ASSISTANT COMMISSIONER OF INCOME TAX, CENTRAL CIRCLE-3(2), CHENNAI vs. MS VA TECH WABAG LIMITED, CHENNAI

These are cross appeals filed by the Assessee and the Revenue respectively for assessment years 2017-18, 2018-19 & 2020-21 against the separate orders of the Commissioner of Income Tax (Appeals) [‘CIT(A) in short] all dated 29.06.2024. First, we take up assessee appeal in for assessment year 2017-2018 for adjudication:-

2. The sole grievance of the assessee in this appeal is with regard to ld. CIT(A) erred in disallowing Rs.6,15,07,670/- in respect of provision made for warranty expenses

6. We heard the rival contention and perused the material on record. We found that the Co-ordinate Bench of the Tribunal in assessee’s own case for assessment years 2010-2011 and 2011-2012 dated 31.08.2023 in and ITA No.807/Chny/2016 has allowed the Balance Provision claimed as provision for warranty. ‘’4.0 Brief factual matrix of the case is that the assesse company is engaged in the business of processing of water and waste water treatment having overseas businesses also. It is engaged in business of design development, manufacture, sale, erection and commissioning of water treatment and sewerage plants on a turnkey basis. 5.0 The first issue that has been challenged by the revenue for AY2013-14, 2015-16 and 2016-17 is in respect of action of the Ld. CIT(A) in deleting the disallowance made by the Ld. AO in respect of provision for warranty. While adjudicating the matter AY-2013-14 is taken as lead year and the figures for that year are considered accordingly. 6.0 The Ld. Counsel for the assesse submitted that the assesse had made a claim for provision of warranty amounting to Rs.33.24 Crs. The net increase for provision in warranty during the previous years was noted at Rs.17.54 Lakhs. Before the Ld. AO the assesse had submitted that in its line of business of water treatment and sewerage plants on a turnkey basis it is required to give a warranty as per specific contracts executed with clients varying from 2 – 3 years in which it maintains the plant and attends to any repairs free of cost. Warranty commitments were integral part of the sale price. It was submitted that the warranty provisions need to be recognized because the appellant had present obligations as a result of past events. The Ld. AO relied upon Hon’ble Apex Court’s decision in the case of Rotork India Pvt Ltd 314 ITR 62 mandating that provision of warranty is a permitted expenditure only if based upon a scientific working. The Ld. AO did not concur with the assesse’s submissions and made addition of Rs.17,53,70,580/- . The Ld. Counsel further submitted that the Ld. First Appellate Authority deleted the addition after comprehensively examining the commercial viability for warranty expenses as well as relying upon a catena of decisions including one in the case of 314 ITR 62 Supra. Before us the Ld. Counsel for the assesse reiterated the submissions made before the Ld. CIT(A) viz vide ITA No.137 in assesse’s own case for AY-2012-13 the Ld. First Appellate Authority and also submitted that the DRP Chennai for AY2010-11 had held that provisions for warranty are allowable business expenditure. Additionally, the Ld. Counsel for the assesse invited our attention to the decision of Coordinate Bench of this tribunal in ITA No.953 / Chny / 2015 in assesse’s own case holding that the provision for royalty are an allowable business expenditure. The Ld. DR would like to make us believe in the merits of the addition made by the Ld. AO and submitted and that the decision of the CIT(A) is unwarranted. IT(TP)A No.7, 8, 9 & 7.0 We have heard rival submissions in the light of material available on records. We subscribe to the view that warranty is an integral part of a sale transaction. It primarily entails a quality assurance from a seller to the prospective buyer with a promise that in the event of any repair or after sales intervention the promised warranty obligations would step in. As regards creation of provisions for warranty the same are created because of inherent difficulty in objectively and precisely estimating as to how much warranty commitments would be invoked by buyers. Here comes the role of adopting a scientific and verified method for creating provisions as has been postulated in the decision of Hon’ble Apex Court in 314 ITR 62 Supra. Thus commercial expediency of allowing warranty including its scientifically calculated provisions is well recognized. We have also taken note of the decision of the Coordinate Bench of this Tribunal in ITA No.953 / Chny / 2015 in assesse’s own case holding as under:- “….. We have heard the rival contentions, perused the materials available on record. We noted the fact that the assessee is engaged in the business of design, develop, manufacture, sale, erection and commissioning of water treatment and sewerage plant. After completion of each and every project there will be a warranty period as per contract executed by the assessee with the client which may vary from two to three years. During this warranty period the assessee needs to maintain the plant and needs to replace the defective component at free of cost. The warranty became an integral part of the sale price and in other words the warranty stood attached to the sale price of the product. The Warranty provision had to be recognized because the assessee had a present obligation as a result of past events resulting in an outflow of resources and a reliable estimate could be made of the amount of the obligation. The assessee is being in the business of design, develop, execute, sale, erection and commissioning of water treatment and sewerage plant made a provision of warranty based scientific methods of accounting adopted by the assessee. This also depends upon historical trend and other related facts. The assessee has a contractual obligation to maintain the plant for a minimum period of two to three years depending upon the agreement and during this period the assessee has to freely replace the components if they became defective. This issue is settled by Hon'ble Supreme Court in the case of Rotok India Put. Ltd. (Supra), wherein it was held that warranty became an integral part of sale price, in other words, the warrant stood attached to the sale price of the product. Warranty provision had to be recognized because, the assessee had a present obligation as a result of past events resulting in an outflow of resources and a reliable estimate could be made of the amount of obligation. The value of contingent liability like warranty expenses, if properly ascertained and discounted on accrual basis, can be an item of deduction U/s.37 of the Act. Since the assessee estimated the warranty and made a provision on a scientific basis the assessee is eligible to claim as revenue expenditure. Furthermore, the assessee reverses any excess provision made in the earlier year(s) and hence, it is clear from this that there is no excess claim by the assessee with regard to warranty. Hence we find no infirmity in the claim of assessee and the same has rightly been allowed by DRP. We uphold the same.

