TMI Blog2022 (3) TMI 1511X X X X Extracts X X X X X X X X Extracts X X X X ..... to consideration, in terms of which the margin of the Assessee stands at 2.18%, the Assessee s international transaction in this segment would be at arm s length. The transfer pricing adjustment in trading segment is set aside. The matter is restored to the files of A.O. / T.P.O. for fresh TP analysis taking into account the above mentioned mistake pointed out. TPO is directed to consider the assessee s reply dated 25.01.2013 vide which it had furnished the segmental details reconciled with the financials. It is ordered accordingly. Technical and marketing support services to the AEs in respect of their direct sales made by the AEs to customers in India - Bifurcation of this segment into ITES and MSS segment - TPO held that services under the technical and marketing services segment is essentially dissemination of information and the assessee is acting as communication channel between the customers and the AEs using IT medium - HELD THAT:- The functions performed by the assessee under this segment are prima facie identical for the concerned assessment year and for the assessment year 2013-2014. For assessment year 2013-2014, when the DRP had held that services rendered by t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... directed the A.O. to verify as to whether the extent of Rs.10,38,82,844 has been subjected to double disallowance - The above directions of the DRP, we are in consonance with and the entire issue raised in ground needs to be reexamined by the Assessing Officer taking into consideration the additional evidences now filed before the Tribunal. It is ordered accordingly. Difference between service income disclosed in the P L Account and amount disclosed in the service tax returns brought to tax as undisclosed income - HELD THAT:- The detailed submission of the assessee and the reconciliations are not seen considered by the A.O. nor the DRP. Therefore, for fresh adjudication of the issue raised in ground the matter is restored to the A.O. The A.O. is directed to afford a reasonable opportunity of hearing before a decision is taken on the issue. It is ordered accordingly. Disallowance of depreciation claimed on assets given on lease and taxation of future lease rentals - HELD THAT:- As per section 32 of the I.T.Act, for claiming depreciation, the assessee should be the owner of the asset and must have used the said asset for the purpose of its business. We find that the there ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... stated by AR that the assessee had filed the details along with the submissions dated 08.10.2013 for a further sum of Rs.24.41 crore before the DRP. However, the same was not taken note by the DRP. Accordingly, the issue of actual expenditure on warranty for the disallowance of Rs.24.76 crore is restored to the files of the A.O. The assessee shall cooperate with the A.O. and shall furnish necessary evidence for having incurred the warranty expenditure failing which the A.O. shall make necessary additions. The issue raised as regards the provision for warranty is allowed and the issue in respect of disallowance of warranty expenditure is allowed for statistical purposes. Addition u/s 69C - unexplained expenditure incurred towards freight inwards, outwards or towards other logistic services obtained - HELD THAT:- A.O. is not justified in stating that the assessee has not produced necessary evidence in support of its objections. The assessee had given objections and necessary evidence before the AO and the DRP.Therefore, in view of the directions of the DRP, which we are in consonance with, we direct the A.O. to re-examine the issue raised in ground 15 afresh. Addition of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e filed before the Tribunal, shall take a decision in accordance with law after affording a reasonable opportunity of hearing to the assessee. It is ordered accordingly. Short credit of TDS - HELD THAT:- We direct the A.O. to give correct credit for TDS in accordance with law. Set-off of loss brought forward - HELD THAT:- We direct the A.O. to examine the issue whether the carry forward losses is to be set off or not. It is ordered accordingly. Disallowing in payment for Microsoft Licenses - HELD THAT:- The assessee s AE centrally procure licences from independent unrelated third party vendors on behalf of the Dell Group for their usage and for usage in the products sold. The cost incurred by the AE in this regard are allocated to each of the Dell group entities on the basis of usage of licences by them and are recovered from them at cost.The assessee had also paid Customs Duty on import of licences. The licences so procured by the assessee are used in the products sold by it. In absence of installing such licences, the product sold by the assessee cannot be utilized by the cutomers. Therefore, the usage of licences cannot be doubted. Allocation of cost is as per the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ntained for the year under consideration, the Assessee treated all the international transactions as being at arm s length. During the year, the Assessee also recovered certain advertisement expenses from Intel USA ( Intel ) and Microsoft USA ( Microsoft ). Since the transactions were with unrelated parties, the assessee did not benchmark the same. During the course of assessment proceedings, reference was made to the Transfer Pricing Officer (TPO). The TPO passed an order dated 29.01.2013 under Section 92CA of the Income-tax Act, 1961 ( the Act ) determining a TP adjustment aggregating to Rs. 250,07,40,281/-, comprising of the following: A. Adjustment of Rs. 53,91,00,000/- determined in the trading segment by ignoring the segmental details along with reconciliation with the financials provided by the Assessee and completely ignoring the installation revenue which according to the assessee, was an integral component of the sales effected in the trading segment; B. TP adjustment determined by bifurcating the technical and marketing support services segment into ITES segment and MSS segment, and treating the recovery of expenses from Intel and Microsoft as part of the cost base ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ;s length price. c) The learned AO / learned TPO erred in including the following companies that do not satisfy the test of comparability and should be rejected. Infosys BPO Ltd Accentia Technologies Ltd Cosmic Global Ltd Eclerx Services Ltd d) The learned AO / learned TPO erred in the computation of mark-up for Allsec Technologies Limited. The learned TPO has erroneously considered the provision for bad and doubtful debts as non-operating in nature. e) Having accepted that the appellant is a limited risk contract support service provider, the learned AO / learned TPO erred in not providing appropriate adjustment towards the risk differential, when the com parables selected are full - fledged entrepreneurial companies. 