Loading judgment…
No AI summary yet for this case.
Income Tax Appellate Tribunal, DELHI BENCH “I-2” NEW DELHI
Before: SHRI AMIT SHUKLA & SHRI O.P. KANT
The aforesaid appeal has been filed by the assessee against the final assessment order dated 29.01.2018, passed by Assessing Officer for the quantum of assessment passed u/s.143(3)/144C/ 254 of the IT Act for the Assessment Year 2009-10, in pursuance of the direction given by the learned DRP vide order dated 07.12.2017. In various grounds of appeal, assessee has raised the following issues:- (i) Grounds no.1 to 1.5 are general in nature which has not been pressed and hence the same are not adjudicated.
(ii) In Grounds No.2 to 2.9, the assessee has challenged the addition of Rs.4,26,35,832/- made on ‘protective’ basis on account of the difference in ALP of the international transaction of advertisement, marketing and promotion expenses (AMP expenses) by applying Bright Line Test. (iii) In Ground No.3, the assessee has challenged the intensity based comparability adjustment on substantive basis, however the ALP has been determined as Nil, therefore, the same has not been pressed before us. (iv) In Ground no.4 to 4.3, the assessee has challenged the disallowance of deduction on account of provision for warranty amounting to Rs.9,80,20,092/-. (v) In Grounds no.5 to 5.1, the assessee has challenged the disallowance of deduction on account of interest paid on delay in deposit of TDS amounting to Rs.1,49,607/- under the provision of Section 40(a)(ii) of the Act. (vi) In Ground no.6, the assessee has challenged the charging interest under sections 234B and 234C of the Act.
The brief facts of the case are that the assessee is a wholly owned subsidiary of Toshiba Corporation, Japan which is a Japanese Technology company, specialized in advanced electronics, engaged in manufacturing and marketing information and communication systems, electronic components, heavy electrical apparatus, consumer products, medical diagnostic imaging equipment, etc. The assessee is engaged in the trading of consumer durables, IT products, etc., providing representative and marketing support services to Toshiba Group Companies worldwide and providing warranty services in India for laptops sold by AEs outside India. The international transactions reported by the assessee are as under:
S.No. Nature of Associated enterprises Value of transaction international transaction in INR 1. Import of Toshiba Home Appliances 135,203,521 consumer Corporation, Toshiba durable consumer Products, products, LCD Toshiba Singapore Pte. and spare Ltd, Toshiba Corporation, parts Japan 2. Import and Toshiba Corporation, 635,578,977 export of IT Japan, Toshiba America Products and Information Systems Inc., accessories Toshiba Europe GmbH, Toshiba Singapore Pte. Ltd. (import of PC and its spare parts), Toshiba Singapore Pte. Ltd. (Sale of PC & Spare parts) 3. Provision of Toshiba America 40,719,692 Warranty Information System Inc., Services Toshiba (Australia) Pte. Ltd. Toshiba Europe GmbH, Toshiba of Canada Ltd., Toshiba Personal Computer & network (Shanghai) Co. Ltd., Toshiba Corporation, Japan (Provision of global warranty services, Toshiba Singapore Ptd. Ltd (Provision of global warranty services), Toshiba Singpagore Pte. Ltd. (Provision of warranty support services), Toshiba Corporation, Japan (Computer repair and maintenance), Toshiba Personal Computer & Network (Shanghai) Co. Ltd. 4. Provision of Toshiba Corporation, 110,334,113 representation Japan, Toshiba Electronics and marketing Asia Singapore Pte. Ltd., support Toshiba Singapore Pte., services Ltd. 5. Reimbursement Toshiba Asia Pacific Pte. 181,764 of expenses Ltd. 6. Receipt of Toshiba Asia Pacific Pte. 395,153 consultancy Ltd. charges Total 922,413,220
