M/S. SHOWA INDIA PVT. LTD.,FARIDABAD vs. DCIT, NEW DELHI

Date of hearing: 17.06.2016 Date of Pronouncement: 30.06.2016 ORDER

PER BEENA A. PILLAI, JM:

“1. That on the facts and circumstances of the case and in law, the Learned Assessing Officer ("Ld. AO") has erred in determining total loss amounting to Rs.4,09,77,489/- as against the returned loss amounting to Rs.39,34,19,281/-.

2 I.T.A.No.166/Del/2013 under Section 92CA(3) of the Income Tax Act, 1961 ("the Act") by the Learned Transfer Pricing Officer ("Ld TPO"). 2.1. That on the facts and circumstances of the case and in law, both the Ld. TPO and Hon'ble Dispute Resolution Panel ("DRP") have failed in appreciating that the said technical services were actually rendered by the parent company under the Technical Services Contract. 2.2. That on the facts of the case, the Ld. TPO has erred in computing Arm's Length Price. ("ALP") of Rs.6,506,275/- being cost of airline tickets as against actual cost of Rs. 6,646,298/-. 2.3. That on the facts of the case and in law, Ld. TPO/Hon'ble DRP has erred in making a determination of the transaction entered into with M/s. Koshin Trading Co. Ltd., an unrelated party on an Arm's Length principle, disregarding that the same is not an Associated Enterprise of the Appellant in accordance with Section 92A of the Act. . 2.4. That on the facts of the case the Ld. AO has grossly erred in making an addition amounting to Rs.12,829,790/- twice, the same already being included in the aforesaid additions amounting to Rs.23,664,501/-.

3. That on the facts of the case the Ld. AO has grossly erred in making an addition of Rs.6,69,05,725/- in respect of undisclosed sales. 3.1. That on the facts and circumstances of the case the Ld. AO/ Hon'ble DRP has failed to fully appreciate the particulars of the evidentiary documentation furnished by the Appellant to explain the discrepancies between the sales record procured by the Ld. AO from M/s. Maruti Udyog Limited and the sales figures returned by the Appellant.

3 I.T.A.No.166/Del/2013

4. That on the facts and circumstances of the case the Ld. Assessing Officer/ Hon'ble DRP has erred in its finding that the list of sundry creditors as furnished by the Appellant and in making an addition amounting to Rs.8,760,176/-. 4.1. That on the facts and circumstances of the case and in law, the Ld. AO violating the principle of natural justice did not provide an adequate opportunity of being heard to the appellant and thereby made an addition merely on the basis that few correspondences sent under Section 133(6) of the Act remained unanswered.

5. That on the facts and circumstances of the case and in law the Ld. AO is not justified in disallowing the gardening expenditure of Rs.28,78,262/- claimed by the Appellant under the head 'Repair and Maintenance - Building'. 6. That on the facts and circumstances of the case the Ld. AO/ Hon'ble DRP has failed to consider the submissions furnished by the Appellant in relation to warranty expenses and has made a disallowance amounting to Rs.50,75,794/-. 7. That on the facts and circumstances of the case Ld. AO has erred in disallowing the cash discount expenses amounting to Rs.26,50,994/- paid to M/s. Maruti Udyog Limited and has disregarded the related documentary evidence. 8. That on the facts and circumstances of the case the Ld. AO/ Hon'ble DRP has failed to appreciate the details and particulars furnished by the Appellant to substantiate provision for ascertained liabilities and has made a disallowance amounting to Rs.22,96,76,550/-.

4 I.T.A.No.166/Del/2013

9. That on facts and circumstances of the case and in law, the Ld. AO erred in initiating penalty proceedings under Section 271(l)(c) of the Act.

10. That on the facts and circumstances of the case and in law Ld. AO has erred in not allowing brought forward losses to be carried forward. 11. That the order passed by Ld. AO/Ld. TPO/ Hon'ble DRP is bad in law and void ab-initio. All of the above grounds of appeal

are without prejudice and notwithstanding each other. The Appellant craves leave to add, amend, vary, omit or substitute any of the aforesaid grounds of appeal at any time before or at the time of hearing of the appeal. Any consequential relief, to which the Appellant may be entitled under the law in pursuance of the aforesaid grounds of appeal, or otherwise, thus may be granted.”

