Account of disallowing warrant cost & warranty cost for computing the book profit u/s 115JBV of IT Act

IN THE INCOME TAX APPELLATE TRIBUNAL

(DELHI BENCH “C” New Delhi)

BEFORE SHRI R. P. TOLANI: JUDICIAL MEMBER

And

SHRI J.S. REDDY: ACCOUNTANT MEMBER

ITA Nos. 1858, 1859 & 2214/Del/ 2011

Asstt. Yrs. 2004-05, 2005-06 & 2005-06 respectively

DCIT, Circle 11(1)

New Delhi.

(Appellant)

Vs.

M/s Invensys India Pvt. Ltd.,

No. 01, Doctors Lane, Gole Market,

New Delhi-110001.

PAN: AABCS 8027 M

(Respondent)

AND

C.O. nos: 360 & 361/Del/2011

(In ITA Nos. 1858, 1859 /Del/ 2011)

Asstt. Yrs. 2004-05 & 2005-06

M/s Invensys India Pvt. Ltd.,

No. 01, Doctors Lane, Gole Market,

New Delhi-110001.

(Appellant)

Vs.

DCIT, Circle 11(1)

New Delhi.

(Respondent)

Revenue By: Shri R.S. Gill CIT (DR)

Assessee By: Shri Salil Kapoor Adv. & Shri Vikas Jain Adv.

ORDER

PER R. P. TOLANI, J.M:

This is a set of two revenue’s appeals for A.Y. 2004-05 and 2005-06 on the quantum assessment and the corresponding cross-objections by the assessee. Revenue has also filed appeal against deletion of penalty u/s 271(1)(c) for A.Y. 2005-06.

2. Common grounds raised in the revenue’s appeals are as under:

“1. On the facts and circumstances of the case and in law, the CIT(A) has erred in deleting the addition of Rs. 52,69,973/- (A.Y. 2004-05) & 19,14,031/- (A.Y. 2005-06) on account of disallowing warrant cost.

2. On the facts and circumstances of the case and in law, the CIT(A) has erred in deleting the addition of Rs. 1,32,59,824/- (A.Y. 2004-05) & Rs. 2,33,57,928/- (A.Y. 2005- 06) on account of variation of arms length price determined u/s 92CA(3) of IT Act.

3. On the facts and circumstances of the case and in law, the CIT(A) has erred in deleting the addition of Rs. 52,69,973/- (A.Y. 2004-05) & Rs. 19,14,031/- (A.Y. 2005-06) on account of addition of warranty cost for computing the book profit u/s 115JBV of IT Act.

2.1. Except ground no. 6 in A.Y. 2005-06 all other grounds of both the cross objections filed by the assessee for A.Y. 2004-05 & 2005-06, are not pressed, hence dismissed.

3. Ld. Counsel for the assessee contends that the issue of disallowance of warranty cost and its addition while computing book profit u/s 115JB of the I.T. Act is covered in favour of the assessee by the ITAT Delhi Bench ‘C’ order dated 28-8-2009 rendered in ITA no. 2196 (A.Y. 2003-04) in the case of DCIT Vs. M/s Invensys India Pvt. Ltd., inter alia, by following observations:

“3. Before us, the learned DR for the revenue except placing reliance on the reasoning given in the order of Assessing officer was neither able to controvert the factual observations made in the order of CIT(Appeals) nor was able to cite any other case law in which a view contrary to the view taken in the decisions supra has been taken. Whereas, on the other hand, learned AR for the assessee placing reliance on the reasoning given in the order of CIT(Appeals) further submitted that this order passed by the CIT(Appeals) does not suffer from any illegality or infirmity rather it further finds support from the decision of Hon’ble Supreme Court in the case of Rotork Controls India P. Ltd. & Ors. Vs. CIT 314 ITR 62 (SC) wherein their Lordships held:

“Held, reversing the decision of the High court that the valve actuators, manufactured by the assessee, were sophisticated goods and statistical data indicated that every year some of these were found defective; that valve actuator being a sophisticated item no customer was prepared to buy a valve actuator without a warranty.

