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Income Tax Appellate Tribunal, DELHI BENCH ‘I-2’, NEW DELHI
The appeal by the department and Cross Objection by the assessee for the assessment year 2004-05 are directed against the order dated 23.03.2012 and appeals by the department for the assessment years 2005-06 & 2006-07 are directed against the separate orders each dated 12.11.2011 of the ld. CIT(A)-XX, New Delhi.
Since the issues involved are common and the appeals were heard together so these are being disposed off by this consolidated order for the sake of convenience and brevity.
At the first instance we will take up appeal of the department in for the assessment year 2004-05. Following grounds have been raised in this appeal:
“1. "On the facts and in the circumstances of the case and in law, the Ld. CIT (A) erred in deleting the addition of Rs.77,90,000/- claimed as expenditure for provision of liability regarding exchange rate fluctuation arising in respect of sums payable to suppliers of raw material purchased by the assessee company.
3 & CO 323/Del/2012 ITA Nos. 258 & 259/Del/2013 Timex Watches Ltd. 1.1 On the facts and in the circumstances of the case and in law the learned C1T(A) failed to appreciate that this was a contingent liability and had not been ascertained and therefore, erred in allowing a relief of Rs.77,90.000/- on this account." 2. "On the facts and in the circumstances of the case and in law the learned CIT(A) erred in deleting the addition of Rs.8,25,000/- on account of advance written off without appreciating the fact that this was on account of amount fraudulently withdrawn by someone and the ratio of the case decision of M/s Badri Das Daga Vs. CIT (supra) squarely applicable to facts of the case." 3. ''On the facts and in the circumstances of the case the Ld. CIT(A) was not justified in taking OP/sales of Artfiled Group Ltd. for the period ending on 31.03.2004 at -6.92% of 1.41% as taken by the TPO." 3.1 "On the facts and in circumstances of the case the Ld. CIT(A) was not justified in directing the AO that the percentage of adjustment to international transaction should be in proportion to quantum of international transaction bears to the total turnover." 3.2 "On the facts and in circumstances of the case the Ld. CIT(A) was not justified in directing proportionate adjustment to the international 4 ITA No. 2769 & CO 323/Del/2012 ITA Nos. 258 & 259/Del/2013 Timex Watches Ltd. transaction as transactions other than international transaction are at arms' length. 4. "The appellant craves leave for reserving the right to amend, modify, alter add or forego any ground(s) of appeal at any time before or during the hearing of appeal."
Vide Ground Nos. 1 & 1.1, the grievance of the department relates to the deletion of addition of Rs.77,90,000/- made by the AO on account of provision of liability regarding exchange rate fluctuation.
Facts related to this issue in brief are that the assessee filed the return of income on 31.10.2004 declaring a loss of Rs.11,02,45,980/-. Later on, the case was selected for scrutiny. During the course of assessment proceedings, the AO noticed that the assessee had debited a sum of Rs.77,90,000/- towards loss on exchange rate for liability on account of exchange rate fluctuation payable to foreign parties in respect of raw material purchased from them. The AO asked the assessee to explain the allowability of this provision. The assessee submitted that it was importing watches raw material and components from various parties on which the price was agreed in foreign currency and that at the end of the financial year, the assessee revalued its 5 & CO 323/Del/2012 ITA Nos. 258 & 259/Del/2013 Timex Watches Ltd. outstanding towards overseas supplier in foreign currency balance according to the rate of the foreign currency and correspondingly the difference was debited to exchange fluctuation account in the profit and loss account, which was in accordance with the AS-11 issued by the Institute of Chartered Accountant of India and accordingly a net provision for the gain or loss due to exchange rate difference was provided in the books of accounts which was an ascertained provision and not a contingent liability. Therefore, it was an allowable expenditure. The reliance was placed on the following case laws: � Indag Rubber Ltd. Vs CIT 174 CTR 636 (Del) � Jain Tube Co. Ltd. Vs CIT 254 ITR 570 (Del) � Atlas Cycle Ind. Ltd. Vs CIT 270 ITR 108 (P & H) � CIT VS Paper Product Ltd. 271 ITR 472 (Del) � CIT Vs Oil India Co. Ltd. 137 ITR 156 (Cal) � CIT Vs International Combustion (I) Pvt. Ltd. 137 ITR (Cal) � CIT Vs ES Dempo & Co. Ltd. 206 ITR 293 (Bom) � State Bank of Travancore Vs CIT, Kerala 158 ITR 102 (SC) � Telemachanique & Control India Ltd. Vs CIT 60 ITD 483 (ITAT, Del) 6. The AO, however, did not find merit in the submissions of the assessee and made the addition of Rs.77,90,000/- by observing that the liability arose only at 6 ITA No. 2769 & CO 323/Del/2012 ITA Nos. 258 & 259/Del/2013 Timex Watches Ltd. the time of payment and that the provision made did not qualify for deduction because it must have actually arisen and incurred not merely anticipated as certain to occur in future. The reliance was placed on the following case laws:
� Tuticorin Alkalies Chemical and Fertilizer Vs CIT 227 ITR 172 (SC) � Indian Overseas Bank Vs CIT 151 ITR 446 (Mad) 7. Being aggrieved the assessee carried the matter to the ld. CIT(A) and submitted that the allowability of foreign exchange fluctuation loss was no more res-integra and the issue was covered by the judgment of the Hon’ble Apex Court in the case of CIT Vs Woodward Governor India P. Ltd. reported at 312 ITR 254. It was also stated that in the instant year there was foreign exchange fluctuation gain of Rs.1,02,82,000/- which had been brought to tax as income and thus there was an inconsistent stand of the AO.