20. Similar issue for provision for warranty is raised by assessee in its appeal in for assessment year 2011-12 and the facts are exactly identical in this year also what was in assessment year 2010-11 in ITA No.953/CHNY/2015, taking a consistent view, we allow the provision for warranty in this year also. This issue of assessee's appeal is allowed….” 8.0 We have noted that the facts of the present case are identical to those in the above referred decision and no distinction has been made by the revenue. Therefore, in respectful compliance to the decision of Coordinate Bench of this Tribunal Supra, we hereby hold that the provisions for royalty are allowable business expenditure. Accordingly, we confirm the order of the Ld. CIT(A) in respect of deletion of addition of Rs.17,53,70,580/- on account of provision of warranty and dismiss the grounds of appeal

raised by the revenue for AY-2013-14. 9.0 As regards / Chny/2021 for AY-2015-16 identical grounds of appeal have been raised by the revenue. No changes, save variations in figures, in facts of the case have been reported. Accordingly the decision in AY-2013

14. Supra shall apply mutatis mutandis. In the result we dismiss the grounds of appeal raised by the revenue for AY-2015-16 also’.

8. As regards No.2247/ Chny/2021 for AY-2018-19 identical grounds of appeal have been raised by the assessee. No changes, save variations in figures, in facts of the case have been reported. Accordingly the decision in AY-2017

18. Supra shall apply mutatis mutandis in this year also. In the result we allow the grounds of appeal raised by the assessee for AY-2018-19 also.