8.1.2 Marketing Support Services a) The learned AO / learned TPO erred in arbitrarily arriving at segmental profit with respect of Marketing support services segment. b) The learned AO / learned TPO erred in adding a mark-up on the impugned marketing support services segment without appreciating the fact that the mark-up on cost is within the + /5% of the arithmetic mean of the comparable companies selected by the appellant and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n of the Hon'ble Supreme Court in the case of ICDS Ltd. vs. Commissioner of Income Tax. Mysore Anr (2012-ITS -01-SC) 14. Disallowance of Provision for Warranty and Warranty expenses - Rs. 821,556,000 A. Disallowance of Provision for warranty - Rs. 57.40 crores The learned AO has erred in not placing reliance on the decision of the Hon'ble Supreme Court in the case of Rotork Controls India (P) Ltd vs. Commissioner or Income Tax (SC) [2009] 80 Taxmann 422. B. Warranty Expenses - Rs.24.76 crores The learned AO and the Hon'ble DRP erred in disallowing the warranty expenses of Rs.24.76 crores without considering the details submitted during DRP proceedings. 15. Unexplained expenditure A. Freight - Rs. 376,642,988 The learned AO erred in invoking section 69C without appreciating that, provisions of section 69C is applicable only in case if no explanation offered on the source of income for the expenses under consideration. The learned AO and the Hon'ble DRP have erred disallowing the freight expenses under section 69C without considering the detail submitted during DRP proceedings. B. Rent - Rs. 2,371,471 The learne ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Rs. 4,73,22,43,000/- Profit Rs. 8,47,38,000/- Margin over cost 1.79% 6.1 The Assessee had submitted to the TPO by reconciling the segmental details with the financials (refer page 5566 of the paperbook-Vol.12), wherein the net mark up on cost was 2.23%. The details of the same are as follows:- Total Income Rs. 6,22,30,99,230/- Total Cost Rs. 6,08,74,11,808/- Profit Rs. 13,56,87,422/- Margin over cost 2.23% 6.2 The Comparison of the benchmarking approach adopted by the Assessee and TPO are as follows:- Particulars Assessee TPO Methodology adopted Transaction Net Margin Method ( TNMM ) TPO accepted the method, the PLI and the comparables selected by the Assessee. (refer page 15 of the TP Order) Profit Level Indicator ( PLI ) OP/OC Database used ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ging installation costs from the clients as a part of the sale of traded goods or if such installation is carried out at the request of its AEs. The DRP therefore upheld the TPO s action. - Re-adoption of proper opening stock: The DRP observed that the TPO has accepted the claim of the Assessee to this extent and directed the TPO to consider the same. - Re-adoption of correct value of cost and revenue: The DRP observed that the Assessee has not reconciled the figures and therefore the action of the TPO was upheld. - Re-exclusion of Rs. 40 crores from the total cost: The Assessee submitted that the TPO has included cost to the extent of Rs. 40 crores which pertains to the technical and marketing support services segment and was recovered with a mark-up from the AEs. While the DRP observed that once the services are segregated, cost related to such other service should not be included in the cost for trading segment, since it was not clear whether the expenses are included, it directed the TPO to examine the same, and exclude it if the expenses are included. - Re-adoption of incorrect depreciation cost: The DRP observed that the cost allocated by the TPO was lesser than t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... irect costs including depreciation, and indirect costs on the basis of revenue, although the Assessee had taken direct costs on actuals; d. The TPO erroneously took into consideration the cost of Rs. 40.31 crores pertaining to the technical and marketing support services segment. 6.8 The learned DR has filed a brief written submission reiterating the reasoning of TPO and DRP. (The Revenue in its appeal vide ground 2 challenges the DRP s directions to adopt the figure of Rs.2.99 crore as depreciation cost in trading. This ground of the Revenue, we shall deal in Revenue s appeal). 6.9 We have heard rival submissions and perused the material on record. Since the assessee s transfer pricing study was inconsistent with its financials, the TPO had proposed to recast segmental details of trading segment vide notice dated 11.01.2013. The assessee filed its reply admitting mistakes (reply dated 25.01.2013) and furnished the segmental details reconciling the financials. The reconciled segmental details with financials are placed at page 556 of the paper book Vol.2. For ready reference, the reconciled segmental details with the financials of the assessee is reproduced below:- ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Rates and taxes 16,63,237 34,87,669 8,80,548 60,31,454 Insurance 17,97,888 70,64,915 15,15,097 1,03,77,900 Power and fuel 1,85,01,686 3,14,93,056 85,46,607 5,85,41,349 Repairs Others - 23,83,02,394 4,18,63,394 28,01,65,788 Legal and professional 17,60,48,489 - 3,00,95,510 20,61,43,999 Communication 1,75,83,169 8,28,62,193 1,71,71,146 11,76,16,508 Commission and rebate 4,60,09,868 18,11,60,213 - 22,71,70,081 Travelling and conveyance 2,13,21,122 10,00,34,107 2,07,45,690 14,21,00,919 Advertisement 7,28,57,118 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 000 Exchange Loss 1,11,09,53,000 Loss on cancellation of forward contracts 1,10,73,000 Interest 7,99,91,000 Depreciation related to MSS not considered in above computation - Profit before tax (66,36,51,678) 6.9.1 The above reconciled segmental details is seen not considered by the TPO and she proceeded to recast the segmental details without assigning any reasons for rejecting the assessee s reconciled segmental details. The assessee in the trading segment provides installation services to the customers for the goods purchased by them. This is evident from the TP study at para 3.2.5 at page 5647 of the paperbook-Vol.12 where it is categorically stated that the Assessee also inter alia provides installation services to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sessment. The additional evidences now produced before the ITAT are necessary document / evidence to prove that installation revenue is integral part of the trading segment. Therefore, for substantial cause and justice, the additional evidence produced vide assessee s applications dated 17.03.2020 and 24.02.2021 are admitted on record. In the TPO s order, the installation revenues are not allocated to any of the segments and thus has been completely ignored which is incorrect. According to the assessee, the installation revenues are attributable only to the manufacturing and trading segments of the Assessee as there can be no installation services in the other segment, viz., technical and marketing support services rendered to the AEs. Moreover, while the TPO took into account the costs incurred in this regard, she failed to allocate the installation revenues to the trading segment. This has resulted in a skewed operating margin. In the subsequent years too, the Assessee has treated the installation revenue as a part of the operating income for the trading segment. This treatment came to be accepted in the subsequent years. 