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Income Tax Appellate Tribunal, DELHI ‘I-2’ BENCH,
Before: SHRI N.K. BILLAIYA, & SHRI SUDHANSHU SRIVASTAVA&
PER N.K. BILLAIYA, ACCOUNTANT MEMBER, These two appeals by the assessee are preferred against the two separate orders for A.Ys 2009-10 & 2010-11 framed u/s 143(3)/144C of the Income-tax Act, 1961 [hereinafter referred to as 'the Act']. Since common issues are involved in both these appeals, they were heard together and are being disposed off by this common order for the sake of convenience and brevity.
Briefly stated, the facts of the case are that the appellant company [DLRI] is a company incorporated in India in September 1998 under the provisions of Companies Act, 1956 and is a subsidiary of De la Rue BV Netherlands [DLRN] except for one share held by De La Rue International Limited, UK. The appellant company is engaged in the business of trading of machines used for counting, accepting, sorting and authentication of cash. These machines are primarily used in banks. The Company also renders after sales support and maintenance services to its customers using such machines.
3. The following international transactions u/s 92CA(1) of the Act were referred to the TPO by the ACIT, Circle -1(1), Gurgaon:
I Arm's length price (as Sr. Method determined by Associated Enterprise Transaction No. adopted the assessee) (Lacs) 102394067 De La Rue Cash Systems, UK De La Rue Cash Systems Ltd. 1. Purchase of finished 8905287 Wanchai Hong Kong Goods De La Rue Cash Systems INC., 2544902 USA
182.900 DeLaRue SDN BHD, Malaysia De La Rue Cash Systems 271030 Benelux, Netherland 12779478 De La Rue Cash Systems UK De La Rue Cash Systems, Dubai 1149323 2. Cross Charges (Received) De La Rue Cash Systems, The 1399633 Netherlands 3. Management Charges IS Service Cost Group 11876701 De La Rue Cash Systems, UK Insurance Charges (Paid) 4. Bank Charges Other De La Rue Cash System, 1357453 Charges (Paid) UK 5. Payables to A.E.'s -do- 296740992
6. Receivables from AE's -do- 5644009
The business activities of the AEs and their nature of relationship with the assessee company are tabulated as under:
Nature of the Brief description of relationship with the Name of the Associated the business carried on Sr. No. associated Enterprise by the associated enterprise as enterprise. referred to in Sec. 92A(2) Manufacturing & 1. De La Rue Cash Systems, UK Holding Company Trading of Machines & De La Rue North America Spares Manufacturing & 2. Group Company Inc., USA Trading of Machines & De La Rue Cash Systems, Trading of Machines & Spares 3- Group Company Hongkong Spares De La Rue (Malaysia), SDN, Trading of Machines & 4- Group Company BHD Spares De La Rue Cash Systems, the Trading of Machines & 5- Group Company Netherlands Spares De La Rue Cash Systems, Trading of Machines & 6. Group Company Dubai Spares
The comparables selected by the appellant are as under:
a) Priya Limited b) CCS Infotech Ltd c) Compuage Inforcom Ltd d) IACI Infocom Ltd e) CMS Computers Ltd f) Iris Computers Ltd g) Kilburn Office Automotion Ltd
Out of the above comparables, the TPO rejected the following comparables:
a) ACI Infocom Ltd b) CCS Infotech Ltd c) Compuage Inforcom Ltd d) Iris Computers Ltd e) Priya Limited f) CMS Computers Ltd
When objection was raised before the DRP in A.Y 2009-10, the DRP directed for inclusion of Compuage Inforcom Ltd and Priya Limited. Surprisingly, the DRP did not direct for inclusion of these two comparables in A.Y 2010-11. More surprisingly, all the aforesaid comparables were accepted as good comparables by the TPO in A.Ys 2007-08 and 2008-09. The following chart gives a bird’s eye view of the inconsistent approach taken by the TPO/DRP:
A.Y 2009-10 A.Y 2010-11 Sl Comparable A.Y 2007-08 A.Y . 2008-09 N o NPM Acce NPM Acc NPM Acc Acc NPM Accep Accept pted epte ept ept ted ed b by by d ed ed by DRP TPO by by by TPO TPO TP DRP O 1 ACI Infocom Ltd 8.43% Yes Not selected 1.79% No No 3.33% No No –consistent losses 2 CCS Infotech Ltd 0.84% Yes 0.92% Yes -0.02% No No 0.08% No No 3 Compuage Infocom 2.32% Yes 2.19% Yes 2.51% No Yes 1.62 No No Ltd 4 Iris Computers Ltd Not selected– Yes 2.21% No No 1.83 No No Insufficient 2.31% Information 5 Priya Ltd 1.81% Yes 2.38% Yes 3.82% No Yes 2.90 No No 6 CMS Computers 1.71% Yes 1.24% Yes 17.05% No No -6.50 No No Ltd 7 Kilburn Office 16.52% Yes 20.82 Yes 15.77% No Yes 17.56 Yes Yes Automation Ltd % Aver 1.29 2.98 age
