ASSISTANT COMMISSIONER OF INCOME TAX, CIRCLE-3(1)(2), BENGALURU vs. M/S HERBAL LIFE INTERNATIONAL INDIA PVT LTD, BENGALURU

Per Chandra Poojari, Accountant Member ITA Nos.2587 & 2219/Bang/2017 are cross appeals directed against the order of the CIT(Appeals)-3, Bengaluru dated 18.09.2017 passed pursuant to the order of the AO u/s. 143(3) r.w.s. 92CA of the Income-tax Act, 1961 [the Act] for the assessment year 2013-14. The assessee is also in appeals in ITA Nos.2220/Bang/2017 & 3168/Bang/2018 for the AYs 2014-15 & 2015-16 against the orders of the CIT(A) dated 18.9.2017 & 11.10.2018 respectively. Since common issues are involved in all these appeals, they are disposed of by this consolidated order for the sake of convenience. Assessee’s appeal (ITA 2219/Bang/2017) 2. The assessee has raised the following grounds:- “On the facts and circumstances of the case and in law, the Honorable CIT(A) erred in upholding the order of the learned Assistant Commissioner of Income Tax — 3(1)(2), Bangalore ("learned AO") which has been passed after taking into account the order of the learned Deputy Commissioner of Income Tax, Transfer Pricing —1(3)(1), Bangalore ("learned TPO") whereby the learned TPO and the learned AO have : A) Grounds of appeal relating to Transfer pricing (`TP') adjustment: 1. Erred in making an addition of INR 6,70,17,193 to the total income of the Appellant on account of adjustment in the arm's length price with respect to the international transaction of provision of software development services by the Appellant. 2. Erred in not accepting the economic analysis undertaken by Appellant in accordance with the provisions of the Act read with the Income-tax Rules, 1962 ("the Rules") and by conducting a fresh economic analysis for the determination of ALP for the

ITA Nos.2219, 2220, 2587/Bang/2017 and 3168/Bang/2018 Page 3 of 51 international transaction of software development services and holding that the said transaction is not at arm's length. 3. Erred by rejecting the use of multiple year data by the Appellant in determining the arm's length nature of the international transaction of software development services and by determining the arm's length margin/price using data only for FY 2012-13, including such data which was not available to the Appellant at the time of complying with the transfer pricing documentation requirements. 4. Erred in applying an inappropriate rejection criteria of rejecting companies having "Export earnings less than 75%" and thereby rejecting the company IDBI Intech Ltd from the set of comparable companies. 5. Erred in applying an inappropriate rejection criteria of rejecting companies having "Different financial year end" to determine the final comparable companies and thereby rejecting "Helios & Matheson Information Technology Limited" from the set of comparable companies. 6. The learned CIT(A) erred in not adjudicating certain grounds of appeal raised by the Appellant and inadvertently stating in his order that the same have not been pressed by the Appellant. 7. Erred in rejecting functionally comparable companies "Akshay Software Technologies Ltd" and "Spry Resources India Pvt Ltd" considered as comparable by the Appellant in respect of international transaction pertaining to provision of software development services. 8. Erred in including non-comparable companies "CG-VAK Software & Exports Ltd", "Larsen & Toubro Infotech Ltd" and "Persistent Systems Ltd" in the comparable set in respect of international transaction pertaining to provision of software development services. 9. Erred in not accepting the Appellant's claim for risk adjustment and hence comparing full-fledged risk bearing entities with the Appellant's captive operations without making any risk

ITA Nos.2219, 2220, 2587/Bang/2017 and 3168/Bang/2018 Page 4 of 51 adjustment for differences between the functional and risk profile of comparable companies vis-a-vis the risk profile of the Appellant. B) Grounds of appeal relating to Corporate Tax matters : 10. Erred in facts and in law in upholding the order of the Learned AO that provision for sales return in the books of accounts of the Appellant is to be disallowed. 11. Erred in not considering the fact that the provisions were created in accordance with the concept of accepted accounting principles of prudence that requires consideration of all anticipated losses even if they are not crystallized in the relevant assessment year. 12. Erred in not considering the fact that the taxable income should be computed in accordance with method of accounting regularly followed by the taxpayer unless they conflict with any express provision of the statute. 13. Erred in not acknowledging the fact that the same method of accounting is followed by the appellant year after year. 14. Erred in concluding that the method adopted by the appellant is not scientific. 15. Erred in not observing that the provision created by the Appellant year on year does not have significant variance from the actual sales return incurred towards such provision in the subsequent period which in itself indicates that the method adopted by the appellant is scientific. 16. Notwithstanding and without prejudice to the above, the learned CIT(A) erred in not giving a direction to allow the provision in the subsequent year in which the loss has crystalized. 17. Erred in levying interest under the provisions of Income Tax Act, 1961. The Appellant submits that each of the above grounds is independent and without prejudice to one another.

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The Appellant craves leave to add, alter, amend, vary, omit or substitute any of the aforesaid grounds of appeal at any time befo1re or at the time of hearing of the appeal, so as to enable the Hon'ble Tribunal to decide on the appeal in accordance with the law.” 3. Grounds No.1 to 9 relate to TP adjustment. Out of these grounds, at the time of hearing, the ld. AR pressed only grounds relating to exclusion of the companies viz., Larsen & Toubro Infotech Ltd. and Persistent Systems Ltd. from the list of comparables. Accordingly the other grounds are dismissed as not pressed. 4. The assessee company is in the business of manufacturing through contract manufacturers and distributing through direct selling network advanced weight management and nutritional products. It also provides information technology related services to Herbalife International of America Inc . 5. Larsen & Toubro Infotech Ltd. : The main objection of the assessee is that this company has brand value and intangibles and so it cannot be taken as a comparable in its case. The assessee has also relied upon certain ITAT decisions. According to the revenue authorities, the assessee has not brought anything on record to controvert these findings of the TPO at page 17 of his order. Further, the CIT(Appeals) observed that the benefit of brand is not restricted to parent company but it is available to all associated companies also if they are using the 'brand name'. In case of assessee too, it is a part of `Herbalife Group', which is using brand `Herbalife' in its products and thus assessee is expected to provide services commensurate with the brand image. It is providing services to its AE because its AE has considered its services of such high level as will not tarnish its (AE's) brand. So naturally the assessee needs to be compensated appropriately by the AE as it cannot be treated as a routine

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Page 6 of 51 service provider which would hardly bother about the brand of the AE. Thus, L & T cannot be excluded from the list of comparables just because it is having a brand value, as the assessee is also at the same footing. Considering above, the grounds in relation to Larsen and Toubro Infotech was rejected by the revenue authorities. Against this, the assessee is in appeal before us. 6. The ld. AR submitted that this company has brand value and intangible and not comparable to assessee’s case. The company’s brand has been growing steadily across the globe and focusing on enhancing overall brand recall and brand expenditure amongst their stakeholders and taking various initiatives for engagement of their clients to the next level thereby enhancing the brand value. From the schedule of fixed assets forming part of the annual report, this company owns significant intangible assets. It is functionally different ad engaged in sale of products as well as services and a product company as evident from extracts of Annual “Report. It has a product engineering service business unit. Revenue is derived from sale of services / products. The operating expenses includes line item of ‘cost of bought-out’ items for resale. There is no segmental information and financial statements do not provide break-up between products and services. It’s a giant company with turnover of Rs.3,613 crores. This company has been excluded in the assessee’s own case for the AY 2011-12. 7. The ld. DR relied on the orders of lower authorities. 8. We have heard both the parties and perused the material on record. In the assessee’s own case in IT(TP)A No. 579/BANG/2016 for the AY 2011-12, this Tribunal vide order dated 7.8.2019 observed as under:- “10. We have perused view of coordinate bench of this tribunal in case of Mercedes Benz Research & Development India (P.) Ltd.