3. In the original round of proceedings, in the draft assessment order, assessee’s income was proposed at Rs.35,08,39,480/- against its declared income of Rs.16,08,68,450/- After DRPs direction, the income of the assessee was revised to Rs.34,87,64,638/-. The Tribunal vide order dated 15th July, 2014 remanded the matter back to the Assessing Officer/TPO to reconsider the issue and re-compute the AMP adjustment after applying the principles laid down by the Special Bench in the case of LG Electronics Pvt. Ltd. Against the Tribunal order. Aggrieved by the said order of the Tribunal, assessee had filed an appeal before Hon'ble High Court, wherein the Hon'ble High Court vide order dated 22nd April, 2015 remanded the matter back to the ITAT to compute the AMP adjustment in the light of the order passed by Hon'ble High Court in the case of Sony Ericsson Mobile Communications India Pvt. Ltd., reported in 371 ITR 118. The Tribunal again vide order dated 30.10.2015 further remanded the matter back to the Assessing Officer/TPO to decide the issue afresh in accordance with law. In the set aside proceedings, the TPO vide order dated 31st March, 2017 and subsequently by the draft assessment order, assessee’s income was proposed at Rs.22,91,01,906/- after making the following additions:-
Particulars Amount (INR) Total income as determined by the Assessee 16,08,68,450 Add: Disallowance of ALP u/s. 92CA 6,80,38,610 Add: Disallowance u/s. 40(a)(ii) 1,49,607 Add: Disallowance u/s.37 33,775 Add: Disallowance u/s.43B 11,464
The main issue with regard to the ALP adjustment was on account of AMP expenses of Rs.6,80,38,610/- which was made on substantive basis. After the DRP’s direction, the substantive adjustment of the said amount was determined at ‘Nil’. However, the TPO had made protective addition on account of AMP distribution of Rs.4,80,11,151/-, which has been reduced to Rs.4,26,35,832/- and that too on protective basis after applying the Bright Line Test. The protective adjustment, in the light of the direction issued by the DRP has been made after taking the following final list of comparables:
S. Company Name Margin Margin Remarks No. (OP/OR) as (OP/OR) per the after the order of the directions TPO of the DRP 1. Best Mulyankan 9.35 9.35 Consultants Ltd.
2. Certification 60.77 Excluded The DRP Engineers directed the International Ltd. TPO to exclude this comparable.
Credit Analysis & 83.76 Excluded The DRP Research Ltd. directed the TPO to exclude this comparable. 4. HCCA Business 15.8 15.8 Services Pvt. Ltd. 5. ICRA Ltd. 59.07 59.07 6. IDC (India) Ltd. 9.67 9.67 7. Indus Technical & 8.28 8.28 Financial Consultants Ltd. 8. Shristi Urban 11.66 Excluded The DRP Infrastructure directed the Development Ltd. TPO to exclude this comparable 9. Tamil Nadu Ex- 8.55 Excluded The DRP Servicemen’s Corpn. directed the Ltd. TPO to exclude this comparable 10. Tata Services Ltd. 0.93 Excluded The DRP directed the TPO to exclude this comparable 11 Test Consultants Ltd. 57.17 57.14 AVERAGE 29.54% 26.55
Accordingly, the arms length price is again being recalculated here as under: Computation of Protective Adjustment Adjustment as per Adjustment after the order of the TPO directions of the ld. DRP Operating Income 179776542 179776542 Average Margin of 29.54% 26.55% Comparable ALP 53105991 47730672 Profit of the 5094840 5094840 assessee
Shortfall 48011151 42635832
Therefore, the adjustment of Rs.48011151/- is being revised to Rs.4,26,35,832/-.”
Thus, the issue before us is, protective AMP adjustment of Rs.4,26,35,832/- which was made by using Bright Line Test.
Before us the learned counsel for the assessee submitted that the BLT method has been held to be invalid by the Hon'ble Jurisdictional High Court in the case of Sony Erricson (supra) and catena of other judgments of the Hon'ble Delhi High Court, wherein it has been consistently held that BLT method cannot be applied for making adjustment in the AMP expenses. He further pointed out that this issue now stands decided in favour of the assessee in assessee’s own case for the Assessment Year 2013-14 and in support he filed a copy of judgment in order dated 13.11.2017, wherein the Tribunal has deleted the said protective issue.
On the other hand, learned DR relied upon the order of the learned DRP.