Therefore, the warranty became an integral part of the sale price; in other words, the warranty stood attached to the sale price of the product. In this case the warranty provisions had to be recognized because the assessee had a present obligation as a result of past events resulting in an outflow of recources and reliable estimate could be made of the amount of the obligation. Therefore, the assessee had incurred a liability during the assessment year which was entitled to deduction under section 37 of the Income-tax Act, 1961.” and another decision of the Hon’ble jurisdictional High Court of Delhi I the case of CIT Vs. Hewlett Packard India (P) Ltd. (2008) 5 DTR (Del) 220; (2008) 171 Taxman 13/ (2008) 173 Taxman 162, wherein the Hon’ble High Court decided this issue in favour of assessee by holding that provision for warranty made by assessee following mercantile system of accounting and calculated on scientific basis was a contingent liability and was an allowable deduction.

4. On considering the submissions of both the parties and the case law supra referred to in the order of CIT(Appeals) as well as the recent decision of Hon’ble jurisdictional High Court in theca see of CIT vs. Hewlett Packard India (P) Ltd. (supra) relied upon by the learned AR for the assessee, we find that the issue under question before whether provision for warranty even if the assessee following the mercantile system of accounting was an allowable deduction stands covered in favour of the assessee. Since the order passed by the CIT(Appeals) is based on these decisions supra, there is no illegality or infirmity in the order of CIT(Appeals) in respect of the issue of warranty provision and therefore, the same is upheld and ground no. 1 of appeal of the revenue is rejected.

5. …

6. …. .

7. After considering the submissions of both the parties, we are of the opinion that the findings of CIT(Appeals) in deleting the impugned addition made by the Assessing officer under section 115JB of the Act since being in conformity with the decision of Hon’ble Jurisdictional High Court in the case of Hewlett Packard India (P) Ltd. (supra), the impugned order of CIT(Appeals) in this regard is upheld and ground no. 2 of appeal taken by the revenue is rejected.”

3.1. The issue of allowability of warranty was challenged by the revenue before the Hon’ble Delhi High Court which by judgment dated 17-8-2010 in ITA no. 1156/2010 (CIT Vs. Invensys India Pvt. Ltd.), decided in favour of the assessee by holding as under:

“The present appeal is directed against the order dated 28th August, 2009 passed by the Income Tax Appellate Tribunal Delhi Bench ‘C’ (in short “tribunal”) in ITA no. 2196/Del/2008 pertaining to the Assessment year 2003-04 whereby the tribunal after placing reliance on the decision in Rotork Controls India P. Ltd. & ors vs. CIT, 314 ITR 62 (SC) has allowed the appeal of the respondent assessee.

We must fairly say that Mr. Sanjev Sabharwal, learned counsel for the revenue, stated that the controversy is squarely covered by the aforesaid decision.

In view of the aforesaid, we do not perceive any merit in the appeal and accordingly the same is dismissed in limine.”

3.2. Apropos other ground of the revenue i.e. the adjustment in the arms length price, brief facts are: The assessee claimed that it maintains proper segmentation segregating sales of related and unrelated enterprises and a bifurcation of domestic and international transactions. TPO while determining the ALP u/s 92CA(3) made the adjustments disregarding the segmentation maintained by the assessee. Further, the adjustment on the entire sales turnover of the Appliance Controls Division (‘ACD’) was made disregarding the objections of the assessee.

3.3. Assessee preferred first appeal raising following contentions –

(i) on merits of the adjustments;

(ii) alternatively restricting the adjustment only to the international transactions relying on ITAT Delhi Bench order in the case of IL Jin Electronics (I) Ltd. Vs. ACIT (ITA no. 483/Del/2008); and that of ITAT Mumbai Bench in the case of Two International Pvt. Ltd. Tata Jewels Exports Pvt. Ltd. and Tara Ultimo Pvt. Ltd. Vs. ACIT (2010-TIOL-166-ITAT-Mum), holding that TP adjustments should be applied only on the value of the international transactions.

3.4. CIT(A) upheld the alternate plea of the assessee by following observations:

“Further, it has also been pointed out that in Appellant’s own case the Dispute Resolution Panel (‘DRP’) for AY 2006-07 has confirmed by holding that the adjustment should be restricted only to the value of international transactions of the ACD.

Therefore, in light of the above, I am of the opinion that the alternate argument pressed by the appellant is to be considered and the addition should be restricted to the value of int4ernational transactions and not on the entire value of sales turnover. Accordingly the ground raised by the appellant company is being partly allowed. AO should modify accordingly.”

3.5. Ld. Counsel contends that settled legal position remains the same. Besides, the DRP also has decided the issue of adjustment of TP only on international transactions in its favour. Therefore, there is no infirmity in the order of the CIT(A).