The ld. CIT(A) after considering the submissions of the assessee deleted the addition by observing as under: “The appellant is following mercantile system of accounting consistently. The forex loss is due to the reinstatement of accounts at the end of the financial year as per the Accounting Standard 11 issued by the Institute of Chartered Accountants of 7 & CO 323/Del/2012 ITA Nos. 258 & 259/Del/2013 Timex Watches Ltd. India. The appellant imports watches, raw materials and components from various parties from abroad on which the payment is in foreign currency. At the end of the year, the appellant revalues its outstanding balances. The underlying liability was on account of revenue transaction, income/loss on account of settlement of creditors/debtors. Therefore, the forex loss also takes the colour of revenue loss. The issue has been settled by the judgment of the Hon’ble Supreme Court in the case of Woodward Governor (2009) 312 ITR 254 (SC). The case of the assessee squarely falls within the ambit of the decision of the Hon’ble Supreme Court. In view of this, the AO is directed to delete the addition made in this regard.”
Now the department is in appeal. The ld. DR strongly supported the order of the AO.
In his rival submissions the ld. Counsel for the assessee reiterated the submission made before the authorities below and further submitted that the issue is squarely covered in favour of the assessee by the earlier order by the ITAT Delhi Bench in for the assessment year 1998-99 vide order dated 09.12.2005 in assessee’s own case. It was also submitted that the department has accepted the claim of the assessee for the assessment years 2000-01, 8 ITA No. 2769 & CO 323/Del/2012 ITA Nos. 258 & 259/Del/2013 Timex Watches Ltd. 2002-03 and 2005-06. Therefore, on the principle of consistency also the disallowance made by the AO was not justified. The reliance was placed on the following case laws: � CIT Vs Excel Industries Ltd. 358 ITR 295 (SC) � Radha Saomi Satsang Vs CIT 193 ITR 321 (SC) � CIT Vs J. K. Charitable Trust 308 ITR 161 (SC) 11. We have considered the submissions of both the parties and carefully gone through the material available on the record. It is noticed that an identical issue has been decided by the Hon’ble Apex Court in the case of CIT Vs Woodward Governor India P. Ltd. (supra) wherein it has been held as under: “Loss” suffered by the assessee on account of fluctuation in the rate of foreign exchange as on the date of the balance-sheet is an item of expenditure under section 37(1) of the Income-tax Act, 1961.” 12. It is also noticed that an identical issue having similar facts was a subject matter of the departmental appeal in assessee’s own case for the assessment year 1998-99 in ITA No. 3561/Del/2003 wherein vide order dated 09.12.2005 the relevant findings have been given as under:
9 & CO 323/Del/2012 ITA Nos. 258 & 259/Del/2013 Timex Watches Ltd.
The ground No. 4 of the department is related to the loss of Rs.16,25,000/- due to exchange rates fluctuations. Assessing Officer observed that the said amount was debited to profit and loss account on account of fluctuation and made the addition. But CIT(A) has deleted the said amount after examining the bank certificate as well as the statement of loss of foreign exchange."
During the course of argument Ld. DR supported the order of the Assessing Officer. On the other hand, Ld. AR relied on the ratio laid down by the special Bench ITAT in the case of ONGC Vs. DCIT, 83 ITD 151 Delhi where it was held that such liability is not notional but accrued. It was also submitted by the Ld. AR that in the immediately succeeding year, while valuing unpaid liability in the year on the exchange rate prevailing at that date a gain of Rs. 43 lakhs accrued to the assessee and the same was offered to tax and actually taxed by the department.
16. By considering the totality of the facts and circumstances of the case we agree with the order of the CIT(A) for the reason that the liability was incurred on account of raw material components etc. and hence it was revenue loss. Since the additional liability had arisen during the current year, the loss incurred by the assessee was "fate accompli'"' and not .a notional one so the same is allowable as per the ratio laid down in the case of ONGC vs. Dy. CIT, 83 ITD 151 (ITAT-Sp. Bench) Delhi. Hence, the order of the CIT(A) on this issue is upheld.”
