TMI Blog2012 (3) TMI 686X X X X Extracts X X X X X X X X Extracts X X X X ..... c. 92CA(3) of the Act making an addition of ₹ 49,37,51,430 to the total income of the assessee on account of adjustment in the arm s length price of the international transaction entered by it with its associate enterprises. In ground Nos. 2 to 8, it has mentioned the different fold of submissions raised by it before the Learned DRP. We will be dealing with all its proposition in seriatim. 2. The brief facts of the case are that the assessee company has filed its return of income electronically on 8.3.2007 declaring an income of ₹ 124,64,07,885. It has filed ITR-VI on 22.3.2007. According to the Assessing Officer, the return was filed beyond due date prescribed under section 139(1) of the Act. However, the return was processed under section 143(1) of the Act on 22.2.2008 at the returned income. The case of the assessee was selected for scrutiny assessment and a notice under sec. 143(2) of the Act was issued on 12.10.2007 which was duly served upon the assessee. Assessing Officer thereafter issued notices under sec. 142(1) and 143(2) of the Act on different dates, whereby he called upon various information from the assessee. According to the Assessing Officer, in comp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... gh seas to BSNL. It was also emphasized by the assessee that BSNL contract is a loss making contract for Nortel Group globally. The losses are primarily driven by the existing contractual terms negotiated in response to the pricing pressure as a result of the competitive nature of the india s telecommunication market. The assessee further submitted that the total value of the international transaction related to BSNL contract having an impact on the taxable income of Nortel India for the relevant assessment year was only ₹ 54,35,71,422. According to it, this is the balance amount after Nortel Group issued credit note to the assessee aggregating to ₹ 454,41,21,331 for import from overseas group entities for the BSNL contract. In addition, Nortel Group also agreed for an additional transfer pricing adjustment of ₹ 221,00,74,655 in order to reimburse Nortel India for the losses on the BSNL contract. In this way, assessee has ensured an arm s length price on the contract for the function performed in connection with execution of the BSNL contract. As a result of the credit note and additional transfer pricing adjustment, assessee had offered an additional income of &# ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the seven. The arithmetic mean of the comparables which were accepted by the Assessing Officer comes to 6.96%. Learned TPO has recommended the adjustment by adopting PLI of 6.96%. The working made by him in paragraph 11 reads as under: 11. In this context, it also becomes important for the assessee to show where each of the comparables lies in its business cycle if the assessee insists on the use of multiple year data. In this case, nothing has been brought on record to show where any of the comparable lie in their market cycle and therefore, a comparison becomes necessary with only those companies whose data is available for the current year. The final list of comparables, based on the above discussion is as under: S.No. Comparables Operating profits on operating revenue (%) Remarks 1 Arraycom India Ltd. (18.73%) Rejected on account of persistent losses 2 Gemini Communication 11.97% Accepted 3 HCL Comnet Ltd. NC ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... etermination of arm s length price as provided in section 92C of the Act read with Rule 10B of the Income-tax Rules. The section 92C provides five methods. The assessee has discussed all these five methods in its TP study report in respect of all the international transactions. Ultimately, it selected transactional net margin method as the most appropriate method in respect of international transaction relating to import of telecommunication equipments. It has pointed out that this method is less effected by transactional difference than CUP method or any other method. This method is generally appropriate for the transactions where other methods cannot be adequately applied. The method adopted by the assessee has been accepted by the TPO also, therefore, it is not in the area of dispute and we are not required to make much discussion on the issue. 7. The learned counsel for the assessee in his first fold of submissions has pointed out that TPO and DRP have failed to specify the basis under section 92C for rejecting the transfer pricing documentation maintained by the assessee, therefore, the order of the TPO is without jurisdiction. On due consideration of this argument and peru ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rm s length basis. To our mind, there could be two situations which ought to have been established by the assessee on the record. The first situation is that the assessee should have established on the record with demonstrative proof, the exact loss it has been suffering on this contract. This could be established by bringing the relevant details on the record i.e. value of imported articles by producing their invoices and how those rates are comparable in the open international market. The second situation would be by bringing the details on the record exhibiting the contract value with other concerns indulging in the similar field. By merely saying that it is a loss making contract and Nortel Group is compensating the loss by giving credit note at a operative margin of 2% is not sufficient. It is a self-styled declaration of results. It has to be verifiable. The declaration of the assessee ought to be cross verifiable with the relevant details, otherwise it is meaningless and the revenue authorities have