2. The brief facts that arise from the order of the authorities below are as under:

2.1 The assessee is engaged in manufacture of electric power steering for four wheelers and also has a non- exclusive right and license for the know-how and intellectual property rights in respect of designs, drawings, standards, specifications and all other technical data relating to various products. The assessee filed its return of income on 30.09.2008, declaring a loss of Rs.39,34,19,281/- for the year under consideration. Since the assessee had undertaken international transactions with its associated enterprises (AE), a reference was made

5 I.T.A.No.166/Del/2013 by the assessing officer to the transfer pricing officer II (2), New Delhi (TPO).

2.2 During the course of the proceedings it was observed by the Ld. TPO that the assessee has made a payment of Rs.34,13,665/-as royalty for the technical know-how, documentation charges amounting to ¥ 10 million per product model. The ld.TPO noted that, as per Article 7 of the Technical Collaboration Contract, the AE was to provide technical assistance, including training and technical personnel. The assessee besides the royalty has made the following payments to its AE’s: i) testing charges- Rs.8,79,103/- ii) training charges- Rs. 6,90,153/- 2.3 The assessee had undertaken various international transactions which are as under:

S.No. Nature of International Method Value of Inter transaction selected -national tran -saction (INR) 1 Import of raw material and 526,502,967 components 2 Import of capital goods 53,431,620 3 Import of finished goods 39,559,387 4 Export of raw material and 4,335,493 component 5 Payment under technical TNMM collaboration agreement Technical support charges 30,170,776 Royalty 3,413,665 Testing charges 879,103 Training charges 690,153 6 Professional services 614,410 7 Export of finished goods 319,789 8 Payment of interest on borrowed CPM 8,210,336

6 I.T.A.No.166/Del/2013 capital 2.4 As per form No.3CEB filed by the assessee along with its return, the assessee made a payment of Rs.3,01,70,776/-as technical support charges to its AE’s. Subsequently it was stated by the assessee that there was a mistake in the form No.3CEB and the total amount of Rs.3,01,70,776/-included an amount of Rs.48,81,310/- paid to unrelated party for supply of capital goods. The Ld. TPO rejected the plea of the assessee and treated the whole of the amount of Rs.3,01,70,776/-as International transaction.

2.5 The ld. TPO concluded that no independent party would have made such payments when it has already made payment of royalty, training charges and testing charges. As per the Ld. TPO, the AE was obliged to provide technical support services under the technical collaboration contract with the assessee and no further charges were required to be paid for such services. The Ld. TPO held that these services are incidental to the subsidiary being a member of a large group. The Ld.TPO referred to OECD guidelines with regard to intragroup services and calculated the arm’s length price (ALP) at nil. Out of the total amount of Rs.3,01,70,776/- the ld.TPO allowed the deduction in respect of air tickets spent by the 7 I.T.A.No.166/Del/2013 assessee on account of technical support service fee, amounting to Rs.65,6,275/-. The ld.TPO considered the transaction for royalty and the transaction for technical support service fees separately.

2.6 The Ld. AO made certain additions in draft assessment order in respect of corporate taxes which are as under:

I) addition made in respect of undisclosed sales to Maruti Udyog Ltd Rs.6,69,05,725/- II) sundry creditors Rs. 87,60,176/- III) Gardening expenses Rs. 28,78,262/- IV) warranty expenses Rs. 50,75,794/- V) cash discount paid to M/s Maruti Udyog Ltd Rs. 26,50,994/- VI) provision for reliability Rs. 22,96,76,550/- VII) carry forward losses of previous year Rs.1,07,89,918/-

Transfer pricing issue:

4. The DRP primarily examined 2 issues being;

i) whether the transaction related to payment of technical support charges, should be evaluated on a stand-alone basis or by aggregating this transaction with the other transactions of manufacturing segment of the assessee and 8 I.T.A.No.166/Del/2013 ii) what should be the arm’s length price of the purported services.

4.1 In respect of the 1st issue the DRP held as under:

“6.1 We have carefully gone through the provisions of the Act, the OECD guidelines on this issue as well as the various judgment cited by the TPO in her order. Here, the payment of technical support charges is a separately identifiable transaction and there is no difficulty in evaluating the transaction separately. We do not think that there is any dispute, as far as possible, income arising from each international transaction should be determined separately unless it is not possible to do so because the transaction is closely linked with each other. We are in complete agreement with the approach of the TPO that this transaction should be evaluated separately to ascertain the effect of the transaction on the income of the assessee. Therefore, the contention of the assessee, i.e., the payment of management fee should be examined by aggregating it with other transactions of manufacturing segment, is rejected by the panel.