ITA Nos.2219, 2220, 2587/Bang/2017 and 3168/Bang/2018 Page 7 of 51 (supra) in respect of M/s. Accropatel Technologies Ltd and M/s L&T Infotech Ltd. It is observed that these comparables were sent back to Ld.TPO by observing as under: "13. Acropetal Technologies Ltd. ('Acropetal'). ** ** ** 16.3 According to the learned Authorised Representative, the other two companies were chosen as comparables by the assessee in its TP Study itself. The learned Authorised Representative however submits that the assessee seeks exclusion of L & T Infotech Limited and Persistent Systems Limited, due to more details being now available in the public domain which render these two companies as not comparable to the assessee and therefore prays that they be excluded from the list of comparable companies. 16.4 Per contra, the learned Departmental Representative for revenue objected to the admission of this additional ground stating that when the assessee itself has selected these two companies, the authorities below had no occasion to consider the objections now raised by the assessee before the Tribunal. 16.5 After having heard both parties and perused and considered the material on record, we find that the functional comparability of these two companies i.e. (i) L & T Infotech Limited and (ii) Sasken Communication Technologies Limited have been considered by benches of this Tribunal in various cases, including those cited by the ld.AR. By way of this additional ground, the assessee is raising objections to the inclusion of these companies on the issue of functional dissimilarity and other grounds. In our considered view, the assessee cannot be precluded from raising an objection against inclusion of a company even if the said company was selected by the assessee in its TP Study. This view was taken by the Special Bench of ITAT, Chandigarh in the case of Dy. CIT v. Quark Systems (P.) Ltd. [2010] 38 SOT 307 As per the principles laid down in the aforesaid decision of the Special Bench (supra), we admit this additional ground raised by the assessee seeking exclusion of these two companies (i) L & T Infotech Limited (ii) Sasken Communication Technologies Limited without commenting on the merits of the case and remit the matter of their comparability analysis to the file of the TPO/A.O. for examination of the

ITA Nos.2219, 2220, 2587/Bang/2017 and 3168/Bang/2018 Page 8 of 51 assessee's claim and to adjudicate thereon after providing the assessee adequate opportunity of being heard, which shall be duly considered. We hold and direct accordingly." 11. On perusal of aforestated observations by coordinate bench of this Tribunal, it is very clear that comparables were remanded for the reason that, in case of Acropetal, DRP rendered finding that segmental details were available which was contrary to materials placed on record. In case of L & T, coordinate bench sent back comparable for reason that financial details which were initially not available on public domain was subsequently available for consideration. 11.1 In the facts of present case there is no such dispute between parties and observations regarding financials of these companies by DRP are concurrent with annual reports placed in paper book filed before us. Thus, in our considered opinion, these comparables cannot be held to be functionally similar with of assessee, who is a contract service provider, working on a cost plus business model.”

ITA Nos.2219, 2220, 2587/Bang/2017 and 3168/Bang/2018 Page 9 of 51 22. The learned AR relied on the order of the co-ordinate Bench in the case of Metric Steam Infotech (India) (P.) Ltd. v. Dy. CIT [IT (TP) Appeal No. 1418 & 2735 (Bang.) of 2017, dated 27-2-2019], wherein the Tribunal held as under:— "11. As far as L&T Infotech Ltd. and Persistent Systems Ltd. are concerned, our attention was drawn to the decision of ITAT Hyderabad Bench in the case of M/s. EPAM Systems (I) P. Ltd. v. ACIT, ITA No. 2122/Hyd/2017 for AY 2013-14, order dated 20-11- 2017. Vide para 12 of the decision, the Tribunal took the view that Persistent Systems Ltd. was into software products and software solutions and no segmental details were available and therefore the profit margin in the software development services segment could not be compared with the assessee's profit margin. As far as L&T Infotech Ltd. is concerned, the Tribunal vide para 17 of the aforesaid order came to a similar conclusion to hold that L&T Infotech should not be regarded as a comparable company. In the light of judicial precedents which remain uncontroverted, we are of the view that the aforesaid two comparable companies should be excluded from the list of comparable companies. " 22.1 It was also brought to our notice that in earlier year, Larsen & Toubro Infotech Limited has incurred expenditure on "cost of brought out items for resale at Rs. 27,10,89,274 for which he drew our attention to the financial statement of Larsen & Toubro Infotech Limited placed at paper book page No. 1081, which is absent in the case of present assessee. He also submitted that it has huge intangible assets and brand value in software at Rs. 143,61,95,196 and it has intangible asset in the form of business rights to the tune of Rs. 153,42,45,196 as shown in the Fixed Assets as on 31-3-2013 placed at paper book page No. 1078. Being so, in our opinion, it cannot be compared with the assessee's case. Accordingly, we direct the TPO to exclude the same from the list of comparables. 12. Following above said decision rendered by the co-ordinate bench, we direct exclusion of Larsen & Toubro Infotech Ltd and CG VAK Software Exports Ltd. We also direct inclusion of M/s R systems International Ltd and M/s Akshay Software Technologies Ltd. Accordingly, we direct the AO/TPO to redetermine the ALP of the transactions in terms of discussions made supra.”

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ITA Nos.2219, 2220, 2587/Bang/2017 and 3168/Bang/2018 Page 11 of 51 Limited is a global company specializing in software products, services and technology innovation. From the list of intangible assets at page 1051 of the paper book, we find that the assessee has been claiming depreciation both on tangible and intangible assets for the periods ending 31.03.2012 and 31.03.2013. From page 1059 of the paper book, we find that the final segmental results of each segment is not available and therefore, we are of the opinion that the TPO ought to have excluded this company from the final list of comparables. We find that in the case of Cashedge India (P.) Ltd. (supra), the Hon'ble Delhi High Court vide its order dated 04/05/2016, has considered the TP study in the case of Cashedge India (P.) Ltd. (supra) for the A.Y. 2010-11 and the comparables therein and at para 6 of its order the Hon'ble High Court has discussed the financial results of Persistent Systems Ltd. and held as under: "6. As far as the first company, i.e., Persistent Systems Ltd., is concerned, the material on record - as found by the ITAT - shows that this company was involved in software development, software products and marketing. Furthermore and perhaps more importantly published segmental data was not available. In these circumstances, having regard to the specificity of the Transfer Pricing Rules under Rule 10(b) to 10(e) of the Income Tax Rules, the data of the said firm, i.e., Persistent Systems Ltd., could not have been included. Likewise, as far as the Wipro Technology Services goes, it was part of the Citi Group and was during the financial year in question acquired on 21.01.2009 by the Wipro Ltd. as a subsidiary. As a part of the arrangement, the existing contracts pertaining to the work of the Citi Group continued to be with the newly created entity, i.e., Wipro Technology Services. Equally importantly, is that there was no published segmented data as far as software development or its finances were concerned with respect to Wipro Technology Services. In these circumstances, the findings of the ITAT are purely factual and cannot be gone into as no substantial question of law arises for consideration." 13. In the case of Saxo India (P.) Ltd. (supra) for the A.Y. 2011-12 the Coordinate Bench of the Tribunal at Delhi has considered the very same facts to hold that it is not a comparable company as segmental information is not available with regard to the products and services. Learned Departmental Representative has not been able to bring out any dissimilarity of facts between the A.Ys 2010-11 & 2011-12 and the

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assessment year before us. Therefore, respectfully following the decision of the Coordinate Bench of the Tribunal and also the decision of the Hon'ble Delhi High Court in the case of Cashedge India (P.) Ltd. (supra), we hold that this company is not a comparable to the assessee- company and has to be excluded from the final list of comparables. AO is directed accordingly.” 14. In view of the above order of the Tribunal relating to the assessment year under consideration, we direct the AO/TPO to exclude Persistent Systems Ltd. from the comparables. Similar grounds are raised in AYs This ground of the assessee is allowed. 15. Ground Nos. 10 to 16 relate to the corporate tax issues with regard to allowability of provision for sales returns in this AY 2013-14. Similar grounds are raised in AYs 2014-15 & 2015-16 also which are taken up for consideration. We consider the facts as narrated in AY 2013-14. 16. The assessee has also filed additional evidence along with the petitions under Rule 29 for these assessment years in the form of sample copies of sales return and amount paid to various parties. The ld. AR submitted that these additional evidence are filed for better understanding of the issue of provision for sales return and are very much necessary for adjudicating these grounds. Further, due to inadvertence the same were not filed on earlier occasion. We have heard both the parties on the admission of additional evidence. In our opinion, there is a reasonable cause for not producing these evidence on earlier occasion and in the interest of justice, the same are admitted for adjudication. Revenue Recognition policy 17. The assessee company maintains its books of accounts using standard Oracle ERP, the entries passed for transactions being standardised. It is submitted that as per Accounting Standards issued by the Institute of Chartered Accountants of India, accounting policy followed

ITA Nos.2219, 2220, 2587/Bang/2017 and 3168/Bang/2018 Page 13 of 51 by a Company are required to be disclosed as part of financial statements of the Company. Accordingly, the Company has also disclosed its accounting policy as notes to its financial statements. Revenue recognition policy is followed for each of the years starting from financial year ending March 2004 onwards. From the financials of different years, the same are audited by different reputed firms but the approach adopted by the assessee company is consistent.

