Loading judgment…
No AI summary yet for this case.
Income Tax Appellate Tribunal, MUMBAI BENCH “J”, MUMBAI
Before: SHRI ABY T VARKEY, HON’BLE & SHRI S. RIFAUR RAHMAN, HONBLE
O R D E R PER S. RIFAUR RAHMAN (AM)
These appeals are filed by the assessee against different directions of the Learned Commissioner of Income Tax (DRP-2), Mumbai-2 [hereinafter in short “Ld. DRP)”] dated 20.03.2021 and 20.01.2022 for the A.Y. 2016-17 and 2017-18 respectively, passed u/s. 144C(5) of Income-tax Act, 1961 (in short “Act”).
2. Since the issues raised in both these appeals are identical, therefore, for the sake of convenience, these appeals are clubbed, heard and disposed off by this consolidated order. We are taking Appeal in ITA.No. 810/MUM/2021 for Assessment Year 2016-17 as a lead appeal.
ITA.NO. 810/MUM/2021 (A.Y. 2016-17)
3. Assessee has raised following grounds in its appeal: -
1. That on the facts and in the circumstances of the case, the lower authorities erred in making an adjustment of Rs.3,58,11,021/- to the income of the assessee, which represented expense incurred by the assessee for the use of trademark owned by the AE.
2. That on the facts and in the circumstances of the case, the lower authorities erred in making an adjustment of Page No. | 2
(A.Y: 2016-17) (A.Y: 2017-18) M/s. Sulzer Pumps India Pvt Ltd Rs.3,99,93,990/- to the income of the assessee, which represented expense incurred by the assessee for the use of SAP licenses procured by the AE from third parties and SAP related support services availed by the assessee from its AE.
3. That on the facts and in the circumstances of the case, the lower authorities erred in making an adjustment of Rs.1,33,45,725/- to the income of the assessee, which represented reimbursement of SAP and Microsoft software license cost made by the assessee to its associated enterprise.
4. That on the facts and in the circumstances of the case, the lower authorities erred in making an adjustment of Rs. 38,30,510/- to the income of the assessee, which represented expenses incurred by the assessee for availing professional services from its associated enterprise.
5. That the facts and in the on circumstances of the case, the lower authorities erred in confirming the alternative disallowance of the TP adjustment under section 37(1) of the Act.
6. That on the facts and in the circumstances of the case, the lower authorities erred in disallowing Rs. 1,63,23,954/- relating to the commission expenditure incurred by the assessee on its export sales.
7. That on the facts and in the circumstances of the case, the lower authorities erred in disallowing Rs. 4,28,59,133/- on account of non- deduction of tax relating to export commission paid by the assessee to its associated enterprises.
That the facts and in the circumstances of the case, the lower authorities erred in disallowing provision made by the assessee towards warranty expenses.
9. That on the facts and in the circumstances of the case, the lower authorities erred in disallowing the warranty expenses incurred by the assessee under Section 40(a)(ia) of the Act, though the expenditure is not liable to deduction of tax at source.
10. That on the facts and in the circumstances of the case, the lower authorities erred in disallowing Rs. 3,23,67,703/- relating to provision made by the assessee towards liquidated damages.
11. That on the facts and in the circumstances of the case, the lower authorities erred in disallowing Rs. 1,10,00,907/- relating Rs.
Page No. | 3 (A.Y: 2016-17) (A.Y: 2017-18) M/s. Sulzer Pumps India Pvt Ltd 36,30,299 to provision made by the assessee towards onerous contracts.
12. That on the facts and in the circumstances of the case, the lower authorities erred in treating a sum of Rs. 66,628/- as the income of the on account of alleged discrepancy in receipts as per books of accounts and 26AS of the assessee.
13. That the amount paid by the assessee in the nature of Education Cess and Higher and Secondary Education Cess ought to be allowed as deduction in computing its business income.
14. That the lower authorities erred in not granting the TDS credit claimed by the assessee in its return of income.
4. We shall proceed to dispose off the appeal ground wise.
With regard to Ground Nos. 1, 2 and 3 which are relating to Payment of Trademark Fees for the license of brand name “SULZER”, Payment of SAP related Support services cost and reimbursement of annual charges towards SAP licenses and Reimbursement of annual charges towards Microsoft Licenses, respectively, Ld. AR brought to our notice that similar grounds which assessee has raised before the Coordinate Bench in ITA.No. 1153 & 6013/Mum/2017 and ITA.No. 6660/Mum/2018 for the A.Y.2012-13, 2013-14 and 2014-15 and Coordinate Bench vide order dated 23.03.2021 has considered and adjudicated the issues in favour of the assessee and he brought to our notice Para No. 25 of the order. Further, he submitted that the Coordinate Bench in assessee’s own case for the A.Y. 2015-16 in Page No. | 4
(A.Y: 2016-17) (A.Y: 2017-18) M/s. Sulzer Pumps India Pvt Ltd ITA.No. 7318/Mum/2019 dated 16.09.2022 has remanded back the issue to the file of TPO. Ld. AR of the assessee prayed for deletion of the addition made by the TPO. Copies of the order are placed on record.
6. On the other hand, Ld. DR relied on the orders of the lower authorities.
7. Considered the rival submissions and material placed on record, we observe that similar issue was considered and adjudicated by the Coordinate Bench in assessee’s own case in ITA.No. 1153 & 6013/Mum/2017 and ITA.No. 6660/Mum/2018 for the A.Y. 2012-13, 2013-14 and 2014-15 respectively, and decided the issue in favour of the assessee. While holding so, the Coordinate Bench held as under: -
“25. We have heard the rival submissions and perused the relevant materials available on record. Having narrated at length the order of the TPO/AO and DRP, the contentions of the Ld. Counsel and the Ld. DR, we adjudicate below the above grounds appeal. We find that the assessee had filed before the TPO on 22.06.2015 (i) Transfer pricing study report for financial year 2011- 12 (ii) Form 3CEB for FY 2011-12 (iii) Financial statements of Sulzer India for the year ended 31 March 2012. The assessee had also filed before the TPO on 04.09.2015 i) Copies of agreements for Trademark fees between Sulzer Management AG and Sulzer India, (ii) Copies of third party
Page No. | 5
(A.Y: 2016-17) (A.Y: 2017-18) M/s. Sulzer Pumps India Pvt Ltd comparable agreements w.r.t trademark fees, (iii) Single year comparable companies margin for FY 20 1 1 -12, (iv) Calculation of operating margin of Sulzer India for FY 2011-12, (v) Description of services and benefits received for payment of ASP management fees, (vi) Copy of agreement for ASP management fees, (vii) E-mail correspondences for payment of ASP management fees, (viii) Copy of inter-company agreement for SAP, (ix) Tickets raised by Appellant for SAP support services, (x) Agreement between Sulzer Holding Inc. and Microsoft Licensing GP, (xi) Agreement between Sulzer Holding Inc. and Sulzer Management AG, (xii) Inter- company memo between Sulzer Management AG and Sulzer India, (xiii) Inter-company invoices and trail of correspondence for engineering services. The assessee had also filed before the TPO on 24.09.2015 (i) Show cause reply for ASP Management fees, (ii) Name of personnel, cost allocation and benefits received from ASP Management services, (iii) Description of services and cost allocation for payment of SAP software related support, (iv) Sample copies of inter-company invoices for SAP software related support, (v) Description of payment of annual charges towards Microsoft licenses fees, (vi) Invoice raised by Sulzer Management AG on SPIL for Microsoft licenses fees The assessee had also filed before the TPO on 08.12.2015 (i) Certificate from Sulzer Management AG for Microsoft Licencce fees along with invoice from Sulzer Holding US to Sulzer Management AG for Microsoft licenses fees, (ii) Certificate from AE for payment of ASP Management fees, (iii) Certificate from AE for payment of SAP software related support The assessee had also filed before the TPO 15.12.2015 (i) Show cause reply for SAP software related support, (ii) Sample copies of email correspondence for SAP software related support, (iii) Show cause reply for payment of trademark fees, (iv) Show cause reply for payment of engineering services, (v) Show cause reply for payment of annual charges towards Microsoft licenses fees, (vi) Brief description for payment of Global IT support service. Finally, the assessee had filed additional evidences before the DRP on 10.06.2016 (i) Detailed note on engineering services along with copies of invoices, (ii) Copy of inter-company invoice for payment of Global IT support service, (iii) Sample copies of email correspondence w.r.t. Global IT support service, (iv) Analysis and benefits derived by use of Sulzer brand.