4.2 In respect of the 2nd issue the DRP held as under:

“6.4 We have carefully gone through the submissions of the assessee and the TPO's order on this issue. We have also consulted OECD guidelines on this issue. According to the guidelines, such services are in the nature of Shareholder services. These are services that the AE provides to its subsidiaries to protect the formers inherent interest in the latter's business. The OECD guidelines recognize the fact the recipient of such services need not make a separate payment on 9 I.T.A.No.166/Del/2013 this account. Para7.6 of OECD guidelines deals with 'shareholder services'. "7.5 There are two issues in the analysis of transfer pricing for intra-group services. One issue is whether intra-group services have in fact been provided. The other issue is what the intra- group charge for such services for tax purposes should be in accordance with the arm's length principle. 7.6 Under the arm length principle, the question whether an intra-group services has been rendered when an activity is performed for one or more group members by another group member should depend on whether the activity provides a respective group member with economic or commercial value to enhance its commercial position. This can be determined by considering whether an independent enterprise in comparable circumstances would have been willing to pay for the activity if performed for it by an independent enterprise or would have performed the activity in-house for itself. If the activity is not one for which the independent enterprise would have been willing to pay or perform for itself, the activity ordinarily should not be considered as an intra-group service under the arm's length principle. " 6.5 After going through the submissions of the assessee, the panel is of the view that it was obligatory on the part of the parent company to provide technical support services under the technical collaboration contract and the assessee would not have availed such services had it been an independent enterprise. We are, therefore, an agreement with the conclusion drawn by the TPO that even if the services were rendered to the assessee, they were in the nature of duplicate services and independent enterprise would not have paid any separate consideration for such services. Accordingly,

10 I.T.A.No.166/Del/2013 panel upholds the action of TPO, i.e., the ALP of such services was Rs. 65,06,275/- and the objection raised by the assessee is rejected.” 4.3 In respect of exclusion of the payment made to third-party amounting to Rs.48,84,310/-, the DRP observed that the assessee has moved an application under section 154 of the act before the ld. AO to exclude it from the value of International transaction. The DRP directed to ld.AO/TPO to dispose of the application of the assessee and to exclude such third party payments from the value of international transaction after verification.

4.4 Regarding the assessee’s argument that only depreciation on the amount capitalised to the fixed assets should be disallowed, was agreed by the DRP. The DRP thus held as under:

“6.7 Regarding the other argument that, only the depreciation on the amount capitalized to fixed asset should be disallowed, we are in agreement with the contention of the assessee. The TPO is directed to reduce the amount capitalized to fixed assets from the 'Block of assets' and re-compute the depreciation. The balance amount, i.e., Rs. 1,28,29,790 [3,01,70,776/- (2,22,25,296- 48,84,310)] shall be added to the income of the assessee.” 4.5 Before us the Ld.AR submitted as under: • that the assessee is entitled to receive technical assistance in the process of manufacturing power steering and also has a nonexclusive right and license for the know-how and intellectual property

11 I.T.A.No.166/Del/2013 rights referred to in the agreement dated 16.10.2006, entered into by the assessee with its AE; • that Article 7 of the agreement provides that the assessee shall receive technical training and technical assistance from the AE and the AE shall cause the technicians to be dispatched for the assistance of the assessee. It is in lieu of these services, that the assessee has paid Rs.3,01,70,776/-to its AE. • that the revenue authorities cannot venture into the question of commercial expediency, as it is the businessman who takes the decision depending upon the peculiar nature of the business. • Ld.AR relied upon the following decisions to substantiate his submissions which are as below: a) Narringdas Sumjmal properties vs. CIT reported in 127 ITR 221 b) CIT vs. EKL Appliances Ltd reported in (2012) 209 taxman 200 (Delhi) c) Reebok India company VS ACIT in d) Dresser-Rand India private limited vs. ACIT, ITA No. 8753/Mum/2010 e) • it has been submitted by the Ld. A.R. that the services availed from the AE by assessee has not been availed from any independent parties. Further he submitted that the AE is not rendering

12 I.T.A.No.166/Del/2013 such services to any other AE/independent parties. • Ld.AR submitted that the transaction for royalty and technical support service fees cannot be considered distinct. The Ld. AR relies upon the decision of this tribunal in the case of M/s hero Moto Corp Ltd versus ACIT in ITA No. 5130/Del/2010. • The Ld. A R submitted that the transactions entered into by the assessee with its AE are closely linked with each other and has to be analysed by way of combined transaction approach

a) M/s Gem Plus India Private Limited versus ACIT reported in 2010-TIOL-55-ITAT-BANG-TP;

13 I.T.A.No.166/Del/2013 b) Cranes software International Ltd vs. DCIT reported in (2014) 52 taxman.com 19 (Bangalore-Trib.) c) M/s Gillette India Ltd versus ACIT reported in 2015- TIOL-340-ITAT-Jaipur-TP d) Bombardier Transportation India private limited versus DCIT in (order dated 4.11.2015)

6.1 The principal activity of the assessee is to manufacture the automated product being power steering. On perusal of the Technical Collaboration Contract and Technical Personnel Dispatch Agreements dated 16/10/ 2006 (placed at 31 to 58 of volume I of paper book), it is observed that the assessee depends upon the technical support received from the technical personnel sent by the AE. It is also clear that, had the assessee not entered into a technical collaboration agreement with its AE, it would not have been able to make any sales whatsoever using the technology. These agreements are approved by the Ministry of Commerce, Department of Industrial Policy and Promotion, including the payment of royalty and lump sum technical know-how fee (certificate placed at page 65 to 71 of paper book volume 1). Article 5 of the Technical Collaboration Contract provides that, technical

14 I.T.A.No.166/Del/2013 assistance would be provided by the AE, which shall include, dispatch and training of technical personnel. The very existence of the assessee’s business depended upon the Technical Collaboration Contract and the technical Personnel Dispatch Agreements.

