HUMBOLDT WEDAG INDIA PVT. LTD.,NEW DELHI vs. ACIT, CIRCLE-11(2), NEW DELHI

The present appeals have been filed by the assessee against the final assessment orders dated 31.10.2018 and 31.03.2021 for the AYs. 2014-15 and 2016-17 passed by the AO u/s 143(3) r.w.s. 144C of the Income Tax Act, 1961.

Humboldt Wedag India Private Limited (‘Appellant’ or ‘the Company’ or ‘HW India’), incorporated in 1976, is a wholly owned subsidiary of KHD Humboldt Wedag International AG Cologne (‘KHD AG’). KHD AG, through its subsidiaries is engaged in the business of process technology design, engineering, project management, the supply of technology and equipment, as well as supervising the erection and commissioning of cement plants and related equipment. It also provides customer services such as, supplying spare parts, optimization of cement plants, and training plant personnel round out KHD’s service portfolio. HW India is engaged in providing services such as designing and engineering, project management, supply of technology and equipment, and supervision of erection and commissioning of cement plants and related equipment.

During AY 2014-15, the Appellant has undertaken various international transactions with its associated enterprises (‘AEs’). For the purpose of benchmarking the prices of the international transactions, the Appellant in its transfer pricing documentation, has followed the transaction-by-transaction approach.

The assessee paid Rs.8.28 lacs for supervising charges, and Rs.14.25 Crores for central services. On supervision services, the AE charged a net profit markup of 4% on the internal cost incurred on the basis of number of hours spent by its personal in providing such services. On the central services,

The markup of 4% and 5% has been disallowed by the TPO and accordingly enhanced the income of the assessee based on the ld. DRP observations for the year 2010-11. For the sake of ready reference, the same is reproduced as under:

The main argument of the ld. AR was that these transactions are benchmarked by using TNMM and furnished that TP documentation whereas the TPO did not follow any prescribed method and the entire markup is disallowed without giving any reasons. The observation of the revenue that the parent company gets benefited by better synergies, scale of economy, better coordination and reporting cannot be accepted.

While the assessee avails supervision services from its AEs and pays markup charges, it also provides such services to the AEs for their third party contracts and receives markup charges. The pricing basis and the results arising from the same have been accepted by the TPO. Disallowing the mark-up on receipt of services while in-principle accepting the provision of similar services rendered having similar intent and basis of pricing cannot be valid ground to disallow the markup. It is not out of contest to note that no such disallowance has been made on the markup in the case of the assessee AY 2007-08 to 2012-13 and AY 2015-16.

Hence, keeping in view, the entire facts and circumstances, the contention of the revenue that the AE invariably derives some benefit and hence no markup should be charged, cannot be accepted.

The assessee contended that the issue of warranty is a recurring provision made in the past several years and that in all the year from 2009-10 onwards by the various judicial authorities.

The ld. DRP for both the years in question directed the AO to modify the disallowance after verifying the provisions made in the earlier years, its actual utilization and writing back of unutilized provision for taxation. The AO was further directed to examine and verify complete details of the data of the provisions created, and actual expenses on the warranty incurred in the subsequent years.

The details submitted by the assessee are perused.

The agreements pertaining to the warranty clause on completion of the projects have been examined. The Article 9 pertaining to the warranties specify that the equipment carry a warranty for a period of 12 months from completion of performance test or 18 months from the date of commissioning or 24 months from the date of last major delivery, whichever is earlier, against any material defect, design defect, manufacturing defect and/or failure of equipment to perform as stipulated. The spares shall carry a warranty period of 12 months from the date of their being put to use or maximum 24 months from the date of delivery whichever is earlier. The Performance Bank Guarantee submitted by the supplier will remain valid till the aforesaid warrantee period. Further, specific items as Gear Box for kith, girth gear, thrust rollers, will have latest defect liability period of 60 months from the date of delivery.

The provision for warranty has been made on a scientific and reasonable basis that the assessee makes a provision for warranty @3% of the contract value upon the completion of the deliveries based upon the historical trend. The following table provides a reconciliation of provisions for warranty for various years i.e. provision created in preceding years, actual expenditure during the year, earlier provision utilized, the balance provision carried forward.

The observations and finding of the Id. CIT(A) is not only in accordance with the facts and material on record, but also in conformity with the principle laid down by the Hon’ble Supreme Court, hence there is no reason to deviate from such a finding and accordingly same is confirmed.”

The Co-ordinate Bench of ITAT vide combined order dated June 11, 2018 for AY 2010-11 & AY 2011-12, has dismissed the Revenue’s appeal filed against the directions of ld. DRP allowing the deduction of provision for warranty, following their order for AY 2008-09. The relevant extract from the order is as follows:

The Co-ordinate Bench of ITAT vide combined order dated April 7, 2021 for AY2012-13 and AY 2013-14, has dismissed the Revenue’s appeal filed against the order of ld. CIT(A) allowing the deduction of provision for warranty, following their order for AY 2008-09. The relevant extract from the order is as follows:

Since, the provision for warranties has been made @ 3% and the unutilized portion has been reversed at a regular intervals from year to year, the appellant has been consistently following the policy of making provision for warranty as per the ITA No. 475/Del/2021 10 Humboldt Wedag India Pvt.Ltd. terms of the contract, the ITAT for AY 2008-09, AY 2010-11, AY 2011-12, AY 2012-13 & AY 2013-14 has allowed provision for warranty, the provision made during AY 2014-15 is on same basis as in earlier years is hereby allowed.