Page No. | 6
(A.Y: 2016-17) (A.Y: 2017-18) M/s. Sulzer Pumps India Pvt Ltd
25.1 In the instant case, we are of the considered view that given the range of transactions involved, the arm’s length method cannot be adequately applied on a transaction-by-transaction basis. Accordingly, for the purpose of determining the ALP, the assessee has rightly aggregated for the purpose of benchmarking (i) purchase of raw materials, sale of finished goods and engineering services that are essentials to its business, (ii) payment of ASP charges, IT and service charges to assist in business administration and (iii) payment of commission that assists the assessee in obtaining purchase orders from third parties. 25.2 Let us discuss a bit on the concept of burden of proof. This ambiguous term refers to two distinct concepts. The first concept is known particularly the burden of persuasion. A party meets this burden by convincing the factfinder to view the facts in a way that favours that party. Today the phrase burden of proof most often bears this meaning. The second concept is known unambiguously as the duty of producing evidence, the burden of going forward with evidence, the production burden or the burden of evidence. A party meets this burden by introducing enough evidence to have a given issue considered in the case. In burden of proof, the onus frequently shifts as the case proceeds from the person on whom it rested at first to his opponent. This occurs whenever, a prima facie case has been established on any issue of fact or whenever a rebuttable presumption of law has arisen. Thus, the phrase burden of proof is used in two distinct meanings viz, the burden of establishing a case and the burden of introducing evidence. It is well-settled that the primary onus is on the assessee to maintain documentation to demonstrate that the price charged in an international transaction complies with the ALP and the method followed to ascertain the price is the most appropriate method. The assessee discharges this onus by maintaining the documentation; thereafter, the onus shifts to the tax authorities. In the event, the tax authorities disagree with the assessee’s view and seek additional explanation, the burden of proof against shifts to the assessee to prove why the method adopted by the assessee is correct. In the instant case, as narrated hereinabove the assessee has discharged its onus by maintaining the documentation. Further, during the TP proceedings, the assessee has filed before the TPO sufficient details called for. Then the burden of proof has shifted to Page No. | 7
(A.Y: 2016-17) (A.Y: 2017-18) M/s. Sulzer Pumps India Pvt Ltd the TPO. However, the TPO has made the disallowances / adjustments on general propositions. We are reminded by the great aphorism of Justice Oliver Wendell Holmes in Lochner v. New York, 198 U.S. 45,76 (1905) that “general propositions do not decide concrete cases.” As mentioned earlier, the assessee vide letter dated 27.02.2015, 04.09.2015, 24.09.2015, 08.12.2015 and 15.12.2015 has filed sufficient details in response to the queries raised by the TPO during the course of TP proceedings. Further, the assessee has filed before the DRP additional evidence dated 06.06.2016. However, instead of examining / scrutinizing those submissions, the tax authorities have made disallowances/adjustments on general propositions. Having considered the above factual scenario, we allow the 4th , 5th, 6th, 7th, 8th and 9th ground of appeal.”
8. Further, we observe that in assessee’s own case for the immediately preceding assessment year i.e., A.Y.2015-16 the Coordinate Bench in ITA.No. 7318/Mum/2019 remanded the issue back to the TPO observing as under: - “041. We failed to understand that how an international transaction of two different years, particularly in the transactions where the rendition test, benefit test, etc are required to be proved. This exercise is required to be proved every year. Therefore, even if the issue is set aside or allowed in another years does not have any impact on determination of ALP of such transaction for the impugned year because assessee necessarily has to benchmark the transaction and then determine its ALP every year. Only some qualitative ratios of decision may have persuasive value.
42. Further in this year assessee itself has benchmarked these transactions adopting different Most Appropriate methods. It is not the case that assessee has aggregated these transactions for benchmarking.
The Ld TPO and Ld DRP has also approached the transaction based on judicial precedents for earlier years. This is not the Page No. | 8 (A.Y: 2016-17) (A.Y: 2017-18) M/s. Sulzer Pumps India Pvt Ltd mandate of provision of Ch X which required to determine ALP of International Transactions every year.
44. Ld TPO and Ld DRP has also noted that with respect to the International Transaction assess has also not submitted certain details. In both the orders of the coordinate benches, its categorically held that Alp of International Transaction is not determined.
As there is no determination of ALP of International Transaction but rejection of evidences of Assessee based on earlier years proceedings, Therefore , we set aside ground no 6 to 9 of the appeal of the assessee back to file of the Ld TPO to examine the information submitted by the assessee along with Most Appropriate Method adopted by assessee, verify the comparability analysis and then determine ALP of International Transactions.”
9. Since the issue is exactly similar and grounds as well as the facts are also identical, respectfully following the decision of coordinate bench in the AY 2015-16, we also set aside the grounds raised by the assessee back to file of AO/TPO to verify the information submitted along with most appropriate method adopted by the assessee, verify the TP study alongwith the comparability study conducted by the assessee and accordingly determine the ALP. Accordingly, the ground Nos. 1, 2 & 3 raised by the assessee are allowed for statistical purpose.
With regard to Ground No. 4 which is relating to payment for availing professional services, brief facts relating to the ground are, during the year under consideration, the Assessee has paid amount towards for technical services. The technical services represents
Page No. | 9
(A.Y: 2016-17) (A.Y: 2017-18) M/s. Sulzer Pumps India Pvt Ltd expenses relating to repair/ rework/ rectification work carried out for pumps sold to the end customer and the warranty period in respect of such pumps has expired. Instead of carrying out the repair/ rework/ rectification work itself, the Assessee requests its AE which is located in the country of customer to carry out the said work. During the course of assessment proceedings, the Assessee was show-caused as to why the ALP of these transaction should not be treated as NIL as upheld by the department in earlier years. In response, Assessee had submitted its submissions. After considering the submissions of the assessee Assessing Officer observed that this is a recurring issue. In earlier year also ALP of this transaction was not accepted by the department. Facts of the year under consideration are not different. Therefore following the precedent and on the facts of the case of this year the ALP of transaction is treated as NIL. The legal aspect of need benefit and evidence test as discussed in Para no.6.1 of the TPO order the TPO's comment are commonly applicable to this transactions. Thus, the benchmarking towards professional licensing fees is rejected as per the section 92C(3) of the Act, and accordingly, an adjustment of ₹.38,30,510/-.
Page No. | 10
(A.Y: 2016-17) (A.Y: 2017-18) M/s. Sulzer Pumps India Pvt Ltd
11. Aggrieved assessee preferred objection before Ld. DRP, after considering the submissions of the assessee, Ld. DRP rejected the objection raised by the assessee observing as under: - “Objection No.5: Payment for professional services received by assessee from AE amounting to Rs.38,30,510/-.
Discussion and Directions of DRP: 9.3.1 We have considered the submission of the assessee. It is found that this issue has been under consideration before the DRP previously in AYs 2012-13 to AY2015-16. It is found that in AY 2012-13, the DRP vide Para 10.3 of the directions dated 29.11.2016, has confirmed the adjustment made by the TPO with following observations: 10.3.1 Grounds of Objection 5 related to the proposed adjustment of Rs. 11,05,9797-in respect of payment for availing engineering services 10.3.2 The assessee has submitted additional evidence vide letter dated 10 6 10.3.2 The additional evidence was forwarded to the AO vide letter dated 14.6.2016 for verification and comments on merits of submissions as well as admissibility of the additional evidence. Reminders were also issued to the AO, the DCIT 15 (3)(2).vide letter dated 22 8 2016 and 22 9 2016. No comments were received from the AO. Therefore the additional evidences submitted by the assessee are admitted for deciding the issue on merit. 10.3.3 We have perused the evidence submitted by the assessee. The assessee has enclosed certain invoices as well as emails as a part of the Paper Book, as well as additional evidence in support of its claim. However no further details as requisitioned by the TPO, as narrated in para 10.1.2 above i.e. the details of employees of the AE who worked for the assessee, the time spent by them, the timesheets evidencing the time is spent etc. to authenticate the expenses claimed were produced before us to verify the claim of the assessee.
Page No. | 11
(A.Y: 2016-17) (A.Y: 2017-18) M/s. Sulzer Pumps India Pvt Ltd
10.3.4 The assessee has not been able to substantiate its claim before us. 10.3.5 In view of the foregoing, the objection raised by the assessee is rejected. 9.3.2 The above findings were followed by the DRP in AY 2013-14, AY 2014-15 and AY 2015-16. The facts of the case remain the same during the year under reference as well. The assessee has also advanced identical arguments on the issue. Hence, there is no reason to deviate from the findings of the DRP for earlier years as above, when there is no change in the material facts during the year under reference. The facts and legalities as discussed at para 6.3.8 & 6.3.9 as discussed by this panel in disposing off the assessee's Objection No.2 equally applied to this issue. However for the sake of avoiding the repetition, the same are not being reproduced here. The Grounds of objection raised by the assessee are accordingly rejected.”