10 & CO 323/Del/2012 ITA Nos. 258 & 259/Del/2013 Timex Watches Ltd. 13. So, respectfully following the aforesaid referred to order, we do not see any merit in this ground of the departmental appeal.
14. The next issue vide Ground No. 2 relates to the deletion of addition of Rs.8,25,000/- made by the AO on account of advance written off.
15. The facts related to this issue in brief are that the AO during the course of assessment proceedings noticed that the assessee had written off a sum of Rs.8,25,000/- towards the amount fraudulently withdrawn by someone and subsequently investigations by the police and assessees own efforts, could not yield any result. According to the AO the aforesaid fact remained unsubstantiated and was found to be of capital in nature. He, therefore, made the addition of Rs.8,25,000/-.
Being aggrieved the assessee carried the matter to the ld. CIT(A) and submitted that the deduction claimed represented business loss and as such was an eligible deduction u/s 37(1) of the Act. It was further submitted that the AO had not disputed this fact that there was a loss of Rs.8,25,000/- as a result of unauthorized withdrawals made 11 & CO 323/Del/2012 ITA Nos. 258 & 259/Del/2013 Timex Watches Ltd. from the bank account in the course of business of the assessee and once such was the position then such sum was eligible for deduction. The reliance was placed on the following case laws: � Mohan Meakin Ltd. Vs CIT 59 DTR 401 (Del) � CIT Vs Mysore Sugar Co. Ltd. 46 ITR 649 (SC) 17. It was stated before the ld. CIT(A) that the amount had been fraudulently withdrawn by anonymous person, the assessee thought prudent to write off the loss though suit had been filed for recovery of the same and that the loss was suffered by the assessee of Rs.8,25,000/- in regular course of business be allowed as a deduction u/s 37(1) of the Act and in the alternative, it was to be allowed as business loss u/s 28(i) of the Act. The reliance was placed on the following case laws: � Ramachandar Shivnarayan Vs CIT 111 ITR 268 (SC) � Badridas Daga Vs CIT 34 ITR 10 (SC) � Commonwealth Trust (India) Ltd. Vs CIT 242 ITR 593 (Ker) � Shitla Prasad Shyam Lal Vs CIT 96 CTR 150 (All) � Kamla Cotton Company Vs CIT 226 ITR 605 (All) � A. W. Figgis and Co. Pvt. Ltd. Vs CIT 254 ITR 63 (Cal)
12 & CO 323/Del/2012 ITA Nos. 258 & 259/Del/2013 Timex Watches Ltd.
The ld. CIT(A) after considering the submissions of the assessee observed that the amount was fraudulently withdrawn from the accounts of the assessee who made out efforts to money back by filing the suit against the bank and that the account from which the money was withdrawn fraudulently was a Current Account used by the assessee for carrying out regular business activities. Therefore, it was an incidental event which had happened in the course of business of the assessee and was an allowable expenditure while computing the income of the assessee u/s 37 of the Act.
Being aggrieved the department is in appeal. The ld. DR reiterated the observations made by the AO and strongly supported the assessment order dated 19.12.2006.
In his rival submissions the ld. Counsel for the assessee reiterated the submission made before the authorities below and strongly supported the impugned order passed by the ld. CIT(A).
We have considered the submissions of both the parties and carefully gone through the material available on the record. In the present case, it appears that an amount of 13 & CO 323/Del/2012 ITA Nos. 258 & 259/Del/2013 Timex Watches Ltd. Rs.8,25,000/- was fraudulently withdrawn from the assessee’s bank account with Citi Bank by forging the signature of the assessee who had filed a suit against the bank, but no progress had yet been made. Therefore, it is clear that the incidental events happened in the regular course of business of the assessee, so it was an allowable expenditure u/s 37 of the Act and the ld. CIT(A) rightly held so. We do not see any infirmity in the findings of the ld. CIT(A) on this issue.
The next issue vide Ground No. 3 relates to the percentage of adjustment to international transaction.
