M/S. DELL INTENATIONAL SERVICES INDIA PVT LTD,BENGALURU vs. ADDITONAL COMMISSIONER OF INCOME TAX, LTU, BENGALURU

O R D E R PER BEENA PILLAI, JUDICIAL MEMBER :

Present appeal has been filed by assessee against order dated 28/11/17 passed by Ld. CIT (A)-5, Bangalore for assessment year 2008-09 on following grounds of appeal: (B)/2018 2 I Corporate Tax

1. Order bad in law and on facts The order passed by the Addl. CIT, LTU, under  section 143(3) of the Act and the order passed by the CIT(A) - 5, under section 250 of the Act, are bad in law and on facts.

2. Disallowance of provision for warranty - Rs. 189,686,000 The learned CIT(A) has erred in disallowing provision  for warranty amounting to Rs. 189,686,000 without providing any cogent reasons. The learned CIT(A) has erred in law and on facts  in disallowing the provision for warranty without appreciating the submissions made by the Appellant in this regard. The learned CIT(A) has erred in not following the  order passed by the Hon'ble Income-tax Appellate Tribunal ("ITAT") for AY 2002-03, AY 2003-04 and AY 2005-06 in the Appellant's own case. The learned CIT(A) has erred in not following the  order passed by his office for AY 2012-13 in the Appellant's own case. 

3. Disallowance of pre-operative expenses – Rs.30,584,000 The learned CIT(A) and the learned Assessing  Officer ("AO") has erred in law and on facts in disallowing the pre-operative expenses amounting to Rs. 30,584,000 without appreciating the submissions made by the Appellant in this regard. The learned CIT(A) and the learned AO has erred in  holding the aforesaid expenditure as capital in nature. The learned CIT(A) and the learned AO has erred  in not accepting the contention of the Appellant that the aforesaid expenditure is incurred for expanding existing business and that there is no diversification of business. The learned CIT(A) and the learned AO ought to have  appreciated the fact that the expenditure is not incurred for the purpose of bringing into existence any new asset or advantage. The learned CIT(A) has erred in contending that the  appellant has not proved the veracity and genuineness of the said expenditure, without providing any cogent reasons. (B)/2018 3 The appellant craves leave to add, alter, rescind and modify the grounds provided herein above or produce further documents, facts and evidence before or during the course of hearing of this appeal. For the above and any other grounds which may be raised at the time of hearing, it is prayed that necessary relief may be provided.

“Based on the facts and circumstances of the case, the Appellant, respectfully submits the following additional ground of appeal for admission before Your Honours: Corporate tax Ground No. 4 - Non-grant of depreciation on disallowance of exchange loss pertaining to capital goods  The learned Assessing Officer ("AO") has erred in not granting appropriate depreciation on disallowance of exchange loss pertaining to capital items. Me said ground is independent and without prejudice to the other grounds of appeal preferred by the Appellant. substitute or amend the above ground of appeal, at any time before or at, the time of hearing, of the appeal, so as to Cory ITA No.777(B)/2018 5 enable the Honorable Income Tax Appellate Tribunal to decide this appeal according to law. The Appellant does not have a Managing Director and hence the additional ground of appeal is signed by the Director of the Company in accordance with the provisions of the Act. 5.1. Ld.AR submitted that this ground was inadvertently not raised before Ld.CIT (A) and hence assessee wishes 2 raises issue before this Tribunal. He submitted that the issue emanates from the records and therefore deserves to be admitted. Ld.AR placed reliance upon decision of Hon’ble Supreme Court in case of Jute Corporation of India Vs CIT and NTPC Ltd., Vs CIT reported in 53. Taxmann 85 & 229 ITR 383 respectively. Ld.DR though, opposed admission of additional ground but could not controvert that the same emanates from assessment records records. 5.2 We have perused submissions advanced by both sides in the light of the records placed before us. It has been submitted that out of total foreign exchange loss claimed amounting to Rs.2,44,66,000/-,. Ld.CIT(A) observed that sum of Rs.2,34,42,910/-pertains to foreign exchange loss on restatement/settlement of creditors for revenue items and balance is capital in nature. It has been submitted that Ld.AO disallowed foreign exchange loss amounting to Rs.2,34,42,910/- on account of revenue transaction by contending that assessee failed to establish claim of loss. Ld.CIT (A) while considering issue observed that assessing officer has given finding that exchange loss due to 6 creation of capital goods amounts to Rs.10,23,09,000/- which cannot be allowed as deduction. He accordingly held based upon remand report, that loss amounting to Rs.2,34,42,910/- only could be considered as explained. Assessee while filing the appeal has not raised any claim regarding depreciation on forex loss disallowed amounting to Rs.10,23,090/- by the Ld.CIT(A). As this issue emanates from the records and forms part of issue considered by Ld.CIT (A), we are admitting the ground raised by assessee. Accordingly additional ground raised by assessee vide application dated 31/07/19 stands admitted.