Aggrieved assessee is in appeal before us, at the time of hearing, Ld. AR submitted as under: -
“V. ALP of Professional fee paid to AE for providing technical services cannot be held to be "Nil" B.38. The payment for professional services represents expenses relating to design layout support, engineering support, supervision of erection and commissioning of pumps, training, etc. provided by the AEs. B.39. Instead of carrying out the above-stated work itself, the Assessee requests its AE which is located in the country of customer to carry out the said work. This proves to be economically as well as operationally efficient for the Assessee, as the cost of carrying out such work by it would have been much higher than the charges paid for this to its AEs, since the AEs being in the location of the customer, are better placed to carry out the work. Further, it also ensures better response time to the customer request and enhances customer relationship. For the above services, the Assessee paid professional service fees to AEs on which it duly deducted the applicable TDS.
Page No. | 12
(A.Y: 2016-17) (A.Y: 2017-18) M/s. Sulzer Pumps India Pvt Ltd
B.40. In order to support its argument, the Assessee had submitted (a) invoices in respect of the payment made to AEs for availing professional services from them (Refer to Page No. 345 - 358 of Paper book II), (b) detailed explanation regarding the nature of services received along with the supporting documents (Refer to Page No. 342 - 344 of Paper book II), and (c) e-mail communications between the Assessee and its AE to prove the receipt of the professional services (Refer to Page No. 345 - 380 of Paper book II). A summary of the same is tabulated below: Vendor Document Number Amount (INR) Sulzer Pumps (US) Inc. 919002336 453,950 Sulzer Pumpen (Deutschland) GmbH 919003340 55,3996 Suizer Pumpen (Deutschland) GmbH 919003340 5,831 Sulzer Korea Ltd. 919003276 80,765 Sulzer Asia Pacific Pte Ltd 952002794 60,869 Sulzer Pumps (US) Inc. 919007562 118,908 Sulzer Pumps Mexico. S.A. de CV 919007563 181,013 Sulzer Pumps (Suzhou) Ltd. 919002352 281,275 PT. Sulzer Turbo Services Indonesia 919005646 399,876 SULZER PUMPS COLOMBIA S.A.S 919007569 921,539 Sulzer Pumps (US) Inc. 919007566 1,271,088 Total 3,830,510 B.41. On account of the submissions in the foregoing paragraphs, it is submitted that the Ld. TPO and consequently DRP has erred in holding the ALP of the transaction under consideration at Nil.”
On the other hand, Ld. DR relied on the orders of the lower authorities.
Considered the rival submissions and material placed on record, we observe that the assessee having renowned brand name and catering to the customers across the world. The assessee is an Indian company selling motors/pumps to Indian customers and also it is submitted that they market specific and special kind of motors/pumps to Page No. | 13
(A.Y: 2016-17) (A.Y: 2017-18) M/s. Sulzer Pumps India Pvt Ltd various customers in other countries. Since it is dealing with the special category of the motors/pumps, it is understandable that assessee has to extend the customer support service to the customers located outside India. It is also understandable that it is cheaper to avail the respective AE’s support. The assessee has submitted relevant supporting documents to demonstrate that they have availed the services of the AE’s. The revenue authorities have rejected the submissions of the assessee without really verifying the same. Therefore, we are inclined remit this issue also to the file of AO with a direction to verify the claim of the assessee after giving them proper opportunity of being heard. Accordingly, the ground raised by the assessee is allowed for statistical purpose.
With regard to Ground No. 5 which is in respect of confirming the alternative disallowance of the TP adjustment u/s. 37(1) of the Act, at the time of hearing, Ld. AR has submitted that AO/TPO cannot resort to disallow the TP adjustments u/s 37(1) of the Act. It is a general submissions made by the Ld AR and considering the fact on record, the AO cannot resort to disallow the expenses or adjustments u/s 37(1) of the Act when the issue is referred to TPO and except making
Page No. | 14
(A.Y: 2016-17) (A.Y: 2017-18) M/s. Sulzer Pumps India Pvt Ltd adjustments as per the TP analysis, no other adjustment can be made by the AO to the same set of issues. Therefore, we are incline to allow the ground no 5 raised by the assessee.
16. With regard to Ground No. 6 which is in respect of disallowance of the commission expenditure incurred by treating the same as provision, Ld. AR brought to our notice that similar ground which assessee has raised before the Coordinate Bench in assessee’s own case for the A.Y.2015-16 in ITA.No.7318/Mum/2019 and Coordinate Bench vide order dated 16.09.2022 has considered and adjudicated the issue in favour of the assessee and he brought to our notice Para No. 18 of the order. Copy of the order is placed on record.
17. On the other hand, Ld. DR relied on the orders of the lower authorities.
Considered the rival submissions and material placed on record, we observe that similar issue was considered and adjudicated by the Coordinate Bench in assessee’s own case in ITA.No.7318/Mum/2019 for the preceding assessment year i.e., A.Y. 2015-16 and decided the issue
Page No. | 15
(A.Y: 2016-17) (A.Y: 2017-18) M/s. Sulzer Pumps India Pvt Ltd in favour of the assessee. While holding so, the Coordinate Bench held as under: -
“018. We have carefully considered the rival contention and perused the orders of the lower authorities. Admittedly, assessee exports the pumps to overseas customers. During the year, the assessee has exported of ₹ 251.91 crores, which is almost 50% of its turnover. Assessee does not have any branch office outside India to source its export orders. For this reason the associated Enterprises of the assessee performs the duty of the agents and assessee pays them commission on the sales. During the year, the assessee has recorded Rs 4, 94,66,527/- as commission due on account of sales recorded during the year. The arm’s-length price of the commission expenses are accepted by the learned transfer pricing officer but the learned assessing officer stated that the commission paid is merely a provision because the invoices for commission has not been received by the assessee during the year. Therefore, it is disallowed. We find that when the sales are concluded during the year, naturally the corresponding expenses of commission have also accrued to the assessee. For such commission, the amount of commission, recipients of commission as well as the basis of such commission payment are known to the assessee. The liability for payment of commission has already been incurred by the assessee as soon as sales are concluded for the reason that corresponding bills have not been received from the associated enterprises cannot come into the way of deduction claimed by the assessee. It is not the case of the revenue that subsequently also the assessee did not receive the bill or no export commission was required to be paid on such sales. Therefore, it is an ascertained liability of the assessee as soon as sales are made. Learned transfer pricing officer by determining the arm’s-length price of the commission expenses clearly proved that the services been rendered by those agents. Therefore, it cannot be said that such provision is not allowable. In View of this, we do not find any reason to uphold disallowance made by the learned assessing officer holding that provision for commission payable to associated enterprises for procuring export order is merely a provision and not an ascertained liability. Hence, we direct the learned assessing Officer delete the disallowance of Rs. 170,99,895/– on this account accordingly ground number 2 of the appeal is allowed.”
Page No. | 16
(A.Y: 2016-17) (A.Y: 2017-18) M/s. Sulzer Pumps India Pvt Ltd 19. Since the issue is exactly similar in this appeal and grounds as well as the facts are also identical, respectfully following the above decision in assessee’s own case for the A.Y. 2015-16, we allow the ground raised by the assessee.
With regard to Ground No. 7 which is in respect of disallowance for non-deduction of tax on export commission paid, Ld. AR brought to our notice that similar ground which assessee has raised before the Coordinate Bench in assessee’s own case for the A.Y.2015-16 in ITA.No.7318/Mum/2019 and Coordinate Bench vide order dated 16.09.2022 has considered and adjudicated the issue in favour of the assessee and he brought to our notice Para No. 14 of the order. Copy of the order is placed on record.
On the other hand, Ld. DR relied on the orders of the lower authorities.