The facts related to this issue in brief are that the Timex Group India Ltd. (earlier Timex Watches Ltd.) was incorporated on 04.10.1988 as a joint venture between Timex Watches B.V., Netherlands (TWN) and Jayana Times Industries Ltd., an Indian Company. The company was originally setup to manufacture components for quartz analog watches and was then called Timex Jayana Ltd. In 1990, Jayana Timex Industries Ltd. withdrew from the joint venture and was replaced by Titan Watches Ltd. and the name of Company was then changed to Timex Watches Ltd. in 1991. During 1999-2000, Titan also withdrew from the 14 & CO 323/Del/2012 ITA Nos. 258 & 259/Del/2013 Timex Watches Ltd. joint venture and sold its stake to TWN and name of the Company was further changed to Timex Group India Ltd. The assessee is engaged in the business of manufacturing, marketing and selling of wristwatches and their spare parts and also provides after sales services of those products. The assessee as a part of manufacturing strategy decided to setup its plant in Noida, Uttar Pradesh in 2003. The Government of India had announced excise benefits for the state of Himachal Pradesh and the assessee wanted to open up a plant in Himachal Pradesh to avail of a much needed advantage in the Indian market. During the Financial Year 2003-04, the assessee had engaged in the following international transactions:
S.No. Particulars Amount (in INR) 1 Purchase of raw material, 26,422,068 consumables and other suppliers 2 Sale of components 1,796,932 3 Purchase of finished watches 24,175,721 4 Sale of finished watches 2,953,091 5 Royalty 964,196 6 Service Income 7,333,655 Total 63,645,663 24. The assessee had used Transactional Net Margin Method (TNMM) as the most appropriate method and OP/Sales was chosen as Profit Level Indicator (PLI). The assessee clubbed the international transaction except for the 15 & CO 323/Del/2012 ITA Nos. 258 & 259/Del/2013 Timex Watches Ltd. service income and benchmarked together. The assessee had carved out the manufacturing segment from the audited accounts, this segment was further divided into three segment, namely, Segment AE, Segment non-AE, Segment other than non-AE. It was stated that during the year under consideration the assessee had entered into transactions of more than 5 crores. The AO referred the matter to the Transfer Pricing Officer (TPO) for determining the Arm’s Length Price of the transactions with its Associated Enterprises (AEs). The TPO vide his order dated 12.12.2006 u/s 92CA(3) of the Act determined/computed the income of the assessee by making an upward adjustment of Rs.3,10,96,895/- by observing at page nos. 17 & 18 as under:
“Thus, it could be seen that while applying TNMM the net profit margin of the tested party has to be computed as it is. Similarly, under clause (ii) the net profit margins of the comparables are also computed. Further, clause (iii) permits adjustments to the net profit margins computed in accordance with clause (ii) i.e. the margins of the comparables to take into account the differences if any between the international transaction and the comparables. In this manner, the adjustment if any warranted to account for differences between the enterprises is only to be made to the margin of the 16 & CO 323/Del/2012 ITA Nos. 258 & 259/Del/2013 Timex Watches Ltd. comparables. Under TNMM Rule 10B(l)(e) does not allow any interpolation or extrapolation to the margins of the tested party. The course which has been provided by the rules is to analyze whether there exist any differences in the comparables and the tested party which require adjustment to the net operating margins, the adjustment invariably is to be made to the comparables. Therefore, a close examination of the functions performed by comparables is a must in this regard. Any functional difference between the comparables and the tested party which could have a bearing on the net profit margin and adjustment needs to be made to account for the difference has not been demonstrated by the assessee or by the tax consulting firm who has conducted the TP study. Without conducting a thorough examination of the financials and details regarding capacity utilization of the comparables, no adjustment can be made and needless to say that adjustment whether upward or downward is to be made to the operating margins of the comparables only. Therefore, the adjustment made by the assessee on account of alleged under capacity utilization has no sanction of law and is accordingly rejected. The PLI of the assessee is computed in the following manner: Net profit from AE segment as computed by the assessee (Rs. 23,36,859) Less: Unabsorbed overheads due to under utilization Rs.1,81,53,977 Less: Extra depreciation on account of under utilization Rs.55,79,736 Net Loss under the AE segment (Rs.2,60,70,572) Total Income under the AE segment Rs.13,92,33,342 NCP Margin (-) 18.72% 17 & CO 323/Del/2012 ITA Nos. 258 & 259/Del/2013 Timex Watches Ltd. Computation of Arm's length price of international transaction Total Income Rs. 13,92,33,342 NCP Margin (-) 18.72% Arm's length NCP 3.61% Net Profit at Arm's length margin Rs. 50,26,323 Adjustment at Arm's length margin [50,26,323-(-2,60,70,572)] (50,26,323 + 2,60,70,572) Rs. 3,10,96,895 Accordingly, an upward adjustment of Rs. 3,10,96,895/- is required to be made to the total income of the assessee. Accordingly, the arm's length price of international transaction shall get adjusted upward/downward as the case may be from the book value of the transaction to extent of Rs. 3,10,96,895/-.