Provision for sales return is made based on past trends and in accordance with the product refund policy of the Company. Such provision is deducted from revenues 18. The ld. AR submitted that sales returns are a regular feature in this line of business and has been consistently accepted by the Company over a period of time. To this extent, there exists uncertainty with respect to recognition of sales revenue. The provision for Sales return has been made in accordance with the Accounting Standard (AS) 9 - Revenue Recognition issued by ICAI which mandates that when the uncertainty relating to collectability arises subsequent to the time of sale or rendering of service, it is more appropriate to make a separate provision to reflect the uncertainty rather than to adjust the amount of revenue originally recorded. Reference is invited to Paragraph 14 of AS 9 (Page no 2408 of submission dated 18 January 2022) provides in relation to disclosure of revenue that in addition to the disclosures required by Accounting Standard 1 on ‘Disclosure of Accounting Policies’ (AS 1), an enterprise should also disclose the circumstances in which revenue recognition has been postponed pending the resolution of significant uncertainties. 19. Further reference is also invited to the opinion of ICAI Expert Advisory Committee Advisory dated 10.10.11 which has noted in that, “The company should recognise a provision in respect of sales returns at the best estimate of the loss expected to be incurred by the company in

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respect of such returns including any estimated incremental costs that would be necessary to resell the goods expected to be returned, on the basis of past experience and other relevant factors.” 20. In above context it is submitted that the estimate of sales return could be made adopting different approaches viz., sales return after the balance sheet date can be tracked to the date of closing accounts finally (OR) estimated by simple tracking the returns year wise for past and adopting the percentage on current sale, (OR) estimated in the manner made by the Company as explained in subsequent paras. It is important to note the estimate made and provisions made have proved accurate upto 90% in the Company’s case i.e., utilisation by way of actual refunds for sales returns out of the provisions made during the period, which is more than a fair estimate. 21. In above context it is pointed out that turnover at end of March 2010 as per audited P&L at page 1273 of paper book was INR 193 crores, whereas at the end of Mar 15 is INR 1,179 crores (page 59 of paperbook for AY 2015-16). 90% accuracy has to been seen in the background of such increasing turnover and various other variables during this period of 6 years whose data is collated on page 1436 of paperbook. 22. Movement of provision towards sales returns can be seen from audited accounts at pages 1195 for March 2007, 1228 for March 2008,1261 for March 2009, 1296 for March 2010, 1333 for March 2011, 1369 for March 2012, 108 for Mar 2013 of paper book for AY 2013-14. While page 68 of paper book AY 2014-15 and page 78 of paper book AY 2015-16 provide the relevant numbers of movement of this provision account.

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Decision of co-ordinate Benches of Hon’ble Tribunal in relation to provision for sales return: 24. Our attention was invited to the following decisions of coordinate benches of this Tribunal which have held that provision for sales return in consonance of well settled accountancy principles needs to be allowed and no disallowance is called for provision for sales return: • Bayer Bio Science v. Addl CIT [ITAT Mumbai - ITA No. 7123/Mum/2011 dated 08.02.2012] (wherein it was held that that the approach of the assessee is in consonance with well settled accountancy principles and the AO was not justified in rejecting the same. The disallowance for provision for sales return is, accordingly deleted. • DCIT 14(1) v. Bayer Bioscience P Ltd [ITAT Delhi - ITA Nos. 5388/M/2009 and 2685/Del./2009 dated 21.04.2016] • DCIT v Cengage Learning India Pvt Ltd [ITAT Delhi - ITA No. 830/Del/2013 dated 10.04.2017]

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AY Opening Provision Utlisation Closing Net Remarks Provision during the Provision Provision year (A-B) A B 2013-14 1,24,83,564 Closing 11,77,81,232 8,38,79,688 4,63,85,108 3,39,01,544 provision i.e. 4,63,85,108 is disallowed by AO – Refer Page 6 of Asst Order

2014-15 4,63,85,108 18,79,30,361 13,30,80,792 10,12,34,677 5,48,49,569 Closing provision less opening provision i.e. 5,48,49,569 is disallowed by AO – Refer Page 6 of Asst Order

2015-16 10,12,34,677 12,85,48,679 17,04,74,559 5,93,08,797 (4,19,25,880) No amount is disallowed by AO since utilisation amount is higher than provision amount – Refer Para 4 to 11 in page 5 & 6 of asst. order

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of INR 12.85 Crores only. Reference is also invited to CIT(A) order for AY 2015-16, wherein the alternate claim made by the Company to allow the excess utilisation of INR 4.19 Crores is also rejected on hyper technicalities and has dismissed without appreciating the fact that the additions of provision for sales return were made by tax authorities for AY 2013-14 and AY 2014-15 and not in earlier years. 28. The ld. AR further submitted that the Company is claiming allowance of provision for sales return on scientific basis from FY 2009-10 onwards on consistent basis and no additions were made till FY 2011-12. The department on the one hand does not want to allow the provision for sales return in the year of creation and on the other hand where the utilisation of provision is higher, they want to deny the benefit on hyper technicalities without appreciating the settled principles of law that principle of consistency needs to be followed. Hence the principle of consistency is not followed by the revenue authorities. 29. Considering all of the above, it is submitted that the provision for sales return is made on scientific basis, utilisation of provisions is 90% accurate and the said method is consistently applied from AY 2009-10 onwards in accordance with the Accounting Standards and opinion of ICAI and therefore, prayed to allow the appeal of and delete the additions. 30. Further, it was submitted that even if for argument sake it is possible estimate, the provision by adopting different formula as suggested by AO or as proposed by Tribunal during the hearing, the formula adopted consistently by the assessee company with around 90% accuracy cannot be rejected by labelling same as unscientific. There cannot be one rigid method for estimating. When it is demonstrated that over a period of several years provision is being made with 90% accuracy it deserves to be accepted. Without prejudice, in case the contention of the assessee on

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above grounds is not acceptable for any reasons and provision is held not to be allowable, it is prayed that the alternate prayer of allowing the utilisation which is the actual refunds made towards sales return in respective years, to be allowed. In that case there is no question of any estimation and the amounts are refunded to third parties at actuals during period of assessment. 31. The assessee has also filed petition for admission of additional evidence by way of sample copies of sales return and amount paid to the associates at page nos. 2249 to 2399 of the PB stating that these details are now filed only for the limited purpose of explaining the process to Tribunal for complete and clear appreciation of the process adopted. Material already available on record on this issue is sufficient evidence for the claim made in connection with provisions towards return of goods. 32. The ld. AR explained the process of working out provision amount by reference to Page 385 of Paper book 1 of AY 2013-14, wherein working of provision for sales return is set out. The Company is taking Net Sales (i.e. Sale of Products less Returns less Discount) applying weights to arrive sales that are likely to remain on the shelf as at the end of March for that financial year. The weights are assigned from 1 to 12 for each of the months in which sales take place starting from April of the financial year, since the Company is taking back the goods sold for last 12 months. Accordingly, for the month of April 2012 the weight applied would be 1/12; for the month of May 2012 it would be 2/12 and so on and for sales made during the recent months of closer to the year-end would be 10/12 for the month of January 2013 and 11/12 for the month of February 2013. Conceptually this is the expected stock to be in market out of which potential returns can happen.

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Less: Opening Provision B 1,24,83,564 Add: Utilisation C 8,38,79,688 [Actual Gross sales return less discounts i.e [14,37,28,048 – 5,98,48,359] Avg discount for the year is approx. 41.64% and therefore discount is [14,37,28,048 * 41.64% = 5,98,49,359].