After considering the relevant findings given in the impugned order as well as order of the Tribunal, we find that on substantive basis no addition has been made after the direction of the DRP as the same has been determined at ‘Nil’. The only issue is protective addition of Rs.4,26,35,832/- which has been made on protective basis after applying BLT. Now, it is well settled proposition under the jurisdiction of Hon'ble Delhi High Court that Bright Line Test Method cannot be applied for making any kind of adjustment under AMP expenses. This precise issue has come up for consideration before the Tribunal in assessee’s own case in Assessment Year 2013-14 where the Tribunal has decided this issue after observing and holding as under:-
“6. The ground Nos. 2, 2.5 to 2.6 relates to protective addition made applying the BLT. 6.1 Before us, the learned counsel submitted that Tribunal in the case of Nickon India Private Limited (ITA No. 4574/Del/2017, dated 20.09.2017) has deleted the identical addition of protective nature, and therefore, in the case of the assessee also, no addition could be sustained. The Ld. CIT (DR), on the other hand, relied on the finding of the lower authorities. 6.2 We have heard the rival submission and perused the relevant material on record. We find that Tribunal in the case of Nickon India Private Limited (supra) has deleted the adjustment made on protective basis applying the BLT. The relevant finding of the Tribunal is reproduced as under:
“78. So, following the decision rendered by Hon’ble Delhi High Court in case of Sony Ericsson Mobile Communications India (P.) Ltd. (supra) and coordinate Bench of the Tribunal in Perfetti Van Melle India Pvt. Ltd. (supra), TP adjustment amounting to Rs.22,30,18,964/- by applying BLT is not sustainable on protective basis having no statutory mandate. So, ground no. 5 is determined in favour of the assessee. ” 6.3 We find that the BLT for computing Arm s Length Price of AMP transaction has already been rejected by the Hon ble Delhi High Court in the case of Sony Ericsson (supra), and thus adjustment even protective basis cannot be sustained. The decision of the Hon ble Jurisdictional High Court is a binding precedent and the lower authorities cannot disregard it merely because the Revenue has challenged it before the Hon’ble Supreme Court. Thus, respectfully following the above decision of the Tribunal, we direct the Ld. AO/TPO to delete the protective addition of Rs.51,09,87,000/-. Accordingly, we allow the relevant grounds of the appeal of the assessee.”
Since, the aforesaid Tribunal decision is in consonance with the judgment of Hon'ble Delhi High Court, therefore, in view of the binding judicial precedent, we also delete the protective addition of Rs.4,26,35,832/- made on account of AMP expenses and accordingly grounds no.2 to 2.9 are allowed.
Coming to the issue of disallowance of provision for warranty, the facts in brief are that assessee has created a provision for warranty amounting to Rs.9,80,20,092/- based on actuarial estimation of liability. However, at the time of filing of return of income, the assessee disallowed the provision for warranty debited to the P&L account and claim allowance only for the amount of actual utilization of the provision. Accordingly, net amount of Rs.7,26,60,664/- was added while computing the taxable income. The assessee placed strong reliance upon the judgment of Hon'ble Supreme Court in the case of Rotork Controls India Pvt. Ltd. vs. CIT, reported in 314 ITR 62 (SC) and other decisions. The Assessing Officer noted that the assessee has voluntarily and suo motu disallowed amount of Rs.9,80,20,092/- on account of provision for warranty at the time of filing of income tax return and the claim was not made through revised return but through return representation during the proceedings before the Tribunal. He held that such a fresh claim cannot be considered by the Assessing Officer other than by way of revised return and in support, strongly relied upon the decision of Goetze India Ltd. vs. CIT, reported in (2006) 248 ITR 323 (SC). However, since the Tribunal has remanded back the case to the Assessing Officer to verify the claim of warranty by the assessee on the basis of facts and material on record, the DRP held that provision created by the assessee is arbitrarily and gave no true picture and actual warranty liability. Accordingly, the claim made by the assessee was rejected.
Learned counsel before us submitted that the provision for warranty was ascertained liability since the same was created by the assessee on the basis of actuarial certificate, the copy of which has been annexed at pages 23 and 26 of the paper book. The details of such provision as per actuarial certificate were as under:- Asset Period of warranty Amount of under provision consideration certificate by actuarial certificate
Personal 3 years 7,05,21,511 computer Fridge 5 years 1,03,00,000 Washing 1 year 14,00,000 machine LCD TV 1 year 11,00,000 TOTAL 8,33,21,511
The closing balance of provision for warranty appearing in the books of Rs.8,33,21,511/- was stated to be duly certified by the actuarial certificate. Learned counsel submitted that the provision for warranty of Rs.8,70,10,950/- was charged by the assessee in the books on the basis of actuarial certificate calls for being allowed and warranty used during the year amounting to Rs.1,43,50,306/- should only be disallowed. He further submitted that this issue stands covered by the decision of the Tribunal in assessee’s own case in the Assessment Year 2008-09 in vide order dated 30.08.2017. Thus, he submitted that this issue is squarely covered by the order of the Tribunal.
