DEPUTY COMMISSIONER OF INCOME-TAX vs. M/S. TATA TOYO RADIATOR LTD.,, PUNE

आयकर अपीलीय अिधकरण “ए” �यायपीठ पुणे म� । IN THE INCOME TAX APPELLATE TRIBUNAL “A” BENCH, PUNE BEFORE MS. SUSHMA CHOWLA, JUDICIAL MEMBER & SHRI D. KARUNAKARA RAO, ACCOUNTANT MEMBER आयकर अपील सं./ITA No.1494/PUN/2016 (िनधा�रण वष� / Assessment Year :2010-2011) DCIT, Circle-7, Pune Vs. M/s Tata Toyo Radiator Limited, Plot No.1, S.No.235 & 245, Village Hinjewadi, Tal Mulshi Pune-411057 �थायी लेखा सं./PAN No. : AAACT 5566 F (अपीलाथ� /Appellant) (��यथ� / Respondent) .. राज� की ओर से /Revenue by : Shri S.B.Prasad, CIT DR िनधा�रती की ओर से /Assessee by : Shri P.J.Pardiwala, AR सुनवाई क� तारीख / Date of Hearing : 23/01/2019 घोषणा क� तारीख/Date of Pronouncement 20/02/2019 आदेश / O R D E R Per D. Karunakara Rao, AM: This appeal is filed by the revenue against the order of CIT(A)-5, Pune, dated 28.03.2016 for the Assessment Year 2010-11. 2. The grounds raised by the Revenue are as under :- 1) Whether on the facts and circumstances of the case, the learned CIT (A)-5, Pune has erred in deleting the disallowance of Rs.6,30,62,000/- i.e. erred in deleting disallowance of administrative service charges made by assessing officer by incorrectly relying on case laws which are factually different from the facts in the case of assessee. 2) The learned CIT (A)-5, Pune has erred in deleting the disallowance of administrative services charges completely despite the fact that in preceding years , the ld CIT (A) has upheld the 75% of disallowances of administrative service charges and the facts of the issue in relevant assessment year are identical with facts in preceding assessment years. 3) On the facts and circumstances of the case, the learned CIT (A) has erred in deleting the disallowances of provision for warranty expenses by treating it as ascertainable existing liability and not as a contingent liability. 4) The appellant craves leave to add or amend the grounds of appeal on or before the appeal is heard and disposed off.

2 ITA No.1494/16 It is prayed that the order of Commissioner of Income tax (Appeals) -5, Pune be set aside and that of assessing officer be restored. 3. Briefly stated relevant facts include that the assessee is engaged in the business of manufacture of aluminium radiators, aluminium intercoolers and heater cores. The assessee filed return of income declaring total income of Rs.60,06,09,268/-. In the scrutiny assessment, the Assessing Officer completed the assessment u/s.143(3) of the Act determining the total income at Rs.66,63,27,268/-. In the assessment proceedings, the Assessing Officer made couple of additions i.e. one on account of the disallowance of administrative service charges paid to TATA Autocomp Systems Ltd. (TACO) and secondly on account of disallowance of provisions for warranty expenses. At the end of the first appellate proceedings, the said additions were deleted by the CIT(A). 4. Regarding the disallowance of administrative expenses, the CIT(A) has discussed this issue in para 3.4 which reads as under :- “3.4 I find that the facts of the case of the Appellant under consideration are identical to the facts of Tata Johnsons Control Automotive Ltd (supra). Respectfully, following the aforesaid decision of the Hon'ble Jurisdictional Tribunal, the addition made on account of disallowance of Administrative Support Services of Rs.6,30,62,000/- is directed to be deleted. Ground No.2 to 7 raised by the Appellant are accordingly allowed.” 4.1 Similarly, on the issue of disallowance on account of warranty expenses, the CIT(A) has also allowed the same as per the discussion given in para 4.3 which reads as under :- “4.3 In light of the above decision and considering the fact that the decisions of the CIT in the above case have not been agitated by the Department, Ground no. 8-9 are accordingly allowed.”