rightly observed that this claim of earning 2% operating margin is of no consequence for determining the ALP of the international transaction in respect of import of telecommunic ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that data relating to the period of being more than two years prior to such Financial Year may also be considered, if such data reveals facts which could have an information on the determination of transfer price in relation to the transaction of comparison. The main section used the expression shall which make it mandatory to first use the current year data. If certain other circumstances put an influence on the determination of transfer pricing in relation to the transaction then other data for period not more than two years prior to such Financial Year may be used. The ITAT in a large number of cases has observed that current year data has to be used. The learned counsel for the assessee has not pointed out any exceptional circumstances which could persuade us to look forward about the applicability of proviso appended to Rule 10B(4) of the Income-tax Rules, 1962. Learned TPO as well as the Learned DRP has considered this aspect and we do not find any error in their findings. 11. In the next fold of submission, it was contended by the assessee that learned TPO has erred in excluding M/s. Arraycom Net Ltd. from the list comparables. It was pointed out by the learned couns ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . The assessee s contentions regarding loss making companies cannot be accepted because if a company continues to make losses over a period of time, as in the case of this comparable, there is no question of using it since any comparison with this company s result would result in an aberration and an anomalous situation. It has been held in the recent judgment of the Hon ble ITAT in the case of M/s. Sony India (P) Ltd. Vs. DCIT (2008) 114 ITD 448 (Delhi) that while a loss making comparable need not be rejected by itself but if there is cumulative effect then it needs to be considered whether the comparables can be accepted or not. Arraycom India Ltd. has been making losses since 2002 and as can be seen from the data submitted by the assessee itself. Therefore, it is being rejected as a comparable . 14. There is no dispute with regard to the proposition that a concern will not lose its status of comparability, merely because it has shown losses. The profit and losses are the two incidence of the business. Every venture makes effort for earning the profit but it is not necessary that it will get the profit every time. However, on an analysis of the comparative details made by the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... make analysis of the data with different angles, results would vary to some extent. In the rules, an effort has been made that comparable which are nearly similar to the assessee should be identified. The important factor having influence on the transaction and functioning of the assessee as well as comparable working in uncontrolled conditions are to be taken. Thus, the various filters are provided for eliminating the subjectivity in determining the ALP. In the present case, learned TPO had made an analysis from different angles and thereafter selected the comparables which has been upheld by the learned DRP, we do not see any reason to disturb. 17. The next issue agitated by the assessee with regard to determination of arm s length price of the international transaction with A.E. is that learned TPO/AO has erred in not providing the benefit of 5% in respect of the arm s length range as provided under the proviso to section 92C(2) of the Act, Prior to its substitution by the new proviso by the Finance Act, 2009 w.e.f. October 1, 2009. The learned counsel for the assessee has submitted that the assessee is entitled for a standard deduction of 5% in the PLI determined by the lear ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 5% for such a transaction, a taxpayer is permitted to have a credit entry which is not below 95% of the ALP so that profit from the transaction is not understated beyond the tolerance level of (-) 5%. Whenever there is an international transaction involving purchase of a product or import of services, there would be a debit entry in the profit and loss account. By allowing a margin of (+) 5% under such a transaction, a taxpayer is permitted to have a debit entry which is not above 105% of the ALP so that profit from the transaction is not understated beyond the tolerance level of (+) 5%. 11.18.3 The decision rule contained in the proviso to the sec. 92C(2) of the Act containing a tolerance band is akin to a similar decision rule of confidence interval used in the theory of statistical inference. Under that theory, a 5% level of significance would provide for a tolerance band consisting of 95% 105% of the arithmetical mean and these points are known as Critical Values . The rule is one of All or Nothing kind of a situation. If a computed value falls within the tolerance band, a favorable inference is drawn. The decision rule contained in the proviso to section 92C(2) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... essment years. 19. Similar view has been taken by the ITAT, Delhi Benches in the case of CRM Services India. No doubts, a different opinion has also been taken by the ITAT in some of the cases referred by the learned counsel for the assessee. We have been informed that appeals are pending against such conclusion before the Hon ble High Court. In the case of S.T. Micro Electronics, one of us is the author i.e. Judicial Member whereas in the case of M/s. Marubeni India (P) Ltd. in ITA No.809/Del/09, both of us has taken a similar view. In view of the above discussion, we do not find any merit in the contentions raised by the learned counsel for the assessee. 