JCIT, BANGALORE vs. M/S HEWLETT - PACKARD INDIA SALES PRIVATE LIMITED, BANGALORE

Page 2 ITA Nos. 579 & 593/Bang/2015 PER BEENA PILLAI, JUDICIAL MEMBER Present cross appeals are filed by assessee as well as revenue against the order dated 30.01.2015 passed by the Ld.CIT(A)-14, Bangalore for A.Y. 2009-10 on following grounds of appeal: Grounds of appeal (Assessee) “Based on the facts and circumstances of the case, Hewlett-Packard India Sales Private Limited ("HPISPL" or "the Appellant"), respectfully submits that: 1 Addition under head Income received in advance ("IRIA") 1.1 The Commissioner of Income-tax (Appeals) ["CIT(A)"] has erred in law and on facts in upholding the addition of Rs 50,612,697, representing unreconciled amounts in respect of IRIA. 2 Addition under head Deferred revenue 2.1 The CIT(A) has erred in law and on facts by upholding the addition pertaining to deferred revenue. 2.2 The CIT(A) has further erred in law and on facts in not appreciating the accounting treatment and revenue recognition policy consistently followed by the Appellant in respect of the amounts covered under deferred revenue addition. 2.3 The CIT(A) has erred in law and on facts by not taking into consideration the accounting opinion issued by the leading accounting expert, Mr Y H Malegam inter alia sanctifying that the accounting treatment of the Appellant is in accordance with Generally Accepted Accounting Principles followed in India and Accounting Standard ("AS 9"). 2.4 The CIT(A) has erred in law and on facts in drawing up inferences and conclusions based on the contract entered into by the Appellant with United India Insurance Contract ("UIIC"). 2.5 The CIT(A) has erred in law and on facts in stating that the claim of TDS on deferred revenue is against the arguments raised by Appellant for recognition of revenue. 2.6 The CIT(A) has erred in law and on facts by not adjudicating on the grounds raised in respect to adhoc cost adjustment made in the assessment order. 2.7 The CIT(A) has erred in law and on facts, in upholding the decision of the Assessing Officer ("AO") of disregarding the accounting system which has been regularly followed by the Appellant, without

Page 3 ITA Nos. 579 & 593/Bang/2015 establishing reasons for which such an accounting system is not correct in light of the provisions of section 145(1) of the Income-tax Act, 1961 ("the Act"). 2.8 The CIT(A) has erred in law and on facts in upholding the addition on account of income deferred from small customers and also upholding the decision of the AO that there is no scope for deferral of income. 2.9 Without prejudice to the above grounds, the CIT(A) erred in law and on facts in not providing a specific direction to limit the addition to the movement in the deferred revenue and the corresponding cost accounts, as per the financial statements and to provide appropriate relief in the subsequent years to ensure no double taxation of the same amounts. 3 Addition on account of audit entries 3.1 The CIT(A) has erred in law and on facts in upholding the addition made by the AO in respect of audit entries of Rs 357,780,932 posted in certain expense account (i.e. rent, travelling, repairs and maintenance, outside contract service, advertisement and business promotion, freight and warehousing charges and legal and professional) without appreciating that these audit entries entailing reclassification, accrual and reversal entries are passed by the Appellant as a part of statutory audit. 3.2 The CIT(A) has erred in law and on facts in not appreciating that the audit entries passed under certain expense head (i.e. rent, travelling expenses, repairs and maintenance and outside contract services ledger accounts) were actually reducing the ledger totals as a part of reclassification/reversals and upholding the addition made by the AO in respect of the subject ledgers. 3.3 The CIT(A) has erred in law and on facts in upholding the addition made on account of audit entries passed in the expense ledger for want of evidence, without appreciating that the Appellant had submitted requisite details sought during the assessment proceedings. 4 Grounds relating to disallowance of deduction claimed under section 40(a)(i) and section 40(a)(ia) of the Act 4.1 The CIT(A) has erred in law and on facts in upholding the disallowance made by the AO in respect of amounts claimed under section 40(a)(i) and 40(a)(ia) of the Act. 4.2 The CIT(A) has erred in law and on facts in not appreciating the accounting system followed by the Appellant in respect of provision for year-end expenses