9. Next issue is with regard to Allowance of bad debts in AY 2017-18 (Revenue Appeal): The appellant claimed amount due from Indian Oil corporation amounting to Rs.13,02,094/- as bad debts stating that amounts are due from several years they are written off in books of company for the year. The amount totaling to Rs.13,02,094/- is withheld by IOL for failure to complete job in time, in case supply of products below agreed standards of quality, for not reaching agreed output etc by appellant and while finalizing assessment the AO has not allowed deduction of bad debts holding that dues from Govt agencies cannot be allowed as deduction. Before us, Assessee submitted that after 1.4.1989, provisions of section 36(1)(vii), dealing with deduction of bad debts written off has under gone a change. Thereafter, it is not necessary for an Assessee to establish that the debt has become bad for it to be allowed and section 36(1)(vii). It will be sufficient if the assessee rights of the debt in the books of account and claims it as a deduction. The Supreme Court in the case of TRF limited 323 ITR 397 SC, has explained the amendment to section 36(1) (vii). The CBDT has issued a circular number 12/2016 dated 30th may 2016 wherein they have clarified that claim for any debt or part thereof in any previous year, shall be admissible under section 36(1)(vii) of the Act if it is written off as irrecoverable in the books of account of the Assessee for that previous year. That in such cases they have also instructed no appeals may henceforth be filed on this ground and appeal is already filed, if any, on this issue before various courts/ Tribunals may be withdrawn/not pressed upon. This will apply to write off of not only the entire debt but also if only a part of the debt is written off as irrecoverable. The ld. Counsel submitted that the co-ordinate bench in IT(TP)A Nos. 7,8,9/Chny/2021 for AY 2013-14, 2014-15, 2015-16 and in for 2016-17 dated 16.10.2024 has allowed the claim for bad debt. Hence, he pleaded that the amount written off by the Assessee as bad debts require to be allowed.

17.0 As regards / Chny/2021 for AY-2015-16, ITA No. IT(TP)-326 / Chny/2021 for AY-2016-17 it is seen that identical grounds of appeal have been raised by the revenue. No changes, save variations in figures and names of government agencies, in facts of the case have been reported. Accordingly the decision in AY-2014

15. Supra shall apply mutatis mutandis. In the result ground of appeal of revenue for these assessment years are also dismissed’.

11. Therefore, in respectful following the orders of Coordinate Bench of this Tribunal Supra, we also note that the Hon’ble Apex Court has also settled the controversy in the case of TRF Limited, wherein Hon’ble Apex Court has held that showing as income in earlier years and claiming as bad debts by passing appropriate entries in financial statements would suffice for allowance of claim. It has also been held that there is no need to establish recoverability of an amount for its allowance u/s 36(1)(vii). We also find that the Ld. CIT(A) has comprehensively analyzed the issue before adjudicating in favour of the assesse. Therefore, we are of the considered view that there is no case for any interference is required in his order. Accordingly, the order of the Ld. First Appellate Authority for AY-2017-18 is upheld and the ground of appeal raised by the revenue challenging the issue of bad debts is dismissed. Accordingly, we affirm the deletion of addition by the ld.CIT(A) in respect of bad debts written off Rs.13.02.094/- for AY-2017-18.

No.2257/ Chny/2024 for AY-2018-19 and for AY 2020-21 (both revenue appeals), identical grounds of appeal have been raised by the revenue. No changes, save variations in figures, in facts of the case have been reported. Accordingly, the decision in AY-2017

18. Supra shall apply mutatis mutandis in these years also. In result, we dismiss the grounds of appeal raised by the revenue for AY-2018-19 and AY 2020-21 also.

AY 2017-18 (Revenue Appeal) with regard to non-deduction of TDS from payment to Jafferji who resident of Sri Lanka: The AO has disallowed payment made to Jafferji od Rs.2,89,92,420/- who is resident of Sri Lanka for rendering marketing and technical services to appellant company in Sri Lanka for execution of projects in that company, for failure to deduct tax u/s 195 holding that payment made by appellant company amounts to “Fee for technical services”.

22. The brief facts are that the assessee claimed to have made expenses on account of engineering services rendered by third parties outside India and made payment for an amount of Rs. 2,96,43,439/-. The assessee before A.O during the course of assessment proceedings explained that VA Tech Wabag Ltd., paid engineering charges of Rs. 2,96,49,439/- to VA Tech Wabag Gmbh Austria. These services are utilized for executing a project at Suralaya, Indonesia (Project No. P117) and Muscut (ProjectNo.P076). Since the projects are located outside India and the technical services rendered by VA Tech Wabag GmbH, Austria was utilized for making or earning any income from a source outside India, as per section 9(i)(vii) of the Act, the engineering charges paid is not an income earned in India and accordingly the assessee has not deducted any TDS on the same. According to A.O, the assessee has not deducted TDS u/s. 195 of the Act and hence, he disallowed the payments made on account of engineering services rendered by third parties outside India by holding the same as if for technical services and added back to the returned income of the assessee. Aggrieved, the assessee preferred objections before DRP.