6.9.2 Further, the TPO in the show cause notice dated 1 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ted to consider the assessee s reply dated 25.01.2013 vide which it had furnished the segmental details reconciled with the financials. It is ordered accordingly. 6.9.5 In the result, ground 7.1 is allowed for statistical purposes. B. TECHNICAL AND MARKETING SUPPORT SERVICES SEGMENT (T.P.ADJUSTMENT) [GROUND 8, 8.1, 8.1.2, 9(a), and 9(b)] 7. The Assessee renders technical and marketing support services to the AEs in respect of their direct sales made by the AEs to customers in India. Under this segment, following services are performed:- (i) Interacting with the existing and prospective clients of the AEs in India, understanding their needs for IT hardware and communicating the same to the AEs. (ii) Communicating the price to the customer based on the price band provided by its AEs. (iii) The AEs has contractual obligation to provide warranty services to its customers in India. The Assessee supports the provision of this service by providing telephonic technical and customer care support for standard problems which do not require on-site services. The Assessee merely co-ordinates for the warranty services for the customers of the AEs. The AEs bears all risks a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... see. The dispute arises in this segment as the TPO (i) bifurcated the segment into ITES segment and MSS segment; (ii) arrived at the segmental of the two so called segments, by allocating cost adhoc at 50% to each of the segments and allocating 100% of the profits to the ITES segment; (iii) determined the adjustments in each of the segments on selection of certain companies which according to the assessee is functionally incompatible; and (iv) considering recovery of expenses from Intel and Microsoft towards advertisement as part of the cost base of the MSS segment, and adding a mark-up thereon. 7.5 Aggrieved by the TPO s order, assessee filed objection before the DRP. The Assessee s objections on the aforesaid adjustments made by the TPO were rejected by the DRP in toto and the TPO s action was upheld. Pursuant to the DRP s directions, TP adjustment made by the TPO was incorporated in the final assessment order. 7.6 Aggrieved, assessee is in appeal before the ITAT. The issue / grounds raised in Technical and marketing support services segment are as follows:- (a) Bifurcation of this segment into ITES and MSS segment ( assessee s ground 8, 8.1) (b) Allocation cost at 50 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... information technology, namely:- (i) back office operations; (ii) call centres or contact centre services; (iii) data processing and data mining; (iv) insurance claim processing; (v) legal databases; (vi) creation and maintenance of medical transcription excluding medical advice; (vii) translation services; (viii) payroll; (ix) remote maintenance; (x) revenue accounting; (xi) support centres; (xii) website services; (xiii) data search integration and analysis; (xiv) remote education excluding education content development; or (xv) clinical database management services excluding clinical trials, but does not include any research and development services whether or not in the nature of contract research and development services; (vi) Evidently, merely because services are rendered using IT medium, they cannot be termed as ITES. Therefore, the arbitrary bifurcation of the services into ITES and MSS ought to be set aside. The functions performed in the technical and marketing services segment as set out in TP study at pages 5642-5644 of the paperbookVol.12 does not indicate that any ITES are provided. Reliance is also placed on the a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt year 2013-2014 reads as follows:- Having considered the submissions, and on perusal of the details filed, we note that as per the Services Agreement entered between the assessee and Dell Global BV (Singapore branch) dated 01.01.2009, the assessee is required to prove certain technical support to the customers who purchase products from the assessee, to provide logistics support to ensure delivery of products and services to the customers and also provide marketing support and Sales promotion services. The technical services are provided to the customers of products, and as such cannot be compared to the function of provision of ITES service. Therefore. we are no in agreement with the TPO's view in comparing such services to call entre activity, and there is no information for the TPO to take such a view. Besides, we note that all these functions is provision of logistics support, marketing support and technical support have interrelation in the facts circumstances of the case. Therefore, it would not be appropriate to segregate them into Technical Services Marketing Supports services. Accordingly, the TPO s action in such segregated analysis is disapproved. The TP ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... reflected at Schedule 13 to the accounts at page 6281 of the paperbook-Vol.13. In respect of the products sold by the AE directly to its customers in India, it was submitted that the assessee provides support services to its AEs separately to enable them to fulfill their warranty obligations in respect of the sales made by them. For the support services, the Assessee was compensated at a markup of 5% on costs (as part of the technical and marketing support services segment). It was stated that the cost of the spares utilized for discharging the warranty obligations including the freight charges in connection therewith are borne by the AE. 8.1 The TPO was of the view that the Assessee had not taken note of warranty expenses while arriving at the margin of the technical and marketing support services and was of the view that no mark-up was received on expenses incurred in relation to support provided for the AE s warranty obligation. Proceeding on this basis that some portion of the warranty expenses of Rs. 211.41 crores (wrongly considered as Rs. 268.81 crores in the TP Order, after adding the amount of provision of Rs. 57.39 crore again) pertained to the MSS segment, the TPO co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssee only provides coordination and support services as regards the same, for which it is compensated on cost plus 5%. The co-ordination and support services includes call centre support, cost for third party services for assistance to customers of the AEs, etc. The cost