On the other hand, learned DR strongly relied upon the order of the Assessing Officer.
After considering the relevant finding given in the impugned order as well as the submission made by the assessee, we find that the assessee has made additional claim of deduction of Rs.7,26,60,644/- on account of provision for warranty [8,70,10,950 charged under the books of account (-) 1,43,50,306/- warranty used during the year]. The said provision has been duly certified by actuarial certificate which is not in dispute. The Hon'ble Supreme Court in the case of Rotork Controls Ltd. (supra) held that warranty services are normal business expenditure and not contingent liability. It was held that a provision is a liability which can be measured only by using a substantial degree of estimation. A provision is recognized when: (a) an enterprise has a present obligation as a result of a past event; (b) it is probable that an outflow of resources will be required to settle the obligation; and (c) a reliable estimate can be made of the amount of the obligation. If these conditions are not met, no provision can be recognized. Liability is defined as a present obligation arising from past events, the settlement of which is expected to result in an outflow from the enterprise of resources embodying economic benefits. A past event that leads to a present obligation is called as an obligating event. The obligating event is an event that creates an obligation which results in an outflow of resources. It is only those obligations arising from past events existing independently of the future conduct of the business of the enterprise that is recognized as provision. For a liability to qualify for recognition there must be not only present obligation but also the probability of an outflow of resources to settle that obligation. Where there are a number of obligations, (e.g. product warranties or similar contracts) the probability that an outflow will be required in settlement, is determined by considering the said obligations as a whole. In the case of the assessee, we find that such an estimation based on actuarial certificate has been approved in the earlier year by the Tribunal after observing and holding as under:- “The ground No. 4 of the appeal is against the non granting of deduction of warranty expenditure during the year. Assessee was making provision of warranty in the books of account or claiming the deduction only when the amount is used. Therefore, as per the schedule 10 of the annual account of the company during the year made the provision of Rs. 18503389/- but claimed warranty during the year of Rs. 7842523/- as used. Due to this an outstanding of Rs. 1660867/- was remaining as on 31.03.2008. Company is following the policy of warranty of actuarial valuation basis, however, during the year while computing the total income in the computation of total income, assessee disallowed a sum of Rs. 18503389/- and claimed deduction of Rs. 7842523/-. Therefore there was an error which was pointed out before the Id AO, the same was not allowed as the assessee did not file the revised return of income. Before the Id CIT(A) also this issue was not admitted and assessee was not granted the benefit. Therefore, the assessee is in appeal before us. According to us the assessee should have been granted the deduction of actual warranty provision of Rs. 18503389/- instead of Rs. 7842523/-. The Hon'ble Supreme Court in the case of Rotork Controls India Pvt. Ltd Vs. CIT in 314 ITR 62 has held that warranty services are normal business expenditure and not contingent liability. In view of this we do not subscribe to the views of lower authorities in not allowing the claim of the assessee. Hence, we direct the Id AO to withdraw the deduction already granted to the assessee of Rs. 7842523/- and to allow deduction of Rs. 18503389/-.”
Accordingly, in view of the earlier year precedence and ratio laid down by the Hon'ble Supreme Court, we direct the Assessing Officer to allow the provision for warranty of Rs.7,26,60,644/- in this year. Hence, the ground no.4 is treated as allowed.
Ground no.5, learned counsel submitted that interest of Rs.1,49,607/- charged on the late deposit of TDS is an allowable deduction as interest paid is compensatory in nature. The principle amount of TDS has been allowed as deduction and consequently interest thereof should also be allowed as deduction. We find that Assessing Officer has made the disallowance under the provision of Section 40(a)(ii) which merely provides for disallowance of taxes applicable on profits and gains earned by the assessee. Thus, disallowance of TDS made by the Assessing Officer ostensibly is not sustainable. Accordingly, we hold that no disallowance on interest can be made u/s.40(a)(ii). Hence, ground no.5 is allowed.