Page 4 ITA Nos. 579 & 593/Bang/2015 and upholding the addition made by the AO in the assessment order. 4.3 The CIT(A) has erred in law and on facts in stating that the disallowance made by the Appellant in the earlier Assessment Year ("AY") 2008-09 under section 40(a)(i) and section 40(a)(ia) of the Act may be in the nature of contingent liability and merited disallowance under section 37 of the Act. 4.4 The CIT(A) has erred in law and on facts in holding certain invoices submitted by the Appellant in respect of the deduction claimed under section 40(a)(i) and section 40(a)(ia) of the Act to be in the nature of prior period, based on the date of the invoice without appreciating the time-lag in posting /accounting for these invoices as per the procedures / policies followed in the Appellant's systems, as was explained by the Appellant. 5 Grounds on reclassification of disallowance under section 40(a)(i) and 40(a)(ia) of the Act 5.1 The CIT(A) has erred in law and on facts by not adjudicating on the grounds raised by the Appellant in respect of reclassification of the expenditures which has been suo moto disallowed under section 40(a)(i) and 40(a)(ia) of the Act, to an expenditure attracting disallowance under section 37 of the Act. 5.2 The CIT(A) has erred in law and on facts by not appreciating the fact that though the reclassification of disallowance from section 40(a) (ia)/ section 40(a)(i) of the Act to disallowance under section 37 of the Act does not have any tax implications for the current year, the same leads to shift in nature of the disallowance from temporary to permanent in nature. 6 Grounds pertaining to disallowance of demonstration expenses 6.1 The CIT(A) has erred in law and on facts by upholding the disallowance made by the AO in disallowing the demonstration expenses written-off amounting to Rs.7,836,077 for want of additional evidence. 6.2 The CIT(A) has erred in law and on facts in failing to appreciate the explanation provided by the Appellant pertaining to the nature of the expenses and substantiating the deduction claimed on expenses incurred in relation to demonstration equipment, which were utilized as samples for the purpose of generating sales. 6.3 The CIT(A) has erred in law and on facts by not appreciating the facts of the decision of the Honourable Delhi Income tax Appellate Tribunal ("ITAT") in the case of

Page 5 ITA Nos. 579 & 593/Bang/2015 Hero Motocorp Ltd (156 TTJ 139) are squarely applicable in the Appellants case. 7 Grounds pertaining to disallowance of expenses debited as cost of goods sold 7.1 The CIT(A) has erred in law and on facts by upholding the addition made by the AO in respect of certain amounts debited under the head cost of goods sold for want of addition evidence and details of Tax Deduction at Source ("TDS"). 8 Ground pertaining to disallowance of warranty and maintenance expenses 8.1 The CIT(A) has erred in law and on facts in upholding the disallowance of Rs 430,570,914 made by the AO under the head warranty expenses. 8.2 The CIT(A) has erred in law and on facts in adjudicating the matter on prior period expenditure by applying the analogy held for upholding the addition made under section 40(a)(ia)/40(a)(i) of the Act. 8.3 The CIT(A) has erred in law and on facts in upholding the addition made under prior period expenditure without appreciating that Appellant had not made any separate claim in respect of subject expenses owing to reversal of provisions at the beginning of the year. 8.4 The CIT(A) has erred in law and on facts by upholding the addition made by the AO on audit entries without appreciating that the same represents mere accounting classification of expense into a different head. 8.5 The CIT(A) has erred in law and on facts in upholding the disallowance on account of audit entries for want of additional evidence. 8.6 The CIT(A) has erred in law and on facts by upholding the addition made by the AO in arbitrarily disallowing 10 percent of the warranty and maintenance expenses contending that various unwarranted expenditures like sales commission, freight, equipment rent etc. were debited to the warranty and maintenance account. 8.7 Without prejudice, the CIT(A) has erred in law and on facts in not appreciating that even if expenditure do not relate to warranties, the same are to be allowed under section 37 of the Act as the expenditure have been incurred for the purpose of business. 9 Other Grounds 9.1 The CIT(A) has erred in law and on facts by upholding the decision of the AO in levying interest under section 234B and section 234C of the Act.

Page 6 ITA Nos. 579 & 593/Bang/2015 9.2 The CIT(A) has erred in law and on facts by upholding the decision of the AO in simultaneously levying interest under section 234B and section 220(2) of the Act on the demand raised under section 143(1) of the Act for the same period. 9.3 The CIT(A) has erred in law and on facts by not adjudicating the ground on penalty proceedings and consequently upholding the decision of the AO in initiating penalty proceedings under section 274 read with section 271 of the Act. Each of the above ground is independent and without prejudice to the other grounds of appeal preferred by the Appellant. The Appellant craves leave to add, alter, vary, omit. substitute or amend the above grounds of appeal, at any time before or at, the time of hearing, of the appeal, so as to enable the Honourable Income tax Appellate Tribunal to decide this appeal according to law.”

Grounds of appeal (Revenue) “In the case of M/ s Hewlett - Packard India Sales (P) Limited A.Y 2009-10 appeal Number: ITA No 47/JCIT _ LTU/CIT (A) -14/12-13 dated 30.01.2015 The order of the Ld. CIT (A) LTU is opposed to law and fact of the case. 1. The Ld CIT (A) has erred in directing the AO to delete addition made on income received in advance 2. The Ld CIT (A) has erred in directing the AO to delete the addition made on claim of liability towards deferred revenue. 3. The Ld CIT (A) has erred in directing the AO to delete the disallowances of other audit entries for lack of evidences. 4. The Ld CIT (A) has erred in directing the AO to delete the disallowance of other provision U/s 37 of the Income tax Act 5. The Ld CIT (A) has erred in directing the AO to delete the disallowance of provision of warranty.

Page 7 ITA Nos. 579 & 593/Bang/2015 6. The Ld CIT (A) has erred in directing the AO to delete the Addition of undisclosed sales on account of goods 7. The Ld CIT (A) has erred in directing the AO to delete disallowance of lease rental paid on account of computers” Brief facts of the case are as under: 2. The assessee is a company and filed its return of income on 30.09.2009 by declaring total income of Rs.389,29,00,660/-. The Ld.AO noted that assessee was engaged in manufacture and trading of computer equipments, printers and accessories and also rendering services of the same. The case was selected for scrutiny and notice u/s. 143(2) of the act was issued. Subsequently, revised return was filed by assessee declaring total income of Rs.428,58,75,420/-. In response to the statutory notices issued, the representative of assessee appeared before the Ld.AO.