Gross Provision for sales return considered D 11,77,81,232

AY 2014-15 Particulars Ref Amounts in INR Closing Provision A 10,12,34,677 [Weighted Average Sales * 1.89% of Provision required] [534.84 Crores X 1.8928%]

Less: Opening Provision B 4,63,85,108

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Add: Utilisation C 13,30,80,792 [Actual Gross sales return less discounts i.e [22,40,78,666 – 9,09,97,874] Avg discount for the year is approx. 40.61% and therefore discount is [22,40,78,666 * 40.61% = 9,09,97,894]. Gross Provision for sales return considered D 18,79,30,361

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whatsoever with the current. year sales. What would make sense is if it was identified that from out of the sales made during a particular period, what percentage of sales got returned. This ratio then multiplied by current year sales would give a scientific estimate of the closing balance required for provision for sales return. Instead of doing this, assessee has just. taken a ratio of sales return and actual sales of the same period and multiplied it by current year sales to arrive at an estimate. Thus, assessee's method of arriving at year end provision for sales return cannot be called 'scientific' or reasonable. 41. The ld. DR further submitted that a perusal of above shows that for estimating the amount of provision to be made, the assessee takes into account the 'Sales return' relating to the sales made during the year under consideration as well as the 'Sales return' pertaining to the sales made in the previous financial year. This method itself shows that it is a defective one as the 'Sales return' relating to the sales made during the year under consideration are already being claimed on actual basis during the year itself and as such no provision is required to be made for the same at the year end. The provision is required to be made only in relation to those 'Sales return' which are not received in the year under consideration but in the following financial year. So the assessee should have considered only those 'Sales return' for estimation purposes, which pertain to the sales made in the previous financial year. 42. Another defect in the method of the assessee s that it is dividing the total sales return (relating to sales in previous financial year as well as that in the current financial year) with total sales in the current financial year to arrive at a percentage of 1.32, which is used to arrive at the estimate of provision to be made at the year end. Here again the assessee should have used the figures of 'Sales return' relating to sales in previous financial year

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and the Total Sales figure of the previous financial year to determine the percentage of the sales in a financial year which are returned back in the next financial year. 43. Further, the application of weighted average of the current year sales but simple ratio of total returns to total current year sales itself is mathematically defective. If it is presumed that for previous, current and following financial year the pattern of monthly sales, 'sales return' relating to the sales made during the year as well as 'sales return' pertaining to sales made in previous financial year is exactly same, then a scientific method should be able to provide the estimation of provision which will exactly match the sales return in the following year. However, this can be mathematically verified that the method adopted by the appellant will not provide such matching estimation even in such ideal situation. Considering above, the method adopted by the assessee cannot be considered as scientific. Thus the decisions relied upon in its support of assessee’s arguments do not help it and in fact the ratio of the same supports the action of AO. The ld. DR strongly relied on the order of the Tribunal in the case of Nike India Pvt Ltd (supra). Thus, it was submitted that the action of the AO in disallowing the provision of Sales return is to be upheld and the grounds of appeal on this issue are to be dismissed. 44. We have heard both the parties and perused the material on record and additional evidence furnished by the assessee before us. It is the submission of the assessee that it is providing for sales returns on a scientific basis with substantial degree of estimation. It has taken support of Accounting Standard 29 (AS 29) relating to "Provisions, Contingent Liabilities and Contingent assets". AS 29 explains that a "provision" should be recognized when:-

ITA Nos.2219, 2220, 2587/Bang/2017 and 3168/Bang/2018 Page 25 of 51 - an enterprise has a present obligation as a result of past event. - It is probable that an outflow of resources embodying economic benefit will be required to settle the obligation and - A reliable estimate can be made of the amount of the obligation.

ITA Nos.2219, 2220, 2587/Bang/2017 and 3168/Bang/2018 Page 26 of 51 obligation out of such past event" does not arise. Hence, we are of the view that the provision for sales return does not represent present obligation arising as a result of past event. Rather, it is an expected obligation that may arise as a result of a future event. 47. The Sales return expected after the Balance Sheet date is an event occurring after the Balance Sheet date. The Accounting Standard 4 titled as "Contingencies and Events occurring after the Balance Sheet date" actually governs this kind of situation. The relevant portions of the AS-4 are extracted below:- "4. Contingencies 4.1 The term "contingencies" used in this Standard is restricted to conditions or situations at the balance sheet date, the financial effect of which is to be determined by future events which may or may not occur. 8. Events Occurring after the Balance Sheet Date 8.1 Events which occur between the balance sheet date and the date on which the financial statements are approved, may indicate the need for adjustments to assets, and liabilities as at the balance sheet date or may require disclosure. 8.2 Adjustments to assets and liabilities are required for events occurring after the balance sheet date that provide additional information materially affecting the determination of the amounts relating to conditions existing at the balance sheet date. For example, an adjustment may be made for a loss on a trade receivable account which is confirmed by the insolvency of a customer which occurs after the balance sheet date."

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is "any expenditure" (not being expenditure of nature described in sections 30 to 36 and not being in the nature of capital expenditure or personal expenses of the assessee) laid out or expended wholly and exclusively for the purposes of business. The question is whether "Sales return" is an expenditure for the assessee? We have noticed earlier that the Sales return actually represents "de-recognition of revenue", which was already recognized in the books of accounts. The Sales return is akin to Purchases in the sense, there will be corresponding receipt of goods and the only difference is that that the goods received in Sales return is the goods already sold by the assessee. When "Sales return" does not qualify as expenditure in terms of sec. 37(1), the Provision for Sales return cannot be allowed u/s 37(1) of the Act. 51. The assessee has placed reliance on the decision rendered by the Delhi bench of Tribunal in the case of Bayer Bioscience P Ltd (ITA Nos. 5388/M/2009 and 2685/Del/2009 dated 21.4.2016 and submitted that the Tribunal has held that the Provision for Sales return is allowable as deduction. We notice that the Delhi bench has followed the decision rendered by Mumbai bench of Tribunal in the assessee's own case in ITA No.7123/M/2011 dated 08-02-2012. We have gone through the above said decisions and notice that the co-ordinate bench did not refer to Accounting Standard 4 relating to "Contingencies and Events occurring after the Balance Sheet Date" and Accounting Standard 29 relating to "Provisions, Contingent Liabilities and Contingent assets". Further, the co-ordinate bench did not consider another important point that the Sales return should result in corresponding receipt of goods, which would in turn result in increase of closing stock. In the preceding paragraphs, we have considered both the Accounting Standards referred above and also the accounting principles attached to accounting of Purchases, Purchases return, Sales and Sales return. We have also analysed the applicability of provisions of

ITA Nos.2219, 2220, 2587/Bang/2017 and 3168/Bang/2018 Page 29 of 51 sec.37(1) to the claim of "Provision for sales return". Accordingly, in view of the detailed reasoning given by us, we are of the considered view that the "Provision for Sales return" is not allowable as deduction under the provisions of Income tax Act. 51.1 The assessee raised one more ground that CIT(Appeals) erred in not giving direction to allow the provisions in the subsequent year in which the loss has crystallised. In our opinion, the AO while computing disallowance on account of provision for sales returns has considered only the net closing provision or closing provision less opening provision and he allowed the utilisation amount in each assessment year under consideration. Thus, it means the AO allowed the actual sales returns made in each assessment year under consideration and there is no question of allowing further deduction on this count, which amounts to double deduction. 51.2 Accordingly, these grounds for all the years under consideration are also dismissed. 52. The assessee’s appeal for AY 2013-14 is partly allowed for statistical purposes. Revenue’s appeal (ITA No.2587/Bang/2017) 53. The revenue has raised the following grounds:- “1. The order of the learned CIT(A) is opposed to law and facts of the case. 2. In the facts and circumstances of the case, the Ld.CIT(A) has erred in directing the TPO to delete the negative working capital adjustment without appreciating the fact that working capital adjustment is given for making reasonably accurate adjustments to the uncontrolled comparable transaction to eliminate the material effects of such differences on the price, cost or profits.