Considered the rival submissions and material placed on record, we observe that similar issue was considered and adjudicated by the Coordinate Bench in assessee’s own case in ITA.No.7318/Mum/2019 for the preceding assessment year i.e., A.Y. 2015-16 and decided the issue
Page No. | 17
(A.Y: 2016-17) (A.Y: 2017-18) M/s. Sulzer Pumps India Pvt Ltd in favour of the assessee. While holding so, the Coordinate Bench held as under: -
“014. We have carefully considered the rival contention and perused the orders of the road lower authorities as well as the order of the assessing officer in case of the assessee for assessment year 2007–08. We find that assessee is a manufacturer of power driven pumps. These pumps are sold to customers in India as well as in overseas market. Assessee does not have any offices outside India but market is served by the associated Enterprises of the assessee. For this purpose, the assessee pays the commission to the associated enterprises. This year such commission payment was of ₹ 35,424,361/–. Though the transaction was accepted by the learned transfer pricing officer at arm’s-length price, however, the learned assessing officer disallowed the same for the reason that assessee has not deducted tax at source u/s 195 of the Act and hence disallowable u/s 40 (a)(i) of the Act , as according to the learned assessing officer u/s 195 of the income tax act the commission paid to associated enterprises should have been subjected to tax deduction at source. In the present case the associated enterprises do not carry on any business operation in India, they merely acted as selling agents of the assessee outside India. The issue is squarely covered by the decision of the honourable Bombay High Court in 364 ITR 227 in DIT v Wizcraft International entertainment private limited wherein it has been held that the non-resident agent did not perform any services in India but rendered services outside India and therefore the commission income to the agent is not liable to tax in India and therefore there was no obligation on part of the assessee to deduct tax at source at the time of making such payment. Further, in the case of the assessee the identical issue has been accepted by the learned revenue authorities in earlier years. In view of this, we do not agree with the findings of the lower authorities that the assessee should have deducted tax at source on payment of commission to its associated enterprises in Foreign Countries , that did not have any permanent establishment in India or were not carrying on any business in India but were rendering services outside India. Accordingly, ground number 1 of the appeal of the assessee is allowed and the learned assessing officer is directed to delete the disallowance of ₹ 35,424,361/– because of commission paid to associated enterprise for procurement of export orders.”
Page No. | 18
(A.Y: 2016-17) (A.Y: 2017-18) M/s. Sulzer Pumps India Pvt Ltd 23. Since the issue is exactly similar in this appeal and grounds as well as the facts are also identical, respectfully following the above decision in assessee’s own case for the A.Y. 2015-16, we allow the ground raised by the assessee.
With regard to Ground No. 8 which is in respect of disallowance of the provision towards warranty expenses, Ld. AR brought to our notice that similar ground which assessee has raised before the Coordinate Bench in assessee’s own case for the A.Y.2015-16 in ITA.No.7318/Mum/2019 and Coordinate Bench vide order dated 16.09.2022 has considered and adjudicated the issue in favour of the assessee and he brought to our notice Para No. 23 of the order. Copy of the order is placed on record.
On the other hand, Ld. DR relied on the orders of the lower authorities.
Considered the rival submissions and material placed on record, we observe that similar issue was considered and adjudicated by the Coordinate Bench in assessee’s own case in ITA.No.7318/Mum/2019 for the preceding assessment year i.e., A.Y. 2015-16 and decided the issue
Page No. | 19
(A.Y: 2016-17) (A.Y: 2017-18) M/s. Sulzer Pumps India Pvt Ltd in favour of the assessee. While holding so, the Coordinate Bench held as under: -
“023. We have carefully considered the rival contentions and perused the orders of the lower authorities. Assessee made provision for warranty expenditure on the pump and sold at the rate of 1.25% . Learned AO disallowed it stating that it is merely provision and not ascertained liability. The learned Assessing Officer further noted that no tax has deducted at source on such expenditure under Section 195 read with section 9(1)(vii) of the Act, the disallowance of ₹3,73,10,068/- was made. We find that assessee is engaged in manufacturing and sale of centrifugal power driven pumps, assessee assures its customer warranty for period of 18 months after sales . As during this period of warranty, assessee indicates a liability to repair, rework and rectify any defect in the product and sold it provides warranty on the basis of past history and scientific basis of failure of the product sold. For 18 months of sale of pump, the assessee makes the provision of warranty. The learned Authorized Representative demonstrated the warranty expenditure for various period where the actual warranty percentage are ranging from 6.48% to 2.46% and which averages out to 1.25 percentage and therefore, the provision was credited in the books of account on that basis. He also referred to the past trend for last three years to show that average warranty is 1.17% of the sales. He submitted that as the warranty condition is embedded into the sale price, as soon as the sale are recorded and recognized as Revenue, related warranty cost is also required to be provided for according to the accounting standard 9 of the ICAI. He therefore, submitted that this warranty cost is ascertained liability and not merely the provision. He further, stated that this issue is squarely covered in favour of the assessee by the decision of the Hon'ble Supreme Court in case of Rotork Controls India (P.) Ltd. (2009) 314 ITR 62 (SC). We find that the provision of the liability has been made by the assessee on the past trends available of the product failure and incurring of warranty expenditure for that. Naturally, assessee extends the warranty of the pumps sold for 18 months. The only information that could be used by the assessee is the past product failure. This is not proved to be incorrect by the revenue authorities. Warranty is necessary cost, which is embedded in the sale price. The contract of sale itself includes the same. Therefore, as soon as the sales are accounted for as income, the corresponding warranty liability is required to be provided as expenditure incurred. The quantum of warranty
Page No. | 20
(A.Y: 2016-17) (A.Y: 2017-18) M/s. Sulzer Pumps India Pvt Ltd expenditure if determined in accordance with some method based on past trends of the product failure, and such provision is not excessive, same deserves to be allowed as expenditure against the sales income by the assessee. The honourable Supreme Court covers this issue in favour of the assessee. Before us, assessee has provided the calculations of each for provision of warranty made in the respective year as well as the financial statements of the assessee for earlier years to show that such provision are not in excess of any requirement for meeting warranty liability. The learned assessing officer and the learned dispute resolution panel did not show what is the scientific method other than this that the assessee should have employed for determining the liability of warranty. In view of this, we are of the opinion that warranty provision made by the assessee is not an unascertained liability but definite and ascertained liability, which is quantified on the basis of past history of the product failure. Accordingly, the learned assessing officer is not correct in disallowing the warranty expenditure amounting to ₹ 37,310,658/– stating that it is not allowable. Therefore, the disallowance deserves to be deleted.
Since the issue is exactly similar in this appeal and grounds as well as the facts are also identical, respectfully following the above decision in assessee’s own case for the A.Y. 2015-16, we allow the ground raised by the assessee.
With regard to Ground No. 9 which is in respect of disallowance of non-deduction of tax on warranty expenses paid, Ld. AR brought to our notice that similar ground which assessee has raised before the Coordinate Bench in assessee’s own case for the A.Y.2015-16 in ITA.No.7318/Mum/2019 and Coordinate Bench vide order dated 16.09.2022 has considered and adjudicated the issue in favour of the Page No. | 21
(A.Y: 2016-17) (A.Y: 2017-18) M/s. Sulzer Pumps India Pvt Ltd assessee and he brought to our notice Para No. 26 of the order. Copy of the order is placed on record.
On the other hand, Ld. DR relied on the orders of the lower authorities.
Considered the rival submissions and material placed on record, we observe that similar issue was considered and adjudicated by the Coordinate Bench in assessee’s own case in ITA.No.7318/Mum/2019 for the preceding assessment year i.e., A.Y. 2015-16 and decided the issue in favour of the assessee. While holding so, the Coordinate Bench held as under: -
“024. With respect to the deduction of tax at source, the learned authorised representative submitted that as the person whom the credit is given is unknown at the time of provisioning, therefore, no tax can be deducted, as the payee is not identified. We find no force in this argument because as soon as the sales are made, the assessee is aware in which geographical location such sales are made and which associated enterprises is going to perform this service over a period of 18 months. It is not the case of the assessee that there are multiple associated enterprises in a particular jurisdiction to perform this activity and assessee selects one of them to perform the same. Therefore, the payees are identified, the quantum is ascertained and the period for which the payment is required to be made is also known. Hence, we reject this argument. There is one more reason to reject the same because at the time of booking of export commission expenses without receiving the bill, the argument of the assessee was exactly opposite. The export commission liability as well as the liability of Page No. | 22
(A.Y: 2016-17) (A.Y: 2017-18) M/s. Sulzer Pumps India Pvt Ltd warranty which are embedded in the sale price and are incurred simultaneously.