20. In ground No.5, assessee has pleaded that learned Assessing Officer has erred in not restricting the transfer pricing adjustment in proportionate to the value of impugned international transaction with the A.E. The brief facts of the case are that assessee has shown the value of international transaction with the A.E. at ₹ 54,35,71,422. Learned TPO has also taken cognizance of this figure in paragraph No.3 of the order passed under sec. 92C(a)(iii) of the Act. He has determined the PLI at 6.96%. According to the T ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sing Officer shall carry out this exercise after providing an opportunity of hearing to the assessee. Accordingly, ground Nos. 1 to 8 are rejected except ground No.5 which is partly allowed for statistical purposes. 21. Ground No.9 is general in nature. In this ground, assessee has submitted that learned DRP has erred in concurring with the finding of the learned Assessing Officer without appreciating the submissions filed by the assessee. This ground was taken regarding corporate issues. It is general in nature and it does not require any specific finding to be recorded, hence it is rejected. 22. In ground no.10, assessee has pleaded that learned Assessing Officer has erred in recognizing excess revenue to the extent of ₹ 55,46,10,230 on account of project with BSNL. Without prejudice to this ground, assessee has further pleaded that Assessing Officer has erred in recognizing revenue under the BSNL contract which would increase the profit margin even though the profit margin under this contract has already been determined by the learned TPO. At the cost of repetition, it is observed that assessee had entered into a contract with BSNL for supply of telecommunication net ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... trical supplies BSNL. 18,084,031 Revenue recognizable 824,555,678 9.10 Thus, as can be seen from the above, the total revenue recognizable was taken to be derecognized to the extent of ₹ 82,455,678/- by the assessee company for computing the revenue recognizable on a percentage completion method. Thus, as indicated above percentage completion of 84.06% (as worked out above) was applied on a total estimated revenue for BSNL project of ₹ 15,208,005,754/- instead of revenue recognizable of ₹ 16,032,561,432/- thus derecognizing revenues to the extent of ₹ 824,555,678/-. Except for the narrations as indicated above no justification was given by the assessee company despite repeated opportunities of submitting all documents in support of their contentions by repeated hearings of the case u/s 142(1)/143(2) of the Act. Books of accounts were also called for in a CD form, which was also not provided. 9.11 As indicated in Para 9.5 above, the assessee company was specifically asked to produce all details, ledger copies, explanations and justifications for working the basis of the total estimated r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Amount determined Total estimated revenue for BSNL Project (K) 15,208,005,754 16,032,561,432 Recognizable revenue based on % completion (J*K) = L 12,783,569,472 13476971139 Less : Revenue recognized till last year (M) 5,060,879,020 5,19,96,70,457 Revenue recognized during current year (N=L-M) 7,722,690,452 827,73,00,682 9.15 Thus, Revenues recognized during Current Year is worked out at ₹ 827,73,00,682/- as against ₹ 772,26,90,452/- shown by the assessee. The difference being ₹ 55,46,10,230/- is added to the total income of the assessee. 24. The assessee has submitted that a sum of ₹ 44,36,24,597 represents AMC revenue which relates to revenue from post contract customer support to BSNL, which includes the provisions for software upgradation or patches required for maintenance of the system supply. As per the agreed arrangement such upgradation shall be implemented free of cost at each site for a seven years by Nortel ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to the assessee and it ought not be included in the estimated revenue, simultaneously corresponding cost of ₹ 4,01,36,000 was also deferred on the principles of matching cost with the revenue. The salestax of ₹ 20,36,02,262 was booked separately by the assessee. He pointed out estimated revenue is arrived at on the basis of PO value which includes sales-tax also. Since, sales tax is not revenue in the hands of the assessee, the same is to be reduced to arrive net estimated revenue of the assessee. The learned counsel for the assessee further placed on record computation of percentage completion of the contract and the revenue under this project. Learned DR on the other hand relied upon the order of the Assessing Officer. 26. We have duly considered the rival contentions and gone through the record carefully. The assessee has made reference to page No. 458 of the paper book wherein details of estimated cost under this project has been filed by the assessee. In these details, it has pointed out the cancellation of tower under the P.O. representing a sum of ₹ 401,36,000. According to the assessee, this figure has totally been ignored. Similarly, additional cost po ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lowed. 