2.1 The Ld.AO based on the responses filed by the assessee, made following additions in the assessment order. Para Particulars Amount [in Rs.] No. Income returned as per the revised 428,58,75,416 return Additions made: Addition of income received in 1 264,92,26,481 advance: 2 Addition of deferred revenue 346,02,21,726 Undisclosed income detected from TDS 3 279,40,71,311 certificates Addition of undisclosed sales on 4 916,08,87,209 account of goods: 5 Disallowances of other audit entries: 36,89,24,197

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Disallowance of claim of deduction 6 40(a)(i) and 40(a)(ia) in the 52,58,75,221 computation of income: Disallowance of lease rental paid on 7 6,27,45,952 account of computers Disallowance of other provisions u s 37 8 7,39,69, 500 of the Income Tax Act: Disallowance of expenditure debited 9 under the head miscellaneous 1,44,57,372 expenses Adjustments in cost of material - 10 46,04,37,752 added for want of evidence Disallowance of demonstration 11 78,36,077 equipment charged off 12 Disallowance of provision of warranty 90,70,53,064 Total income assessed 2477,15,81,278

Aggrieved by the order of the Ld.AO, assessee preferred appeal before the Ld.CIT(A).

2.2 The Ld.CIT(A) after considering the submissions of the assessee deleted the addition pertaining to AMC contracts amounting to Rs.2,59,86,30,784/- by holding that income in respect of AMC contracts were to be offered to tax over a period of the respective contracts. In respect of other reconciliation items, the Ld.CIT(A) sustained addition upto Rs.5,06,12,697/-. Aggrieved by the order of the Ld.CIT(A), assessee and revenue are in appeal before this Tribunal. For the sake of convenience, grounds raised by assessee and revenue on common issues shall be considered together.

Page 9 ITA Nos. 579 & 593/Bang/2015 3. It is noted that Ground nos. 1 and 2 raised by assessee and revenue are in respect of the income received in advance and addition under the head deferred revenue. 3.1 Income received in advance The Ld.AR submitted that sum of Rs.5,06,12,697/- represents a negative amount reflected under the head other reconciliation items in the list of contracts comprised in the closing balance of “Income received in advance” as per the financial statements. The details of the same was submitted to the Ld.AO which were running into voluminous pages. Thus there was no dispute that the said amount was not accounted and recognised as income over period of contracts. The contracts being in huge volumes assessee could not file the details contract-wise in order to verify the closing balance. 3.2 Addition towards the deferred revenue: The Ld.AR submitted that addition in respect of the deferred revenue pertains to integrated large scaled contracts entered into by assessee with its customers such as banks, insurance companies etc. that entailed delivery of integrated solutions comprising of supply of products, services, third party product / services generally spread over multiple geographical locations over a period of time with various delivery / supply milestones as agreed between the customers. It is submitted that assessee has recognised cost and revenue in relation to such contracts based on the term of each contract which is in accordance with Accountant standard 9 issued by ICAI. He submitted that the contract-wise data was provided to the authorities below and the

Page 10 ITA Nos. 579 & 593/Bang/2015 income received in advance by assessee amounted to Rs.2,616,125,327/-, the break-up of which are as under:

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3.3 The Ld.AR then submitted that, in respect of the addition on account of deferred revenue, this is the first year when such disallowance has been made. In fact he submitted that this is

Page 18 ITA Nos. 579 & 593/Bang/2015 the only year in which the disallowance has been made and in the subsequent assessment years no disallowance has been made by the Ld.AO.

3.4 The Ld.AR then submitted that TDS in respect of the entire amount has been claimed during the year as the ITR does not allow appropriating the TDS that is already been deducted. He submitted that it is just the timing issue. He submitted the position that is accepted by the assessee as well as revenue in the past and subsequent assessment year the details of which are as under: “2.2 Position accepted by Revenue and Taxpayer in the past and subsequent years (v) Revenue Authorities and the Taxpayer have accepted position of recognition of revenue on the accounting principles followed by the taxpayer and have required the Taxpayer to restrict TDS credit, and claim the same based on recognition of revenue in respect of DR. A summary of the position in the past and future years has been summarized as follows: a) AYs prior to AY 2007-08 — No addition has been made in respect of deferred revenue. b) AY 2008-09 – The AO made an addition in of 1,53,06,33,861 in respect of deferred revenue under reassessment proceedings following the approach adopted in the assessment order for AY 2009-10. The CIT(A), based on a remand report from the learned AO (refer page 1 to 4 of paper book - part 4), deleted the addition in respect of DR and directed the AO to restrict TDS credit and allow the same to be claimed based on the recognition of income (refer OGE order dated 12 March 2019 - page 1 to 4 of paper book - part 4). The Revenue Authorities and the Taxpayer have accepted the said order of the CIT(A) and no further appeal has been preferred by either of the parties before the ITAT on the said matter.