ITA Nos.2219, 2220, 2587/Bang/2017 and 3168/Bang/2018 Page 30 of 51 3. The Ld.CIT(A) erred in not acknowledging the fact that working capital is calculated to find out as to how much is the cost of capital that must be recovered from the customers by increasing sales price. 4. The Ld.CIT(A) erred in rejecting M/s ICRA Techno Analytics and M/s Tech Mahindra Ltd as a comparable on the grounds that it is functionally different when the primary source of income for the comparable is from provision of software development services. 5. The Ld.CIT(A) while seeking exact comparability erred in fact and in law in imposing condition beyond law whereas the requirement of law is to acknowledge only those differences that are likely to materially affect the margin. 6. The Ld.CIT(A) erred in fact and in law in disregarding the position of law that there could be differences between the enterprises compared under the TNMM method that are not likely to materially affect the price or cost charged or the profits accruing to such enterprises. 7. For these and other grounds that may be urged at the time of hearing, it is prayed that the order of the CIT(A) in so far as it relates to the above grounds may be reversed and that of the Assessing Officer may be restored. 8. The appellant craves leave to add, alter, amend and / or delete any of the grounds mentioned above.” 54. Ground Nos.2 & 3 is regarding negative working capital adjustment. The issue has been discussed in detail by the TPO in para 13 of his order. During the hearings the appellant was asked to give detailed working of the risk adjustment it was seeking and the basis thereof. However, the assessee just sought an adhoc adjustment on this account. It relied on decision of Bangalore ITAT in case of Philips Software Centre [2008] 26 SOT 226 (Bangalore) and other decisions. The TPO was of the view that such a claim of the assessee does not have any scientific backing. No such adjustment was made by the appellant in its own TP study and it is only a theoretical one. The CIT(Appeals) observed that the TPO has rightly pointed out that the assessee cannot be considered as a risk-free entity as

ITA Nos.2219, 2220, 2587/Bang/2017 and 3168/Bang/2018 Page 31 of 51 held by the Mumbai ITAT in the case of Symantec Software Solutions (P.) Ltd. v Asst. CIT [2011] 216 SOT 48/11 taxmann.com 264 for AY 2006-07. The CIT(A) relied on the decision of Zyme Solutions AY 2010-11 in IT(TP). A No. 465/ Bang/2015 order dt 22.01.2016 and Syniverse Teledata Systems (P.) Ltd. v. Deputy Commissioner of Income Tax, Circle 12(1), Bangalore [2017] 80 taxmann.com 196 (Bangalore - Trib.) dt. 15.2.2017. 55. The CIT(A) further observed that the Bangalore ITAT in TS-274- ITAT-2017 rejected the assessee's claim of risk adjustment by holding that such adjustment cannot be provided on arbitrary basis if the same cannot be quantified accurately. The ITAT distinguished the decision in case of Philips Software Centre [2008] 26 SOT 226 (Bangalore) and as regards the decision of ITAT in case of Hellosoft India [2013J 40 taxman.com 235 (Hyderabad - Trib.), the ITAT observed that "such sub silentio tribunal order is not a binding precedence". The ITAT relied on the decision of Supreme Court in the case of CIT v. B.C. Srinivasa Setty [1981] 5 Taxman 1 (SC) and held that the adjustment of risk cannot be given if it cannot be quantified accurately. That risk adjustment cannot not be granted as a general rule was also upheld in CDC Software India Pvt Ltd [TS-839-ITAT- 2016(Bang)-TPJ and Stryker Global Technology Centre Pvt Ltd [7S-450- ITAT-2015(DEL)-TPJ. He noted that the assessee has not brought on record how lack of this adjustment has influenced the result of the comparables with quantified data. Second proviso to sec 92C(2) also covers and take care of these aspects. Since it is impossible to have a perfect comparable without any differences, the legislature has provided a margin of +/- 5% while determining ALP. Further, in following cases this was held that the margin of +/- 5 % takes care of the risk difference: • Symantec Software Solutions (P.) Ltd [2011] 11 taxmann.com 264 (Mumbai) followed in

ITA Nos.2219, 2220, 2587/Bang/2017 and 3168/Bang/2018 Page 32 of 51 • SAP Labs India (P.) Ltd[2012] 17 taxmann.com 16 (Bang.) • Aptara Technologies Pvt Ltd [TS-309-ITAT-2016(PUN)-TP] 56. In view of the above, the CIT(Appeals) rejected the grounds of the assessee. Against this, the revenue is in appeal before us. 57. We have heard both the parties and perused the material on record. Similar issue came for consideration in GXS India Technology Centre P. Ltd. for AY 2013-14, order dated 16.11.2021 wherein the Tribunal held as under:- “16. We have heard rival submissions and perused the material on record. The CIT(A) has given a categorical finding that the assessee is a captive service provider and is operating on cost plus basis. It was held by the CIT(A) that since the entire revenue of the assessee was from its AEs, negative working capital is not appropriate by relying on the Co-ordinate Bench order of the Tribunal in the case of Lam Research India Pvt. Ltd. (supra). In the notes to financial statement under the head long term borrowing an amount of Rs.99,74,436 is mentioned. This amount is secured against hypothecation of vehicles on financial lease. In the financials an amount of Rs.16,43,002 has been mentioned under the heading interest expenses. This interest is against the amount taken for financial lease as mentioned earlier. Therefore, the assessee does not have borrowings / loans for working capital and is purely a captive service provider providing software development services only to its AEs. Therefore, in such circumstances, there is no working capital risk since the assessee is working on a cost plus model. The co-ordinate Bench of the Tribunal in the case of e4e Business Solutions India Private Limited (supra) had in detailed discussed the entire concept of negative working capital adjustment and why it should not be made. The said order of the Tribunal has also discussed in detail, the case of Technotree Convergence relied on by the learned DR (para 9 of e4e Business Solutions India Private Limited). Since the assessee in this case does not have working capital loans / borrowings and entails no working capital risks, the ratio decidendi in the case of e4e Business Solutions Limited (supra) directly applies to the assessee and no working capital adjustment should be made. Therefore, the CIT(A)'s conclusion that no negative working capital adjustment is to be made by placing reliance on the order of the Bangalore Bench of the Tribunal in the case of Lam Research

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India Private Limited (supra) is correct and no interference is called for. It is ordered accordingly.” 58. In view of the above order of the Tribunal, we uphold the order of the CIT(Appeals). This ground of the revenue is dismissed. 59. The next issue that the department has challenged is rejection of ICRA Techno Analytics Ltd. and Tech Mahindra Ltd. as a comparable on the grounds that it is functionally different. 60. ICRA Techno Analytics: The assessee before the CIT(Appeals) argued against inclusion of in the list of comparables by the TPO and submitted that the said company is functionally different as it is engaged in software development & consultancy, engineering services, web development & hosting as well as business analytics and business process outsourcing but segmental data is not available, Also the company fails the RPT filter of 25% as applied by the TPO. From the annual report of the company the CIT(Appeals) observed that the functional profile of the company has under gone a change w.e.f. FY 2011-12 due to certain mergers in that year. As per annual report of the year under consideration (Page 22 of annual Report, Background- Significant Accounting Policies) the company is now engaged in software development and consultancy, engineering services, web development and hoisting services, business analytics and business process outsourcing. As per Revenue recognition (Page 22 of annual Report) the revenue from services consists of revenue earned from services performed for software development & consultancy, licensing and sub-licensing Fee, annual maintenance charges for software support, web development and hosting; revenue from sales is recognized as and when delivery of the branded software is made and is booked net of trade discount. Thus the company is operating in Software Development (IT) segment as well as IT Enabled Services segment. In fact, during

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financial year 2011-12, there was a merger of an ITES company into this company, however no separate income from ITES segment is being shown in the segmental data although the annual report states otherwise. So claim of the assessee that the company is not functionally similar to it for Software Development segment being found to be correct, the CIT(Appeals) directed this company to be excluded by the TPO from the list of comparables as no segmental details were available. 61. Tech Mahindra Ltd. : The assessee made detailed submission to support its claim before the CIT(Appeals) that this company should not be considered as a comparable in its case for determination of ALP. The main argument was that the company is functionally different as it is operating in multiple segments and segmental details are not available. The issue has been discussed by the TPO on pages 20 and 21 of his order. The TPO has used consolidated segmental data of the group to out the profit margins of this company as no segmental details were available in the unconsolidated report. On perusal of the segmental details in the consolidated report, the CIT(Appeals) observed that the segmental details are not strictly as per the functionality i.e,, software development, ITES etc. but it indicates three segments viz., Telecom Service Provider, Telecom Equipment Manufacturer and Business Process Outsourcing. Nowhere in the report is it indicated that services provided in relation to first two segments fall only in the category of Software Development and not any other services. Strangely, while selecting Tech Mahindra as a comparable, the TPO has discussed the functionality of only this company and not the group as a whole, the filters have been applied on the unconsolidated results of this company rather than group as a whole, but while working out the profit margin, the TPO has chosen the segmental of the group, without showing how all the filters applied by it are satisfied for the group as a whole.

