in the absence of any detailed technical estimate, the assessee had resorted to correct method of valuation. Under such circumstances, the assessment order was prejud ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... related to the investment made by the assessee and investment in dividend yielding assets was made out of assessee’s own funds or funds borrowed from the holding company and no part of the interest expenditure could be held as incurred for earning exempt income. This specific finding of ld. CIT(A) has not at all been controverted by the department by bringing any evidence on record and, therefore, we confirm the findings of ld. CIT(A) in deleting the disallowance of ₹ 79,18,827/- made on account of interest expenditure relatable to earning of exempt income by AO. In the result this ground is dismissed. - ITA nos. 321/Del/2012, 5651/Del/2012, 6142/Del/2012, ITA nos. 5907/Del/2010, 5898/Del/2012 - - - Dated:- 19-8-2016 - SHRI S.V. MEHROTRA : ACCOUNTANT MEMBER AND SHRI C.M. GARG : JUDICIAL MEMBER For The Department : Shri A.K. Saroha CIT(DR) and Shri Amrit Lal Sr. DR For The Assessee : Shri Ajay Vohra Sr. Adv. and Shri Aditya Vohra Av. ORDER PER S.V. MEHROTRA, A.M: All the captioned appeals were heard together and are being disposed of this composite order, for the sake of convenience. ITA no. 321/Del/2012 ( Revenue s appeal for AY 2004-05) : ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... A) referred to the decision of the ITAT in ITA no. 2195/Del/2008 wherein vide order dated 8.10.2010, the Tribunal had set aside the order of CIT passed u/s 263 in respect of provision for warranty after following the decision of the Hon ble Supreme Court in the matter of Rotork Controls India Pvt. Ltd. 314 ITR 62 (SC). 5. Being aggrieved with the order of ld. CIT(A), the department is in appeal before us and has taken following ground of appeal: Whether ld. CIT(A) was correct on facts and circumstances of the case and in law in deleting the addition of ₹ 2,55,57,990/- made by the AO on account of payment under AMC contract . 5.1. Brief facts apropos this issue are that ld. CIT in his order passed u/s 263 dated 18.3.2009 contained at page 131 onwards of the paper book, noted from the Notes to Account that assessee had made payment of AMC of ₹ 255.58 lakhs on which no tax was deducted. This payment was made to following persons: Particulars Country Amount paid (Rs) Gilat Satellite Networks Limited Israel 17,700,589 Telesystems Internat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... provided outside India. (c) The assessee further submitted that the provisions of section 40(a)(i) of the Act would apply, inter alia, if: i) Any interest, royalty, fees for technical services ( FTS ) or other sum chargeable under this Act, which is payable outside India, or to a non resident in India; ii) On which tax has not been deducted. iii) In accordance with the provisions of Chapter XVII-B. 5.6. As regards the applicability of section 195 of the Act, the assessee submitted that as per Chapter XVIIB, section 195 of the Act is the applicable section for payments made by an assessee to a non-resident outside India. Therefore, in order to examine whether payments made by assessee required deduction of tax at source, in terms of section 195 it has to be examined whether the sum paid to the non-resident payee is chargeable to tax in India in the hands of non-resident payee or not. The applicability of section 195 will be decided accordingly. Reliance was placed on the decision of Hon ble Supreme Court in the case of Gee India Technology Vs. CIT 327 ITR 456. 5.7. As regards the chargeability of income under the provisions of the Act in relation to a sum paid to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... communication in India, therefore, ld. CIT(A) was not right in holding that services were rendered outside India. He referred to page 28 of the PB, wherein the extended maintenance agreement is contained and referred to the recital relating to maintenance support service for all the Gillette hub station equipment. He referred to the second covenant wherein the nature of services to be rendered by Gillette Israel are contained and referred to following clauses: 2.3.3 Buyer agrees and acknowledgos that Gilat may in Gllat's absotule discretion, dispatch to Buyer's hub station site Gilat's Emergency Personnel as Gilat may deem necessary from time to lime for the purpose of assisting the Buyer to remedy the Major Degradation. If Gilat dispatches such a person, Buyer shall provide to such person access to the Hub Station Equipment and all assistance necessary or desirable to overcome the Major Degradation. 2.6 Product Replacement and Repair: Throughout the tern of this agreement, Gilat shall repair or replace any failed or defective part or parts of the Hub Station Equipment in accordance with the provisions of Sub-Paragraphs 2.6.1 through 2.6.4. 2.6.2 The ti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ention cannot be accepted in view of specific covenant contained in the agreement, which, inter alia, includes covenant no. 2.6, which deals with product replacement and repair as per which Gillette shall repair or replace any failed or defective part or parts of the hub station equipment in accordance with the provisions of sub para 2.6.1 to 2.6.4. Therefore, it is not correct to say that the entire services were rendered in India. As a matter of fact the replacement could be effected only by Gillette. It is not the case of AO that the non-resident payee had any PE in India and, therefore, the business income in the hands of non-resident payee could not be taxed in India. Further, we are in agreement with the detailed analysis carried out by ld. CIT(A) in holding that no technical services were provided to the assessee and the services were in the nature of normal maintenance/ repairs/ replacement etc., performed outside India. Therefore, such payments did not fall within the purview of Explanation 