3 ITA No.1494/16 5. Aggrieved with the above relief granted by the CIT(A) on account of both issues, the Revenue is in appeal before us with the abovestated grounds of appeal. Disallowance of Administrative Service Charges paid to TACO 6. The relevant facts include that the assessee paid a sum of Rs.630.62 lakhs to TACO. On examining the relevant details obtained during the assessment proceedings, the Assessing Officer held that the said payment is not allowable in the absence of any agreement for the year under consideration and also for assessee’s failure to prove the business connection to the payments made. The Assessing Officer is of the opinion that the TACO did not render any services to the assessee. There is no written agreement between the parties. The Assessing Officer discussed about making of similar payments to TACO in earlier assessment years 2007-08 onwards too, while denying the claim of deduction. Following the same reasoning, the Assessing Officer disallowed the said sum of Rs.630.62 lakhs. 7. During the first appellate proceedings, the assessee submitted the facts relating to the submission of the copy of the agreement dated 12.04.2011 entered into between the assessee and TACO and also the details of the services received by the assessee. The details of the submission are extracted in para 3.2 of the order of the CIT(A). As per the submissions regarding the existing agreement, it is the submission of the assessee that there exists an Administrative Support Agreement (ASA) dated April 12, 2011 which enables the assessee for availing various

4 ITA No.1494/16 administrative services from the TACO. Originally, TACO and the assessee had entered into such ASA on 13.04.2006 which expired on 12.04.2009. Despite the expiry of the same, the services continued till new agreement was executed on 12.04.2011. Therefore, the Assessing Officer erroneously held that the agreement does not exist for the year under consideration. Regarding the details of services too, the assessee submitted and listed out the nature of the services which are extracted at page 5 of the order of the CIT(A). 8. On considering the above detailed submissions of the assessee on one side and the discussions mentioned in the order of the CIT(A) on the other, the First Appellate Authority allowed this part of the ground in view of the settled nature of the issue in a case of group concerns, named M/s Tata Johnsons Control Automotive Ltd.. The relevant para 3.4 is extracted hereunder :- “3.4 I find that the facts of the case of the Appellant under consideration are identical to the facts of Tata Johnsons Control Automotive Ltd. (supra). Respectfully, following the aforesaid decision of the Hon’ble Jurisdictional Tribunal, the addition made on account of disallowance of Administrative Support Services of Rs.6,30,32,000/- is directed to be deleted. Ground No.2 to 7 raised by the Appellant are accordingly allowed.” 9. Aggrieved with the above decision of the CIT(A), the Revenue raised ground no.1 and 2 in this appeal. 10. Before us, ld. DR for the Revenue relied heavily on the order of the Assessing Officer. 11. On the other hand, ld. AR for the assessee narrated the facts of the case on one side and the details of the agreement and rendering of the

5 ITA No.1494/16 services to the assessee by the TACO, on the other. The facts about the undisputed transactions of payments of the said amount of Rs.630.62 lakhs were also demonstrated. Further, ld. AR submitted that the rendering of such services by TACO is identical to the one rendered services to the Tata Johnsons Control Automotive Ltd.. In this regard, ld. Counsel brought our attention to the said order of the Tribunal in the case of Tata Johnson Controls Automotive Limited (supra), copy of which is placed at page 296 of the Paper Book, and submitted that the CIT(A) rightly relied on the said order of the Tribunal in granting the relief to the assessee. According to ld. AR, the said order of the CIT(A) does not call for any interference. 12. Bringing our attention to page 297 of the Paper Book, a copy of the order of the Tribunal in the case of Tata Johnson Controls Automotive Limited (supra), ld. Counsel submitted that the ground no.2 relating to allowability of the administrative service charges paid to TACO under similar circumstances was the same issue adjudicated by the Tribunal vide order dated 09.12.2015 in favour of the assessee. Referring to contents of para 31 and 32 of the said order of the Tribunal (supra), ld. Counsel demonstrated the fact of adjudication by the Tribunal on the issue of allowability of the administrative service charges in full and in principle. The Tribunal dismissed the percentage based allowance of the expenditure as done by the CIT(A) in the said case. He also submitted that similar view was taken by the Tribunal relying on the said decision of the Tribunal for earlier assessment years in assessee’s own case. 13. On considering both the sides on this issue of allowability of administrative service charges paid by the assessee to TACO, we find the