The TPO accepted the segmental accounts and also accepted three comparables selected by the assessee. However, objected to the calculation made by the assessee who had taken out unabsorbed overheads and extra depreciation on account of unutilized machines while calculating the margin of manufacturing segment involving transaction with the AE. The TPO did not considered one of the comparable, namely, Artfield Group Ltd. because the data during the TP study was available only for six months and subsequently, the full year data was available which was presented before the TPO who did not use the same for 18 ITA No. 2769 & CO 323/Del/2012 ITA Nos. 258 & 259/Del/2013 Timex Watches Ltd. calculating the PLI of his comparable. The TPO held that the adjustment made by the assessee to its financials were not acceptable because Rule 10B(1)(e) of the Income Tax Rules, 1962 does not provide such adjustments to the financials of the assessee.
The AO asked the assessee to file the reply on the proposed adjustment by the TPO. The AO observed that the assessee had filed a detailed reply along with the copy of annexure and letter submitted before the TPO who had already considered the contention of the assessee in this regard and had computed/advised the addition. Therefore, the contention/objection of the assessee were rejected. The AO accordingly made the addition of Rs.3,10,96,895/- being an adjustment on account of Arm’s Length Price of international transaction.
Being aggrieved the assessee carried the matter to the ld. CIT(A) and submitted as under:
Without prejudice to the above contention of the appellant that multiple year data should be used, it is respectfully submitted that the TPO has erred in considering the current year update of the comparables selected by the appellant in order to arrive at the arm's length mean margin. The 19 & CO 323/Del/2012 ITA Nos. 258 & 259/Del/2013 Timex Watches Ltd. appellant has presented a re-computation of the operating margin of one of the comparables viz. Artfield Group since the data for the FY 2003-04 became available at Onesource.com later, the appellant recomputed the operating margins for the said comparable and submitted the same vide submission dated 8 November 2006. However, the TPO has erred on two points: • The TPO has not considered this fact that the operating margin of 1.41% as mentioned in the TP Report was arrived at after considering the financial data for 6 months ended 30 September 2003 for the said comparable since at the time of preparing the TP Report, the data for only 6 months was available. • However, at the request of the TPO, an updation of the operating margins of the comparables was performed and the financial data for the financial year ending 31 March 2004 was taken into consideration and hence, a margin of (6.42%) was computed and submitted as a part of the above mentioned Submission. Further, the TPO has neither discussed with the appellant on this point nor he asked for the back-up of the calculation, leading to a presumption in the mind of the appellant that the said re-computation has been accepted by the TPO. In order to support the re-computation done for the Artfield Group, please find attached as Annexure 22 (pages 229- 232), the back-up computation and a copy of the 20 ITA No. 2769 & CO 323/Del/2012 ITA Nos. 258 & 259/Del/2013 Timex Watches Ltd. financial data as available in the OneSource.com database.
The ld. CIT(A) after considering the submissions of the assessee observed that the TPO had no objection in accepting the comparable Artfield Group. Therefore, it was only reasonable to take the full financial year data of the accepted comparables for benchmarking purpose. The ld. CIT(A), therefore, held that 12 months data year ending 31.03.2004 should have been taken for calculating the PLI. Accordingly, the mean margin of the comparables was worked out as under:
Name of Company OP/Sales FY 2003-04 Artfield Group Ltd. -6.42% Egganagoldpfeil Holdings 3.33% Peace Mark (Holdings) Ltd. 6.10% Mean 1% 29. The ld. CIT(A) directed the AO to recalculate the international transactions taking the mean margin at 1% instead of 3.61% as calculated by the TPO. As regards to the using of single year data, the ld. CIT(A) observed that the single year data has to be considered unless the assessee demonstrated that prior year’s data had an influence on the setting of transfer price of international transaction either at the time of setting them or by way of adjusting them 21 & CO 323/Del/2012 ITA Nos. 258 & 259/Del/2013 Timex Watches Ltd. subsequent to entering into the international transaction to align them to the arm’s length price. The reliance was placed on the following case laws:
� AZTEC Software 107 ITD (AT) 141 (SB) (Bang) � Mentor Graphic 109 ITD 101 (Del) � Honeywell Ltd. 209 TIOL 104 (AT) (Pune) 30. The reliance was also placed on the judgment of the Hon’ble Delhi High Court in the case of Schefenacker Motherson Ltd. Vs ITO (2009) TIOL 376. The ld. CIT(A) accordingly upheld the action of the AO for taking only single year data for benchmarking the international transaction. A regards to the issue relating to proportionate adjustment to the international transaction, the ld. CIT(A) directed the AO to restrict the adjustment to the international transaction in the proportion of 5.63/13.92 which came up 40.44% by observing as under:
The appellant placed reliance on the rulings pronounced by the Hon'ble Delhi Bench of the ITAT in the case of IL Jin Electronics (I) Pvt. Ltd. [2010 36 SOT 227], and by the Hon’ble Bangalore Bench in the case of Genisys Integrating Systems (India) Pvt. Ltd. (IT 1231 / Bang-2010). In the said ruling the Hon’ble Delhi Bench of the ITAT has held that the adjustment made to the transfer prices of the taxpayer should be proportional to the 22 & CO 323/Del/2012 ITA Nos. 258 & 259/Del/2013 Timex Watches Ltd. quantum of international transactions entered into by it. As the decision relied by the appellant is the decision of the Hon’ble ITAT Delhi which is binding on the CIT(Appeals) in Delhi, proportionate adjustment is justified in this case. The total turnover in this segment is Rs. 13.92 crores and total international transaction is Rs. 5.63 crores. Therefore, the percentage of adjustment to the international transaction should be in the proportion of 5.63/13.92 which comes to 40.44%. TPO/ AO is directed to restrict the adjustment to the international transaction only to this proportion.
