TMI Blog2020 (12) TMI 556X X X X Extracts X X X X X X X X Extracts X X X X ..... cided in own case [ 2018 (6) TMI 1732 - KARNATAKA HIGH COURT] both the Appellate Authorities below were justified in returning the proper findings of facts on the relevant material before them and have rightly found that the provisions of warranty made by the Respondent-Assessee Company was on the basis of the scientific and consistent method and therefore, the present appeal of the Revenue does not give rise to any substantial question of law and the same deserves to be dismissed and is accordingly dismissed. Disallowance of foreign exchange loss arising on revaluation of foreign exchange exposures as at the year end - AO noticed that the assessee has revalued its assets and liabilities with foreign exchange exposure as at the year end on marked to market basis and declared net gain - A.O. disallowed the loss holding that it is contingent in nature - HELD THAT:- We notice that this issue has been decided in favour of the assessee by coordinate bench of Tribunal in the case of Quality Engineering Software Technologies Pvt. Ltd.[ 2015 (1) TMI 869 - ITAT BANGALORE] wherein held forward contracts are in respect of consideration for export proceeds, which are revenue items. Th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... A.R. submitted that the decision in the case of Samsung Electronics Company Ltd. was rendered by Hon ble jurisdictional High Court on 15.10.2011. Prior to the said decision of Hon ble High Court, certain Tribunal decisions were available to the effect that software purchases are not in the nature of royalty. One such decision is rendered by the Tribunal in the case of Sonata Information Technologies Ltd. Vs. ACIT 103 ITD 324. The Ld. A.R. submitted that the payments made for purchases of software were made by the assessee during the year under consideration prior to the decision rendered by Hon ble jurisdictional Karnataka High Court in the case of Samsung Electronics Company Ltd (supra). Hence the assessee was under bonafide belief that the payments made for purchases of software are not liable for TDS obligations, in view of the certain decisions holding so. In these kinds of cases, the coordinate benches of Tribunal have held that the assessee cannot be fastened that TDS liability on account of subsequent amendment or subsequent ruling of the Court and accordingly, the disallowance made u/s 40(a)(i) of the Act was deleted. In support of this submission, the Ld. A.R. relied o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g/2015 in CIT v Samsung Electronics Co. Ltd. (16 taxmann.com 141) was passed on October 15,2011). Courts have consistently upheld this principle as seen in: ITO v. Clear Water Technology Services (P.) Ltd. (52 taxmann.com 115) Kerala Vision Ltd. v. ACIT (46 taxmann.com 50) Sonic Biochem Extractions (P.) Ltd. v. ITO (35 taxmann.com 463) Channel Guide India Ltd. v. ACIT (25 taxmann.com 25) DCI v. Virola International (20 14(2) TMI 653) CIT v. Kotak Securities Ltd. (20 taxmann.com 846). 26. The above decisions have been considered and discussed in the case of Ingersoll Rand (India) Ltd. (supra) by the Bangalore Bench of the ITAT and it was held therein that prior to the decision of Hon'ble jurisdictional High Court in the case of CIT v. Samsung Electronics Co. Ltd. (supra) which was passed on 15.10.2011 transactions carried out on purchase of off the shelf software are not liable to TDS and hence there can be no disallowance u/s.40(a)(ia) of the Act based on subsequent development of law after the date on which payments are made. 27. we are of the view that in the light of law as laid down by this Tribunal in the case ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d deleted the same. Accordingly, the Ld. CIT(A), following the decision rendered by ITAT, deleted the disallowance. 10. We heard the parties on this issue. The Ld. A.R. submitted that the issue relating to disallowance of provision of warranty in the assessee s own case has since been decided in favour of the assessee by Hon ble Karnataka High Court in ITA No.243/2012 dated 25.6.2018 passed for assessment year 2006-07. 11. We heard Ld. D.R. and perused the order passed by the Hon ble Karnataka High Court. We notice that this issue has been decided in favour of the assessee by Hon ble Karnataka High Court in the assessee s own case. For the sake of convenience, we extract below the operative portion of the order passed by Hon ble Karnataka High Court:- 8. Having heard the learned Counsels for the parties, we are of the clear opinion that no substantial question of law arises in the present appeal filed by the Revenue. We are satisfied that the Respondent-Assessee company has consistently followed the similar practice with regard to making provision of warranty given to the customers for providing them free repairs and maintenance for the computers and hardware supplied ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f the Act lies before this Court only on substantial questions of law. The final fact findings of the Tribunal under the Act are binding on this Court and cannot be disturbed unless they are found to be perverse on the basis of established material on record. We do not find any such case of Revenue in the present appeal. 12. Moreover, we are satisfied that the practice of making a provision for warranty in the present case has been found to be consistent, scientific and regular by the two Appellate Authorities below in consonance with the judgment of the Hon'ble Supreme Court in the case of Rotork Controls India (P) Ltd. (supra). The Hon'ble Supreme Court in the aforesaid case, discussed in detail how the accounting entries for product warranty are to be made by the Assessees. We quote below the relevant portion of the judgment for ready reference: 10. What is a provision? This is the question which needs to be answered. A provision is a liability which can be measured only by using a substantial degree of estimation. A provision is recognized when: (a) an enterprise has a present obligation as a result of a past event; (b) it is probable that an outflow of resour ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s arising from past events have to be recognized as provisions. These past events are known as obligating events. In the present case, therefore, 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 three conditions for recognition of a provision are satisfied in this case. 13. In this case we are concerned with Product Warranties. To give an example of Product Warranties, a company dealing in computers gives warranty for a period of 36 months from the date of supply. The said company