of spares and parts to be replaced under the warranty are borne by the AEs. (ii) During the proceedings before the TPO, the Assessee had submitted that the amount of Rs. 211.42 crores does not pertain to the sales made by AEs in India and that it pertains solely to the sales made by the Assessee. This fact is not disputed. The DRP s directions was for the Assessee to show that the expenses in relation to providing support services for the AE s warranty obligations are either reduced from the costs or accounted for separately. It is evident from Schedule 13 to the accounts that the entire expenses incurred in rendering the technical and marketing support services (including costs in relation to the support services) of Rs. 40.31 crores are reduced from the total operating expenses incurred by the Assessee (please see page 6281 read with page 6309 of the paperbook-Vol.13) and a mark-up of 5% is charged on Rs. 40.3 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as follows:- The Assessing Officer during the relevant assessment year had called for details of taxes deducted on source on various payments in the nature of repairs and maintenance, legal and professional charges, communication, commission and rebate, advertisements, and travelling and conveyance. The assessee submitted details for a substantial amount (upto 80 percent). The AO brought to tax the difference between the amount debited to P L Account and the amount for which details of tax deducted at source was furnished. The A.O. held that taxes have not been deducted on the difference and thus made a disallowance of Rs. 55,30,36,094 by section 40(a)(ia) of the I.T.Act. 9.1 Aggrieved, the assessee filed objection before the DRP. The DRP directed the AO to verify the details submitted by the assessee and that wherever tax has been deducted, the claim of the assessee was to be allowed. The DRP also directed the AO to verify as to whether to the extent of Rs. 10,38,82,844/- there had been a double disallowance. In the final assessment order, the AO did not consider the details submitted by the assessee (at page 57) holding that sufficient opportunity had been given. 9.2 Ag ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ot been deducted on the difference and thus made a disallowance of Rs.55,30,36,094 invoking section 40(a)(ia) of the I.T.Act. It was submitted that to the extent of Rs.10,38,82,844, the assessee had already disallowed the same in its computation of income, and therefore, there is double disallowance to that extent. This fact has been noticed by the DRP and the DRP in its order had specifically directed the A.O. to verify the same. The assesee had produced additional evidence vide its petition dated 05.11.2018. The additional details for an amount of approximately Rs.23.10 crore has been submitted along with the ledger extracts and details of the TDS wherever it is applicable. The additional evidence now produced before the Tribunal are necessary material for proper adjudication of the issue. Therefore, for substantial cause and justice, we take on record the additional evidence now produced before the Tribunal. 9.4.1 The gist of the learned AR s submission is that on considering the additional evidence together with the details submitted to the A.O., it is clear that all amounts debited to the profit and loss account, has been either subjected to TDS or amounts are in such a nat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d Maintenance Particulars Amount Amount debited to profit and loss account 28,01,66,000 Less : Amount voluntarily disallowed u/s 40(a)(ia) 2,70,56,573 (I) 25,31,09,427 Amount for which details of TDS details have been submitted 36,96,39,920 Less : Capital expenditure not debited to profit and loss account. 12,95,80,993 (II) 24,00,58,927 Balance (III=I-II) 1,30,50,500 Less : Amount on which TDS is not applicable, details of which was filed before DRP but not considered in order (IV) 62,11,652 Less : Additional evidence filed before this Hon ble Tribunal on 05.11.2018 on which TDS is not applicable (V) 68,06,111 Balance for which details not filed (VI) = III-IV-V 32,737 9.4.2 The above reconciliation submitted needs to be verified by the TPO. The DRP in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ation and others of Rs. 116,80,40,000, whereas the service tax returns disclosed Rs. 189,78,40,682 as the amount on which service tax liability was discharged. Thus, prima facie there was a difference in service revenue of Rs. 72,98,00,682. During the assessment proceedings assessee submitted that, the above said difference was due to the following reasons: (i) Rs. 54,81,88,597/- represents service tax paid as a service recipient (not as a service provider) with respect to Information Technology Software Service (ITSS) availed by the Company from outside India. This being an expenditure for the Company, this cannot be considered as service income (ii) Balance amount of Rs. 18,16,12,085/- pertains to revenue, the recognition of which is deferred to future years. 10.1 In the draft assessment order (refer page 41 to 44) the AO disregarded the explanation furnished by the Assessee as regards the difference and brought to tax the difference between the income reflected in the P L Account of Rs. 116,80,40,000/- and the amount reflected in the service tax return of Rs. 189,78,40,682/- i.e., an amount of Rs.72,98,00,682/- to tax as undisclosed income. 10.2 Aggrieved, the asses ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... page 321 to 329 of Volume 2 of the paperbook Sample invoices page 319 read with pages 331 to 361 of Volume 2 of the paperbook * Journal entries along with back-up details pages 363 to 389 of Volume 2 of paperbook * General Ledger extracts/screenshots providing details of the accounting entries passed in the books of account (Page 317 of Volume 2 of the paperbook) * Sample copies of Form 15CB certificates covering an amount of approximately Rs. 43.68 crores pages 391 to 431. * As regards the balance Rs.18,16,12,085 though it was submitted initially that the same was on account of deferment of income, on further analysis, reconciliation was given and the reconciliation clearly indicate that the amount reflected in profit and loss account is more than the amounts as per service tax return. 