Now the department is in appeal. The ld. DR reiterated the observations made by the TPO and the AO and strongly supported the assessment order passed by the AO.
In his rival submissions the ld. Counsel for the assessee reiterated the submission made before the authorities below and strongly supported the impugned order passed by the ld. CIT(A). It was further submitted that the issue under consideration is squarely covered by the judgment of the Hon’ble Jurisdictional High Court in the case of CIT Vs Keihin Panalfa Ltd. in ITA 11/2015 vide order dated 09.09.2015 (copy of the said order was furnished which is � M/s Genisys Integrating Systems (India) Pvt. Ltd. Vs DCIT in ITA No. 1231/Bang./2010 order dated 05.08.2011 (ITAT Bangalore) � IL Jin Electronics (I) (P) Ltd. Vs ACIT in order dated 06.11.2009 (ITAT Delhi) 33. We have considered the submissions of both the parties and carefully gone through the material available on the record. In the present case, it is an admitted fact that the ld. CIT(A) directed the AO to make the proportionate adjustment of the expenses to the extent it is attributable to the international transactions.
On a similar issue the Hon’ble Jurisdictional High Court in the case of CIT Vs Keihin Panalfa Ltd. (supra) held that TP adjustment on account of expenses in respect of international transactions can be made proportionate to that extent which is attributed to the international transaction. The relevant findings have been given in para 12 of the order dated 09.09.2015 which read as under: “12. The contention that the adjustment on account of expenses as determined by the TPO must be 24 & CO 323/Del/2012 ITA Nos. 258 & 259/Del/2013 Timex Watches Ltd. attributed entirely to the international transaction in bereft of any merits. During the Financial Year 2003-04 relating to the Assessment year 2004-05, the Assessee had reported an operating income of Rs.72,24,22,000/-. The total expenses for the said period amounted to Rs.68,00,88,000/-. Admittedly, the international transactions in question amounted to Rs.15,90,66,935/- which were only 23.38% in value of the total expenses. The TPO had determined the PLI (Operating Profit over Total Cost) of comparable cases at 8.29% against 6.22% as declared by the Assessee. Applying the PLI of comparable cases, the adjusted total expenses were computed at Rs.66,71,17,924/-, thus, indicating an adjustment of Rs.1,29,70,076/-. As is apparent from the above, the said adjustment related to entire expenses and not just the international transactions alone. Since the international transactions only constituted 23.38%, a TP Adjustment proportionate to that extent could be made in respect of such international transactions. Thus, only an adjustment of Rs.30,33,593/- could be attributed to the international transactions in question. The same was accepted by the CIT(A) as well as the Tribunal. We do not find any infirmity with their decision.”
In the present case also the ld. CIT(A) directed the AO to make the adjustment of the expenses in the proportion which the international transaction had to the total turnover. Therefore, the view taken by the ld. CIT(A) is inconsonance 25 ITA No. 2769 & CO 323/Del/2012 ITA Nos. 258 & 259/Del/2013 Timex Watches Ltd. with the ratio laid down by the Hon’ble Jurisdictional High Court. We, therefore, do not see any valid ground to interfere with the findings of the ld. CIT(A). Accordingly, we do not see any merit in this ground of the departmental appeal.
As regards to CO No. 323/Del/2012, the ld. Counsel for the assessee submitted that he has the instruction not to press the Cross Objection and gave in writing as under:
“Not pressed”
The ld. DR did not object if the Cross Objection is dismissed as not pressed. Accordingly, the Cross Objection of the assessee is dismissed as not pressed.
In for the assessment year 2005- 06, the grounds raised by the department read as under:
“1. "On the facts and in the circumstances of the case and in law the learned CIT(A) erred in deleting the addition of Rs.3,16,43,179/- made by the AO on account of Arms Length Price." 2. "On the facts and in the circumstances of the case and in law the learned CIT(A) erred in deleting the addition of Rs.5,66,270/- made by the AO on account of advances written off."