It would be pertinent to mention here that not only the business profile of the assessee has not changed during the year under appeal, but also the business profile of all the aforesaid comparables is same as they were in A.Ys 2007-08 and 2008-09. We could not find any justifiable reason for not accepting the comparables which were considered by the TPO himself in earlier A.Ys. Moreover, two comparables, namely, Compuage Inforcom Ltd and Priya Limited, which were directed to be included in list of comparables by the DRP have not been directed so in A.Y 2010-11 by the DRP itself. Once again, no justifiable reasoning has been given.
We have given thoughtful consideration to the business profiles of the aforesaid comparables. We find that all the companies are in similar line of business and fulfil all the relevant conditions to find place in the final list of comparables.
Considering the facts in totality, in the light of final list of comparables considered in A.Ys 2007-08 and 2008-09, we have no hesitation in directing the Assessing Officer/TPO to accept all the afore-listed comparables in the final list of comparables for determination of Arm’s Length Price.
Accordingly, all the transfer pricing grounds alongwith sub- grounds are allowed.
The next grievance relating to computation of operating profit margin relates to foreign exchange loss and liabilities and provisions no longer required written back.
In so far as the treatment of foreign exchange/loss is concerned, we find that on this count, the appellant company has taken inconsistent view over the years. In A.Ys 2007-08 and 2008-09, the appellant company treated the forex gain as part of operating profit and the same was accepted as such by the TPO/DRP. Surprisingly, in A.Y 2009-10, since there was a forex loss, the assessee treated the same as non-operating whereas in A.Y 2010-11, where there was forex gain, once again the assessee treated it as part of operating profit.
In our considered opinion, once it has been held that the business profile of the appellant company has not changed from the past year, merely because there was a forex loss on account of fall in rupee, the same cannot justify the treatment of forex loss as non-operating in A.Y 2009-10. In our considered view, there should be consistency in the approach of the assessee and since the assessee has taken a very inconsistent view in A.Y 2009-10 and the DRP has rightly treated the forex loss as part of operating profit, we do not find any reason to interfere with the same. Ground No. 2.5(a) of A.Y 2009-10 is dismissed.
Though the appellant has relied upon several judicial decisions, but as mentioned elsewhere, we have dismissed this ground on the Rule of Consistency, hence the judicial decisions relied upon by the assessee have not been considered on the facts of the case in hand.
In A.Y 2010-11, as mentioned elsewhere, the assessee has taken the forex gain as operating profit but the DRP has treated the same as non operating. Once again, there is a inconsistent approach by the DRP this time. Once it has been decided that forex gain/loss is part of the operating profit, the same view has to be taken for AY 2010-11 also. We accordingly, direct the Assessing Officer/TPO to treat the forex gain in AY 2010-11 as part of operating profit for determination of operating profit margin. Ground No. 2.1(a) of AY 2010-11 is allowed.
Ground No. 2.5(b) in A.Y 2009-10 relates to liabilities and provisions written back.
The lower authorities have treated the same as non-operating in nature placing reliance on Safe Harbor Rules. The notification of CBDT issued on 18.09.2013 on Safe Harbor Rules define concept of operating expense, operating revenue and operating profit respectively.