The anticipated loss claimed by the assessee with regard to Shri Cements Ltd. has been disallowed by the AO. The ld. DRP held that the details furnished by the assessee in this regard do not contradict the view taken by the AO.

The assessee is engaged in the business of industrial plant engineering and supply of equipment for cement and mineral plants, entered into various contracts with customers for supplies and engineering services ranging from 2 to 4 years. The contracts contain clause for payment of liquidated damages for default of delivery as per the agreed terms entered in the contract agreements. The ld. DRP directed the AO to verify the provisions made in the earlier years, actual utilization and writing back of unutilized provision to taxation.

The table below provides a reconciliation of provision for Liquidated Damages made/ reversal of Provision and utilization for Liquidated Damages for various years:

We also find that the issue has been adjudicated in the case of the assessee in the appeals filed by the revenue for the assessment years 2008-09, 2010-11, 2011-12, 2012-13, 2013- 14.

For the sake of ready reference, the operative part of the earlier order is reproduced below:

Since, the provision for liquidated damages has been made regularly and allowed in P&L account and since the unutilized portion has been reversed at a regular intervals from year to year, since, the ITAT for AY 2008-09, AY 2010-11, AY 2011-12, AY 2012-13 & AY 2013-14 has allowed provision for liquidated damages, the provision made during AY 2014-15 is on same basis as in earlier years is hereby allowed.

The assessee has claiming provision for anticipated losses on the grounds that Accounting Standard 7 on construction contracts allows such provision. He relied on the judgments in the case of Mazagaon Dock Ltd. Vs. JCIT 29 SOT 356, Dredging International Vs ACIT 48 SOT 430 wherein the loss on estimated basis determined on technical estimation has been allowed.

The ld. DRP held that this liability has not been crystallized during the relevant period and disallowed the loss owing to the ITA No. 475/Del/2021 13 Humboldt Wedag India Pvt.Ltd. absence of cogent evidences to prove that the liability has been taken shape.

Before us, the assessee reiterated the arguments taken up before the authorities below while the ld. AR relied on the order of the ld. DRP.

Heard and perused the material available on record.

What is the profit of a trade or business is a question of fact and it must be ascertained, as all facts must be ascertained, with reference to the relevant evidence, and not on doctrine or theories. At first sight, it might be thought that the calculation of variables such as revenue, expenditure and profits should be the same for the purposes of both commercial accounting and taxation but not so. The fundamental point, of course, is that accounting and taxation exist for different reasons. The purposes and requirements of commercial accounting principles and taxation are not always the same.

Accounting involves the preparation of information for the purposes of control and decision-making and may require interpretation, forecasting or simply recording factual information.

The main purpose of taxation is usually to raise revenue but it is also used as an instrument of government economic and social policy. For a tax system to operate successfully within the law it requires a degree of certainty that may not always be appropriate for commercial accounting. Furthermore there alternative methods of preparing accounts that are ITA No. 475/Del/2021 14 Humboldt Wedag India Pvt.Ltd. equally acceptable in terms of accounting standards but the choice of which is not accepted for the taxation purpose. There are several reasons why financial reporting rules and practices might not always be appropriate for determining final tax liability. The primary goal of financial accounting is to provide useful information to management, shareholders, creditors, and others properly interested; the major responsibility of the accountant is to protect these parties from being misled. The primary goal of the income tax system, in contrast, is the equitable collection of revenue, the major responsibility of the state is to protect the public finance. Hence, any presumptive equivalency between tax and financial accounting would be unacceptable.

Furthermore, there are other reasons why taxation might deviate from accounting concepts of income. While the most obvious purpose of taxation is to finance public expenditure, the extent and magnitude of taxation in modern economies also makes it a powerful instrument of government economic and social policy in its own right. While it is true that some taxation measures might be introduced to improve economic decision making, others are implemented for very different reasons. The concept of tax expenditures ably describes the situation that those provisions of the income tax containing special exemptions, deductions and other tax benefits were really methods of providing benefits by deviating from the system of profits derived following accounting standards. Thus, we find that wherever exemption or deductions are called for, the same has been provided explicitly in the provision of the Income Tax Act. Even, the provision for warranty, liquidated damages have ITA No. 475/Del/2021 15 Humboldt Wedag India Pvt.Ltd. been allowed taking into consideration the matching principle of revenue accounting. In the instant case, we further find that no cogent evidences have been furnished by the assessee as to how this loss has been arrived at.

Hence, we decline to interfere with the decision of the ld. DRP on this issue.

We hereby direct the AO to verify the date of filing of return by the assessee with regard to the timeline extended for the instant year and charge interest accordingly.

In the result, the appeal of the assessee in is partly allowed. Order Pronounced in the Open Court on 18/08/2021.