ITA Nos.2219, 2220, 2587/Bang/2017 and 3168/Bang/2018 Page 35 of 51 However, since for this group in the absence of any material available in the annual report or information got by TPO under section 133(6) that the same relate to the software development alone, the CIT(Appeals) was of the view this company cannot considered as a proper comparable and directed to exclude this company from the list of comparables. 62. Against the order of the CIT(Appeals) excluding the above two comparables, the revenue is in appeal before us. 63. This issue came up for consideration in the case of GXS India Technology Centre Pvt. Ltd. v. ACIT in IT(TP)A No.128 & 331/Bang/2018 dated 16.11.2021 and with regard to the above two comparables it was held as under:- “Tech Mahindra Ltd. 10. The above company has been excluded by the CIT(A) after detailed analysis of the annual report. The relevant observation of the CIT(A) reads as follows:- "9.1 Tech Mahindra Limited : The appellant has made detailed submission to support its ground of appeal that this company should not be considered as a comparable in its case for determination of ALP. The argument of the appellant are in substance same as made before the TPO. The submissions of the appellant have duly been considered. The main argument of the appellant is that the company is functionally different as it is operating in multiple segments and segmental details are not available. The issue has been discussed by the TPO on pages 18 and 19 of his order. The TPO has used consolidated segmental data of the group to work out the profit margins of this company as no segmental details were available in the unconsolidated report. On perusal of the segmental details in the consolidated report, it is observed that the segmental details are not strictly as pr the functionality i.e. software development, ITES etc but it indicates three segments viz., Telecom Service Provider, Telecom Equipment Manufacturer and Business Process

ITA Nos.2219, 2220, 2587/Bang/2017 and 3168/Bang/2018 Page 36 of 51 Outsourcing. Nowhere in the report is it indicated that services provider in relation to first two segments fall only in the category of Software Development and not any other services. Strangely, while selecting Tech Mahindra as a comparable, the TPO has discussed the functionality of only this company and not the group as a whole, the filters have been applied on the unconsolidated results of this company rather than group as a whole, but while working out the profit margin, the TPO has chosen the segmental of the group, without showing how all the filters applied by it are satisfied for the group as whole. Anyhow, as discussed above, since for this group there is not any material available in the annual report or information got by TPO under section 133(6) that the same relate to the software development alone, this company cannot be considered as a proper comparable. So the ground of appeal of the appellant in relation to this company is allowed and the TPO / AO should exclude this company from the list of comparables." 11. The above discussion of the CIT(A) clearly explains that Tech Mahindra Limited is functionally dissimilar to that of the assessee. Tech Mahindra Limited has got multiple segments and on perusal of the segmental details in the consolidated report, it can be seen that the said company is strictly not into software development services, ITES etc. Moreover Tech Mahindra Limited is having turnover far exceeding Rs.200 crore. Therefore, this company gets excluded by application of upper turnover limit also. Hence, we see no reason to interfere with the order of the CIT(A) in excluding the above company from the list of comparables. It is ordered accordingly. ICRA Techno Analytics 12. The CIT(A) has excluded this company by holding that it is functionally not similar after detailed analysis of the annual report. The relevant finding of the CIT(A) in this regard reads as follow:- "9.1 ICRA Techno Analytics: The appellant has argued against inclusion of ICRA Techno Analytics. Ltd in the list of comparables by the TPO. The appellant has made

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Page 37 of 51 detailed submissions to support Its ground of appeal that this company should not be considered as a comparable in its case for determination of ALP.- The submission of the appellant is that the said company is functionally different as it is engaged in software development & consultancy, engineering services, web development & hosting as well as business analytics and business process outsourcing but segmental data is not available. the appellant has also submitted that the company falls the RPT filter of 25% as applied by the TPO. The submissions of the appellant have duly been considered. From the annual report of the company it is observed that the functional profile of the company has under gone a change w.e.f. FY 2011-12 due to certain mergers in the year. As per annual report of the year under consideration (page 22 of annual Report, Background- Significant Accounting Policies)” the company it is observed in software development and consultancy, engineering services web development and hoisting services, business analytics and business process outsourcing As per Revenue recognition (page 22 of annual report) tile revenue from services consists of revenue earned from services performed for software development & consultancy, licensing and sub-licensing Fee; annual maintenance charges for software support, web development and hosting; revenue from sales is recognized as and when delivery of the branded software is made-and is booked net of trade discount. Thus the company is operating in Software development (IT) segment as well as IT-Enabled Services segment In fact, during financial year 2011-12, there was a merger of an ITES company into this company, however no separate income from ITES segment is being. shown in the segmental data although the annual report states otherwise. So claim of the appellant that the company is not functionally similar to it for Software Development segment is found to be correct. Considering above this company should have been excluded by the TPO from the list of comparables as no/ segmental details were available. The AO/ TPO is therefore directed to remove this company from the list of corn parables. Considering above, this ground of the appeal of the appellant is allowed."

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provisions were made at year end and then reversed in the beginning of the next accounting year as no income had accrued in the hands of the payee. It relied upon various decisions including in the case Bosch Limited vs ITO ITA No. 1583(BNG)/2014, Karnataka Power Transmission Corporation Limited vs DCIT(TDS) 383 ITR 59(Kar), Telco Construction Equipment Co. Limited ITA No. 478/Bang/2012, Pfizer Limited Vs ITO(TDS) 55 SOT 277 etc. The assessee also submitted that TDS provisions are not applicable in cases where payee/recipient of the income is unidentifiable. The appellant also relied upon the decisions in the cases of Industrial Development Bank of India (2007) 293 1TR 267, Dishnet Wireless Limited 17A No. 320-329/MDS/2014, Apollo Tyres Limited ITA No.3215 and 3216/DEL/2015 and submitted that TDS provisions are not applicable in the absence of income earned by the payee as charge to tax does not rise. The AO however rejected the contentions of the assessee and disallowed an amount of Rs.15,31,44,903. Further, on a rectification application moved by the assessee in view of the amended provisions w.e.f. AY 2015-16, the AO restricted the disallowance to 30% of the above amount on which tax was not deducted at source. 70. The CIT(Appeals) upheld the action of the AO in making disallowance under Section 40(a)(ia) of the Act. Against this, the assessee is in appeal before us.

ITA Nos.2219, 2220, 2587/Bang/2017 and 3168/Bang/2018 Page 40 of 51 “23. We have heard the submissions of the learned counsel for the Assessee and the learned DR. The learned counsel for the Assessee at the outset brought to our notice that pending disposal of the appeals, the Assessee had furnished before the AO, details regarding the actual payment of TDS in subsequent financial year, on the provisions made in the various financial years. These details were verified by the AO. The AO has addressed a letter to the DR in which the AO after verification has found that the Assessee had deducted tax at source at the time when the provision made in one financial year is subsequently reversed and the expense booked in the subsequent financial year. The following are the contents of the said letter (copy filed by DR in Court), in so far as it relates to taxes deductible at source. "3. During the course of appellate proceedings before the Hon'ble ITAT the assessee company took the same plea that it had deducted tax at source in the subsequent year on all the amounts that was disallowed u/s. 40a(i) and 40a(ia) as and when these amounts were paid. The Hon'ble ITAT therefore directed that such details be produced before the Income Tax Officer (TDS) for verification. 4. At the remand stage the assessee company has now submitted year wise details of rental charges paid, professional charges paid, contract amounts paid and details of other payments. The details of year end provisions as per tax audit report (disallowed u/s. 40a(i) and 40a(ia)), payments made in subsequent year in respect of these provisions and details of tax deducted at source on such payments along with proof of deposit of such TDS into Govt. account were called for and systematically verified. Since, the transactions were enormous in respect of these four assessment years, verifications were carried out randomly for different months for these assessment years. After thorough verification of the transactions in respect of the months selected randomly and after analysis of consolidated annual figures separately for each sections of TDS, it is seen that the amounts which were shown as provisions as on 31 March of a particular year, whether either liquidated by way of payment or was added back to the profit and loss account in subsequent year. Wherever payments were made tax has been deducted at source under the relevant provisions of the IT Act and remitted to the Govt. account.