4. Ld. CIT(DR) relied on the orders of assessing officer.

5. We have herd rival contentions and perused the material available on record. Apropos ground nos. 1 & 3 of the revenue’s appeals i.e. the claim of allowing warranty cost and non-inclusion of addition of warranty cost while computing the book profit u/s 115JB stands decided in favour of the assessee by ITAT and the issue of allowability of warranty cost is upheld by Hon’ble Delhi High Court also. In view therefore respectfully following these authorities these grounds of revenue are dismissed.

5.1. Apropos the second ground i.e. adjustment in respect of transfer pricing, the assessee has not pressed this ground in the cross-objections. The restriction of TP adjustment to international transactions has been upheld by the CIT(A) following the above ITAT and DRP orders in its own case for A.Y. 2006-07. In view of these facts and circumstances, we find no infirmity in the order of CIT(A) which is upheld.

6. In the result, both the revenue’s appeals are dismissed.

7. That leaves ground no. 6 in assessee’s cross objections for A.Y. 2005- 06 which is as under:

“That the learned CIT(A) has erred in not reducing the Reversal of provision for bad debts amounting to INR 9,010,145/- while calculating profit under section 115JB of the Act given that the book profits computed under section 115JB of earlier assessment years was increased by such provision for bad debts created in those years.”

8. Ld. Counsel for the assessee contends that Hon’ble Punjab & Haryana High Court in the case of CIT Vs. Hutchison Max Telecom (P) Ltd. (2011) 338 ITR 614 has restored the matter back to the file of assessing officer by following observations:

8. Learned counsel for the Revenue argued that cl. (i) of Expln. 1 had been inserted in s. 115JB(2) of the Act by Finance (No.2) Act, 2009 which is effective retrospectively from 1st April, 200l. According to cI. (i), any amount or amounts set aside as provision for diminution in the value of any asset shall not reduce the book profits of an assessee. It was submitted that provision for bad and doubtful debts would be covered thereunder. Support was gathered from the decision of this Court in CIT vs. Steriplate Ltd. n Appeal No, 931 of 2008, decided on 30th May, 2011. learned counsel for the Revenue also placed reliance on a judgment of the Madras High Court in Dy. CIT vs. Beardsell Ltd. (2000) 162 CTR (Mad) 467 : (2000) 244 ITR 256 (Mad). learned counsel for the assessee, however, cited the judgment of the Supreme

Court in CIT vs. HCL Comnet Systems & Services Ltd. (2008) 219 CTR (SC) 222 : (2008) 13 DTR (SC) 105 : (2008) 305ITR 409 (SC) but he could not controvert the submission of the learned counsel for the Revenue that insertion of cl. (i) in Explanation to s. 115 JB(2) retrospectively w.e.f. 1st April, 2001 was applicable but it was submitted that the matter requires to be considered by the AO regarding the applicability of other clauses mentioned in the Explanation.

9. After hearing counsel for the parties, we are of the opinion that identical issue came up for consideration before this Court in Steriplate (P) Ltd.'s case (supra) where this Court had observed that introduction of cI. (i) of Expln. 1 to s. 115JB(2) of the Act was made effective from 1st April, 2001 and would, therefore, apply to asst. yr. 2001-02 and subsequent assessment years.

10. In view of the above, the issue needs to be decided afresh by the AO. The judgment of the apex Court referred to by the learned counsel for the assessee in the wake of the aforesaid amendment made retrospectively does not advance the case of the assessee in any manner.”

8.1. In view of this judgment, ld. Counsel contends that the issue may be set aside back to the file of the assessing officer to decide the same in accordance with law.

9. Ld. DR is heard.

10. We have herd rival contentions and perused the material available on record. Following Hon’ble Punjab & Haryana High Court judgment in the case of Hutchison Max Telecom (P) Ltd. (supra), we set aside the matter back to the file of assessing officer to decide the same afresh in accordance with law, after giving the assessee an opportunity of being heard.

11. In the result assessee cross-objection for A.Y. 2004-05 is dismissed and that for A.Y. 2005-06 is partly allowed for statistical purposes only.

12. Coming to the Revenue’s appeal relating to deletion of penalty levied u/s 271(1)(c) for A.Y 2005-06, the impugned penalty was levied by the assessing officer on account of adjustment to the ALP u/s 92CA(3). It shall be pertinent to mention that in quantum proceedings the ALP were reduced to international transactions only. Assessing officer however imposed penalty u/s 271(1)(c) on the entire adjustments.