6. Ground No. 1 is in respect of disallowance of provision for warranty amounting to Rs.18,96,86,000/-. 6.1 Ld.AR submitted that assessee made provision for warranty expenditure on a scientific basis in respect of information technology hardware and other pereferrals sold and which are under the warranty period as on 31/03/08. It has been submitted that for purpose of estimating warranty provision model for ascertaining warranty cost takes into account, only those units in respect of which warranty period has not expired as on date of estimating the provision. He submitted that provision for warranty is always made by assessee on net basis and not on gross basis. He thus emphasized that additional provision required to be made for newly sold units would automatically get net of with unavailed provision on units in respect of which warranty period expired 7 during the year. Thus it has been submitted that no separate reversal of unavailed provision in respect of units for which warranty period automatically get adjusted against additional provision is required to be made, in respect of newly sold units during the year. Referring to page 191 and note 16 at page 221 of paper book, he submitted that, assessee has not claimed entire closing balance as expense during the said period and total debit to profit and loss account on account of provision for warranty was only amounting to Rs.18,96,86,000/-. Ld. DR placed reliance upon the orders of authorities below. 6.2 We have perused submissions advanced by both sides in light of the records placed before us. It has been submitted by Ld.AR that identical issue has been consistently arising in earlier assessment years referring to assessment year 2005-06 in ITA No. 85/B/2014 and CO No. 21/B/2016 he submitted that scientific method of accounting provision for warranty has not changed. We have perused assessment order and it is observed that assessee submitted a table which shows the actual provision made during the year amounts to Rs.99,93,17,000/-which has been added to opening balance from which a sum of Rs.88,14,99,000/-has been written back during the year being utilised. The consistent method followed by assessee has not been doubted by the Department. This Tribunal vide order dated 13/10/17 analysed the scientific method of estimating liability on account of warranty claims. We are also of the view that parity of basis of provision for warranty in earlier assessment years is (B)/2018 8 squarely applicable to year under consideration and therefore there is no reason to disallow the claim. Accordingly we reverse the order of Ld. CIT (A). Accordingly this ground raised

by assessee stands allowed.

7. Ground No.3 is in respect of pre-operative expenses being disallowed amounting to Rs. 3,05,84, 000/-. It has been submitted by Ld.AR that assessee is engaged in business of buying and selling of information technology hardware product and providing pre-sales and post-sales services for many years in India. He submitted that as a part of expansion plan of existing business, in sale of information technology hardware product during assessment year 2007-08, assessee decided to set up new facility/project to assemble/manufacture computer system and computer system related peripherals. He submitted that there was no diversification of business, but it was only an expansion of existing business and computer systems and custom computer systems related peripherals. It has been submitted that assessee incurred administrative expenses like salary, wages and contribution to provident fund, repairs and maintenance, communication and conveyance, as has been identified and disclosed in the notes of account, thus pre-operative expenses for the year under consideration. He also emphasized that in notes to account at page 221 of paper book it has been indicated that these expenses are identified in nature of revenue expenses as a part of continuation of same business.

ITA No.777(B)/2018 9 7.1 Ld.AR thus submitted that authorities below were not correct in holding that these were preoperative expenses being capital in nature related to new business. 7.2 Ld. DR placed reliance upon the orders of authorities below.