6.2 Further the transfer pricing study (placed at page 164 of the paper book volume 1, in para 4.7) explains the nature and terms of the international transaction entered into by the assessee with its AE. The assessee as per the TP steady is dependent upon its AE, even for carrying out research and development activities and providing manufacturing technology. Further at pages 253 to 281 of the paper book narrates the details of the technical fees paid for the year under consideration. Whenever international transaction of such a nature is undertaken, it is a combination of technical know-how, royalty and technical assistance through deputation of employees. Merely by importing machinery or designs and drawings, it cannot be said that the assessee would be competent to make use of such machinery. No doubt that the technical know-how of the able personnel is needed under normal circumstances.

6.3 It is noticed that the TPO in para 4 of his order, has recorded that the assessee has made further submissions by letter dated 07/10/2011. Along with the said letter the assessee has furnished invoices that has been raised. The Ld. TPO then observed as under:

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“In the arena in which the assessee is functioning, it will be difficult to imagine a successful business entity in the global environment without receipt of the services which carries huge intrinsic and creative value. It is only a particular business expert who can evaluate the true intrinsic and creative value of such services. In view of these facts it shall be just to avoid any guesswork to evaluate or judge value of these services in isolation or individually.” 6.5 The Hon’ble jurisdictional High Court in the case of 16 I.T.A.No.166/Del/2013 Hive Communications (P.) Ltd., vs. CIT reported in (2011) 201 Taxman 99 has held that the legitimate business needs of the company must be charged from the viewpoint of the company itself and must be viewed from the point of view of a prudent businessman. Hon’ble court has observed as under:

“It is not for the Assessing Officer to dictate what the business needs of the company should be an re is only to judge the legitimacy of the business needs of the company from the point of view of a prudent businessman. The benefit derived or accruing to the company must also be considered from the angle of a prudent businessman. The term "benefit" to a company in relation to its business, it must be remembered, has a very wide connotation and may not necessarily be capable of being accurately measured in terms of pound, shillings and pence in all cases. Both these aspects have to be considered judiciously, dispassionately without any bias of any kind from the view-point of a reasonable and honest person in business.” 6.6 So far as the segregation of international transaction is concerned, it is assumed that the various international transaction were entered into with respect to the final commercial venture undertaken by the assessee, be it the manufacture and the sale of the goods or provision of services by it. The assessee has priced the royalty and the technical services provided by the AE separately, and they were all provided under 2 different agreements which constitutes an International Transaction. Ld. TPO on one breath does not doubt the existence of services being rendered by the personnel sent by the AE, while on the 17 I.T.A.No.166/Del/2013 next breath he has denied that technical support fees paid by the assessee to its AE, on the ground that no independent enterprise would pay such expenses under similar circumstances.

6.7 In our view, neither this can be a ground for rejecting the claim for deduction nor it can be a ground for assuming that the technical service fees paid by the assessee to the AE is not at arm’s-length. The documents/evidence submitted by the assessee wide letter dated 07/10/2011 has not been analysed by the TPO. It cannot by any stretch of imagination be held that the evidences are irrelevant. For example the assessee has produced all the invoices and the proof of payments in respect of the services rendered by the employees of the AE. On one hand commercial expediency is recognised but on the other hand it has been held that the transactions were really not for the benefit of the assessee.

6.8 We are therefore inclined to set aside this issue to the Ld. TPO for determination the ALP in accordance with the ratio laid down by Hon’ble jurisdictional High Court in the case of EKL Appliances Ltd reported at 209 Taxman.com 200, wherein it has been held as under:

“19. There is no reason why the OECD guidelines should not be taken as a valid input in the present case in judging the action of the TPD. In fact) the CIT (Appeals) has referred to and applied them and his decision has been affirmed by the Tribunal. These guidelines) in a different form) have been recognized

18 I.T.A.No.166/Del/2013 in the tax jurisprudence of our country earlier. It has been held by our courts that it is not for the revenue authorities to dictate to the assessee as to how he should conduct his business and it is not for them to tell the assessee as to what expenditure the assessee can incur.