10.4 The learned DR supported the findings of the A.O. and the DRP. 10.5 We have heard rival submissions and perused the material on record. The Assessing Officer in the draft assessment order brought to tax as undisclosed income, the difference reflected in the profit and loss account of Rs.116,80,40,000 and the amount reflected in the service tax return of Rs.189,78,40,68 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... venue as per ST return 134,96,52,085 Less: Gross Income from support services included in ST return on gross basis whereas reflected in the financials on net basis. Hence excluded for parity 35,01,23,435 Revised service revenue in ST return to be compared with service revenue as per financials (B) 99,95,28,650 Higher income as per financials (A-B) 14,63,51,350 Add: Income from product sale of peripherals and accessories grouped under service income in the financials on which no service tax applicable -Identified to the extent of Rs.14,24,71,202 -(C) 14,63,51,350 Revenue as per service tax return matching with financials-(B)+(C) 114,58,80,000 10.5.1 The above reconciliation clearly indicate that the amount reflected in the profit and loss account is more than the amounts as per the service tax return. The break-up of the services income as per the profit and loss account are detailed as under:- Description Amount (in Rs.) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Difference 14,63,51,350 10.5.5 Out of the above, the difference of Rs.14,24,71,202, according to the assessee, represents sale of certain expendable equipment / peripherals and accessories. It is stated by the assessee that since the said income is not the main income of the assessee, i.e., trading and manufacturing, the same is grouped under service and others in the financials. The list of items grouped under installation and other services , ledger extracts and sample invoices is available at page 441 to 545 of Vol.2 of the paper book. 10.5.6 The assessee had filed detailed submission before the A.O. and the DRP. The submissions made by the assessee before the AO and the DRP are as follows:- a. Submission dated 08.10.2013 filed before the DRP Pages 263 535 of Volume 2 of the paperbook b. Submission dated 20.02.2013 filed before the AO Page 4275 read with 4307 of Volume 9 of paperbook. c. Submission dated 22.03.2013 filed before the AO Page 4761 of Volume 10 of the paperbook 10.5.7 The detailed submission of the assessee and the above reconciliations are not seen considered by the A.O. nor the DRP. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... et stand transferred to the lessee whereas in the case of ICDS, ICDS was to remain the exclusive owner of the leased vehicles and therefore the decision in the case of ICDS is inapplicable to the assessee. The DRP further held that Circular No.2 dated 09.02.2001 is not applicable. Pursuant to the DRP s direction, final assessment order was passed. The assessee being aggrieved, has raised this issue before the ITAT. As regards the claim for depreciation on leased assets, the submission of learned AR are summarized as follows:- * There is no distinction between an operating lease and finance lease for the purposes of the Act. As per Section 32 of the Act, an assessee must be the owner of the asset and must use the asset for the purpose of business in order to be eligible to claim depreciation. Hence, for tax purposes, depreciation continues to be allowed to the legal owner and in accordance with the provisions of Section 32 of the Act. * The assessee satisfies the twin conditions provided under Section 32 of the Act. * The CBDT Circular No. 2 dated 9.02.2001 provides that AS 19 requiring capitalization of the asset by the lessees in a finance lease transaction will have no ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d. (1997) 95 taxman 579 (P H) (ii) CIT v. Coral Electronics (P) Ltd. (2005) 142 Taxman 481 (Mad.) [para 2, 3 and 8). 11.4 The learned DR strongly supported the orders of the A.O. and the DRP. 11.5 We have heard rival submissions and perused the material on record. The assessee is primarily engaged in the manufacture and trading of computers. The assessee also gives on lease computer equipment. The assessee-company entered into lease agreement dated 14.11.2006 with General Motors India Private Limited (the lessee). The assessee for the relevant assessment year had claimed depreciation on assets leased stating that it was the owner of the assets. The A.O. by relying on certain clauses in the lease agreement, held that the assessee is in the business of financial lease and is not the owner of the assets leased. By relying on the judgment of the Hon ble Apex Court in the case of ABB v. IFCI reported in 154 Taxman 512 (SC), the Special Bench of the ITAT in IndusInd Bank v. Additional CIT and the Bangalore Bench of the Tribunal in Hewlett Packard India Sales Pvt. Ltd. held that in case of finance lease, the lessee is the owner of the asset and is entitled to depreciation. The A. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the lessee at the end of the lease period for a nominal value would not take away the lessor s right to claim depreciation. The A.O. had relied on clause 5, clause 6 and clause 8 and 9 of said lease agreement to hold that the assessee is not the owner of the leased asset. The relevant clauses relied on by the A.O. are as follows:- (i) Clause 6 - Lessee is to incur the repair cost for the equipment s maintenance. (ii) Clause 8 and 9 Lessee is to incur taxes and insurance cost of the equipment. (iii) Clause 5 Assignment of warranty rights that the assessee has against the manufacturer to the lessee. 11.5.4 None of the above clauses, prima facie, indicate that the lessee is the legal owner of the assets that are leased. On the contrary, the clause provides that the lessor shall make payment of the taxes and will be entitled for a reimbursement from the lessee. Insurance although maintained by the lessee shall be to the satisfaction of the lessor and also the cost incurred which are recurring in nature and are incidental to operating the asset, it is the lessee s responsibility to bear the same. After perusal of the lease agreement, prima facie, we are of the view t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rent assessment year. We are of the view that the entire lease rental income (subsisting during the lease period) does not accrue in the first year as the same ought to be taxed as and when they accrue over the lease period. When the A.O. has accepted that the interest component of lease would accrue as and when the same is due, the same principle would apply to the principle components as well. The stand of the assessee is supported by the judgment of the Hon ble Punjab Haryana High Court in the case of CIT v. Punjab Tractors Co-operative Multipurpose Society Ltd. (1997) 95 taxman 579 (P H) and the judgment of the Hon ble Madras High Court in the case of Coral Electronics (P) Ltd. (2005) 142 taxman 481 (Mad.). The learned AR, on directions from the Bench, had furnished primary entries for leasing. However, there is no clarity on the same. It is not clear how the A.O. has arrived at the figure of Rs.5,89,52,591 to be disallowed in the current year and how it pertains to the future lease rentals. Therefore, in the interest of justice and equity, we restore the issue of taxation of future lease rentals (also raised in the ground 13), to the files of the A.O. 11.5.6 In the result ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mber attached to each IT hardware so as to identify cases of faults; (iii) Thus, the warranty cost is nothing but the