6 ITA No.1494/16 contents of para 31 are relevant to extract. For the sake of completeness, the said para 31 is extracted hereunder :- “31. Another aspect of the issue raised is the observations of Revenue authorities that no services have been rendered by associate enterprises and if any services have been rendered, they are not sufficient to justify the payment. The assessee before us has filed compilation of papers including the copies of reports, e-mails and other documents evidencing the rendering of services from day to day. All these documents were not considered by the authorities below and we find no merit in the orders of revenue authorities in brushing aside those documents in a summary manner without properly analyzing the same. 14. Further, we perused the order of the Tribunal in assessee’s own case for the assessment years 2006-07 to 2009-10, copy of which is placed at page 261 of the Paper Book. Responding to ground no.1 of ITA No.1034/PN/2013 relating to the disallowance of “administrative service charges” paid to TACO, Hon’ble Tribunal, vide ITA No.1029/PN/2013 and others, order dated 18.03.2016, allowed the appeal of the assessee and dismissed the grounds raised by the Revenue. The contents of para 15 and 16 of the said order are relevant to extract. For the sake of completeness, the same are extracted hereunder :- “15. We find that identical issue of allowability of claim arose before the Tribunal in Tata Johnson Controls Automotive Ltd. Vs. DCIT (supra), where the JV was formed between TACO and Johnson Control Inc. (‘JCI’) and the concerned JV entered into an Agreement with TACO for providing administrative services both at start-up and operating phases. Even in the facts of the present case, the assessee was a JV company with 51:49 share between TACO and Tata Toyo Radiator Pvt. Ltd. The assessee before us was engaged in the business of manufacturing and selling of aluminum radiators, aluminum intercoolers and heater cores and there was an Agreement entered into between the assessee and TACO for providing administrative services, against which the assessee had paid the administrative service charges. The issue arising before us is with regard to allowability of the said expenditure. The Tribunal in Tata Johnson Controls Automotive Ltd. Vs. DCIT (supra) had deliberated upon the issue at length and after consideration of various aspects of the case, had held as under:- xxxxx xxxxx 16. Admittedly, the issue arising before us is identical to the issue before the Tribunal in Tata Johnson Controls Automotive Ltd. Vs. DCIT (supra) and following the same parity of reasoning, we hold that the said expenditure is to be allowed in entirety in the hands of assessee being paid in accordance with the terms of the Agreement agreed upon between the parties and for the purpose of carrying on the business of assessee more efficiently. It may be pointed out herein that the assessee had initially entered into an Agreement with TACO in 1997 and the said

7 ITA No.1494/16 expenditure had been allowed in the hands of assessee from year to year. However, the assessee renewed the Agreement in 2006 and the expenditure for the first time was not allowed in the hands of assessee in assessment year 2006-07. We find no merit in the orders of authorities below in this regard and accordingly, we modify the order of CIT(A) and direct the Assessing Officer to allow the expenditure in entirety in the hands of assessee. It may be pointed out herein only that the issue vide grounds of appeal No.1 and 2 raised by the assessee in assessment year 2006-07 and grounds of appeal No.1 and 2 raised by the Revenue are similarly raised by both the parties in assessment years 2007-08 to 2009-10. Accordingly, we allow the claim of assessee vis-à-vis the said expenditure in all the years i.e. assessment years 2006-07 to 2009-10. The grounds of appeal No.1 and 2 raised by the assessee in all the appeals are thus, allowed and the grounds of appeal No.1 and 2 raised by the Revenue in all the appeals is thus, dismissed.” 15. From the above extracts of the order of the Tribunal (supra), we are of the opinion that the matter is covered one in favour of the assessee and against the Revenue. Therefore, we are of the opinion the ground no.1 and 2 raised by the Revenue in this appeal are required to be dismissed and allowed in favour of the assessee. Accordingly, the ground no.1 and 2 raised by the Revenue are dismissed. Warranty Expenses 16. Ground no.3 relates to disallowance of provisions for warranty expenses. The assessee made warranty provision amounting to Rs.26,56,000/-. In response to the query from the Assessing Officer, the assessee replied stating that the said amount was quantified by scientific method qua an earlier year. He also submitted that similar claim is allowable in view of the Hon’ble Supreme Court judgement in the case of M/s Rotork Controls India (P.) Ltd. vs. CIT, 314/62. On considering the submissions of the assessee, the Assessing Officer rejected the same and came to the conclusion that the estimation for provisions is not based on the scientific and sensible method. The Assessing Officer treated the same as contingent