6.10 Accordingly, grounds No.2.1 and 2.2 of assessee’s appeal stand allowed for statistical purposes.

6.11 In respect of ground No. 2.3, the assessee had admitted an inadvertent mistake, that has crept in form 3CEB under the head technical support service fee paid to AE, against which the assessee had filed a rectification application dated 30.10.2012 before the Ld.AO/TPO. It is further observed that along with this application the assessee has also filed confirmation of the AE the parent

19 I.T.A.No.166/Del/2013 company M/s. Showa Corporation, Japan (26 to 28 of the supplementary paper book), which suggests that M/s. Koshin Trading Co. Ltd., is not an AE of the parent company in Japan. The DRP had directed the Ld.AO/TPO to deal with the rectification application filed by the assessee and to exclude the same from the international transaction subject to verification. However the Ld. AO has not complied with the directions of the DRP. Accordingly the ground is set aside to the Ld. AO/TPO to exclude the payments made by the assessee to unrelated party from the technical support fee paid by the assessee to its AE after verification as directed by the DRP.

6.12 In respect of ground No. 2.4 raised by the assessee, the DRP had directed the ld.AO to reduce the amount capitalised to fixed assets from the block of assets. The relevant para of the DRP has been extracted in para 4.4 above. It is observed that the Ld. AO has not followed the directions of the DRP. Accordingly this ground is set aside to Ld. TPO/AO to do the working as per the DRP direction.

7.1 The ld. AO noticed that assessee had made sales amounting to Rs.50,56,99,152/- to Maruti Udyog Ltd. The AO noticed that as per the assessee's submissions, it had made sales amounting to Rs.50,56,99,152/- to 20 I.T.A.No.166/Del/2013 Maruti Udyog Ltd. On the basis of information received by the AO from Maruti Udyog-Ltd, U/S 133(6) that the assessee had made sales of Rs.75,04,70,614/-to Maruti Udyog Ltd., the AO asked assessee to show cause as to why its sales should not be increased by an amount of Rs.24,47,71,462/- and added back to its income. In reply dated 26.12.2011, the assessee submitted before the AO that the figure of Rs.75,04,70,614/- shown by Maruti Udyog Ltd. did not entirely represent the turnover and also included amounts on account of VAT, excise duty, turnover of last year etc. whereas the sales shown by the assessee to Maruti Udyog Ltd. were net of such amounts, Apart from this, there were some clerical mistakes.

7.2 The ld.AR submitted that reconciliation of the turnover with the working of Maruti Udyog Ltd as provided by them under 133 (6) of the Income tax Act has been calculated and placed at page 301 of the paper book volume II, which is as under:

Particualrs Amount Rs. Amount Rs. Sales as per Maruti Ydyog Ltd. (MUL) 750,470,615 Add: Sales not considered by you for Gurgaon unit of MUL 1,634,110 752,104,725 Less: Amount excess taken being the amount of opening balances of each qtr wrongly considered as turnover by you (detail as below) 66,135,920 Less amount of price decrease of Rs.22224454 wrongly taken as price increase 44,448,908 Less: Excise duty 88,084,014 Less: Sales Tax 23,353,507 Less: amount of turnover for 2006-

21 I.T.A.No.166/Del/2013 07 wrongly added to current year sales 2,391,133 Less: amount of price decrease taken twice by you and already rectified as above 22,224,454 246,637,936 Turnover as per your working 505,466,789 Turnover as per the assessee 505,699,152 Rejection etc. not acknowledged by the assessee as on 31.03.08 (232,363) Detail of opening balances of quarterly differences: Summary Qtr.4 57,286,036.11 Qtr.3 3,597,941.00 Qtr.2 5,251,942.89 Qtr.1 - Total 66,135,920.00 7.3 The ld.AR submitted that the AO has accepted some of the items of the reconciliation. However he held that the reconciliation filed by the assessee in respect of excise duty, sales tax, amount of price decrease wrongly taken as price increase was not supported with any evidence. The Ld. AR has submitted that the assessee had filed additional evidences in support of the same which was sent to the assessing officer for remand report. The relevant portion of the remand report had been reproduced at para 2.3 of the DRP order which is as under:

“2.3 In the remand report the AO after verification has stated that excise duty of Rs.8,80,84,014/- has been verified from the records and the same has been paid. He also stated that the sale of Rs.2,33,53,507/- is also verifiable from the sale tax assessment order and, therefore, the claim of the assessee is in order. In respect of the other items of reconciliation as given in 22 I.T.A.No.166/Del/2013 the above chart the AO has not accepted the submissions made by the assessee. He has submitted that the price decrease has been taken as per the books of Maruti Udyog Ltd., wherein an amount of Rs.2,22,24,454/- has been shown as debit amount in the accounts of M/s Showa India Pvt. Ltd. Regarding the additional price decrease effect of Rs. 4,44,48,908/- it seems it is the result of the double effect of the price decrease. However, the mechanism of price decrease is not transparent, as there is no specific clause in the agreement in this regard entered between M/s Maruti Udyog Ltd. and the assessee. Miscellaneous rejections of Rs.2,32,363/- are not verifiable neither from the details given by the assessee during the course of assessment proceeding nor from the submissions given before the Dispute Resolution Panel. The assessee did not submit the required details during the proceedings along with backup for the reconciliation statement.” 7.4 The ld.AR submitted that the DRP/TPO/AO, did not appreciate the details of the price decrease filed by the assessee and the Ledger account of Maruti Udyog Ltd(placed at pages 302 to 331 of paper book volume II), showing the sales for the year under consideration. The DRP gave relief to any extent of Rs.11,14,37,512/-.

7.5 On the contrary the Ld. DR relied upon the order of the DRP .

7.6 We have perused the submissions made by both the parties and the orders passed by the authorities below. It is observed that the authorities below have not considered the evidence filed by the assessee in the right perspective the calculation of reconciliation submitted by the assessee at page 301 of the paper book very clearly shows the 23 I.T.A.No.166/Del/2013 difference in the turnover due to various statutory payments that the assessee has collected from M/s Maruti Udyog Ltd. The statutory payments as submitted by the assessee has been paid to the government account which can be verified by the authorities very easily.

7.7 We are, therefore, inclined to set aside this issue to the file of the Ld. AO for verification of the details filed by the assessee and to allow the claim of the assessee as per law. Accordingly this ground filed by the assessee stands allowed for statistical purposes.

Name Description Amount Rs. Vee Gee Industrial Enterprises Purchase 22,95,040/- Progressive Tools and components Purchase 64,65,136/- Pvt. Ltd. Progressive Tools and components Creditor 20,52,430/- Pvt. Ltd. Total 1,08,12,606/- 8.2 The learning AO, therefore, made an addition of Rs.1,80,12,606/-.

24 I.T.A.No.166/Del/2013 8.3 The DRP observed as under:

“3.2 We have considered the matter. Since the assessee could not file confirmations from the above mentioned parties and they also did not respond to the notices u/s 133(6) issued by the AO, mere filing of copies of their accounts and copies of purchase bills does not prove the genuineness of purchases from these parties. Therefore, the AO's proposed action is upheld. However, it is noticed that in respect of M/s Progressive Tools and .Component Pvt. Ltd. the AO has added Rs.64,65,136/- being purchases from this party and also·Rs.20,52,430/-" on account of unconfirmed credit balance on 31.03.2008 of this party. Since the credit balance on 31.03.2008 of this party is after taking into account purchases of Rs.64,65,136/- from this party, there is a double addition to the extent of Rs.20,52,430/- as addition of Rs.64,65,136/- is being upheld in respect of purchases from this party. Thus out of proposed addition of Rs.l,08,12,606/-, addition of the extent of Rs.87,60,I 76/- (1,08,12,606 - 20,52,430) is upheld.”

8.4 The Ld.AR submitted that the transactions of purchase from these parties have been made in the normal course of the business by the assessee, which are duly supported by bills for purchases and that the payments have been made through banking channels by the assessee. He submitted that these evidences have been filed which were remanded to the AO. However the Ld. AO has not considered the same.

8.5 On the contrary the Ld. DR relied upon the order passed by the authorities below and the remand report

25 I.T.A.No.166/Del/2013 8.6 We have perused the submissions made by both the parties as well as the orders passed by the authorities below. It is observed by the DRP that the AO has added certain purchases from these parties. Further additions have been made on account of confirmed credit balances from the same parties. It is also observed that the details/evidences filed by the assessee (pages 650 to 1093 of paper book volume III) has not been verified and considered by the Ld. AO.

8.7 We are therefore inclined to set aside the issue to the files of the Ld. AO for considering the evidences filed by the assessee and to allow the claim as per law after proper verification. Accordingly this ground reached by the assessee stands statistically allowed.

9.2 The ld. DRP held as under:

“5.2 It was submitted by the assessee that gardening expenses were incurred at the factory premises to maintain flora and fauna of the factory complex. It was submitted that these expenses were incurred

26 I.T.A.No.166/Del/2013 wholly and exclusively for the purpose of the assessee's business and the ratio of the decision of Rajasthan High Court cited by the AO Was not applicable to the facts of the assessee’s case. In the remand report dated 20.09.2012, the Assessing Officer submitted that the assess'ee has produced only bills and vouchers to prove this expenditure. The assessee did not give any details about the 'location of the garden or the statutory requirements of maintenance of the garden. On going through the bills, it was also observed that the expenditure pertains to purchase of plants and hosepipes. Therefore, the AO's contention was that the addition was rightly made.” 9.3 The ld.AR submitted that the gardening expenses were incurred at the factory premises to maintain flora and fauna of the factory complex. It is submitted by the Ld.AR that these expenses are been incurred wholly and exclusively for the purposes of assessee’s business.