26 & CO 323/Del/2012 ITA Nos. 258 & 259/Del/2013 Timex Watches Ltd. 3. "On the facts and in the circumstances of the case and in law the learned CIT(A) erred in deleting the addition of Rs.5,65,648/- made by the AO on account of excess claim of depreciation on computer peripherals." 4. "On the facts and in the circumstances of the case and in law the learned CIT(A) erred in deleting the addition of Rs.1,22,952/- made by the AO on account of unascertained liability of Legal & Statutory Services.." 5. "The appellant craves for reserving the right to amend, modify, alter, add or forego any ground(s) of appeal at any time before or during the hearing of appeal".
As regards to the Ground No. 1, the common contention of both the parties was that the issue is similar to the Ground Nos. 3 to 3.2 in ITA No. 2769/Del/2012 for the assessment year 2004-05. Therefore, our findings given in the former part of this order shall apply mutatis mutandis.
Regarding Ground No. 2 relating to advances written off. It was submitted by both the parties that the facts for this issue are similar to the facts involved in the assessment year 2004-05 wherein identical issue was raised vide Ground No. 2. Therefore, by considering the similarity in the facts for the year under consideration vis-à-vis the 27 & CO 323/Del/2012 ITA Nos. 258 & 259/Del/2013 Timex Watches Ltd. assessment year 2004-05 in ITA No. 2769/Del/2012 (supra), we do not see any merit in the appeal of the department on this issue.
Ground No. 3 of this appeal relates to the disallowance on account of excess claim of depreciation on computer peripherals.
Facts related to this issue in brief are that the AO during the course of assessment proceedings noticed that the assessee had included Video Conferencing Machine, Inverter, Ethernet, Switches, Routers, Printer, UPS & Scanner in block of computers instead of Plant & Machinery and claimed the depreciation @ 60% instead of 15%. He made the disallowance of Rs.5,65,648/- by making the following calculation and observations: “ Name of item Price Depreciation Allowable Availed Depreciation Video Conference 234500 140700 35175 Machine Laser Printer 18900 11340 2835 Modems 93600 56160 14040 Invertor 5750 3450 863 Router 59000 35400 8850 Ethernet 95000 35400 8850 Scanner 7205 2162 162 Printers 68800 20640 1548 Backup Tape Library 457600 137280 10296 28 & CO 323/Del/2012 ITA Nos. 258 & 259/Del/2013 Timex Watches Ltd. Switches 82160 24648 1849 Switches 197600 59280 4446 Unigraphic Seat 384800 115440 8658 Printers 13000 3900 293 Printers 64500 19350 1451 Total 1782415 658250 92602 Thus an amount of Rs.5,65,648/- is being disallowed as being excessive depreciation debited to the P/L account.” (Addition of Rs.5,65,648) 43. Being aggrieved the assessee carried the matter to the ld. CIT(A) and submitted as under:
In the instant case, the depreciation has been claimed on computer, printers, scanners and UPS as would be evident from the details placed in the Paper Book. It is thus submitted that, in light of the above evidences, it be held that the assessee is entitled to depreciation of 60% of the computer peripherals and the disallowance claimed of depreciation of Rs.5,65,648/- may kindly be deleted.
It was further submitted that the issue was covered by the judgment of the Hon’ble Jurisdictional High Court in the case of CIT Vs BSES Yamuna Powers Ltd. in vide order dated 31.08.2010. The reliance was also placed on the following case laws:
29 & CO 323/Del/2012 ITA Nos. 258 & 259/Del/2013 Timex Watches Ltd. � DCIT v Datacraft India Ltd. (Mumbai Special Bench ITAT in ITA no. 7462 and 754) � ACIT Vs Container Corporation of India Limited (2009-TIOL-195-ITAT-DEL) -Delhi ITAT � Expeditors International India (P) Ltd. vs. Addl. CIT (118 TTJ 652) (Delhi Tribunal) � ACIT, Circle 3(1), New Delhi vs. Cincom System India Pvt. Ltd. (Delhi Tribunal in ITA No. 1534/Del/2008) � ACIT, Circle 3(1), New Delhi vs. Continental Carriers Pvt. Ltd. (Delhi Tribunal in ITA No. 2137/Del/2008) � ITO vs. Samiran Majumdar (280ITR (AT) 74 Kolkata Tribunal)"
The ld. CIT(A) after considering the submissions of the assessee deleted the addition by observing in para 6.4 of the impugned order as under:
6.4 The submission made by the appellant is carefully examined. The appellant had purchased computer peripherals like printers, video conferencing machine, inverters, Ethernet, Switches, Routers and UPS which are classified as eligible items for depreciation at 60% by the decisions of the Hon’ble Courts and Tribunals cited above. Therefore, I hold that the appellant is entitled for depreciation at 60% on the purchases made under the head computers. The AO is directed to allow the depreciation accordingly.