Page 19 ITA Nos. 579 & 593/Bang/2015 (Refer page 46 to 49 of paper book 4 for Revenue grounds for AY 2008-09). c) AY 2010-11 – The AO has not made any addition in respect of deferred revenue on account of negative movement in deferred revenue. However, no specific remark has been made by the AO in the assessment order. d) AY 2011-12 to AY 2013-14 – The Taxpayer, as part of the assessment submissions, offered to restrict TDS credit and claim the same over the period of recognition of income pertaining deferred revenue in line with the approach adopted pursuant to the CIT(A) order for AY 2009-10. The AO has acknowledged the approach adopted by the Taxpayer and has not made any addition owing to the negative movement in the deferred revenue in the assessment orders. e) AY 2014-15 and AY 2015-16 —The Taxpayer, as part of filing the tax return and the assessment submissions, offered to restrict TDS credit and claim the same over the period of recognition of income pertaining deferred revenue in-line with the approach adopted pursuant to the CIT(A) order for AY-2009 10. The AO has accepted the approach adopted by the Taxpayer in the assessment orders. f) Subsequent AYs – The taxpayer has in the return of income restricted TDS credit in respect of the closing balance of deferred revenue and the same has been claimed in the subsequent year [in line with the approach pursuant to the order of the CIT(A) in AY 2008-09]. This position has been accepted by the AO in the assessment orders passed up to AY 2018-19.” 3.5 The Ld.AR thus submitted that in respect of the deferred revenue, the TDS credit may be considered accordingly on year to year basis as the revenue recognition on accounting policies followed by the assessee, and accepted by the revenue is consistent in all the preceding and subsequent assessment year. On the contrary, the Ld.DR relied on the orders passed by the authorities below.

Page 20 ITA Nos. 579 & 593/Bang/2015 We have perused the submissions advanced by both sides in the light of records placed before us.

3.6 We note that similar issue has been considered by Coordinate Bench of this Tribunal in assessee’s own case which has been recorded hereinabove. It has been submitted that the order giving effect to the order of this Tribunal for A.Y. 2008-09 has been passed by the Ld.AO on 12.03.2019 wherein necessary reliefs have been granted to the assessee after necessary verifications. We direct the Ld.AO to carry out verifications in accordance with the directions of this Tribunal given in 2008-09 recorded hereinabove.

3.7 We also direct the Ld.AO to consider the TDS credit on proportionate basis on the basis of the accrued AMC income for the relevant year under consideration. Accordingly, ground nos. 1-2 raised by assessee and revenue stands partly allowed for statistical purposes.

Page 21 ITA Nos. 579 & 593/Bang/2015 professional and outside contractor services and disallowed the same for want of further evidences /details.

4.2 The Ld.AR further submitted that the assessing officer also included the audit entries to reduce the expenses which had the effect of reduction of expenses claimed for the purposes of addition in the assessment order. The Ld.AR has filed in the written submission following details summarising the additions made by the Ld.AO on this account.

4.3 On an appeal before the Ld.CIT(A), the assessee submitted that audit entries substantially represent reclassification of entries that result in reclassification of certain expenses items from one ledger head to another ledger head which has been carried out by the assessee based on examination during audit process. It is also due to accrual or reversal of entries that has been identified during the audit process.

Page 22 ITA Nos. 579 & 593/Bang/2015 4.4 The Ld.CIT(A) after analysing the information / details furnished by the assessee deleted addition in respect of audit entries under the expenses ledger account pertaining to communication expenses amounting to Rs.1,11,43,265/- and sustained the balance addition of Rs.35,77,80,923/-.

4.5 The Ld.AR submitted as under: (i) The Audit entries largely represent reclassification entries or accrual/reversal entries (moving expense from one head to another based on nature), which were passed based on the information available at the time of finalization of accounts. Theses audit entries are regular occurrences and entries are passed based on the observations raised as a part of the normal audit process. (ii) The addition made by the AO and sustained by the learned CIT(A) include negative amounts in the Audit entries to the extent of INR 27,05,37,052 that have the effect of reduction of the subject expenses. The additions in respect of such amounts are not warranted. (iii) It may be noted that there has been no addition in respect of such 'audit entities' in any of the assessment orders of the Assessees in the future years. In the reassessment proceeding for AY 2008-09, the learned AO has made an addition of INR 88,01,13,420 on account of want of evidence. CIT(A) vide order dated 31 March 2018 has granted the relief [Refer conclusion para no. 13.2 of CIT(A) in paper book 4]. (iv) Given the above, we request honorable members to delete the addition of INR 35,77,80,932 sustained by the CIT(A). (v) As a part of assessment / appellate proceeding, the Assessee submitted various details such as ledger extracts (6 expense mentioned above), rental agreement and list of accrual entries as part of audit entries along

Page 23 ITA Nos. 579 & 593/Bang/2015 with appropriate explanation towards passing audit entries. (vi) Additionally, without prejudice to the above, the Assessee vide additional evidence petition (refer page 133 to 176) has collated and furnished additional information /details in connection with the audit entities. These details inter alia include party-wise listing capturing the details of expenses, reclassification details (From account code & to account code), line-item level break-up along with TDS deduction details wherever applicable, and sample copy of invoices. Accordingly, we request honorable members to give direction for deletion of the additions made by the AO.