9.4 On the contrary the Ld. DR supported the order of the authorities below.

9.5 We have perused the submissions made by both the parties as well as the orders passed by the authorities below. It is observed that the ld.AO has not verified that details/evidences filed by the assessee and also has not verified as to whether there existed any garden within the factory premises of the assessee.

9.6 We accordingly set aside this issue to the ld.AO for verification of the facts and to consider the claim of the assessee within the parameters of law. Accordingly this ground filed by the assessee stands statistically allowed.

27 I.T.A.No.166/Del/2013

10.2 The DRP confirmed the addition on the ground that the assessee did not give any reliable data/details about making the estimate of the warranty expenses.

10.3 Before us the Ld.AR submitted that assessee sells electronic power steering for 4 wheelers mainly to Maruti Udyog Ltd. At the time of sale the assessee provides a standard warranty, whereby in the event of failure or steering becomes defective, the company undertakes to rectify or replace the steering free of cost.

10.4 The ld.AR submitted that provision for warranty was made at the rate of 1% of the turnover. He relied upon the decision of Hon’ble Supreme Court in the case of M/s. Rotork Controls India Pvt. Ltd., vs. CIT reported in (2009) 180 Taxman 422 (SC). He further submitted that CIT (A)-9 wide order dated 28/05/2014, for assessment year 2009- 10 has allowed the claim of the assessee by holding as under:

“8.3. In the appellant's case, the provision of warranty expenses is regularly being made by it. As held by 28 I.T.A.No.166/Del/2013 the Hon'ble court, the warranty estimates need reassessment at the yearend every year. As one reaches close to the end of the warranty period, the probability that the warranty expenses will be incurred is considerably reduced and that should be reflected in the estimation amount. The AO's observation that it was reduced to 0.50% during the year from 0.75% in earlier years shows application of mind on the part of the appellant while making such provision. Moreover, it was claimed by the appellant that during F.Y. 2011-12, the excess provision for warranty made in the prior years amounting to Rs.1,44,49,381/- was reversed considering that no claim was made during the warranty tenure of the products for earlier years and no adjustment for such reversal was made in the computation of income for A.Y.2012-13. These facts show that the provision of warranty expenses has been made on the basis of scientific estimation keeping in mind the anticipated liability likely to arise in future. The A.O. has not pointed out any discrepancy in the supporting data produced by the appellant for making such estimation. The liability is not purely a contingent liability but a determined liability with some degree of estimation involved in it. Therefore, the same is an allowable expense U/S 37 of the Act. The A.O's action is disallowing the warranty expenses of Rs.1,34,21,722/- is not justified. The addition made by the AO on account of such disallowance is directed to be deleted. Ground No.3 of appeal is allowed.” 10.5 We have perused the submissions made by both the parties as well as the orders passed by the authorities below. It is observed that the assessee has produced warranty analysis and Ledger account for warranty expenses for the year under consideration at page 378 of the paper book volume II.

29 I.T.A.No.166/Del/2013 10.5 We accordingly set aside the issue to the file of the Ld.AO for verification of the details/evidences filed by the assessee and to allow the claim following the ratio laid down by the Hon’ble Supreme Court in the case of M/s Rotork Controls India Pvt. Ltd. (supra). Accordingly this ground of the assessee stands statistically allowed.

11.2 The DRP held as under:

“7.3 We have considered the submissions of the assessee and have perused the material on record. From perusal of page no. 157 to 163 of the paper book relating to this ground of appeal, .it is seen that no such confirmation from Maruti has been furnished. It has been submitted that cash discount is given where payment is received within 30 days of the receipt of the material from the company. The assessee could not produce any supporting documents depicting the cash discount given to M/s Maruti Udhyog Ltd. except the E-mail which says, as a policy matter cash discount at 12.25% would be deducted in case of early payments. The assessee has failed to get a confirmatory letter or copy of the ledger account from M/s Maruti Udyog Ltd., who is the sole purchaser. In the absence of any material to prove that indeed cash discounts were given, we decline to interfere in the order of the Assessing Officer.”