In our considered view, the liabilities and provisions written off in earlier years were taken as part of operating profit, therefore, when the same are written back, they must be considered as operating in nature for computation of operating profit margin. We direct accordingly.
In A.Y 2010-11, Ground No. 2.1(b) and (c) relate to treatment of income of Rs. 1,05,07,777/- received by the assessee from rendering management support services to its AEs as non-operating in nature and notionally attributing Rs. 60,114/- as non-operating expenses to the management support service income.
The appellant company rendered management support services to its AEs and recovered an amount of Rs. 10,507,777/- after charging a mark up of 10% on the cost. The expenses incurred in relation to provisions of such management support services amounted to Rs. 97,15,490/-. We find that on the one hand the TPO has treated the management support service income of Rs. 10,507,777/- as non operating and corresponding expenses of Rs. 97,15,490/- have been considered as operating in nature, thereby blowing hot and cold in the same breath. If management support services income is considered as non-operating, then corresponding expenses incurred while rendering such services should be considered as non operating instead of notional amount of Rs. 60,114/-.
While deciding this ground against the assessee, we direct the TPO/Assessing Officer to consider the actual expenditure of 97,15,490/- for allocation towards management support service income of Rs. 1,05,07,777/- considered as non operating. This ground is partly allowed.
The other common issues in the appeals under consideration relate to disallowance of provisions for warrantee and disallowance of liquidation damages. The quantum may differ in both the appeals.
In so far as disallowance of provisions for warrantee is concerned, the facts on record show that as per the purchase orders and agreement for sale of cash sorting and counting machines, the appellant is under obligation to provide warrantee on sale of machines which varies from 1-2-3 years. Thus, the appellant company is obliged to meet its obligations for warrantee and provide free service which requires incurrence of expenses on various accounts. The Assessing Officer has disallowed the provisions for warrantee by alleging that no historical trends were available for making warrantee provision during the year under consideration and since the amount actually utilised is far less than the provisions, the reasonableness of quantum is also not established nor any scientific method has been brought on record by which the said provision amount has been arrived at. Warrantee provision is merely an adhoc provision and, therefore, cannot be allowed.
When the above objection was raised before the DRP, the DRP partly allowed the claim for provision of warrantee to the extent of 1.25% of the sales as against the provision made at 5%.
Before us, the ld. AR vehemently stated that the warrantee is in- built in the purchase order/agreement and the liability on account of warrantee is integral part of sales Revenue. It is the say of the ld. AR that since the entire sales revenue is accounted as revenue, therefore, corresponding deduction for warrantee provision should also be allowable. The ld. AR further pointed out that on similar facts in assessee’s own case, the Tribunal has decided this issue in favour of the assessee in for A.Y 2007-08.
Per contra, the ld. DR strongly supported the findings of the lower authorities.
We have carefully considered the orders of the authorities below qua the issue. In our understanding of the facts, we find that the machines are supplied to various parts of the country and there are different costs of providing warrantee services in different parts, which mean that in some regions there are few machines but to meet the warrantee obligations, engineers have to be stationed there. The distance of the machine from the engineer’s location is also a relevant factor, since long distance transfers require additional expenditure to be incurred. Further, in our view, usage of the machines differ from customer to customer. There is no dispute that the warrantee obligation is inbuilt in the purchase order/agreement and the warrantee provision is not a contingent liability and it is quite certain that the expenses would be incurred in meeting the warrantee obligation linked to the sales of the current year in the following year. The Hon'ble Supreme Court in the case of Bharat Earth Movers Vs. CIT 245 ITR 428 has laid down that if a business liability has arisen in an accounting year, the deduction should be allowed although the liability may have to be quantified and discharged on a future date. A similar issue was considered by the coordinate bench in vide Ground No. 1 of that appeal. Relevant finding of the order reads as under:
“10. We have heard both the parties and perused all the records. Ground No. 1 and 1.1 is relating to disallowance of Rs.1,76,90,14/- on account of warranty provisions which was estimated at 10% of sales. It is settled position that provisions for warranty is a business necessity and such provision is an allowable expenses. The CIT(A) in 2006-07 held that the warranty provision provided at 10% of sales was actually utilized only to the extent of 1.16% by the Company and the rest was reversed. Thus, the CIT(A) held that it is considered fair and reasonable that warranty provision to the extent of 1.50% of the sales would justifiable and remaining provision needs to be added back. The contention of the Ld. AR that warranty obligation is inbuilt in the purchase order/agreement as mentioned in Clause 6 & Clause
Thus, the liability on account of warranty is integral part of the sales revenue. Since, the entire sales revenue is accounted as revenue by the assessee. Therefore, corresponding deduction for warrant provision who also be allowed. The Tribunal for A.Y. 2006-07 being order dated 02.02.2016 held as under:
"6. We have considered the submissions of both the parties and perused the records of the case. We are in agreement with the reasoning given by Ld. CIT(A) for which he has given reasons in his order, & 5017/Del/2012 enumerated above. Merely because the assessee had written back the provision in subsequent year cannot be a basis for disallowing the assessee's claim in the current year, particularly when assessee had given specific basis for making this warranty provision. Assessee's claim is fortified by the decision relied upon by Ld. CIT(A). Accordingly, we see no reason to interfere in the order of Ld. CIT(A) on the issue in question. Accordingly, order of Id. CIT(A) is upheld."