2 to section 9(1)(vii) of the Act. Further, we are in agreement with ld. CIT(A) s conclusion regarding taxability under the provisions of relevant tax treaty/ DTAA, wherein after elabor ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n submissions filed by assessee, in which primarily assessee demonstrated how the sum of ₹ 458.14 lacs was written down under the head purchases in the P L a/c as per Schedule 16 and also referred to the queries raised by AO and assessee s reply in this regard. Assessee pointed out that it was explained to the AO that the method of writing off of the inventories was in line with the normal accounting practice followed by the industry and in line with accounting practice of writing off the inventories consistently followed by the assessee in the earlier assessment years also. The assessee submitted that assessment u/s 143(3) was completed without drawing any adverse inference in this regard. The assessee further pointed out that an amount of ₹ 561.92 lacs (which was charged to P L A/c under the head Cost of goods and services ), represented only 25% of the cost of spares and accessories, which was written off during the financial year under consideration. Further an amount of ₹ 103.78 lakhs (which had been written off in the earlier year), was written back (i.e. it was offered as income), during the financial year and, hence, it was only the net amount of ₹ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ilence of the AO as to why he allowed the assessee s claim in this regard would mean that there was no application of mind at his level. He should have recorded reasons for allowing the claim. He, accordingly, set aside the order of AO to his file for reconsideration of the same on the disputed issue alleged in the notice. 11.1. Ld. counsel for the assessee pointed out that it is well settled law that the way the assessment order is drafted is not within the assessee s control. He relied on the decision of Hon ble Punjab Haryana High Court in the case of Hari Iron Trading Co. Vs. CIT 263 ITR 437 (P H). He further relied on the decision in the case of CIT Vs. Eicher Ltd. 294 ITR 310 (Del.), wherein it was held that when all the material facts were disclosed by assessee and AO applied his mind then failure to record finding in assessment order does not entitle the AO to issue notice for reassessment. Ld. counsel referred to page 28 of the PB, wherein the assessee s reply dated 3.12.2008 to the AO in connection with the queries raised is contained in which assessee had given justification for writing off of stock as per the books of a/c as under: 6. Justification for the writ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... etwork Systems India Ltd. was engaged in the business of market VSAT equipment and providing telecom related services in India, as assessee. He pointed out that in this case also ground raised before the Tribunal was regarding sustenance of part disallowance to the extent of 25% of total disallowance made by the AO on account of provision for impairment of stock. Ld. counsel referred to paras 10 11 of the order, wherein the Tribunal has observed as under: 10. The department is in appeal against the CIT(A) s order in granting a relief of ₹ 18,19,034/- out of the total addition of ₹ 24,25,379/- made by the Assessing Officer while the assessee is in appeal in sustaining the disallowance to the extent of 25% of the total disallowance made by the AO. 11. In the Assessment year 2005-06, the assessee had shown the value of inventories after making adjustment of ₹ 3,47,216/- on account of stock impaired during the year. In the line of the reasons given by the AO in the AY 2004-05, the assessee s claim on account of reduction in the value of inventories on account of impairment of stock to the extent of ₹ 3,47,216/- has been disallowed. On an appeal, the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ee for determining the net realizable value is not correct because market does not fluctuate 25% every time. 12.1. ld. CIT(DR) pointed out that assessee s claim is negated by the fact that next year assessee had itself written back 1.03 crores in respect of inventory exceeding one year. He submitted that this negates the assessee s contention regarding 25% fall in the value of inventory. ld. CIT(DR) further submitted that assessee had not given any supporting evidence regarding net realizable value of stock. 12.2. Ld. CIT(DR) referred to the decision of Hon ble Delhi High Court in the case of Hughes Communication India Ltd., contained at pages 150 to 156 of the PB, wherein in para 7 the Hon ble High Court, inter alia, has observed as under: 7. The findings recorded by the Tribunal are not challenged. In fact the learned standing counsel fairly stated that the assessee can value the stock at the lower of the cost or the net realizable value as it is a recognized and accepted method. He, however, submitted that the claim of the assessee was not supported by any details. But this submission is contrary to the finding of the Tribunal which has referred to the assessee s lett ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s. 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. There is no deviation in the method of accounting employed in the previous year from the accounting standards prescribed under section 145 of the Income-tax act, 1961. 