25. The next argument for non-deduction of tax of the warranty expenditure raised by the learned authorised representative is that as the warranty expenditure relates to services utilized in business carried out by the assessee outside India and thereby it falls into the exclusion under Section 9(1) (vii) (b) of the Act from the definition of income of fees for technical services. He submitted that assessee export goods manufactured by it to overseas customers. To them, the warranty obligation of the assessee was fulfilled by Associated Enterprises. These Associated Enterprises then, charges the assessee for the services provided by it. He submitted that the payment for availing repair services was utilized by the assessee for the business carried on by the assessee outside India of making or earning income from source outside India. Therefore, according him these payments falls in the exclusion clause of Section 9(1)(vii)(b) of the Act not liable for taxation in India. Therefore, no tax is required to be deducted at source. To further support his arguments, that assessee should be regarded as a person carrying on business outside India, he further referred to several judicial precedents. He submitted that this judicial precedents clearly lay down that even if the person does not have a physical persons in another jurisdiction, he can be considered as carrying on business in that country, if he habitually and regularly sales goods in that country. He further submitted that the term business is of a very wide import, thus he submitted that warranty services have been availed from Associated Enterprises for earning income form a source outside India and therefore, the payment is not subject to TDS under Section 195 of the Act. He further distinguished the decision of the Hon'ble Delhi High Court in case of CIT vs. Hevells India Ltd as well as of Hon'ble Madras High Court in CIT vs. Anglo French textiles (1993) 199 ITR7 85 (Mad) Hon'ble Delhi High Court was not concerned with the applicability of first explanation to section 9(1)(vii)(b) of the Act. He submitted that the Hon'ble Gujarat High Court in case of Motive India InfoTech Pvt. Ltd. [2018] 409 ITR 178 (Guj) squarely covers the issue in favour of the assessee. He further relied on the decision of DCIT vs. Lufthansa Cargo Hon'ble Delhi High Court 375 ITR 85. He otherwise submitted that warranty charges are not liable to tax with respect to Associated Enterprises in Switzerland, Spain and Singapore in view of make available clause. He submitted that the warranty charges does not satisfy that condition and therefore, in any case, the warranty charges paid to Associated Enterprises who are residents of Switzerland, Spain and Singapore no tax is required to be deducted and therefore, no disallowance for non deduction of Page No. | 23
(A.Y: 2016-17) (A.Y: 2017-18) M/s. Sulzer Pumps India Pvt Ltd tax can be made. We find that this issue is squarely covered in the favour of the assessee by decision of the honourable Gujarat High Court in [2018] 409 ITR 178 (Guj)in wherein it has been held as Under:- “5. Having heard learned advocates for the parties, we notice that indisputably the assessee who provides software related services to many of its clients situated abroad, had hired services of the said M/s. Pacific Hub Corporation, Philippines. The said M/s. PHC, Philippines does not have a permanent establishment in India. It would render services for obtaining human resources and infrastructure services to the assessee for serving its foreign based clients. In this context, a question arises whether at the time of making payments for such services, deduction of tax at source was31 necessary.
6. In the case of GE India Technology Centre P. Limited v. CIT reported in [2010] 327 ITR 456 (SC), the ratio laid down by the Supreme Court was that mere remittance of money to a non-resident would not give rise to the requirement of deducting tax at source, unless such remittance contains wholly or partly taxable income. It is true that after such judgment was rendered, the Legislature had amended section 195 of the Act by inserting Explanation 2 by the Finance Act, 2012, but with retrospective effect from April 1, 1962. Such Explanation provides that for removal of doubts, it is clarified that the obligation to comply with subsection (1) of section 195, and to make deduction as provided therein applies and shall be deemed to have always applied to all persons, resident or nonresident, whether or not the non-resident person has a residence or place of business or business connection in India ; or any other presence in any manner whatsoever in India. Mere requirement of permanent establishment in India was thus done away with. Nevertheless, the basic principle that requirement of deduction of tax at source would arise only in a case where the payment made to a non- resident was taxable, still remains. It was observed in a decision dated April 9, 2018, rendered in Tax Appeal No. 290 of 2018 (Principal CIT v. Nova Technocast Pvt. Ltd. [2018] 12 ITR-OL 353 (Guj)) by the Division Bench of this court, as under (page 356 of 12 ITR-OL) :
Page No. | 24
(A.Y: 2016-17) (A.Y: 2017-18) M/s. Sulzer Pumps India Pvt Ltd
"It can thus be seen that while confirming the order of CIT(A), the Tribunal relied on the judgment of the Supreme Court in the case of Page No : 183 GE India Technology Centre P. Limited v. CIT reported in [2010] 327 ITR 456 (SC). In such judgment, it was held and observed that the most important expression in section 195(1) of the Act consists of the words, 'chargeable under the provisions of the Act'. It was observed that, '. . . A person paying interest or any other sum to a non-resident is not liable to deduct tax if such sum is not chargeable to tax under the Act'. The counsel for the Revenue, however, drew our attention to Explanation 2 to sub-section (1) of section 195 of the Act which was inserted by the Finance Act of 2012 with retrospective effect from April 1, 1962. Such Explanation reads as under : 'Explanation 2.— For the removal of doubts, it is hereby clarified that the obligation to comply with sub-section (1) and to make deduction thereunder applies and shall be deemed to have always applied and extends and shall be deemed to have always extended to all persons, resident or non- resident, whether or not the non-resident person has— 33- (i) a residence or place of business or business connection in India ; or (ii) any other presence in any manner whatsoever in India.' It is indisputably true that such Explanation inserted with retrospective effect provides that obligation to comply with sub-section (1) of section 195 would extend to any person resident or non-resident, whether or not nonresident person has a residence or place of business or business connections in India or any other persons in any manner whatsoever in India. This expression which is added for removal of doubt is clear from the plain language thereof, may have a bearing while ascertaining whether certain payment made to a nonresident was taxable under the Act or not. However, once the conclusion is arrived that such payment did not entail tax liability of the payee under the Act, as held by the Supreme Court in the case of GE India Technology Centre P. Limited (supra), sub- section (1) of section 195 of the Act would not Page No. | 25
(A.Y: 2016-17) (A.Y: 2017-18) M/s. Sulzer Pumps India Pvt Ltd apply. The fundamental principle of deducting tax at source in connection with payment only, where the sum is chargeable to tax under the Act, still continues to hold the field. In the present case, the Revenue has not even seriously contended that the payment to foreign commission agent was not taxable in India."
In this context, we would refer to section 9(1)(vii)(b) of the Act. Sub-section (1) of section 9 enlists situations under which the income shall be deemed to accrue or arise in India. Clause (vii) contained therein pertains to income by way of fees for technical services payable by the Government or a person who is a resident, or a person who is a nonresident under the circumstances specified therein. Sub-clause (b) thereof pertains to a person who is a resident and reads as under : "9. Income deemed to accrue or arise in India.— (1) . . . (vii) income by way of fees for technical services payable by— (a) the Government ; or (b) a person who is resident, except where the fees are payable in respect of services utilized in a business or profession carried on by such person outside India or for the purposes of making or earning any income from any source outside India ; or"35 8. As per sub-clause (b) thus, the income by way of fees for technical ser vices payable by a person who is a resident would be deemed to accrue or arise in India. However, this clause contains two Explanations, namely, where the fees are payable in respect of services utilized in a business or profession carried on by such person outside India, or for the purpose of making or earning any income from any source outside India. In other words, therefore, if the assessment of an assessee falls in either of these two clauses, the income by way of fees for technical services paid by the assessee would still not be covered within the deeming clause of sub- section (1) of section 9.
9. In the present case, the Commissioner (Appeals) and the Tribunal have accepted the assessee's factual assertion that the payments were for technical services provided by a non-resident, for providing services to be utilized for serving the assessee's foreign clients. Thus,
Page No. | 26
(A.Y: 2016-17) (A.Y: 2017-18) M/s. Sulzer Pumps India Pvt Ltd the fees for technical services was paid by the assessee for the purpose of making or earning any income from any source outside India. Clearly, the source of income, namely, the assessee's customers were the foreign based companies.
10. We are fortified in the view by a judgment of the Karnataka High Court in the case of CIT v. ITC Hotels reported in [2015] 233 Taxman 302 (Karn), in which it was held that where the recipient of income of parent company is not chargeable to tax in India, then the question of deduction of tax at source by the payer would not arise.
Learned counsel for the Revenue, however, relied on a decision of the Delhi High Court in the case of CIT v. Havells India Limited reported in [2013] 352 ITR 376 (Delhi). In such case, however, the court was of the opinion that the payment made by the assessee to a US based company for certification facilitating export was not in relation to the source of income which was based in India. The facts were thus different. It was also argued that the Commissioner (Appeals) had relied on a decision in the case of Adani Enterprises Ltd. (supra) against which, the Revenue's appeal has been admitted by the High Court. It prima facie appears that the facts in the case of Adani Enterprises were different. In the present case, we have primarily gone on the question of the nature of the assessee's activities and the nature of services rendered by the parent based company, for which commission was paid. Keeping the question pending before the High Court in the case of Adani Enterprises untouched, we can still dispose of this appeal.‖ 026. Above decision of the honourable Gujarat High Court has also considered the decision of the honourable Delhi High Court of CIT V Havells India Ltd 280 taxman accordingly, we agree with the assessee that no tax is required to be deducted u/s 195 of the income tax act on the said sum of warranty expenditure paid to associated enterprises. Therefore , disallowance of warranty expenditure on this account is also not warranted. Accordingly, ground number 3 of the appeal of the assessee is allowed.”