On the contrary, the Ld.DR relied on the orders passed by the Ld.AO. We have perused the submissions advanced by both sides in the light of records placed before us.

4.6 We note that the details furnished by assessee has not been properly verified by the Ld.AO. We note that there are certain expenses which have been reduced and also forms part of the addition made by the Ld.AO which is not the proper way of analysing. The Ld.AO is directed to carry out necessary verification in respect of the evidences filed by the assessee and to consider the claim in accordance with law. It is also directed that wherever there is a reduction, no addition to be made in respect of the same. The rest of the other payments shall be verified by the Ld.AO. Needless to say that proper opportunity of being heard must be granted to the assessee.

Page 24 ITA Nos. 579 & 593/Bang/2015 Accordingly, ground no. 3 in assessee and revenue appeal stands allowed for statistical purposes.

5.1 The Ld.AR submitted that assessee had claimed deduction of Rs.52,58,75,221/- that were already disallowed in the assessment year 2008-09 and claimed during the current year as deduction on account of subsequent TDS and remittances happened during the year under consideration. It is submitted that during the assessment proceedings, the assessee had furnished the submissions explaining the accounting policy followed, opening provisions that were reversed during the year and the appropriate TDS recorded at the time of recording the actual expenses along with the details of tax with held and remitted. The Ld.AR submitted that the authorities below has not considered the submissions / evidences. On an appeal before the Ld.CIT(A), it is submitted that the Ld.CIT(A) upheld the addition for want of one-to-one correlation to the accrual entities and the details provided in respect of payments along with taxes that held in connection with the same.

5.2 The Ld.AR submitted that an identical issue has been considered by Coordinate Bench of this Tribunal in assessee’s own case for A.Y. 2011-12 vide order dated 30.03.2022 in ITA No. 779/Bang/2016.

Page 25 ITA Nos. 579 & 593/Bang/2015 5.3 He submitted that this Tribunal has deleted the adjustment made by the Ld.AO by holding that 1 to 1 match of the provision is not necessary. The Ld.AR submitted that against this order, the revenue has not filed any appeal before the Hon’ble Supreme Court and that the order of this Tribunal has attained finality. The Tribunal held as under: “13. We heard the rival submissions and perused the material on record. The provisions of Section 40(a)(ia) provides that - 40. Notwithstanding anything to the contrary in sections 30 to 38, the following amounts shall not be deducted in computing the income chargeable under the head "Profits and gains of business or profession",— (a) in the case of any assessee— ******* (ia) thirty per cent of any sum payable to a resident, on which tax is deductible at source under Chapter XVII-B and such tax has not been deducted or, after deduction, has not been paid on or before the due date specified in sub-section (1) of section 139: Provided that where in respect of any such sum, tax has been deducted in any subsequent year, or has been deducted during the previous year but paid after the due date specified in sub-section (1) of section 139, thirty per cent of such sum shall be allowed as a deduction in computing the income of the previous year in which such tax has been paid: 14. As per the provisions as extracted herein above the assessee is entitled for the deduction of the amount which was disallowed earlier, in the year in which the TDS is deducted and paid. In the given case, the amount which was disallowed earlier by the assessee is claimed as a deduction u/s.40(a)(ia) in the year under consideration based on the fact that the assessee has deducted and remitted the TDS on the amount in year under consideration. There is no other condition attached while claiming the expenditure in the year of TDS remittance under the law. Hence the reasons given by the AO for disallowance that one-to-one matching with the provision made for the previous not done and that the invoices pertain to previous year are not tenable. The fact as submitted by the AR that the said details are duly verified and taken into account for computation of interest u/s.201(1A) in the previous assessment 2010-11 also

Page 26 ITA Nos. 579 & 593/Bang/2015 merits consideration. Considering the provisions of the Act and the facts we are of the considered view that the assessee has rightly claimed the deduction of Rs. 55,27,89,460 under section 40(a)(ia). The AO is directed to give relief to the assessee accordingly. This ground of the assessee is allowed.”

5.4 The Ld.DR on the contrary submitted that the entire issue may be remanded to the Ld.AO for verification. He submitted that this Tribunal while considering this issue for A.Y. 2011-12 had recorded a finding that the payments have been duly verified in the provisions u/s. 201(1A) for the previous year 2010-11. Whereas in the present facts of the case, no such verification has been carried out. He thus prayed for the entire amount to be remanded to the Ld.AO for necessary verification. We have perused the submissions advanced by both sides in the light of records placed before us.

5.5 We note that principally the issue deserves to be allowed in case the amount so claimed in this year has been offered to tax in the preceding year. Though assessee had furnished all the necessary details, the verification has not been carried out by the Ld.AO based on such evidences filed. In the interest of justice, we remand this issue back to the Ld.AO to carry out necessary verification and to consider the claim in accordance with law. Accordingly, ground no. 4 raised by assessee stands partly allowed for statistical purposes.