23. The DRP accepted the objections of the assessee and reverse the finding of the A.O by observing in Para 3.3.2 and 3.3.3 as under: “3.3.2. We have considered the draft order of the Assessing Officer, the contentions of the assessee, etc. carefully. The assessee is into the business of erecting water treatment plants in several countries. For this purpose it has been availing technical (engineering) services from M/s. VA Tech Wabg GmbH, Austria, a non-resident company, which has no PE in India. All these services are availed and utilized in foreign countries for erecting the water treatment plants in respective countries. There are no disputes in these facts. Recently, a similar issue came up before the Chennai bench of ITAT for adjudication in the case of DOCIT U. Ajapa Integrated Project Management Consultants P. Ltd. In this case, the company paid consultancy fee to non-resident consultants for carrying out consultancy services in Nigeria. These consultants were used in business of the company abroad. The Hon'ble bench held that income of such non-residents could not be deemed to accrue or arise in India, and, therefore, section 9(1)(vii) (b) would not apply. The relevant portion of the decision is as under: DCIT V. Ajapa Integrated Project Management Consultants P Ltd [2011] 16 taxmann.com 269 (Chennai)/ (2012| 49 SOT 37 (Chennai)(URO) 16. We have perused the orders and heard the rival contentions. This issue is slightly different from the issue raised by the Revenue in its ground No.2. Here, the payments made by the assessee were to nonresidents Indian who were working abroad. Assessee had made no deduction of tax at source whatsoever. As per the assessee, they were working for its business carried on in Nigeria and hence, by virtue of Section 9(1) (vi)(b) of the Act, the fees payable to such nonresidents could not be considered as income accruing or arising to them in India. We find that that the ACIT in his directions under Section 144A of the Act,had stated as under: "S 9(1)(vi)(b) itself provides the exception. If the Resident- assessee utilizes the services of the Non-resident, in its business outside India, it is covered under the exception given in the section itself and the payment received by the non-resident cannot be deemed to accrue or arise in India. Here, the assessee company, utilized the services of two non-resident in its business outside India, i.e. in Nigeria. Therefore, though assessee company has shown that the payments are Resolution Pane directly related to the Nigerian project, the fact that the payments were made from India and not from Nigeria leaves some ambiguity in determining whether the exception provided to the non-resident on utilization of services outside India would directly apply to the said non-resident consultants and Chennai whether the income accrue to them in India or abroad, as section 9(1)(vi)(b) is a deeming provision." [Emphasis supplied] 17. It is clear from the above that the payments made by the assessee to non-resident consultants, were directly related to the Nigerian projects of the assessee. Assessee being engaged in consultancy business, the fees paid to Such consultants on its projects abroad has to be considered as fees paid for services utilized in the business of the assessee outside India. Therefore, clearly Section 9(1)(vi)(b) of the Act applied and the income earned by such non residents cannot be deemed to accrue or arising in India. Therefore, assessee had every reason to hold a bona fide belief that no part of the payment had any element of income which was chargeable to tax in India. When the assessee held such a bona fide belief, it is clearly covered by the decision of Hon'ble Apex Court in GE India Technology Cen. (P) Ltd. (supra) and decision of Special Bench of this Tribunal in Prasad Productions Ltd. (supra). This being so, assessee could not be put in a position where it can be visited with the rigours associated with non deduction of tax at source. It cannot be fastened with any liability associated with non-deduction of tax at source on such payments. In these circumstances, application of Section 40(a)(i) of the Act was not called for. ...." Further, the Chennai “A" bench of ITAT in the case of Aqua Omega Services (P.) Ltd. v. ACIT, held that fee for technical services paid to non-residents for providing underwater diving services in Saudi Arabia under a contract, is not liable for TDS. since the services of nonresidents, to whom technical fee was paid by assessee, were utilized for business carried on outside India for earning income from a source outside India. The relevant portion (Head-note) of the decision is as under: Aqua Omeqa Services (P.) Ltd. D. ACIT[2013] 31 taxmann.com 179 (Chennai-Trib.)/2013] 23 1TR(T) 191 (Chennai - Trib.) Head- note: Section 9, read with section 40(a)(i), of the Income-tax Act, 1961 - Income - Deemed to accrue or arise in India Fees for technical services - Assessment year 2008-09 - Assessee was in business of providing underwater diving services in Saudi Arabia undera contract and paid fees to non-resident divers there - Whether, since services of non-residents, to whom technical fee was paid by assessee, were utilized for business carried on outside India for earning income from a source outside India, no TDS liability would arise- Held, yes (Para 19) 3.3.3 The facts of the present assessee's case are exactly similar to the facts involved in the above two cases. Hence the above decisions of the ITAT are equally applicable to the facts of the instant assessee. Therefore, respectfully following the decision of the jurisdictional ITAT in the above referred two cases, we hold that the above technical (engineering) service payments to the non-residents for services rendered outside India, are not assessable to tax in India in the hands of the recipients and consequently the assessee is not under any obligation to deduct the TDS on the above technical (engineering) service payments u/s. 195 of the Act. Therefore, the provisions of section 40(a)(i) have no application in the pre sent case. Accordingly, the proposed disallowance of export technical (engineering) service payments of Rs.2,96,49,439/- for non-deduction of TDS u/s.40(a)(i) r.w.s. 195 of the Act, is not justified and deleted. The assessee succeeds in its objections in this regard.”