Page No. | 27
(A.Y: 2016-17) (A.Y: 2017-18) M/s. Sulzer Pumps India Pvt Ltd
Since the issue is exactly similar in this appeal and grounds as well as the facts are also identical, respectfully following the above decision in assessee’s own case for the A.Y. 2015-16, we allow the ground raised by the assessee.
With regard to Ground No. 10 which is in respect of disallowance of the provision towards liquidated damages, Ld. AR submitted that similar issue is raised for the A.Y. 2017-18 in Ground No. 14 and brought to our notice relevant facts relating to the ground and filed its written submissions vide letter dated 23.02.2023, for the sake of clarity it is reproduced below:-
“1. The Assessee-company is engaged in the business of manufacturing and sale of single and multistage centrifugal power- driven pumps. The pumps manufactured by the assessee-company are custom built for every order and are not off the shelf products. The assessee-company commences manufacturing the pumps for a customer only after receiving a firm order from the customer. The pumps generally take 12 to 18 months for manufacturing, depending upon the technical specifications of the pumps. The pumps generally form part of a larger project that the customer would be undertaking. For example, when IOCL places an order for a pump to be used in its oil refinery project, it is only after the supply of the pumps by the assessee-company that the ONGC can continue with its project. Thus, from the perspective of the customer of the assessee- company, time is the essence of the contract in so far as the delay in supply of pumps by the assessee- company would delay the larger project being undertaken by the Assessee's customer. Accordingly, the contract entered into by the assessee-company with its customers provides for a specific date or a specific time period for the delivery of the pumps contracted. The contract also provides that, in the event of delay by the assessee-
Page No. | 28
(A.Y: 2016-17) (A.Y: 2017-18) M/s. Sulzer Pumps India Pvt Ltd company in supplying the pumps on or before the specified date, the assessee-company may be liable to compensate the customer at a specified rate.
Liquidated damages are a means of compensation for the breach of a contract. Liquidated damages are the damages which the parties to the contract agree to as payment, on the breach of contract. The Black's Law Dictionary defines 'Liquidated Damages' as under': "An amount contractually stipulated as a reasonable estimation of actual damages to be recovered by one party if the other party breaches. If the parties to a contract have properly agreed on liquidated damages, the sum fixed is the measure of damages for a breach, whether it exceeds or falls short of the actual damages,"
A perusal of the above clarifies that liquidated damages are nothing but pre-estimated compensation for the damages, which the parties agree while making the contract, likely to arise in case of a breach of contract or a stipulation thereunder. If the contract entered into does not specify compensation in case of breach, then the same would be reasonable based on the loss suffered by the aggrieved party as a result of breach. The principle behind awarding compensation is to put the aggrieved party in the position as it would have been had there been no breach leading to loss or damage.
The assessee-company generally supplies all its pumps on or before the date agreed by it. However, owing to certain unavoidable circumstances, the assessee company, in a few instances has delayed the delivery of the pumps beyond the delivery date agreed to. For every delay which occurs in supplying the pumps within the date agreed to, the clause relating to liquidated damages gets triggered under the contract and the customer gets a right as per its discretion to enforce such clause. Accordingly, when the management realises, on the basis of the past experiences and estimations, that the customer would exercise its right to charge liquidated damages under the contract, the assessee company creates a provision for the liquidated damages that would have to be paid to the customer.
5. The customers of the Assessee-company deduct / retain LD from the retention money payable by it to the assessee under the contract entered into by them. On such an event, the amount is shown as utilized in the provision account by the assessee- company.
Page No. | 29
(A.Y: 2016-17) (A.Y: 2017-18) M/s. Sulzer Pumps India Pvt Ltd
Based on the contractual terms entered into, during the year under consideration, the Assessee has created a provision for liquidated damages amounting to Rs. 12.53.81.882/- The Ld. AO and consequently the DRP has however sought to disallow the provision on the ground that the said provision has not been made on the basis of any reliable and scientific estimates. The summary and details of LD provision are enclosed. (Refer to Page No. 83-84 of Paperbook III). II. Accounting Standard 7. The assessee-company is maintaining its books of accounts on accrual basis, as mandated by Section 128 of the Companies Act, 2013 (Co Act"). Section 129 of the Co Act provides that the items contained in the financial statement shall be in accordance with the accounting standards notified under section 133 of the Act. Section 133 read with Rule 7 of the Companies (Accounts) Rules, 2014 lays down that the standards of accounting as specified under the Companies Act, 1956 shall be deemed to be the accounting standards until accounting standards are specified by the Central Government under section 133. Under the Companies Act, 1956, section 211(3C) read with Companies (Accounting Standards) Rules, 2006 prescribed Accounting Standards for the companies. Subsequently, the Central Government notified Companies (Indian Accounting Standards) Rules, 2015 (IndAS) under section 133 which were made mandatorily applicable from FY 2016-17 onwards. However, the applicability of IndAS was restricted to the listed companies and the companies having net worth of more than Rs. 500 Crores. Since, for the year under consideration which is FY 2016-17, the net worth of the Assessee was less than Rs. 500 Crores, therefore Accounting Standards as prescribed under the Companies Act, 1956 were applicable to the Assessee-company and the provision for liquidated damages was accordingly created. 8. Accounting Standard (AS) 29 deals with Provisions, Contingent Liabilities and Contingent Assets. The objective of this AS is to ensure that appropriate recognition criteria and measurement bases are applied to provisions and that sufficient information is disclosed in the notes to the financial statements to enable users to understand their nature, timing and amount, amongst others. 9. Paragraph 14 of AS 29 states that "a provision should be recognised when: (a) an enterprise has a present obligation as a result of past event; (b) it is probable that an outflow of resources embodying economic benefits will be required to settle the Page No. | 30
(A.Y: 2016-17) (A.Y: 2017-18) M/s. Sulzer Pumps India Pvt Ltd obligation; and (c) a reliable estimate can be made of the amount of the obligation. If these conditions are not met, no provision should be recognised." Under the AS, an obligation is a present obligation if, based on the evidence available, its existence at the balance sheet date is considered probable, i.e., more likely than not. Paragraph 16 provides that "a past event that leads to a present obligation is called an obligating event. For an event to be an obligating event, it is necessary that the enterprise has no realistic alternative to settling the obligation created by the event."
10. Further, the Expert Advisory Committee (EAC) of the Institute of Chartered Accountants of India (ICAI) has given an opinion on the issue of Accounting treatment of liquidated damages on unexecuted portion of contract' in response to a query sent by their member. Although, the opinion is only that of the Expert Advisory Committee and does not necessarily represent the opinion of the Council of ICAI, it provides guidance on whether provision of such ascertained liability can be created or not: "...The Committee is of the view that the liquidated damages are akin to penalty and there is a contractual obligation on the part of the company to pay for liquidated damages as soon as there is delay in the supply of goods beyond the due date as per the delivery schedule. Further, this obligation cannot be avoided by the company's future course of actions as it does not have any realistic alternative but to settle the contractual obligation (ie., making the payment of such liquidated damages). Thus, there exists a present obligation arising from past event, viz, delay beyond scheduled delivery and settlement of which is expected to result in an outflow of resources embodying economic benefits. Accordingly, the Committee is of the view that the company should recognize a provision in respect of liquidated damages for the period of delay between the due date of supply of goods as per the delivery schedule and the expected date of delivery of the said goods and not only for the period of delay till the date of financial statements, in the light of evidence provided by events occurring after the balance sheet date, as per paragraph 36 of AS 29.
Page No. | 31
(A.Y: 2016-17) (A.Y: 2017-18) M/s. Sulzer Pumps India Pvt Ltd
11. In this regard, it is submitted that the assessee-company created a provision for liquidated damages in accordance with AS 29. III. Provision created and supporting documents on sample basis.