product of number of incidents reported and cost involved in servicing each unit under various categories of products; (iv) The system of tracking the faults and related warranty costs is extremely scientific with minimal margin of error as it is based on actual faults reported and costs incurred in servicing them. (v) The assessee neither creates the provision customer wise nor the utilization of such provision for warranty would be tracked customer wise. The tracking is based on the products and not customers. The warranty service for products sold is carried out based on the service tag number ascribed to each such product. Hence, non-submission of the list of customers for whom the warranty expense has been incurred cannot be the basis to conclude that the assessee does not create provision for warranty on a scientific basis, as has been done by the AO. (vi) Further, there are automatic reversals of the provision when products go out of warranty period. For the purpose of estimating the warranty provision, the assessee takes into account only those u ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... material on record. As regards the provision for warranty, the learned AR explained that the methodology followed by the assessee for estimating warranty cost is on a scientific basis and it is based on past years experience. The detailed explanation of the learned AR is recorded in para 12.2 (supra), hence, the same is not reiterated. The Tribunal in assessee s own case for assessment year 2002-2003, 2003-2004 and 2005-2006 had dismissed the appeal of the Revenue and held that the provision of warranty claimed is based on scientific basis and held that it is entitled for deduction. The relevant finding of the Tribunal in assessee s own case for assessment year 2005-2006 in IT(TP)A No.1838/Bang/2013 (order dated 13.10.2017), reads as follows:- 21. We have given a very careful consideration to the rival submissions. The basis on which provision for warranty was made by the assessee was that the Assessee has arrived at a model for ascertaining the warranty cost, based on the type of equipment, periodicity of warranty and nature of commitment. The Assessee has a specialized warranty accounting team which tracks the incidents reported for each product country-wise and associated co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 5. Learned AR of the assessee submitted t hat in the earlier order, though the Hon ble Tribunal held that provision for warranty was made following scientific method and the past history, still the matter was remanded to the AO for verification. He submitted t hat when the entire material is on record, it is not in the fitness of things, to remand the matter to the file of the AO. Our attention was drawn to the material on record wherein the methodology and basis of estimating warranty provision was made out which reads as under: 5. Warranty provisioning policy Methodology and basis of estimating warranty cost: The company has submitted a detailed methodology of estimating the warranty provision before the AO vide its submission on 17.03.2006 for AY 2003-04. An extract of the acknowledged copy of the same is attached herewith as Annexure 2. Please find below a summary of the same: The company has arrived at a model for ascertaining the warranty cost, based on the type of equipment, periodicity of warranty and nature of commitment. The company has a specialized warranty accounting team which tracks the incidents reported fo reach product country-wise and associated ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is of provision for warranty for assessment year 2002-2003, 2003-2004, 2005-2006 and the relevant assessment year, the ruling of the Tribunal in assessment years 2002-2003, 20032004, 2005-2006 is squarely applicable for this assessment year also. 12.5.3 We noticed in the final assessment order, the A.O. had commented that the ITAT order in assessee s group case, namely, CIT v. Dell International Services India Private Limited (wrongly mentioned as assessee s group company) has been set aside by the Hon ble High Court and restored to the Tribunal with a direction to examine the claim of warranty. In this background, it is necessary to recapitulate the background of the Tribunal order for assessment years 2002-2003 and 20032004. In the first round, the Tribunal vide its order dated 16.12.2017 (in ITA Nos.362/Bang/2007 363/Bang/2007) dismissing the appeals filed by the Revenue. The said order was challenged by the Revenue before the Hon ble High Court of Karnataka in ITA Nos.448/2008 and 449/2008. The Hon ble High Court of Karnataka vide judgment dated 26.09.2012, remanded the matter to the Tribunal to decide the issue in the light of Hon ble Supreme Court s judgment in Rotork Co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s.24.76 crore, failing which the A.O. shall make necessary additions. It is ordered accordingly. 12.5.4 Therefore, the issue raised in ground 14 as regards the provision for warranty is allowed and the issue in respect of disallowance of warranty expenditure of Rs.24.76 crore, is allowed for statistical purposes. Addition made under section 69C of the Act (Ground No.15) 13. The brief facts of the issue raised in ground 15 are as follows:- The AO during the course of assessment proceedings had called for details of TDS made on freight expenses. It is stated that the assessee had submitted the details of all freight expenses irrespective of whether the same was incurred towards freight inwards, outwards or towards other logistic services obtained. The details so submitted amounted to Rs. 79,81,25,181 (details of amount of Rs.79,72,64,081 submitted vide submission dated 07.11.2012 and details of amount of Rs.8,61,100 submitted vide submission dated 26.11.2012) .In the schedule to the P L Account, an amount of Rs.42,14,82,193 was debited as freight outwards. The AO disallowed the difference between the two (i.e. Rs.79,81,25,181 Rs.42,14,82,193) and brought to tax Rs.37 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rtain to freight incurred towards transportation of spare parts for warranty. The party-wise details of the said freight amount pertaining to warranty along with the details of TDS deducted on them are available at pages 633-639 and 663-667 of Volume 2 of paperbook. (v) On similar lines, the AO also added an amount of Rs. 23,71,471/- being rent. This difference between the amount debited as Rent (amounting to Rs. 7,06,32,000) and the amount as per the party-wise break up submitted (amounting to Rs. 7,30,03,471) amounting to Rs. 23,71,471 represents the amount debited under other heads of the Profit and Loss account. (vi) Out of the above, Rs.5,04,900/- was inadvertently debited to the rates and taxes ledger, which was explained to the AO vide submission dated 20.02.2013 (Please see page 4285 read with 4599 of Volume 9 of the paperbook). (vii) TDS certificates were provided vide submission dated 07.11.2012 (relevant pages page 1015, 1333-35 at volume 4 of the paperbook) 13.2 In support of above contention, the learned AR relied on the judgment of the Hon ble Delhi High Court in the case of CIT v. Radhika Creation reported in (2011) 10 taxman.com 138 (Delhi). It was con ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssued its direction at paragraph 12.2 to verify the claim. It has directed the AO to produce necessary documents. As per the DRP, if the assessee fails to furnish the evidences the addition will survive to the extent of non furnishing of evidences. 