Aggrieved, the Revenue is in appeal before the Tribunal.

17. However, the co-ordinate bench of Tribunal in IT(TP)A No.7,8,9 and in for AY 2013-14, 2014-15, 2015-16 and AY 2016-17 dated 16.10.2024 held as under: 10.0 The next issue that has been raised by the revenue for AY-2013- 14, 2014-15, 2015-16 and 2016-17 is in respect of action of the Ld. CIT(A) in deleting the disallowance made by the Ld. AO in respect of consultant marketing fees(Overseas) made u/s 40(a)(ia). The facts of all the four years have been reported to be identical and hence for the purpose of this adjudication we take AY-13-14 as the lead year. Conveying brief facts of the case, the Ld. Counsel for the assesse informed that there was a survey u/s 133A on 27.07.2014 upon the assesse. It transpired therefrom that the assesse had paid consultancy fees to non-resident parities without TDS deduction u/s 40(a)(ia). Before the Ld. AO, the assesse pleaded that the impugned expenses did not warrant TDS deduction u/s 40(a)(ia) as the services were rendered outside India for assesse’s overseas projects and the parties are all stationed outside India with no local office etc. The assesse also gave details of services reportedly given by the said non-resident parties. The Ld. AO however rejected the contentions by relying upon explanation-2 to section 9(1)(vii) and treated the same as fee for technical services which mandated prior deduction of TDS. The Ld. AO particularly invoked the amendment of section -9 of the income tax act made by Finance “ Act -2010 which postulated that whether or not the non-resident is in India will be immaterial if the fees are paid for technical services, inter-alia, comprising managerial, technical or consultancy services. Ld. Counsel for the assesse informed that consequently the Ld. AO proceed to make an addition of Rs.7,98,23,850/-. He submitted that the Ld. First Appellate Authority has rightly deleted the addition on the premise that Ld. AO could not establish rendering of services in India as well as rejecting hypothesis of application of section-9(1) to the assesse’s case. Consequently the Ld.CIT(A) applying the ratio of this tribunal in ITA 2169, ITA 6148 as well as decision of DRP in assesse’s own case for AY-2010- 11 deleted the addition. During the course of present proceeding, the Ld. AR invited our attention to the decision of the Coordinate Bench of this Tribunal in ITA No.953 / Chny / 2015 in assesse’s own case for AY2010-11 whereby the issue has been restored back to the file of Ld. AO for readjudication of the matter after proper verification of facts of the case. The Ld. DR held the view that the addition made by the Ld. AO is based upon correct understanding of law. 11.0 We have heard rival submissions in the light of material available on records. The decision of the coordinate bench of this tribunal in assesse’s own case for AY-2010-11 vide ITA No.953 / Chny / 2015 has been found to be having a direct bearing on the impugned controversy and hence is being considered. In the said case Hon’ble coordinate bench has observed as under:-