12. In the instant case, as the assessee-company has not adhered to the delivery schedule in a few cases, there is a present obligation of paying the liquidated damages at the rate mentioned in the contract which is recovered by the customer from the sales invoices raised subsequently. It is also highlighted that the assessee has been creating a provision for liquidated damages from financial year 2005-06, however, the previous assessment year was the very first year wherein such disallowance was made by the Ld. AO. 13. As per the contracts, the liquidated damages are payable 0.5% to 1% of the purchase order price of the undelivered goods for each week of the delay, subjected to a maximum amount. Accordingly, the assessee has created a provision on the basis of the contracted rate of damages payable on account of delay in delivery and has claimed the same as deduction under the income- tax law. 14. To illustrate, the assessee received a Purchase Order dated 15.05.2015 from Toyo Engineering Corporation (Refer to Page No. 85-95 of Paper book III), whereby the following were agreed upon: Ordered Item(s): Centrifugal Pump (20 line items) Total Amount: 1,218,460 USD (Final as Amended) Delivery Condition: FOB Incoterms 2010 Delivery Date: 29.02.2016 Delivery Place: Mumbai or Nhava Sheva Liquidated Damages for Delayed Delivery: Vendor shall pay Liquidated Damages to Purchaser at the rate of 0.5% of the undelivered portion contract price, for each complete week of the delay, subject to a ceiling of 10% of the undelivered
Page No. | 32
(A.Y: 2016-17) (A.Y: 2017-18) M/s. Sulzer Pumps India Pvt Ltd portion in the event of delivery delay against contractual delivery time 15. The assessee however could not deliver the ordered items as on the date agreed upon due to delay in seal systems by the vendor, motor testing issues from the tester and flange thickness issues. The items could only be dispatched on 02.05.2016. The Bill of Lading was dated 18.05.2016 (Refer to Page No. 100 and 108 of Paperbook III). The sale invoice dated 02.05.2016 in relation to the concerned purchase order is enclosed (Refer to Page No. 100-133 of Paperbook III).
Similarly, vide Purchase Order dated 18.05.2015 (Refer to Page No. 96-99 of Paperbook III). Toyo Engineering Corporation placed an order with the following terms and conditions: Ordered Item(s): 2 Year Spare Parts for BNGA001C Total Amount: 150,000 USD (Final as Amended) Delivery Condition: FOB Incoterms 2010 Delivery Date: 29.02.2016 Delivery Place: Mumbai or Nhava Sheva Liquidated Damages for Delayed Delivery: Vendor shall pay Liquidated Damages to Purchaser at the rate of 0.5% of the undelivered portion contract price, for each complete week of the delay, subject to a ceiling of 10% of the undelivered portion in the event of delivery delay against contractual delivery time.
The assessee however could not deliver the ordered item as on the date agreed upon due to delay in dispatch clearance due to errors in spare list and packing list and also, in cross section drawing. The items could only be dispatched on 29.06.2016. The Bill of Lading was dated 30.06.2016 (Refer to Page No. 134 and 140 of Paperbook III). The sale invoice dated 29.06.2016 in relation to the concerned purchase order is enclosed (Refer to Page No. 134-149 of Paperbook III).
Page No. | 33
(A.Y: 2016-17) (A.Y: 2017-18) M/s. Sulzer Pumps India Pvt Ltd
18 Accordingly, the assessee was liable to pay liquidated damages to Toyo Engineering Corporation as per the Purchase orders (the orders being at FOB, 3 weeks' delay has been added over and above the actual delay): Date Dispatch Delay- ~LD OED agreed Value LD value Invoice No date Weeks* rate upon* 1516022 02-May-16 25-Feb-16 49,59,120 12 0.50% 2,97,547 800016445 1516022 02-May-16 25-Feb-16 28,02,840 12 0.50% 1,68,170 800016445 1516022 02-May-16 25-Feb-16 29,42,580 12 0.50% 1,76,555 800016445 1516022 02-May-16 25-Feb-16 84,65,760 12 0.50% 5,07,946 800016445 1516022 02-May-16 25-Feb-16 62,16,360 12 0.50% 3,72,982 800016445 1516022 02-May-16 25-Feb-16 58,89,720 12 0.50% 3,53,383 800016445 1516022 02-May-16 25-Feb-16 79,08,120 12 0.50% 4,74,487 800016445 1516022 02-May-16 25-Feb-16 1,11,72,480 12 0.50% 6,70,349 800016445 1516022 02-May-16 25-Feb-16 26,81,580 12 0.50% 1,60,895 800016445 1516022 02-May-16 25-Feb-16 31,97,040 12 0.50% 1,91,822 800016445 1516022 02-May-16 25-Feb-16 88,53,000 12 0.50% 5,31,180 800016445 1516022 02-May-16 25-Feb-16 80,19,000 12 0.50% 4,81,140 800016445 1516022 29-Jun-16 25-Feb-16 90,00,000 18 0.50% 8,10,000 800016502 Total 8,21,07,600 51,96,456
In view of the above, the assessee created the provision for these liquidated damages amounting to Rs. 51.96.456 that became payable to Toyo Engineering Corporation as per the purchase orders. However, the actual damages payable were settled at 23,227 USD between the parties. Accordingly, the assessee debited the Provision with Rs. 14,68,179 (with exchange of Rs. 63.21) and also credited/ reversed the balance amounting to Rs. 37,28,277 (Relevant entries in the books are enclosed at Page No. 150-151 of Paperbook III). The account of the customer was credited with the actual damages payable (copy of credit note is enclosed at Page No. 152 of Paper book III).
Page No. | 34
(A.Y: 2016-17) (A.Y: 2017-18) M/s. Sulzer Pumps India Pvt Ltd
20. The fact that provision has been made taking into account the damages levied in the contract itself clearly shows that the provision for liquidated damages created during the year are genuine and represents a policy of fair estimate of expenditure that would generally be incurred for fulfilling the liability of liquidated damages. Furthermore, the provision created has been allowed as deduction in the past years. IV. Prayer 21. Therefore, when the clause on liquidated damages contained in the contracts entered into by the assessee clearly fixes amount of liquidated damages in delay, the liability of the assessee to pay accrues immediately upon delay and such liability is fully ascertainable.. It is accordingly submitted that the lower authorities erred in disallowing the provision for liquidated damages under section 37 of the Act, without having appreciated the law and the facts of the case. Similar submission is being made for AY 2016-17 [ITA No. 810/M/21]”
On the other hand, Ld.DR relied on the order of the lower authorities.
Considered the rival submissions and material placed on record, we observe from the detailed submissions made by the assessee that it creates provisions against the delay in executing the order or execution of the motor or pump orders and as per the terms of agreement, whenever there is delay in execution of the contracts, it creates provisions. After due deliberation, it settles the damages which are likely to be claimed by the customers.
Page No. | 35
(A.Y: 2016-17) (A.Y: 2017-18) M/s. Sulzer Pumps India Pvt Ltd
“22. Disclosures under Accounting Standards (Continued) 22.9. Disclosure in respect of provisions: Warranty Claims* Liquidated Damages** Particulars 31 March 2016 31 March 2015 31 March 2016 31 March 2017 Balance as at beginning 82,684,527 62,964,000 171,424,853 100,779.187 of the Year Additional provision - 39,310,658 32,367,703 71,490,116 made during the year Utilizations (amounts (6,541,222) (17,590,131) (77,804,659) (844,451) incurred and charged against provision) Unused amounts (Nil) (Nil) (Nil) (Nil) reversed during the year Provision written back (19,218,709) (-) (-) (-) Balance as at year end 56,924,596 82,684,527 125,987,897 171,424,853
* Warranty claims covers the expenses related to repairing and maintenance of pumps sold as per the terms of the contract entered into by the Company with its customers, Future cash flows in respect of the same are expected to occur over the period of warranty. **Liquidated damages covers the expenses related to delayed delivery of pumps? as per the terms of the contract entered into by the Company with its customers. The outflow with regard to the said damages depends on exhaustion of remedies available to the Company under the respective contracts and hence, the Company is not able to reasonably ascertain the timing of outflow.
After considering the submissions, we are in agreement with the assessee that it has to create the liability towards the delay in execution of the contract based on the terms of agreements. In our view, there is a time line or limit for above damages to be settled. Therefore, it should be settled within one year of creation of such liability. We observe from Page No. | 36
(A.Y: 2016-17) (A.Y: 2017-18) M/s. Sulzer Pumps India Pvt Ltd the provisions created by the assessee in AY 2016-17 for ₹.3,23,67,703/- and settled the previous year damages during this assessment year for ₹.7,78,04,659/-. It shows that the provisions created for liquidated damages for AY 2016-17 will be settled during A.Y.2017-18. Similarly, for AY 2017-18, it will be settled in AY 2018-19. Therefore, we noticed that the assessee carried forwards in AY 2016-17 for Rs. 12,59,87,897/-. In our considered view, the carry forward of the provision to this extent is beyond the requirements. Hence, we direct the AO to allow only to the extent of provision created for AY 2016-17 and balance has to be reversed, in other words, it should be treated as income for the present AY. Accordingly, the ground raised by the assessee is allowed for statistical purpose with the direction to AO to determine the provisions allowable to the current AY and balance has to be reversed after giving proper opportunity of being heard to the assessee. At the same time, we direct the assessing officer to allow more than the provisions created for the current assessment year provided the assessee gives proper explanation for carry forward beyond one year. In our view, there may certain occasion, which may require the parties to settle the dispute beyond one year. Only to that extent, the assessee is allowed to carry forward and we direct the assessing
Page No. | 37
(A.Y: 2016-17) (A.Y: 2017-18) M/s. Sulzer Pumps India Pvt Ltd officer to follow our above direction. Accordingly, the ground raised by the assessee is allowed for statistical purpose.