Page 27 ITA Nos. 579 & 593/Bang/2015 6. Ground no. 5 by assessee and ground no. 4 of revenue’s appeal are in respect of reclassification of disallowances amounting to Rs.36,55,82,852/- u/s. 40(a)(i) /(ia) of the act.

6.1 The Ld.AR submitted that the assessing officer reclassified the amounts disallowed by the assessee u/s. 40(a)(i)/(ia) u/s. 37 of the act for want of details. Identical issue has been remanded to the Ld.AO hereinabove. We note that this year being revenue neutral, no tax implication is applicable in the present issue. However, we direct the Ld.AO to carry out necessary verification in respect of the same as the assessee is bound to claim the amount suomoto disallowed in the year under consideration while filing its return of income in the subsequent year. In the interest of justice, we remand this issue back to the Ld.AO to carry out necessary verification based on the evidences filed. Accordingly, ground no. 5 raised by assessee and ground no. 4 of revenue appeal stands partly allowed for statistical purposes.

7.1 The Ld.AR submitted that assessee had claimed Rs.78,36,077/- towards demonstration equipment returned of. It is submitted that the assessee was called upon to explain the nature of such expenses returned off, the accounting policy followed and the submission of entitlement of such expenses under the provisions of the act. The Ld.AO disallowed the claim

Page 28 ITA Nos. 579 & 593/Bang/2015 of assessee for want of further details / evidences which was upheld by the Ld.AO.

7.2 The Ld.AR submitted that in the financial year relevant to the AY 2009-10, HPISPL has included an amount of Rs 7,836,077 pertaining to demonstration equipments being charged-off in the cost of goods sold. In this regard, we wish to submit that as per the accounting policy of the Company, demonstration equipment is stated at cost and is fully charged-off on the expiry of the estimated useful life of the equipment. This is substantiated by the accounting policy followed by the Company as disclosed in Schedule 19 para (g) of the audited financial statements.

7.3 As per the accounting policy followed by HPISPL, we have provided below, a table that depicts the nature of demonstration equipments and their estimated useful lives: Useful life (in Demonstration equipment months) Procurve Products 12 Business Critical Systems 12 Storage 12 Workstations 9 PCs and Notebooks 9 Industry Standard Servers 9 Commercial Imaging and 9 Printing products

Consumer Imaging and Printing 9 products IPG Indigo and Large Format 12 Signage Printers

Page 29 ITA Nos. 579 & 593/Bang/2015 7.4 The Ld.AR submitted that the aforementioned demonstration equipments (samples, in common parlance) are sent to prospective customers for the purposes of demonstration. Since the demonstration equipments are meant for generating sales, the amortization costs of these equipments, depending on the life of the equipment (which ranges from 9 months to 12 months depending on the type of equipment – as depicted in the table above), are charged to the cost of goods / services during the period as per HPISPL’s accounting policy.

7.5 He further submitted that the amount has been recorded in the inventory schedule VI to the balance sheet which is placed at page 11 of the paper book and in the notes to the account, a description has been provided by noting that “demonstration equipment is stated at cost and is fully charged on the expiry of the estimated useful life. Spare parts pending, re-export, re….stated net realisable value. It is further submitted by the Ld.AR that such disallowance has not been made in any other year and that other expense has been always accepted to be wholly and exclusively only for the purposes of business or profession. On the contrary, the Ld.DR placed reliance on orders passed by authorities below.

7.6 We note that assessee has furnished additional evidences listing the product-wise details of the demonstration equipment. These details deserves to be verified by the Ld.AO and the claim of the assessee has to be considered in accordance with law.

Page 30 ITA Nos. 579 & 593/Bang/2015 Accordingly, ground no. 6 raised by assessee stands partly allowed for statistical purposes.

8.1 The Ld.AR submitted that the assessing office had disallowed certain expenses claimed by assessee under the head cost of goods sold for want of further details or evidences. The Ld.CIT(A) based on further details field by assessee deleted the addition in respect of customs duty and sub-broker fees. In respect of services, IC Billing, the disallowance was restricted to partial amount. Against this, assessee as well as revenue has preferred appeal before this Tribunal.

8.2 At the outset, the Ld.AR has submitted the additional evidences in the form of sub ledgers, group under services, IC billing and reconciliation statement of cost of goods sold account. Based on the above, both the sides prayed for the issue to be remanded tot eh Ld.AO for necessary verification. We have perused the submissions advanced by both sides in the light of records placed before us.

8.3 We note that the application dated 13.12.2019 consist of pages 1 to 217 that pertains to this issue considering the joint prayer by both the sides we remand this issue to the Ld.AO by admitting the additional evidences filed by the assessee. The

Page 31 ITA Nos. 579 & 593/Bang/2015 Ld.AO is directed to verify the claim of assessee in the light of the evidences filed and in accordance with law. Needless to say that proper opportunity of being heard must be granted to assessee. Accordingly, ground no. 7 raised by assessee stands partly allowed for statistical purposes.