12.1. On first appeal, CIT(A) deleted the penalty by following observations:

“I have considered the above arguments and submissions made by the Appellant and the grounds on jurisdiction have not been deliberated upon by the Appellant and hence I have proceeded into the merits of the case. Vide my order dated 28-02-2011, I have held that the Transfer Pricing adjustment proposed by the AO has to be reduced from Rs. 2,23,57,928/- to Rs. 18,57,065/- since the adjustment cannot exceed the value of international transactions. Given the same, there is no concealment of income or furnishing any inaccurate particulars of income by the Appellant so as to warrant levy of penalty under section 271(1)(c) of the Act.”

13. Ld. Counsel for the assessee contends that all the relevant details were filed along with the transfer pricing report submitted by the assessee, besides the explanations and objections raised before TPO. Besides, TPO’s order was erroneous inasmuch as neither the segmentation nor the international transactions were taken into consideration. All the relevant facts having been furnished along with the return there is no infirmity in the order of CIT(A).

Besides. No penalty u/s 271(1)(c) can be imposed qua 115JB, as has been held by Hon’ble Delhi High Court in the case of CIT Vs. Nalwa Sons Investments Ltd. (2010) 327 ITR 543 by following observations:

“As per s. 271(1)(c), the penalty can be imposed when any person has concealed the particulars of his income or furnished incorrect particulars of the income. Once this condition is satisfied, quantum of penalty is to be levied as per cl. (iii) of s. 271(1)(c) which stipulates that the penalty shall not exceed three times" the amount of tax sought to be evaded". The question would be, as to whether furnishing of such wrong particulars had any effect on the amount of tax sought to be evaded. Under the scheme of the Act, the total income of the assessee is first computed under the normal provisions of the Act and tax payable on such total income is compared with the prescribed percentage of the 'book profits' computed under s. 115JB. The higher of the two amounts is regarded as total income and tax is payable with reference to such total income. If the tax payable under the normal provisions is higher, such amount is the total income of the assessee, otherwise, 'book profits' are deemed as the total income of the appellant in terms of s. 115JB. In the present case, the income computed as per the normal procedure was less than the income determined by legal fiction namely 'book profits' under s. 115JB. On the basis of normal provision, the income was assessed in the negative i.e. at a loss of Rs. 36,95,21,018. On the other hand, assessment under s. 115JB resulted in calculation of profits at Rs. 4,01,63,180. The income of the assessee was thus assessed under s. 115JB and not under the normal provisions. No doubt, there was concealment but that had its repercussions only when the assessment was done under the normal procedure. The assessment as per the normal procedure was, however, not acted upon. On the contrary, it is the deemed income assessed under s. 115JB which has become the basis of assessment as it was higher of the two. Tax is thus paid on the income assessed under s. 115JB. Hence, when the computation was made under s. 115JB, the concealment had no role to play and was totally irrelevant. Therefore, the concealment did not lead to tax evasion at all. The upshot of the aforesaid discussion would be to sustain the order of the Tribunal, though on different grounds. Therefore, while the reasoning and approach of the Tribunal is not tenable, for the reasons disclosed above, penalty could not have been imposed even in respect of the false claim of depreciation made by the assessee.-CIT vs. Gold Coin Health Food (P) Ltd. (2008) 218 CTR (SC) 359 : (2008) 11 DTR (SC) 185 : (2008) 304 ITR 308 (SC) distinguished.”

14. Ld. DR is heard.

15. We find no infirmity in the order of CIT(A) in deleting the penalty. Accordingly, order of CIT(A) is upheld. Besides, Hon’ble Delhi High Court has held that no concealment penalty u/s 271(1)(c) can be imposed for adjustment while working out book profit u/s 115JB. In view thereof, this revenue’s appeal is dismissed.

16. In the result, All the three revenue’s appeals stand dismissed. Assessee’s cross objection for A.Y. 2004-05 is dismissed and assessee’s cross objection for A.Y. 2005-06 is partly allowed for statistical purposes as indicated above.

Order pronounced in open court on 11/07/ 2013.

Sd/- Sd/-

(J.S. REDD ) (R.P. TOLNI)

ACCOUNTANT MEMBER JUDICIAL MEMBER

Dated the 11-07- 2013

*MP*

Copy forwarded to

1. APPELLANT

2. RESPONDENT

3. CIT

4. CIT (A)

5. CIT (ITAT), New Delhi.