With regard to Ground Nos. 11, 12 & 13 of grounds of appeal, at the time of hearing, Ld.AR of the assessee submitted that these grounds are not pressed, accordingly, these grounds are dismissed as not pressed.
37. With regard to Ground No. 14 which is in respect of non-granting of TDS credit claimed in Return of income, Ld. AR of the assessee submitted that assessee has claimed TDS in the return of income and the same is also appearing in respect of Form 26AS and prayed that the direction may be given for granting of TDS credit.
On the other hand, Ld.DR relied on the orders of the lower authorities.
Considered the rival submissions and material placed on record. Considering the overall merits on the submissions made by the assessee we are inclined to remit this issue back to the file of Assessing Officer with a direction to verify the records submitted by the assessee on TDS
Page No. | 38
(A.Y: 2016-17) (A.Y: 2017-18) M/s. Sulzer Pumps India Pvt Ltd or tax credit as per the 26AS and allow the same as per law. It is needless to say that assessee may be given a proper opportunity of being heard. In the result the issue under consideration is remitted back to the file of Assessing Officer for statistical purpose. Ground raised by the assessee is allowed for statistical purpose.
In the result, appeal filed by the assessee is partly allowed as indicated above.
ITA.NO. 593/MUM/2022 (A.Y. 2017-18)
Assessee has raised following grounds in its appeal: -
1. The lower authorities erred in not following the Tribunal's order dated 23.03.2021 in the case of the assessee itself for the Assessment Years 2012-13 to 2014-15 wherein the Transfer Pricing Adjustments, which are under consideration in the present appeal (except the adjustment towards the fee paid for availing professional fees), were deleted by the Tribunal.
2. The lower authorities erred in not adjudicating and rectifying the arithmetical mistake apparent from the record regarding the Transfer Pricing Adjustments made. 3. That the facts and in the on circumstances of the case, the lower authorities erred in making an adjustment of Rs.2,36,03,370/- to the income of the assessee, which represented expense incurred by the assessee for the SAP related support services availed by the assessee from its AE.
Page No. | 39
(A.Y: 2016-17) (A.Y: 2017-18) M/s. Sulzer Pumps India Pvt Ltd
4. That on the facts and in the circumstances of the case, the lower authorities erred in making an adjustment of Rs. 1,59,64,899/- to the income of the assessee, which represented reimbursement of SAP and Microsoft software license cost made by the assessee to its associated enterprise.
5. That on the facts and in the circumstances of the case, the lower authorities erred in making an adjustment of Rs. 15,32,74,432/- to the income of the assessee, which represented expenses incurred by the assessee for availing ASP Management services from its associated enterprise. 6. That on the facts and in the circumstances of the case, the lower authorities erred in making an adjustment of Rs. 71,76,859/- to the income of the assessee, which represented expenses incurred by the assessee for availing professional services from its associated enterprise. 7. That on the facts and in the circumstances of the case, the lower authorities erred in making the alternative disallowance of the TP adjustment under section 37(1) of the Act. 8. That on the facts and in the circumstances of the case, the lower authorities erred in disallowing Rs. 27,01,479/- relating to provision made by the assessee towards warranty expenses. 9. That on the facts and in the circumstances of the case, the lower authorities erred in holding that the provision for warranty is liable for deduction of tax at source and erred in holding that the provision is not allowable as deduction for failure to deduct tax thereon. 10. That on the facts and in the circumstances of the case, the lower authorities erred in holding that the assessee was liable to deduct tax on the warranty expenses actually incurred by it. 11. That on the facts and in the circumstances of the case, the lower authorities erred in disallowing Rs. 7,81,55,105/- relating to the commission expenditure incurred by the assessee on its export sales.
Page No. | 40
(A.Y: 2016-17) (A.Y: 2017-18) M/s. Sulzer Pumps India Pvt Ltd
12. That on the facts and in the circumstances of the case, the lower authorities erred in holding that the provision for commission on export sales is liable for deduction of tax at source and erred in holding that the provision is not allowable deduction for failure to deduct tax as thereon.
13. That on the facts and in the circumstances of the case, the lower authorities erred in holding that the assessee was liable to deduct tax on the export commission actually paid by it to its associated enterprises. 14. That the facts and in the on circumstances of the case, the lower authorities erred in disallowing Rs. 12,53,81,882/- relating to provision made by the assessee towards liquidated damages. 15. That the facts and in the on circumstances of the case, the lower authorities erred in disallowing Rs. 15,26,07,614/- relating to provision made by the assessee towards onerous contracts.”
Ground No. 1 and 2 of grounds of appeal raised by the assessee are general in nature, accordingly, needs no specific adjudication.
43. Ground Nos. 3, 4 & 5 of grounds of appeal raised by the assessee in this assessment year are similar to Ground Nos. 2 and 3 of grounds of appeal raised for the A.Y.2016-17 and the decision taken therein shall apply mutatis-mutandis to the appeal for the A.Y. 2017-18. We order accordingly.
Ground No.6 of grounds of appeal raised by the assessee in this assessment year is similar to Ground No. 4 of grounds of appeal raised
Page No. | 41
(A.Y: 2016-17) (A.Y: 2017-18) M/s. Sulzer Pumps India Pvt Ltd for the A.Y.2016-17 and the decision taken therein shall apply mutatis- mutandis to the appeal for the A.Y. 2017-18. We order accordingly.
45. Ground No.7 of grounds of appeal raised by the assessee in this assessment year is similar to Ground No. 5 of grounds of appeal raised for the A.Y.2016-17 and the decision taken therein shall apply mutatis- mutandis to the appeal for the A.Y. 2017-18. We order accordingly.
Ground Nos. 8, 9 & 10 are similar to Ground Nos. 8 and 9 of grounds of appeal raised by the assessee for the A.Y. 2016-17 and the decision taken therein shall apply mutatis-mutandis to the appeal for the A.Y. 2017-18. We order accordingly.
Ground Nos.11 and 12 of grounds of appeal raised by the assessee in this assessment year is similar to Ground No. 6 of grounds of appeal raised for the A.Y.2016-17 and the decision taken therein shall apply mutatis-mutandis to the appeal for the A.Y. 2017-18. We order accordingly.
Ground No. 13 of grounds of appeal raised by the assessee in this assessment year is similar to Ground No. 7 of grounds of appeal raised
Page No. | 42
(A.Y: 2016-17) (A.Y: 2017-18) M/s. Sulzer Pumps India Pvt Ltd for the A.Y.2016-17 and the decision taken therein shall apply mutatis- mutandis to the appeal for the A.Y. 2017-18. We order accordingly.
Ground No.14 of grounds of appeal raised by the assessee in this assessment year is similar to Ground No. 10 of grounds of appeal raised for the A.Y.2016-17 and the decision taken therein shall apply mutatis- mutandis to the appeal for the A.Y. 2017-18. We order accordingly.
50. With regard to Ground No. 15 which is in respect of disallowance of the provision towards onerous contract, Ld. AR of the assessee Referring to Page No. 3 of the Paper Book submitted that, for the current Assessment Year, this is a double disallowance, since the assessee had already disallowed the provision in its computation.
On the other hand, Ld.DR relied on the order of the lower authorities.
Considered the rival submissions and material placed on record, we observe that assessee suomoto disallowed in computation of income the provision for expected loss to the extent of ₹.15,26,07,615/-. Since the assessee itself disallowed, the Assessing Officer has made similar
Page No. | 43
(A.Y: 2016-17) (A.Y: 2017-18) M/s. Sulzer Pumps India Pvt Ltd disallowance in Assessment Order, which is not proper. Therefore, we are inclined to direct Assessing Officer to delete the addition made on provision towards onerous contracts. Therefore, this ground of appeal is allowed.
In the result, appeal filed by the assessee is partly allowed as indicated above.
To sum-up, both the appeals filed by the assessee are partly allowed as indicated above.
Order pronounced in the open court on 12th May, 2023