30 I.T.A.No.166/Del/2013 11.3 The Ld. A.R. submitted that cash discount is given when the payment is received within 30 days of the receipt of the material from Maruti Udyog Ltd. The Ld. A.R. submitted that assessee had submitted emails between the assessee and Maruti Udyog Ltd showing payments made after reduction of cash discount at 12.25% (which was the prime lending rate of SBI during the year). The Ld. A.R. submitted that this was an incentive given to the parties for ensuring early payment of sale proceeds and the same is allowable under section 37 of the act as it is a standard business practice in the trade and allowed to the customer out of commercial expediency.

12.3 On the contrary the Ld. D.R. submitted that the assessee had not disclosed the details of the bill dates and description of the goods supplied. He thus submitted that the disallowance made by the authorities below should not be interfered with.

12.4 We have perused the submissions made by both the parties as well as the orders passed by the authorities below. It is observed that a similar issue had arisen for the subsequent year before the Ld. CIT (A)IX. The Ld. CIT (A) wide order dated 28/05/2014 had allowed the claim of the assessee. However we observed from the records filed before us that the authorities below has not properly verified the quantum which is available from the details filed by the assessee in the paper book. We thus set aside

31 I.T.A.No.166/Del/2013 this issue to the ld.AO for verification of the details/evidences filed by the assessee and to allow the claim within the parameters of law. Accordingly the grounds raised by the assessee stands statistically allowed.

13.2 The ld.DRP held as under:

“8.2. We have considered the matter. The details submitted by the assessee in the paper book and also in the compilation of additional evidences were examined. The audit fees payable to Ernst & Young has been shown at Rs.3 lacs whereas the invoice is for Rs.3,53,765/-. Similarly, the audit fee payable to S.R. Batliboi as per the details is not matching with the supporting documents filed as additional evidence. Similarly, expenses in respect of M/s Honda Express Logistics shown in the details are not verifiable from the additional evidences. Regarding stamp duty on land, the assessee did not give any reply during the course of assessment proceedings. However, on perusal of provision for liabilities in the balance sheet, it was noticed that provision for Rs.81,36,000/- was made for payment for stamp duty for the financial year 2007-08. However, the actual payment was made for Rs.71,19,000/- only and that too during the asstt. year 2010-11. The assessee did not file any reconciliation statement in this regard. Therefore, in the light of various

32 I.T.A.No.166/Del/2013 discrepancies in the details filed and the documentary evidence, the contention of the assessee cannot be accepted. Thus it is found that the details submitted by the assessee do not prima-facie lead to any decipherable inferences to accept the claim. Therefore, we decline to interfere in the order of the Assessing Officer in respect of this ground "Of objection.” 13.3 The ld.AR submitted that the provisions are in respect of unascertained liability for expenses provided on accrual basis or for accounts such as material in transit or registration fee on land which has no bearing on the income of the assessee. He submitted that the Ld. AO did not call for any further details and made the addition which was unwarranted for. The assessee therefore filed additional evidence before the DRP.

13.4 The Ld. A.R. submitted that had the ld.AO to call for further details all the evidences would have been filed before the assessment proceedings. He further submitted that these liabilities were discharged in the next financial year.

13.5 We have perused the submissions made by both the parties as well as the orders passed by the authorities below. It is observed that the ld.AO/TPO has not verified the correct factual position on the basis of the documents/evidences filed by the assessee. We therefore set aside the issue to the file of the Ld. AO for due verification of the facts and to allow the claim as per law. Accordingly this ground raised by the assessee stands allowed for statistical purposes

33 I.T.A.No.166/Del/2013

14.1 This ground raised by the assessee is premature in nature that does thus does not call for any adjudication. We accordingly dismiss this ground unanswered.

15.2 The DRP held as under:

“9.1. The Assessing Officer did not allow the set off of brought forward losses of Rs.1,07,89,918/- for the assessment year 2007-08 on the ground that the loss was not assessed and, therefore, not allowed to be carried forward. This is a factual issue and can be determined based on the returns filed and losses declared and determined in the earlier Assessment Years.” 15.3 The ld.AR submitted that under section 139, no losses allowed if return of loss has not been filed by the due date mentioned in section 139 (1). In the case of the assessee the return declaring the loss was duly filed on 14/11/2007 which was within the due date relevant for the assessment year 2007-08.

15.4 On the contrary the ld. DR relied upon the orders passed by the authorities below

34 I.T.A.No.166/Del/2013 15.5 We have perused the submissions made by both the parties as well as the orders passed by the authorities below. It is observed that the DRP has directed the Ld. AO to determine the losses based on the return filed by the assessee for the year 2007-08. The Ld. AO did not follow the directions of DRP.

15.6 We thus set aside the issue to the files of the Ld. AO to give effect to the directions of the DRP and to allow the claim as per law. Accordingly this ground raised by the assessee stands statistically allowed.

Order pronounced in the open court on 30th June, 2016.

Sd./- Sd./-