considers following options : (a) account for warranty expense in the year in which it is incurred; (b) it makes a provision for warranty only when the customer makes a claim; and (c) it provides for warranty at 2% of turnover of the company based on past experience (historical trend). The first option is unsustainable since it would tantamount to accounting for warranty expenses on cash basis, which is prohibited both under the Companies Act as well as by the Accounting Standards which requi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ificant way. In our view, on the facts and circumstances of this case, provision for warranty is rightly made by the appellant-enterprise because it has incurred a present obligation as a result of past events. There is also an outflow of resources. A reliable estimate of the obligation was also possible. Therefore, the appellant has incurred a liability, on the facts and circumstances of this case, during the relevant assessment year which was entitled to deduction under Section 37 of the 1961 Act. Therefore, all the three conditions for recognizing a liability for the purposes of provisioning stands satisfied in this case. It is important to note that there are four important aspects of provisioning. They are - provisioning which relates to present obligation, it arises out of obligating events, it involves outflow of resources and lastly it involves reliable estimation of obligation. Keeping in mind all the four aspects, we are of the view that the High Court should not to have interfered with the decision of the Tribunal in this case. 13. We are, therefore, satisfied that both the Appellate Authorities below were justified in returning the proper findings of facts o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tion as held by the Bengaluru bench of ITAT in the caseof Quality Engineering Software Technologies Pvt. Ltd. 16. The Ld. D.R. submitted that marked to market losses have been held as notional loss by the CBDT instruction No.3/2010 dated 23.3.2010. Accordingly, he submitted that the A.O. was justified in making the disallowance. 17. We heard the parties on this issue and perused the record. We notice that this issue has been decided in favour of the assessee by coordinate bench of Tribunal in the case of Quality Engineering Software Technologies Pvt. Ltd. (supra). For the sake of convenience we extract below the decision rendered by the coordinate bench in the above said case: 4.5.8 In the case on hand, it is not in dispute that the forward contracts have been entered into by the assessee in order to protect its interest against fluctuations in foreign currency, in respect of consideration for export proceeds, which is a revenue item. Therefore, in sum and substance, it has the trappings of stock-in-trade and the assessee has to restate or revalue the same as on the Balance Sheet date. The consequent effect of this accounting treatment was to recognize the exch ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... from a transaction in respect of a forex-derivative is a speculation loss or not, the Assessing Officers may refer to Proviso (d) below sub-section (5) of Section 43 inserted by the Finance Act, 2005, with effect from 1.4.2006. It lays down that any 'eligible transaction' in respect of trading in derivatives referred to in clause (ac) of section 2 of the Securities Contracts (Regulation) Act, 1956, that has been carried out in a recognized stock exchange shall not be treated as a speculative transaction. Further, an 'eligible transaction' for this purpose would be one that fulfils the conditions laid down in Explanation to Section 43(5)(d). Any loss in a speculative transaction can be set off only against profit from speculative transactions. In the case on hand, as discussed earlier, a contract has been concluded and a liability has crystallized. In this factual matrix, from the wordings of the Instruction, it follows that the loss arising out of the forward contract is not notional. In such a case, the CBDT Instruction requires the Assessing Officer to examine whether such a loss is on account of a speculative transaction as contemplated in section 43(5) of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a contract of sale, he simultaneously enters into one or more contracts to purchase the same quantity before the Vaida day. The result of such dealings, when the sale and purchase are to and from the same person, has the effect of cancelling the contracts leaving only differences to be paid. The technique of hedge trading can be understood in simple terms. It is said that the hedge contract is so called because it enables the persons dealing with the actual commodity to hedge themselves, i.e., to insure themselves against adverse price fluctuations. A dealer or a merchant enters into a hedge contract when he sells or purchases a commodity in the forward market for delivery at a future date. His transaction in the forward market may correspond to a previous purchase or sale in the ready market or he may propose to cover it later by a corresponding transaction in the ready market, or he may offset it by a reverse transaction on the forward market itself. Hedging contracts need not succeed the contracts for sale and actual delivery of goods manufactured, but the latter may be subsequently entered into, provided they are within reasonable time. In order to be genuine and valid he ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ns of the commodity, manufactured or the merchandise sold. 5.3. Hedging contracts are dealt in Clause (a) of the proviso to section 43(5) of the Act. From the above discussion it can safely stated that the said clause applies, if following conditions are fulfilled: (1) There is a contract for actual delivery of goods manufactured by the assessee /a merchandise sold by it, (2) Assessee must be a subsequent transaction intend to guard against losses through future price fluctuations in respect of such contract, (3) Transaction in question must be a contract entered into in respect of raw materials or merchandise in the course of the assessee's manufacturing business and it should have been settled otherwise than by actual delivery of goods, (4) Hedging contracts may be both with regard to sales and purchases, (5) Hedging contracts need not succeed the contracts for sale and actual delivery of goods manufactured, but the latter may be subsequently entered into, provided they are within the reasonable time not exceeding generally the assessment year, (6) In order to be genuine and valid hedging contracts of sales, the total of such transactions sh ..... 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