30 & CO 323/Del/2012 ITA Nos. 258 & 259/Del/2013 Timex Watches Ltd. 46. Now the department is in appeal. The ld. DR although supported the order of the AO but could not controvert the findings given by the ld. CIT(A).
In his rival submissions the ld. Counsel for the assessee reiterated the submissions made before the authorities below and strongly supported the impugned order.
We have considered the submissions of both the parties and carefully gone through the material available on the record. It is noticed that on a similar issue the Hon’ble Jurisdictional High Court in the case of CIT Vs BSES Yamuna Powers Ltd. (2013) 358 ITR 47 (supra) held as under: “Computer accessories and peripherals such as printers, scanners and server form an integral part of the computer system. In fact, the computer accessories and peripherals cannot be used without the computer. Consequently, as they are part of the computer system, they are entitled to depreciation at the higher rate of 60 per cent.”
Since the ld. CIT(A) has decided this issue by following the judgment of the Hon’ble Jurisdictional High Court. We, therefore, do not see any merit in this ground of the departmental appeal.
31 & CO 323/Del/2012 ITA Nos. 258 & 259/Del/2013 Timex Watches Ltd. 50. The last issue vide Ground No. 4 in this appeal relates to the deletion of addition of Rs.1,22,952/- made by the AO on account unascertained liability.
The facts related to this issue in brief are that the assessee had debited Rs.6,00,000/- towards provision for legal & statutory services. The AO noticed that the invoice raised were of Rs.4,77,048/-. He, therefore, disallowed remaining amount of Rs.1,22,952/-.
Being aggrieved the assessee carried the matter to the ld. CIT(A) and submitted as under:
It is next submitted that appellant has been following this method consistently in as much as provisions are firstly made in the year in which liability has accrued and, thereafter the same is reversed in the succeeding year and, difference of provision reversed and, actual expenditure is debited/credited by the appellant company since the liability is in respect of difference crystallized in the instant year. It is also submitted that, this method has been accepted by the revenue consistently. It is thus submitted that, applying the rules of consistency too no disallowance is warranted.
32 & CO 323/Del/2012 ITA Nos. 258 & 259/Del/2013 Timex Watches Ltd. 53. The ld. CIT(A) after considering the submissions of the assessee deleted the addition by observing in para 7.2 of the impugned order as under:
7.2 The appellant is consistently following the accounting policy of creating the provision for such expenses and on receipt of the bill actual payment is made and the provision account is reversed in the beginning of the year. The event of receipt of bill was subsequent to finalization of the account. Since, the appellant is following this accounting policy consistently disallowing this sum can amount to taxing the same sum either in the next year or in the current year twice. As this policy is consistently followed by the assessee, there is no justification to interfere with the accounting policy. The AO is directed to delete the addition made in this regard.
Now the department is in appeal. The ld. DR submitted that the assessee did not furnish the relevant bills for incurring the expenses. Therefore, the AO was justified in making the disallowance.
In his rival submissions the ld. Counsel for the assessee reiterated the submission made before the authorities below and supported the impugned order by the ld. CIT(A).
33 & CO 323/Del/2012 ITA Nos. 258 & 259/Del/2013 Timex Watches Ltd.
We have considered the submission of both the parties and carefully gone through the material available on the record. In the present case, it appears that the ld. CIT(A) allowed the claim of the expenses on this basis that the assessee was following this accounting policy, consistently and claiming the expenses by creating the provisions for such expenses. In our opinion, this issue requires verification at the level of the AO, he should verify as to whether the expenses pertained to this year or not and that the claim of the assessee was allowed in earlier and subsequent year on similar basis. Accordingly, this issue is set aside to the file of the AO for verification.
Now we will deal with 2006-07. The only effective ground raised
in this appeal reads as under: “On the facts and in the circumstances of the case and in law the learned CIT(A) erred in deleting the addition of Rs.3,38,05,744/- made by the AO on account of Arm’s Length Price.”
58. During the course of hearing, it was the common contention of both the parties that the facts for the year under consideration are similar to the facts involved for the 34 & CO 323/Del/2012 ITA Nos. 258 & 259/Del/2013 Timex Watches Ltd. assessment year 2004-05 in ITA No. 2769/Del/2012. Therefore, our findings given for ground nos. 3 to 3.2 in ITA No. 2769/Del/2012 for the assessment year 2004-05 shall apply mutatis mutandis for the assessment year 2006- 07.
In the result, the appeals of the department for the assessment years 2004-05 and 2006-07 alongwith the and Cross Objection of the assessee for the assessment year 2004-05 are dismissed while the appeal of the department for the assessment year 2005-06 is partly allowed for statistical purposes. (Order Pronounced in the Court on 21/06/2016)