'Prima facie the final order has to be passed without providing any opportunity. The assessee company has never made any such claim in response to noticed issued u/s 142(1) of the IT Act. It was discussed in the draft assessment order. Prima facie the expenditure incurred towards freight was much more than the amounts debited into pal account. Hence no further opportunity could be given to the assessee company and the entire amount of Rs.37,66,42,988/- is retained in the final order. 14.8 Unexplained expenditure - Rent: In paragraph 3 of the draft assessment order a sum of Rs.23,71,471/- was added as unexplained expenditure on payment of rent. In this connection a detailed analysis has been made in the assessment order. Without providing any specific evidence the assessee company has filed the grounds of objection before DRP stating that the said amount has been grouped under other heads of expense in the pal account. In thi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t order. 14.1 Aggrieved by the draft assessment order, the assessee filed objections before the DRP. The DRP rejected the contention of the assessee that the said amount was offered to tax in the previous and subsequent assessment years. The DRP held that income requires to be taxed at the earliest point of time. As regards the alternate contention that if the said amount is taxed in the current AY, the same ought not to be taxed in the other years, the DRP did not issue any directions to that effect holding that the issue did not pertain to the current assessment year. 14.2 Aggrieved, the assessee has raised this issue before the ITAT. The submission of the assessee is summarized as follows:- (a) Before the AO, a detailed reconciliation between the two amounts explaining the difference of Rs. 43,76,995 was submitted to the AO. As per the reconciliation statement, the differential amount was offered to tax as under: (i) Rs.7,24,111/- in the form of excess Vat refund (in excess of the amount as per Joint Commissioner CT, Chennai) recognized and offered to tax for the FY 2007-08; and (ii) Rs.36,52,884/- by debiting the VAT refund receivable account and crediting sales ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... The A.O. brought to tax the difference between Rs.94,14,66,995 and Rs.93,70,89,776 of Rs.43,77,219 as undisclosed income in the draft assessment order. The DRP rejected the contention of the assessee that the said amount was offered to tax in the previous and subsequent assessment years. The DRP held that income requires to be taxed at the earliest point of time. As regards the alternate contention that if the said amount is taxed in the current assessment year, the same ought not to be taxed in the other years, the DRP did not issue any directions to that effect holding that the issue did not pertain to the current assessment year. 14.4.1 It is the claim of the assessee that the entire amount has been offered to tax over a period of three years. The learned AR in his submission had stated that out of difference of Rs.43,77,219 brought to tax by the A.O., a sum of Rs.7,24,111 was offered to tax in the assessment year 2008-2009 and Rs.36,53,108 in the assessment year 2010-2011. It is the claim that the assessee had suffered losses to set off above income, hence, there is no loss to the Revenue on account of the same not been offered to tax during the relevant assessment year 200 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (iii) Deva Interiors Rs. 63,71,722/- The said amount pertains to payments made towards interior decoration for the factory at Chennai. The same was capitalized as building. 15.1 In the draft assessment order, the AO brought to tax an amount of Rs. 13,13,46,253 and allowed depreciation of Rs. 1,21,65,545/- on the basis that the same was claimed as revenue expenditure by the assessee. The DRP directed the AO to verify the claim of the assessee that the said expenses were not claimed as revenue expenditure at all. In the final assessment order, the addition as per draft assessment order was sustained stating that the verification was already done at the stage of draft assessment order. 15.2 Aggrieved, the assessee has raised this issue before the ITAT. The submission of the learned AR are as follows:- a. It is submitted that the AO has erred in placing reliance on the party-wise break-up of repairs and maintenance expenses to make an addition without appreciating that the assessee had not claimed the same as revenue expenditure at all in the first place. b. The payments made to Sobha Developers, Firepro and Deva Interiors were included in the party-wise list of pay ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ought to be reversed and reduced from the capitalized amount and thus the net amount of Rs.22,21,746 has been capitalized as buildings in the fixed asset schedule. The AO proceeded on the basis that if any discount was received, the same ought to have been offered to tax without appreciating that the assessee had capitalized the net amount and was thereby claiming depreciation on the reduced amount. (iii) Deva Interiors Rs. 6,371,722 The payment made towards interior decoration for the factory at Chennai was capitalized as building. The details of capitalization were submitted to the AO and are available at page 5001 of Volume 10 of the paperbook. 15.3 The learned Departmental Representative was duly heard. 15.4 We have heard rival submissions and perused the material on record. The DRP in its order, directed the A.O. to verify the claim of the assessee that the expenditure is capitalized and not claimed as a revenue expenditure. The directions of the DRP read as follows:- 13.2 The assessee has itself stated that the expenditure is in the nature of capital expenditure but it claims that the same has been capitalized and not claimed as revenue expenditure i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the assessee company has debited the capital expenditure into P L account. Hence, it cannot said that it was not verified. Accordingly, the addition of Rs.11,91,80,698/- made in the draft assessment order is retained. 