9.1 On an appeal before the Ld.CIT(A), relief was granted in respect of provision of warranty amounting to Rs.47,66,62,150/- and upheld the addition under other head for want of further details / information. Against the order of the Ld.CIT(A), assessee and revenue are in appeal before this Tribunal. The Ld.AR on each of the expenditure claimed under this head submitted as under: “Prior period Expenditure – INR 9,90,74,018 (iii) As has been explained in the context of the accounting treatment in the case of allowance under section 40(a) and

Page 32 ITA Nos. 579 & 593/Bang/2015 40(a)(ia), the Taxpayer reverses accruals created in the previous year and accounts for expenses in connection with the subject accruals and complies with the applicable withholding tax. As a part of the proceedings before the learned CIT(A), the Taxpayer has also furnished sample extract of such reversal entries [Page 373 & 374 of paper book 3]. Accordingly, the amount of INR 9,90,74,018 has have been incorrectly held to be 'prior period items' by the learned AO and CIT(A). (iv) Further, in addition to the details furnished before the learned CIT(A), the Taxpayer has compiled listing in respect of INR 9,90,74,018 capturing party wise details, posting date along with TDS deduction and remittance details and sample copy of invoices and the same have been included in the petition for additional evidence [Page 177 to 210 of additional evidence petition]. (v) Given the above, the addition of INR 9,90,74,018 sustained by the CIT(A) should be deleted. Other Entries – INR 10,51,68,432 (vi) Before the Learned AO and CIT(A), it has been explained that the 'other entities' amounting to INR 10,51,68,432 are of the same nature as 'audit entities' covered under Ground 3 above. Accordingly, the arguments provided in the case of Ground 3 are also applicable here. (vii) Given the above, the addition of INR 10,51,68,432 sustained by the CIT(A) should be deleted. (viii) Additionally, the Taxpayer has compiled listing in respect of INR 10,51,68,432 capturing party wise details, posting date along with TDS deduction and remittance details and sample copy of invoices. Further, the same have been included in the petition for additional evidence [page 211 to 224 of additional evidence petition]. Ad-hoc disallowance - 1NR 22,63,28,464 (ix) This addition represents an ad-hoc disallowance computed at 10 percent of a portion of the expenditure made by the Learned AO based on observations that the expenditure of various natures not related to warranty were captured under the warranty ledger. The same was also sustained by the learned CIT(A) essentially for want of further details /evidence.

Page 33 ITA Nos. 579 & 593/Bang/2015 (x) The subject disallowance being disallowance of an adhoc percentage of a portion of the expenditure, is not warranted. (xi) The Learned AO and CIT(A) failed to appreciate that account head 'Warranty support and maintenance service expenses' as was reflected in the profit and loss account of the Taxpayer inter alio included expenses in connection with warranty and various other maintenance services. Therefore, nature of expenses observed by the Learned AO being in the nature of equipment rent, professional charges, logistic services, consultancy fees, scanning services etc. were all expenses incurred to certain warranty and service contracts. (xii) Given the above, the addition of INR 22,63,28,464 sustained by the CIT(A) should be deleted.”

9.2 On the contrary, the Ld.DR submitted that the warranty expenses claimed are not in accordance with the provisions of the act and there are double deduction in respect of the same. It is submitted by the Ld.DR that there is no evidence filed by the assessee to show the reversal account. We have perused the submissions advanced by both sides in the light of records placed before us.

9.3 We note that assessee has submitted that the expenses has been disallowed for the first time in the current year. It is the submission of the assessee that assessee has always followed the consistent method in determining the warranty. In the interest of justice, we remand this issue back to the Ld.AO to verify the claim of assessee in the light of the submissions made and evidences filed in support. Needless to say that proper opportunity of being heard must be granted to the assessee.

Page 34 ITA Nos. 579 & 593/Bang/2015 Accordingly, ground no. 8 of assessee’s appeal and ground no. 5 of revenue’s appeal stands allowed for statistical purposes.

Revenue’s appeal 11. Ground no. 6 raised by revenue is against the relief granted by the Ld.CIT(A) on the undisclosed sale of goods.

11.1 The Ld.AR submitted that assessing officer from the trial balance filed by the assessee found that the gross sales of the company was Rs. 12979,31,04,484 whereas in the financial statement only a net sale figure of Rs. 6017,11,59,234 was reflected. The assessee explained the difference as being on account of pre-sales and post-sales discount provided to its customers with the pre-sales discounts reflected on the face of the sales invoices and the post sales discounts reflected in the Trial Balance. The reconciliation by the assessee was stated to be on account of the following kinds of discounts/items offered by it. It is submitted that since these items were not found as debit entries in the P&L account the Ld.AO denied the claim of

Page 35 ITA Nos. 579 & 593/Bang/2015 assessee. The Ld.AR submitted that the assessing officer accepted the VAT returns which totalled upto the sales disclosed and was higher than the sales admitted the income tax return. The Ld.AO thus made out a case of suppression of sales and made an addition of Rs.916,08,87,209/-.

11.2 On an appeal before the Ld.CIT(A), the assessee filed various details in the nature of credit notes, cash discounts offered, commission payments write off of refunds etc. which was remanded to the Ld.AO for a remand report. In the remand report the Ld.AO accepted sum of Rs.1,38,88,193/- based on the confirmation letters filed by the assessee from various parties. The balance were rejected as no confirmations were received and for lack of entry in the profit and loss account.