ITA Nos.2219, 2220, 2587/Bang/2017 and 3168/Bang/2018 Page 41 of 51 5. Though, the tax has been deducted at source at the time of payments in respect of provisions made as on 3l March, it is be stated that it was the assessee company's responsibility to deduct tax at source and remit it to the Govt. account as soon as item of expenditure is debited by it in the books of accounts. Reference is invited to sub section 2 of section 194C, which mandates that the any amount credited to any account whether called "suspense account" or by any other name, in the books of accounts such crediting shall be deemed to be credit of such income to the account of the payee and the provisions of this section shall apply accordingly. Similar provisions/explanation is also to be found in other sections relating to TDS. Thus, it can be seen that the assessee company has failed to deduct tax at source on the provisions made by it as at 31st March within the stipulated time. The assessee company has deducted tax at source on these amounts in the subsequent year as and when the same were paid by it. Thus, it is liable for charging of interest u/s. 201(1A) for delayed deduction and remittance of tax to Govt. account." (Emphasis supplied) 24. In view of the above, the demand on account of tax u/s. 201(1) of the Act, in our view, will no longer survive. However the appeals will survive with regard to the liability of the Assessee to interest u/s. 201(1A) of the Act. Therefore the appeals in so far as it relates to challenge to order u/s. 201(1) of the Act have to be allowed. 25. As far as the question whether the TDS provisions are attracted when the Assessee makes a provision for expenditure in the books of accounts, the learned counsel for the Assessee made submissions which are identical to submissions made before the AO/CIT(A). His submissions were:— 1. When payee is not identified there can be no charge u/s. 4(1) of the Act and therefore there can be no obligation to deduct tax at source. 2. The returns of TDS to be filed under the Income Tax Rules, 1962 contemplates furnishing of names of payees. 3. Judicial decisions recognise that there can be no TDS obligation in the absence of payee.

ITA Nos.2219, 2220, 2587/Bang/2017 and 3168/Bang/2018 Page 42 of 51 4. If there is no income chargeable to tax in the hands of the payee, there can be no TDS obligation. TDS obligations arise only when there is "Income". TDS obligations do not arise on the basis of mere payment, without there being income and corresponding liability of the person receiving payment from the Assessee to pay tax.

ITA Nos.2219, 2220, 2587/Bang/2017 and 3168/Bang/2018 Page 43 of 51 is put to loss by reason of the system of accounting followed by the Assessee and the fact that otherwise the money should have reached the coffers of the revenue much earlier, is sufficient to uphold the levy of interest u/s. 201(1A) of the Act. (5) When the Assessee argues that the payees are not identified, it is not open to the Assessee to also contend that there is no accrual of income in the hands of the payee or that the payment is not chargeable to tax in the hands of the payee in India. (6) The CBDT circular No. 3/2010 is in the context of banks crediting interest on fixed deposits of customers and the decisions rendered by the judicial forums based on those circular are all not relevant as the same are relevant only in the case of Banks and cannot be pressed into service in other cases such as the case of the Assessee.

ITA Nos.2219, 2220, 2587/Bang/2017 and 3168/Bang/2018 Page 44 of 51 which he or it may incur, be deemed to be an assessee in default in respect of the tax. The contention of the learned DR that the Assessee having admitted its default u/s. 40(a)(i) & 40(a)(ia) of the Act, cannot in proceedings u/s. 201(1) of the Act, be heard to say that there was no default under chapter XVII-B of the Act is therefore correct. The disability u/s. 40(a)(i) & 40(a)(ia) of the Act, and the liability and Sec. 201(1) of the Act cannot be different and they arise out of the same default. Once there is a disallowance u/s. 40(a)(i) & 40(a)(ia) of the Act, it is not possible to argue that there was no liability under chapter XVII-B of the Act and therefore the provisions of Sec. 201(1) of the Act will not be attracted. 28. Now let us examine the various point of time at which liability to deduct tax at source is laid down in the various provisions of the Act. Sec. 192(1) fixes the point of time when payment made is in the nature of salary and the point of time at which tax had to be deducted is at the time of making payment. Sec. 194 of the Act fixes the point of time when dividend is paid and lays down that obligation to deduct tax at source is before making any payment In cash or before issuing any cheque or warrant or before making any distribution or payment to a shareholder. 29. Sec. 194-C applies when payment is made to contractor. The point of time at which tax had to be deducted at source is at the time of credit to the Account of contractor or payment in cash or cheque, whoever is earlier. Sub-Section (2) of Sec. 194-C lays down that where any sum referred to in sub-section (1) is credited to any account, whether called "Suspense account" or by any other name, in the books of account of the person liable to pay such income, such crediting shall be deemed to be credit of such income to the account of the payee and the provisions of this section shall apply accordingly. Similar provision such as Sec. 194(2) exists in Sec. 194-H Explanation (ii) of the Act which applies when the payment made is in the nature of "Commission or brokerage", in Sec. 194-J Explanation (c ) when payment made is Fees for Technical or Professional Service and Sec. 195 Expln.-1 when payment is made to non-resident. The reason for introduction of provisions such as Sec. 194(2) of the Act has been explained in CBDT circular No. 550 dated 1.1.1990 as follows:

ITA Nos.2219, 2220, 2587/Bang/2017 and 3168/Bang/2018 Page 45 of 51 "26.3 Under the existing provisions of section 193 of the Income- tax Act, tax has to be deducted at source by the person responsible for making any payment in the nature of interest on securities at the time of payment. The liability to deduct tax at source was being postponed by making a provision for such payment. In order to prevent the postponement of liability to deduct tax and payment to the credit of the Central Government, the Finance Act has provided that tax will be deducted at source either at the time of credit to the account of the payee or at the time of payment thereof, whichever is earlier. For this purpose, credit to any suspense account or any other account, by whatever name called, shall be deemed to be a credit of such income to the account of the payee." (Emphasis supplied) 30. It is thus clear from the statutory provisions that the liability to tax at source exists when the amount in question is credited to a "suspense Account" or any other account by whatever name called, which will also include a "Provision" created in the books of accounts. Therefore it is not possible for the Assessee to argue that there was no accrual of expenditure in accordance with the mercantile system of account and therefore the TDS obligations do not get triggered. 31. With regard to the argument of the learned counsel for the Assessee that there is no accrual of expenditure as per the mercantile system of accounting and that the payee is not identified, we agree with the conclusions of the CIT(A) on this aspect. The CIT(A) has rightly held that under the mercantile system of accounting accrual of liability for any expenditure is not dependent of receipt of invoice from the person to whom payment for expenditure has to be made and that accounting practice followed by the Assessee was contrary to the mercantile system of accounting. The claim of the Assessee that it creates provision in the books of account on an estimated basis in some cases, on a historical basis in other and using some sort of arithmetical or geometric progression in some other cases was not acceptable. The Assessee had not established this plea with concrete evidence. The conclusion of the CIT(A) that the Assessee has full knowledge of what is due to its Vendors, sub-contractors, commission agents etc. Therefore there was no necessity to create provision in our view is justified in the facts and circumstances of the present case.

ITA Nos.2219, 2220, 2587/Bang/2017 and 3168/Bang/2018 Page 46 of 51 32. With regard to the argument of the learned counsel for the Assessee that there is no charge u/s. 4(1) of the Act in the hands of the payee and therefore the TDS provisions are not triggered, we find that Chapter XVII of the Act deals with collection and recovery of tax. Sec. 190(1) provides that "Notwithstanding that the regular assessment in respect of any income is to be made in a later Assessment Year, the tax on such income shall be payable by deduction or collection at source or by advance payment". Sec. 190(2) of the Act provides that "Nothing in Sec. 190 shall prejudice the charge of tax on such income under the provisions of Sec. 4(1) of the Act." The statutory provisions therefore clearly envisage collection at source de hors the charge u/s. 4(1) of the Act. The sum collected by way of tax collection at source is appropriated as tax paid by the payee only on assessment in the hands of the payee. Sec. 195 however uses the expression "Chargeable to Tax". In the present case, it is not the case of the Assessee that payments made to non-residents are not chargeable to tax nor has the Assessee been able to demonstrate as to how payment made to non- resident is not chargeable to tax. The Assessee is a person making payment and the simple obligation cast upon him is to deduct a sum specified by the Act from and out of the payment and remit to the credit of the Central Government. The person making payment after deduction of tax at source gets a valid discharge in law for the entire amount paid. 33. As rightly contended by the learned DR, the CBDT Circular No. 30/2010 is a specific circular applicable in the case of Banks and issued under peculiar circumstances. The Assessee cannot take shelter under the said Circular. 34. The argument that TDS provisions operate on income and not on payment, in the facts and circumstances of the present case, is erroneous. As we have already seen Sec. 194C, 194J and 195, which are the sections applicable in the present case, does not use the expression, "Income". The above sections use the expression "Sum" and tax deduction has to be on the "sum so paid". Sec. 194H and Sec. 194-I deal with TDS obligation on payment of commission and rental income. These payments by its nature are specific and the entire payment is attributable to commission or rent and therefore the commission and rent paid is treated as "income" and therefore the expression income by way of commission or rent is found in these