15.4.2 It is to be noted that in the final assessment order the A.O. observed that the ledger and other evidences collected during the course of assessment proceedings was thoroughly examined and specific inference was drawn that the assesseecompany had debited capital expenditure into profit and loss account. The Assessing Officer, pursuant to the DRP s directions, has not verified again in view of the above said observations. The directions of the DRP we are in approval. In the interest of justice and equity, we direct the A.O. to verify once again the claim of the assessee. The AO shall afford a reasonable opportunity of hearing to the assessee before a decision is taken on the issue raised in ground 17. It is ordered accordingly. 15.4.3 In the result, ground 17 is allowed for statistical purposes. Disallowance of expenditure disallowed under section 40(a) in the previous years and reversed in the current assessment year (Ground 18 Additional ground 2 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ch provision for expenses is reversed upon receipt of invoices. Reversal entries are passed by crediting the respective expenditure accounts which is in effect crediting the Profit and Loss account, thereby resulting in higher income for the year. (c) The AO having agreed that the reversal entries were submitted to him, erred in concluding that such reversal entries should have been credited to the P L account instead of the respective expenses accounts. (d) Section 41(1) has no application as there is no cessation of any liability for which the assessee had claimed any deduction in any previous year. The basis of the assessee s claim is that since the provision was disallowed in the computation of a previous year, on reversal of the same, there should be no addition to the income to that extent. (e) The AO failed to appreciate that upon receipt of invoices and the actual expenses being booked, the assessee deducted tax at source on payments made to the parties. However, one to one correlation of the provision of expenses and with the actual invoices and TDS thereon is not the prerequisite for allowing the deduction on reversal of provision. (f) Ledger extracts for adve ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ble. Also, enclosing sample copies of invoices in relation to the same. (e) Details of subsequent payments made to vendors in relation to Repair and maintenance - Others expense amounting to INR 2,089,863, along with details of TDS, wherever applicable. 16.3.3 It was submitted that the additional evidence now produced goes to the root of the issue and for collecting details of the same from the vendors etc. it required time and same could not be produced before the A.O. nor the DRP. The additional evidence now submitted gives the details of the tax deducted at source along with sample invoice copies. For proper adjudication of the issue raised in grounds 18 and additional ground 24, the additional evidences are taken on record. Since the additional evidence had been admitted, necessarily, the same has to be examined by the A.O. For the above said purpose, ground 18 and additional ground 24 are restored to the files of the A.O. The A.O. after considering the submissions made before him, the DRP and the additional evidence filed before the Tribunal, shall take a decision in accordance with law after affording a reasonable opportunity of hearing to the assessee. It is ordered a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... connected with the assessee s ground 7.1 and since ground 7.1 of the assessee s appeal is restored to the files of the AO/TPO (vide our findings in para 6.9 to 6.9.5), we restore ground 2 also to the files of the AO/TPO. 20.1 Hence, ground 2 is allowed for statistical purposes. Ground 3 21. Brief facts in relation to the issue raised in ground 3 are as follows: It was submitted that assessee s AE centrally procures licenses from independent unrelated third party vendors, on behalf of the Dell Group, for their usage and for usage in the products sold. It was stated that the cost incurred by the AE in this regard are allocated to each of the Dell group entities on the basis of usage of licenses by them and are recovered from them at cost. During the year under consideration, the Assessee reimbursed an amount of Rs. 170,60,69,281/- (refer pages 5584, 5625 to 5627 of the paperbook- Vol.12). On this payment, the Assessee deducted tax at source (refer pages 5558-5560 of the paperbook-Vol.12). Customs duty was also paid on import of the licenses. The TPO held that the Assessee has not demonstrated receipt of services, the cost base of the AE, the allocation key of cost a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ctions of the assessee relating to mark up of warranty cost. It is to be noted that the DRP s direction was not given effect to and therefore, ground 4 is misconceived. However, this issue is connected with ground 10 raised in assessee s appeal. Since we have directed the AO / TPO to reexamine ground 10 of the assessee s appeal (see para 8.7 to 8.7.2), ground 4 raised in Revenue s appeal is also restored to the files of the AO / TPO. 22.1 In the result, ground 4 is allowed for statistical purposes. Ground 5 23. The brief facts in relation to the above ground are as follows: Assessee s business includes trading and manufacturing of computer hardware and peripheral products. These products are mainly sourced from outside India from Dell group entities and mainly sold in India s domestic markets with small portion of exports. The assessee being an import driven entity, during the year has made a total import of Rs. 2,277 crores and a total export of Rs. 465 crores. During the said financial year, the rupee value has depreciated considerably from Rs. 40/USD at the beginning of the year to Rs. 50/USD at the end of the year. Owing to huge imports during the year and the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... reign currency transaction to be initially recognized using the exchange rate as on the date of the transaction. However, at each balance sheet date, the foreign currency monetary items would be required to be reported using the closing rate. Such exchange loss accrued as at the year-end is in accordance with the method of accounting regularly adopted by the assessee and is not notional or contingent in nature. Before the AO, the assessee had submitted the following: ledger extracts showing the accounting entries for forex gain/loss for the financial year 2008-09; Sample invoices the process adopted in accounting the forex gain/loss for each of the foreign currency transaction; voluminous back-up workings including monthly Foreign Currency Trial Balance substantiating the net forex gain or loss booked in the forex ledger extracts; Sample copies of intercompany summary extracts showing the invoice value in foreign currency for various transactions etc. 23.5.2 The AO completely ignored the detailed workings on forex loss. Having mentioned in the order that sample invoice copies were submitted, the AO erred in contending that no evidences were provided by the as ..... X X X X Extracts X X X X X X X X Extracts X X X X
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