After looking to the order of the ITAT for Assessment Year 2007-08, the ITAT have dismissed appeal of the Revenues by holding that merely because the assessee had returned back the provisions in subsequent year cannot be a basis for disallowing the assessee's claim in the current year, particularly when the assessee had given specific basis for making warranty provisions. The Hon'ble Apex Court in case of Rotork Controls India (P) Ltd. (supra) has given the criteria which are fulfilled by the assessee herein. Thus, issue is squarely covered in favour of the assessee and, therefore, Ground No. 1 and 1.1 of the assessee's appeal is allowed.”
As no distinguishing decision has been brought in favour of the Revenue, respectfully following the findings of the coordinate bench [supra], this ground is decided in favour of the assessee.
15 30. Next issue relates to disallowance of liquidated damages.
We find that a similar issue arose before the Tribunal in vide Ground No. 2 in that appeal. The relevant findings of the coordinate bench read as under:
“14. We have heard both the parties and perused all the relevant records. Ground No. 2 and 2.1 is regarding disallowance of Rs. 1,34,98,850/- being the liquidated damages provided on account of delay and supply of machines. It is pertinent to note that as per the purchase orders agreements, the company is liable to pay liquidated damages for the failure to supply the machines to the banks as per the agreed delivery schedule. During the present Assessment Year the assessee company had debited liquidated damages amounting to Rs.1,34,98,850/- in its profit and loss account for delay in supply of machines to banks. During the course of assessment proceedings, the assessee company has submitted party wise details of liquidated damages incurred along with sample purchase orders/agreements containing the liquidated damages clause and also sample copies of correspondences received by the company from banks on levy of liquidated damages all
16 these documents were produced before the Assessing Officer but the same was not properly verified by the Assessing Officer. The Clause prescribing the liability to pay liquidated damages arose at the point of time when the Company fail to deliver the machines on the due date and at that point of time the liability agreed which is a prudent trader it could quantify and take into account by means of trader. The Assessing Officer as well as the CIT(A) has not taken correct cognizance as to liquidated damages incurred by the company and accordingly deducted by the customers from the payment of sale proceeds is as per the agreed terms and contract. All these factors have not been properly assessed by the Assessing Officer as well as CIT(A). The Ld. AR's contention that these provisions have been set off in the & 5017/Del/2012 next Assessment Year i.e. 2008-09 the same has to be verified at the level of the Assessing Officer. Therefore, we direct the Assessing Officer to verify all these documents along with the claim of set off of this claim in the year 2008- 09. Therefore, this issue is restored to the file of the Assessing Officer. Needless to say, the Assessing Officer has to give proper opportunity of hearing to the assessee by following principles of natural justice. Therefore, Ground No. 2 and 2.1 is partly allowed for statistical purpose.”
Respectfully following the findings of the coordinate bench [supra], we direct accordingly. This ground is partly allowed for statistical purposes.
In the result, the appeals filed by the assessee in 1606/DEL/2015 are partly allowed.
The order is pronounced in the open court on 28.09.2018.