11.3 It is submitted that the assessee once again furnished evidences in the form of bank statements establishing the linkage between the party-wise transaction of some of the large partners / distributors and the actual payout of discount amount through cheques. It was submitted that the cash discounts were allowed in the post sale stage for reasons of timely payment etc and the net received from the customer is credited into the accounts. The Ld.CIT(A) also carried out enquiries u/s. 133(6) with some of the large distributors / channel partners of assessee who make up for the bulk business during the relevant year. The Ld.CIT(A) observed as under:

Page 36 ITA Nos. 579 & 593/Bang/2015

Page 37 ITA Nos. 579 & 593/Bang/2015

Page 38 ITA Nos. 579 & 593/Bang/2015 11.4 The Ld.CIT(A) also verified the details of with various other partners / distributors of assessee correlating the transaction in its totality. With regard to post sales discount it was submitted that the assessee first accrues the amount in its books which is then reflected in its discount liability ledger and thereafter the payouts are made to the respective parties.

11.5 Party-wise details furnished by assessee and sample invoices were also verified by the Ld.CIT(A) and a comparative figures for all the parties were summed up post reconciliation which is as under:

11.6 Based on the above the Ld.CIT(A) was satisfied that it was a matter of reconciliation that was not carried out by the Ld.AO that led to the addition. The Ld.CIT(A) detailed verification and the remand report from the Ld.AO concluded that suppression of

Page 39 ITA Nos. 579 & 593/Bang/2015 sales is not indicated in the assessee’s facts. Based on a detailed analysis the addition was deleted.

11.7 The Ld.DR apart from supporting the order of the Ld.AO could not produce anything on record in order to establish contrary to what has been observed by the Ld.CIT(A). We therefore do not find any infirmity in the view taken by the Ld.CIT(A) and the same is upheld. Accordingly ground no. 6 raised by revenue stands dismissed.

12.1 At the outset the Ld.AR submitted that the Ld.CIT(A) has allowed the claim of assessee by analysing in detail the lease transaction between assessee and its customers. The Ld.AR submitted that assessee had claimed sum of Rs.10,65,93,376/- on account of car lease rental payment in hire purchase and finance leases. It was submitted by the Ld.AR that assessing officer disallowed the claim based on the description that the amount pertained to computers / computer equipments taken on finance lease.

12.2 It is submitted that assessee has been following consistent Accounting Standard 19 and has capitalised in the books of account and claimed depreciation thereon.

Page 40 ITA Nos. 579 & 593/Bang/2015 Subsequently, based on the CBDT Circular No. 2 of 2001 the assessee starting treating the income differently and the lease rentals paid by assessee was claimed as revenue expenditure as assessee was never the owner of the equipments / assets. The Ld.AO did not accept this position and considered the amount to be capital in nature by relying on the decision of Hon’ble Supreme Court in case of ABB Ltd. vs. Industrial Finance Corporation of India reported in (2006) 154 ITR 512. Subsequently, the decision of Hon’ble Supreme Court in case of M/s. I.C.D.S Ltd. vs. CIT reported in (2013) 350 ITR 527 reversed the said position.

12.3 On an appeal before the Ld.CIT(A), the Ld.CIT(A) considered the claim by observing as under:

Page 41 ITA Nos. 579 & 593/Bang/2015

Page 42 ITA Nos. 579 & 593/Bang/2015

The Ld.AR relied on the decision of Hon’ble Supreme Court in case of I.C.D.S Ltd. vs. CIT (supra)

12.4 On the contrary, the Ld.DR submitted that at the end of the lease the assets were to be transferred to the assessee and therefore the lease rental paid cannot be allowed as revenue expenditure.

12.5 The Tribunal for A.Y. 2002-03 held as under: “14. We have perused the orders and heard the rival submissions. AO himself has stated in the assessment order that though assessee termed the lease as financial lease, the terms of the lease did not provide for transfer of ownership to the lessee automatically at the end of the lease. Only reason why the lease was considered to be financial in nature was that the lease period was more or less on par with the life of the assets which were leased out and the renewal of the lease was at the option of the lessee for a nominal rent. However, in our opinion none of these can substitute the clause in the lease agreement which specified that the ownership of the assets continued

Page 43 ITA Nos. 579 & 593/Bang/2015 to be with the assessee. Insurance for the leased products were borne by the assessee. Assessee was the owner and held the title of the assets. Giving an equipment on lease by itself can be considered as a business. We are of the opinion that by virtue of the decision of Hon’ble Apex Court in I. C. D. S (supra), assessee having capitalised the assets in its books was eligible for claiming depreciation thereon. We do not find any reason to interfere. Ground.2 of the Revenue stands dismissed.” Accordingly ground no. 7 raised by revenue stands dismissed.

In the result, the appeal filed by the assessee stands allowed for statistical purposes and appeal filed by the revenue stands partly allowed for statistical purposes. Order pronounced in the open court on 21st November, 2023.

Sd/- Sd/- (CHANDRA POOJARI) (BEENA PILLAI) Accountant Member Judicial Member Bangalore, Dated, the 21st November, 2023. /MS /

Copy to: 1. Appellant 2. Respondent 3. CIT 4. DR, ITAT, Bangalore 5. Guard file By order

Assistant Registrar, ITAT, Bangalore