27. In ground No.11, grievance of the assessee is that Assessing Officer has erred in disallowing the deduction in respect of provisions for warranty amounting to ₹ 14,42,47,994. The brief facts of the case are that the assessee company has made a provision for warranty of ₹ 14,42,47,994 in relation to the project undertaken by it for BSNL. The assessee has debited the above amount in the profit and loss account. Learned. Assessing Officer vide order sheet entry dated 15.10.2009 directed the assessee to justify the stage for recognition of warranty expenses and to give its working so as to arrive at the figure of provisions for warranty claimed by it. In response to the query of the Assessing Officer, it was submitted by the assessee that provisions for warranty has been made by it @ 3.5% of the value of imported equipment for BSNL project. This percentage has been adopted by the assessee on the basis of the rates experienced by the Notel Group Companies in the Asia Pacific Region on sale of similar or sameequipments. Thus, according to the assessee, it was in accordance with standard practice applied for several years (since the late 1990) in the Asia Paci ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the point of sales to make good any defect or damage. Thus, it is not a contingent liability rather liability has accrued. Learned Assessing Officer did not find merit in this explanation of the assessee on the ground that it is general in nature, assessee failed to submit full supporting evidence in support of its claim. Hence, on 19.11.2009, he again issued a notice under sec. 142 of the Income-tax Act, 1961. In this notice, he called for the details exhibiting usage of warranty in case of BSNL project for all years. He called for the so called empirical study of the Nortel Group demonstrating its experience of warranty expenses at 3.5% of cost of sales in this area. He also called for cost of GSM equipment to BSNL with supporting bills and vouchers, copy of the ledger account showing cost of imported equipments supplied to South Zone and East Zone. Assessing Officer thereafter issued a final showcause notice on 23rd November 2009. Learned Assessing Officer has rejected the claim of assessee by observing as under: (i) No copy of the Warranty Agreement with BSNL was filed. Instead a copy of the Advance Purchase Order raised by BSNL on Nortel India was attached. As per this ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er observed that the commencement of the warranty depended upon commissioning of complete network in the telecom circle, which itself was an uncertain event. The objections of the assessee were accordingly rejected. In doing so, D.R.P-II also distinguished the ratio as laid down in the Hon'ble Delhi High Court order in the case of CIT vs. Vinitec Corporation Pvt. Ltd. (2005) 278 ITR 0337 and the Apex Court decisions in Rotork Controls India Pvt. Ltd. (2009 TIOL 64) and Bharat Earth Movers (245 ITR 428) in that before allowing claim of the provision for warranty, it was necessary that various conditions such as formation of reliable estimate of obligation and arising of liability must be satisfied. 5.10 As has been discussed in the preceding paragraph, the assessee company has failed to produce any working to justify that the provision was made on a scientific basis . Further the fact that the assessee company has made a provision for warranty for the year to the extent of ₹ 14.42 crores as against an actual incurring of the expense of Nil against the account during the year proves the point that the provision made is highly excessive. No actual expenses have been actua ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . 73 ITR 53 and Bharat Earth Movers Vs. CIT, Karnataka reported in 245 ITR 428. He also relied upon the orders of the ITAT in the case of Hero Honda Motors vs. JCIT reported in 95 TTJ 782, JCIT vs. Sony India reported in 4 SOT 30. He further submitted that the assessee has produced the details exhibiting the warranty utilization for the Asia Pacific Region for the year 2006 which was brought to the notice of learned Dispute Resolution Panel also. He made a reference to page 359 of the paper book-2. On the other hand, Learned DR relied upon the order of the Assessing Officer. He pointed out that as per APO, the warranty period of 12 months would commence from the date of the commissioning of the complete network in that service area. In the present year, such commissioning did not take place, therefore, warranty claim could not have arisen during the year. Thus, the provision is not as per APO. He also pointed out that the learned Dispute Resolution Panel has observed that warranty liability depends commissioning of the complete network in the entire circle which itself is an uncertain event. With regard to the alleged empirical study report available at page 359 of the paper book i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... actured and sold, then the provision made for warranty in respect of those large number of sophisticated goods would be entitled to deduction from the gross receipts under section 37 of the Income-tax Act, 1961. Hon ble Court further observed that it would all depend on the data systematically maintained by the assessee. Hon'ble Supreme Court thereafter explained the concept of product warranty by giving an example on page 72 of the report. The discussion made by the Hon ble Court as under: 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 per cent 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 Accou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... not arise in a significant 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 . 32. In the light of Hon'ble Supreme Court s decision, let us examine the facts of the present case. According to the a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e APO but it is the duty of the assessee to justify that claim on the basis of data systematically maintained by it, which suggests that the alleged contingent liability has been worked out on the basis of past experience and it is akin to a real event. Therefore, we allow this ground of appeal for statistical purposes and remit the issue to the file of the Assessing Officer. The assessee shall submit requisite details and the issue will be adjudicated in the light of Hon'ble Supreme Court s decision in the case of Rotork Controls India Pvt. Ltd.