32. In the appeal filed by the revenue, ground bas been taken for deleting addition of ₹ 1.20 crores made by the AO on account of reduction in value of closings stock of finished goods. We have considered the rival contentions and found from the record that since the Starts of its operation in the assessment year 1996-97, the assessee company was consistently valuing the defective stock at the realizable value being lower then cost. Similar write down in the valuation of such stock was allowed by the department in the assessment year 1996-97 and 1997-98. However, during the year under consideration, by disturbing the method of valuation the AO made addition. Jurisdictional High Court in case of Commercial and industri ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n 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 by 75% as on 1.4.2005, the remaining 25% of depreciation on these spares had been charged to COGS. This note should have prompted the AO to examine as to the basis on which net realizable value of the inventories had been arrived at because as rightly pointed out by ld. CIT(DR) there could not be 25% fall in the market value of inventories every year. Moreover, this policy had the effect of writing off entire value of spares in 4 years whereas it is evident from the assessee s own account that in next year assessee had realized the value of the spares to the extent of ₹ 1.03 crores. This should have prompted the AO to examine the basis for arriving at net realizable value of asset and how the management had arrived at the useful life of spares. As per significant accounting policy, reproduced earlier, the net realizable value was determined with reference to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... osing 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 the assessee is following a regular method of accounting but the effect of which is not deducing true profits from business, then it cannot be said that correctness of method can be ignored by AO, as has been held by Hon ble Supreme Court in the case of British Paints 188 ITR 44, wherein it has been held as under: that even if the assessee had adopted a regular system of accounting, it was the duty of the Assessing Officer under section 145 of the Income-tax Act, 1961, to consider whether the correct profits and gains could be deduced from the accounts so maintained. If he was of the opinion that the correct profits could not be deduced from the accounts, he was obliged to have recourse to the proviso to section 145 of the Income-tax Act, 1961. 14.4. Therefore, it cannot be said that by adopting an ad hoc method of arriving at net realizable value ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e 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 should have been accepted. iii. All the accounting standard and accounting policies never prescribed any presumptive loss when the goods were actually in use. iv. The assessee s case did not fall under any of the approved accounting standard of method of accounting. 17.3. After elaborately considering section 145, the AO further concluded as under: (a) As per proviso to section 145, the method employed by assessee should be such from which, in the opinion of AO, the income could properly be deduced and it is the duty of the AO to examine whether the method of accounting regularly employed by the assessee, was correct and from that method the income, profits and gains could be correctly deduced or not. The AO relied on the decision of Hon ble Supreme Court in the case of CIT Vs. British Paints India Ltd. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssee 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 Vs. SAS Hotel Enterprises Ltd. 334 ITR 194. 18. Ld. CIT(DR) submitted that assessee had resorted to reduce 25% of the value every year of spares and stocks, which is not the correct method of arriving at net realizable value of spares. He submitted that assessee should have backed its claim by some evidence regarding net realizable value. Thus, he pointed out that the valuation is not based on any proper technical estimation. 19. Ld. counsel for the assessee reiterated the submissions advanced before ld. CIT(A) and submitted that assessee was following a practice which was prevalent in the industry and, therefore, assessee s claim should have been allowed. He relied on the decisions which have been referred in the appeal relating to challenge of the 263 proceedings. 20. We have conside ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... disallowance u/s 14A not made. 23.1. After considering the assessee s submissions, the AO computed the disallowance under Rule 8D at ₹ 1,06,61,713/-. Apart from this, the AO also disallowed the assessee s claim of loss of ₹ 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 the assessee s claim regarding disallowance made u/s 14A. Being aggrieved, both the assessee and the department are in appeal before us. First we take up the assessee s appeal, wherein following grounds are raised: 1. That in the facts circumstances of the case the Ld. Commissioner of Income tax (Appeals) erred in law in sustaining the disallowance of expenditure amounting to ₹ 27,42,886/- under section 14A of the Income-tax Act, 196 I ( the Act ) read with Rule 8D (2) (iii) of the Income-tax Rules, 1962 ( the Rules ). 1.1 That in the facts circumstances of the case the Ld. Commissioner of Income tax (Appeals) erred in law in confirming the disallowance under section 14A of the Act without appreciating the fact that no expense ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 ₹ 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 of 365 days its actual cost is fully written off. 3. On the facts and circumstances of the case and in law, the Ld. CIT (A) has erred in holding that the action of the AO, rejecting the method of accounting was in clear violation of section 145(3) of the I. T. Act. 4. On the facts and circumstances of the case and in law, the Ld. CIT(A) has erred in holding that no investment was made out of interest bearing funds, thereby deleting the disallowance of ₹ 79,18,827 /- made u/s 14A relating to interest portion. 5. The appellant craves leave, to add, alter or amend any ground of appeal raised above at the time of the hearing. 28. Ground nos. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ere 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 purpose of making any disallowance u/s 14A of the Act. Total 14,761.18 23,194.6 ..... X X X X Extracts X X X X X X X X Extracts X X X X
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