8 ITA No.1494/16 liability and, therefore, the same was not allowed. The Assessing Officer added the same in the assessment. 17. Before the CIT(A), the said issue was contested by the assessee. The assessee filed a written submission dated 23.03.2016 highlighting the scientific method, past records and past provisions etc and filed the details of such provisions made and the amount consumed/utilized in the past. He also relied on the Apex Court judgement in the case of M/s Rotork Controls India (P.) Ltd. (supra). Various decisions were cited before the CIT(A) in favour of allowing of such claim. The assessee also submitted the facts relating to the similar claim in the earlier assessment years. Referring to the assessment years 2006-07 and 2007-08, the assessee submitted that the claim of provision on account of warranty expenses were allowed in favour of the assessee. The contents of para 4.2 & 4.3 are relevant in this regard. On hearing the assessee and appreciating the submissions of the assessee, ld. CIT(A) allowed the claim of provisions for warranty expenses. The contents of para 4.3 of the CIT(A) is extracted as follows :- “4.3.2 The Assessing Officer disallowed the amount of warranty provision on the premises that it is not ascertained but only a contingent liability. But Assessee the Appellant is maintaining its accounts on mercantile basis, a liability which is inbuilt in the same price itself and accrued during the year, though to be discharged at a future date, is required to be provided. This view is fortified by the above decision of Supreme Court wherein it was held that the provision for warranty is an existing liability any not a contingent liability. After the above decision of the Apex Court, the only point that arises in respect of provision for warranty is whether quantification of the liability made by the Appellant is reasonable and reliable having regard to the past experience and analysis of data. In the present case, as already mentioned, the Appellant had given figures of sales executed, the actual warranty expenses incurred in the last five years and basis for making the provisions for warranty made for these two years. On the basis of actual expenses incurred for warranty and sales in the last five years, the Appellant estimated the liability in respect of the warranty on local sales made during the year under Appeal. In fact, as stated by the Appellant, the provision, which was initially made at 0.68% of last 18 months sale, had been gradually reduced to 0.26% in the financial year 2007-2008. Thus, the quantification or estimate of the liability in the instant case has been made on an acceptable and reasonable basis, namely the past experience and

9 ITA No.1494/16 date regarding rejections after sale, breakdowns, replacement in warranty period etc. and, therefore the quantum of provision made cannot be said to be arbitrary or unscientific. In such circumstances, the disallowance made by the Assessing Officer in respect of differential amount of provision for warranty amounting to Rs.26,00,000/- for the A.Y. 2006-07 and Rs.20,58,000/- for the A.Y. 2007-08 is not justified and accordingly deleted.”

10 ITA No.1494/16 the provision of Rs.3,72,10,000/- was utilized. The said warranty expenses were utilized out of the provisions created over the years in the past. Therefore, the claim of the assessee cannot be disallowed as done by the Assessing Officer. Further, it is a fact that the assessee’s claim i.e. Provision for warranty expenses was allowed in the past and the Department is not in appeal for the assessment years 2006-07 and 2007-08. Considering the same, we are of the opinion the provision created by the assessee is not excessive and cannot be held as not based on the proper scientific method. Therefore, we are we are of the opinion the findings of the CIT(A) in this regard are fair and reasonable and it does not call for any interference by us. Accordingly, ground No.3 of the appeal of Revenue is dismissed. 21. In the result, appeal of the Revenue is dismissed. Order pronounced in the open court on 20/02/2019. Sd/- Sd/- (SUSHMA CHOWLA) (D. KARUNAKARA RAO) �याियक सद�य / JUDICIAL MEMBER लेखा सद�य / ACCOUNTANT MEMBER पुणे /Pune; �दनांक Dated : 20/02/2019 PKM Sr.PS./Sujeet आदेश क� �ितिलिप अ�ेिषत/Copy of the Order forwarded to : 1. अपीलाथ� / The Appellant- 2. ��थ� / The Respondent- 3. आयकर आयु�(अपील) / The CIT(A)-5, Pune 4. आयकर आयु� / CCIT, Pune 5. िवभागीय �ितिनिध, आयकर अपीलीय अिधकरण, पुणे / DR, ITAT, Pune 6. गाड� फाईल / Guard file. आदेशानुसार/ BY ORDER, स�यािपत �ित //True Copy// Senior Private Secretary आयकर अपीलीय अिधकरण, पुणे / ITAT, Pune