(supra). 34. Ground Nos. 12 and 13 are inter-connected with each other. They read as under: 12. On the facts and circumstances of the case and in law, the learned A.O. has erred in not allowing deduction for expenses of ₹ 12,493,042 which were claimed by the Appellant during the course of assessment proceedings. 13. On the facts and circumstances of the case and in law, the learned A.O. has erred in not allowing deduction for expenses of ₹ 130,932,301 which were erroneously not charged to profit and loss account for subject assessment year and were hence claimed by the Appellant during the course of assessment proc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the expenses to the above extent will be allowable in those assessment years as per sec. 40(a)(i) of the Income-tax Act, 1961. The assessee has claimed the balance amount of ₹ 1309,32,301 in the present year. Such claim was made by the assessee during the assessment proceedings vide letter dated 6.10.2009. Assessing Officer disallowed the claim of assessee by observing that such claim was not made in the return filed either under sec. 139(1) or under sec. 139(5) of the Act. He made reference to the decision of Hon'ble Supreme Court in the case of Geotze India Ltd. (supra) 37. The learned counsel for the assessee submitted that the ITAT in the case of Chicago Pnematic India Ltd. Vs. DCIT reported in 15 SOT 252 had considered a similar situation wherein judgment of Hon'ble Supreme Court in the case of Geotze India was also quoted by the department. These two amounts are directly effecting the tax liability of the assessee and, therefore, the admissibility of deduction ought to have been decided on merit by the Assessing Officer while examining the accounts. Learned DR on the other hand relied upon the order of Assessing Officer and submitted that once the assessee fa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uit, we have found that the CBDT as back as in 1955 issued Circular No. 14 (XL-35), dated 11th April, 1955 as to what should be a Departmental attitude towards refund and reliefs to the assessees. The subject circular is reproduced below for the purpose of ready reference : V. Miscellaneous - Refund and reliefs due to assessees - Departmental attitude towards - The Board have issued instructions from time to time in regard to the attitude which the Officers of the Department should adopt in dealing with assessees in matters affecting their interest and convenience. It appears that these instructions are not being uniformly followed. 2. Complaints are still being received that while Income-tax Officers are prompt in making assessments likely to result into demands and in effecting their recovery, they are lethargic and indifferent in granting refunds and giving reliefs due to assessees under the Act. Dilatoriness or indifference in dealing with refund claims (eithcr under section 48 or due to appellate, revisional, etc. orders) must be completely avoided so that the public may feel that the Government are actually prompt and careful in the matter of collecting taxes and gran ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to present a proper application. (e )Section 33A : Cases in which the Income-tax Officer (now Assessing Officer) or Assistant Commissioner (now Deputy Commissioner) thinks that an assessment should be revised, must be brought to the notice of the Commissioner of Incometax. (f )Section 35 : Mistakes should be rectified as soon as they are discovered without waiting for an assessee to point them out. (g )Section 60(2) : Cases where relief can properly be given under this sub-section should be reported to the Board. In this Circular, the Board has recognised the fact that responsibility for claiming refunds and reliefs rests with the assessee. AS IMPOSED BY LAW even then the Board has directed the officers to draw the attention of the assessees in respect of any refunds or reliefs to which they are eligible, which they have not claimed for some reason or the other. The Board has also given few examples in this regard and has specifically clarified that, these examples are not exhaustive. Further, the Board also issued Circular F. No. 81/27/65-IT(B), dated 18th May, 1965 defining the duties of P.R.Os. in providing assistance to the public . In this circular, the Board has al ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is now issued directing the assessing authorities to grant reliefs/refunds while completing the assessment proceedings, even though such circular may be at variance with the law, as pronounced by the Hon ble Supreme Court, but the same would be binding on the subordinate income-tax authorities. In our opinion, therefore, circulars of same nature which have been already issued would not become irrelevant or can be ignored. Admittedly, the circular issued in 1995 has not been withdrawn, hence, it has got binding force on the subordinate authorities even as on date. Accordingly, we hold that the Assessing Officer is bound to assess the correct income and for this purpose, the Assessing Officer may grant reliefs/refunds suo motu or can do so on being pointed out by the assessee in the course of assessment proceedings for which assessee has not filed revised return, although, as per law, the assessee is required to file the revised return. Having stated so, in our view, the learned CIT(A), having co-terminus powers with the powers of Assessing Officer and the fact that appellate proceedings are the continuation of original proceedings, should have entertained the claim of assessee and a ..... X X X X Extracts X X X X X X X X Extracts X X X X
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