ITA Nos.2219, 2220, 2587/Bang/2017 and 3168/Bang/2018 Page 47 of 51 sections. Moreover as person responsible for making payment, it is the duty of the Assessee to deduct tax at source. Sec. 194C, 194-J, 194-H and 194-I do not use the expression "Chargeable to tax". As we have already seen, it is not the case of the Assessee that the payments are not chargeable to tax in the hands of the payee. As we have already seen, the Assessee deducted tax on the provision made for various expenses in the subsequent financial years when the provision entries were reversed. The Assessee therefore cannot take a plea that the payments in question are not chargeable to tax and therefore there was no obligation on its part to deduct tax at source. 35. We will now deal with the various case laws on which the learned counsel for the Assessee placed reliance. In Dy. CIT v. Telco Construction Equipment Co. Ltd. [IT Appeal No. 478 (Bang.) of 2012 for AY 07-08 order dated 7.3.2014], the question for consideration was obligation to deduct tax at source in respect of provision created in the books towards commission payable under Sec. 194-H of the Act. The Commission agent had undertaken to sell product, collect amounts from customers and also obtain C forms. The sale through the agent had concluded. The commission payable was shown as "provision" since the agent had to collect the amounts from customers and also obtain "C" forms. The Tribunal held in para-6 of the aforesaid order that the Assessee had credited the amount to a provision account and not to the agent's account and therefore provisions of Sec. 194H of the Act are not attracted. The Tribunal also held that the agent would get a vested right to receive commission only when they fulfill the obligations under the agreement. Expln.(ii) to Sec. 194H of the Act was neither brought to the notice of the Tribunal, nor was that provision considered by the Tribunal. In that sense it can be said that the precedent is sub silentio and therefore not binding. Besides the above, in the present case the Assessee's claim that there was no accrual of liability, as we have already seen is not correct. 36. The next decision on which the learned counsel for the Assessee placed reliance was that of the ITAT Pune Bench in the case of Dy. CIT v. Yeota Merchants Co-op. Bank Ltd., ITA No. 805/PN/2011 for AY 07-08 order dated 31.8.2012. In the aforesaid case Provision for audit fees was disallowed u/s. 40(a)(ia) of the Act for non-deduction of tax at source u/s. 194J of the Act. The audit fee in question was payable to auditors who are appointed by the Co-operative Department, after the

ITA Nos.2219, 2220, 2587/Bang/2017 and 3168/Bang/2018 Page 48 of 51 end of the relevant previous year. The Tribunal found that such audit fee was a statutory liability payable as per the provisions of the law of State of Maharashtra applicable for State Co-operative Societies. It was therefore held that there was neither accrual of liability nor was the payee known and therefore TDS provisions were not implemented due to peculiar situation and therefore the disallowance u/s. 40(a)(ia) of the Act was deleted. In the present case, as we have already seen, there is nothing to show that there was no accrual of liability nor was there any statutory liability that existed. 37. The next decision on which the learned counsel for the Assessee placed reliance was the decision of ITAT Bangalore in the case of Bovis Lend Lease (I) (P.) Ltd. v. ITO [2010] 36 SOT 166. The facts of the case were that the Assessee engaged a non-resident for rendering management services. The Assessee credited the sum payable to non- resident to an Outstanding Expenses Account. As per the agreement with the non-resident had to submit a statement of service charges along with invoice and 30 days from receipt of invoice the Assessee had to pay the sums to the non-resident. The services were rendered by the non-resident and sums due to the non-resident were credit in an outstanding expenses account. The account of the non-resident was however credited after receipt of invoice which was in a later financial year. The Assessee had obtained order u/s. 197 of the Act for non- deduction of tax at source and remitted the amount to the non-resident without deduction of tax at source. The revenue initiated proceedings u/s. 201(1) of the Act on the ground that the certificate u/s. 197 was not valid and that the Assessee was bound to deduct tax at source at the time of credit to outstanding expense account. The Tribunal held that the management service fee was not taxable and therefore there was no TDS obligation. The Learned counsel for the Assessee relies on an observation in para 88 of this order wherein the Tribunal has observed that application u/s. 197 of the Act for non-deduction of tax at source need not be made at the time of credit or payment, whoever is earlier and can be made belatedly also. From this probably he wants to conclude that TDS obligation arises only at the time of credit to the account of payee or actual payment whichever is earlier. This decision, in our view, is not applicable to the present case. As we have already seen, the law provides for a deeming fiction fore e.g. Sec. 194C(2), deeming credit to a suspense account as a credit to the account of the

ITA Nos.2219, 2220, 2587/Bang/2017 and 3168/Bang/2018 Page 49 of 51 payee. This fiction is neither considered nor dealt with any of the orders cited by the learned counsel for the Assessee. 38. The next decision cited by the learned counsel for the Assessee is the decision of the Hon'ble Karnataka High Court in the case of Bharti Airtel Ltd. v. Dy. CIT [2015] 372 ITR 33/228 Taxman 219 (Mag.)/[2014] 52 taxmann.com 31. In this decision the question was whether the difference between the Maximum Retail Price (MRP) and the price at which prepaid cards used in cellular phones are sold to a dealer is commission on which Bharati Airtel Ltd., had to deduct tax at source u/s. 194-H of the Act. The Hon'ble Karnataka High Court in para-63 observed that where existence of income in the hands of the payee is absent there can be no TDS obligation. The learned counsel for the Assessee has placed reliance on the above observation. In our view the question before the Court was different and the issue with which we are concerned in the present appeals was never under consideration by the Hon'ble High Court. It is possible to pick words from a decision and use it out of context. 39. In the case of UCO Bank v. Union of India [2014] 369 ITR 335/[2015] 228 Taxman 141/[2014] 51 taxmann.com 253 (Delhi) the question before the Hon'ble Delhi High Court was as to whether the Bank in which deposits are kept by the Registrar General of Delhi High Court pursuant to orders of court, should deduct tax at source u/s. 194A of the Act. The Hon'ble Court held that Registrar General was neither the payee nor recipient of income and that the funds kept in deposit are funds which are "custodia legis". The Hon'ble Court observed that if TDS is deducted that would amount to recovery of tax without the corresponding income being assessed in the hands of any assessee. In the absence of an ascertainable assessee the machinery of recovering tax by deduction of tax at source breaks down because it does not aid the charge of tax u/s. 4 of the Act but takes a form of a separate levy, independent of other provisions of the Act which is not permissible. In our view the aforesaid observations are not applicable to the present case. As we have already seen, the Assessee is fully aware of the payee but postpones credit to the account of the payee for want of receipt of invoice. We are, therefore, of the view that the ratio laid down in the aforesaid decision will not be any assistance to the plea of the Assessee before us.

ITA Nos.2219, 2220, 2587/Bang/2017 and 3168/Bang/2018 Page 50 of 51 40. The learned counsel for Assessee relied on some decisions of ITAT benches where in the case of Banks, TDS obligation was held to be not applicable based on Circular No. 30/2010. We have already held that the said CBDT circular is applicable to banks and cannot be taken advantage by the Assessee who is not a bank. We are therefore not discussing the said decisions. 41. For the reasons given above, we do not find any merit in the appeals that relate to challenge of levy of interest u/s. 201(1A) of the Act. The appeals, in so far as it relates to holding the Assessee as an "Assessee in default" u/s. 201(1) of the Act are however allowed. 42. In the results, the appeals that relate to challenge of levy of interest u/s. 201(1A) of the Act are dismissed. The appeals, in so far as it relates to holding the Assessee as an "Assessee in default" u/s. 201(1) of the Act are however allowed.”

ITA Nos.2219, 2220, 2587/Bang/2017 and 3168/Bang/2018 Page 51 of 51 75. In the result, the appeals by the assessee for AY 2013-14 is partly allowed for statistical purposes, assessee’s appeal for AYs 2014-15 & & 2015-16 and department’s appeal for AY 2013-14 are dismissed.

Pronounced in the open court on this 9th day of February, 2022.

Sd/- Sd/- ( N V VASUDEVAN ) ( CHANDRA POOJARI ) VICE PRESIDENT ACCOUNTANT MEMBER

Bangalore, Dated, the 9th February, 2022. /Desai S Murthy /

Copy to:

By order

Assistant Registrar ITAT, Bangalore.