“….46. Before us also, the Ld. counsel for the assessee relied on the decision of Hon'ble Madras High Court in the case of CIT v. Faizan Shoes (P.) Ltd. [2014] 48 taxmann.com 48 (Mad.), wherein the Hon'ble High Court has considered that the services rendered by non-resident agent for completion of export commitment would not fall under the definition for fee for technical services. The Hon'ble Jurisdictional High Court observed in para 12 as under: "12. In the light of the above said decisions and the finding rendered by us on the earlier issue that the services rendered by the nonresident agent can at best be called as a service for completion of the export commitment and would not fall within the definition of "fees for technical services", we are the firm view that Section 9 of the Act is not applicable to the case on hand and consequently, Section 195 of the Act does not come into play. In view of the above finding, the decision of the Supreme Court in Transmission Corpn. Of A.P Ltd's. case (supra), relied upon by the learned Standing Counsel for the Revenue is not applicable to the facts of the present case. We find no infirmity in the order of the Tribunal in confirming the order of the Commissioner of Income Tax (Appeals)."

of revenue is allowed for statistical purposes. 13.0 As regards / Chny/2021 for AY-2014-15, ITA No. IT(TP)-9 / Chny/2021 for AY-2015-16, ITA No. IT(TP)-326 / Chny/2021 for AY-2016-17 it is seen that identical grounds of appeal have been raised by the revenue. No changes, save variations in figures, in facts of the case have been reported. Accordingly the decision in AY2013

14. Supra shall apply mutatis mutandis. In the result ground of appeal of revenue for these assessment years are also allowed for statistical purposes.

18. We have gone through the order of the ld.CIT(A) and find that in the present AY 2017-18 there was sufficient discussion regarding the issue in question. Hence, respectfully following the order of the co-ordinate bench of Tribunal in ITA No. No.953/Chny/2015 and and also in the light of Article 14 of India Sri Lanka DTAA, we refrain from interfering in the impugned order of the ld. CIT(A). In result, we dismiss the grounds of the revenue on this issue.

‘’Article 23 METHODS FOR ELIMINATION OF DOUBLE TAXATION The laws in force in either of the Contracting States shall continue to govern the taxationof income in the respective Contracting States except when any provision to the contrary is made in this Agreemen:. When income is subject to tax in both Contracting States. relief from Double Taxation shall be given in accordance with the following paragraphs of this Article.2. In India: (a) Where a resident of India derives income which, in accordance with the provisions of this Agreement, may be taxed in Sri Lanka, India shall allow as a deduction from the tax on the income of that resident, an amount equal to the tax paid in Sri Lanka. Such deduction shall not, however, exceed that portion of the tax as computed before the deduction is given, which is attributable, as the case may be, to the income which may be taxed in Sri Lanka. DTAA permits deduction of tax paid in Sri Lanka against the income earned in Sri Lanka. The deduction shall be in the year in which the same was withheld as per DTAA. AO may be asked to consider the provisions of the DTAAA’. Alternatively, the AO may be directed to consider granting credit of the amount in AY 2019-20. Without prejudice, as this amount was not received, the same should be reduced from income.

21. We find that the lower authorities have not find occasion to see the impact of the Article 23 of the DTAA between Sri lanka and India vis-à-vis Rule 128 of the Income Tax Rules, 1962. Hence, we set aside this issue of credit for Foreign TDS to the file of AO for reconsideration in the light of the Article 23 of the DTAA between Sri lanka and India vis-à-vis Rule 128 of the Income Tax Rules, 1962 or any other provisions of the Act. Hence, this appeal of assessee is allowed for statistical purposes.