ACIT, Circle -1(1), Tirupathi V. Amaraja Batteries Limited, Tirupathi

CO 135/HYD/2012

• Counselvise Citation: [2012] 122 COUNSELVISE.COM (IT) 8003 (ITAT-HYDERABAD)
• Duration Of Justice: 2 month(s) 2 day(s)
• Appeal Type: Cross Objection
• Pronouncement Date: 27-11-2012
• Appeal Filed By: Assessee
• Order Result: Dismissed
• Bench Allotted: B
• Assessment Year: 2008-2009
• Appeal Filed On: 24-09-2012
• Result in Favour of: Revenue
• Court: TRIBUNAL
• Department Lawyers: M JAGADISH BABU
• Assessee Lawyers: E PHALGUNA KUMAR
• Keywords: Transfer pricing; Arm length price

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL HYDERABAD BENCH B, HYDERABAD BEFORE SHRI CHANDRA POOJARI, ACCOUNTANT MEMBER AND SMT. ASHA VIJAYARAGHAVAN, JUDICIAL MEMBER ITA NO. 1231/HYD/2012 ASSESSMENT YEAR: 2008-09 ASST. COMMISSIONER OF INCOME-TAX, APPELLANT CIRCLE (1)1, TIRUPATHI VS. M/S AMARA RAJA BATTERIES LD., RESPONDENT TIRUPATHI. (PAN AABCA9264E) C.O. NO. 135/HYD/12 (IN ITA NO. 1231/HYD/2012 ASSESSMENT YEAR: 2008-09 M/S AMARA RAJA BATTERIES LD., CROSS OBJECTOR TIRUPATHI. (PAN AABCA9264E) VS. ASST. COMMISSIONER OF INCOME-TAX, RESPON DENT CIRCLE (1)1, TIRUPATHI REVENUE BY : SHRI M. JAGADISH BABU ASSESSEE BY : SHRI E. PHALGUNA KUMAR DATE OF HEARING : 21/11/2012 DATE OF PRONOUNCEMENT : 27/11/ 2012 ORDER PER ASHA VIJAYARAGHAVAN, J.M.: THIS APPEAL PREFERRED BY THE REVENUE IS DIRECTED AG AINST THE ORDER OF THE CIT(A), GUNTUR, DATED 30/05/2012 FOR T HE ASSESSMENT YEAR 2008-09. THE ASSESSEE FILED C.O., WHICH IS IN SUPPORT OF THE ORDER OF THE CIT(A). ITA NO. 1231 /HYD/2012 & 135/HYD/12 M/S AMAR RAJA BATTERIES LTD. 2 2. BRIEFLY THE FACTS OF THE CASE ARE THAT THE ASSES SEE COMPANY IS CARRYING ON BUSINESS OF MANUFACTURE AND SALE OF BAT TERIES AND IT FILED THE E-RETURN OF INCOME FOR THE YEAR UNDER CON SIDERATION ADMITTING TOTAL INCOME OF RS. 140,74,69,360/-. DURI NG THE COURSE OF ASSESSMENT PROCEEDINGS, THE AO HAD ISSUED A QUESTIO NNAIRE AND A REFERENCE WAS MADE TO THE TRANSFER PRICING OFFICER FOR ASCERTAINING THE ARM LENGTH PRICE (ALM) OF THE INTERNATIONAL TRA NSACTIONS ENTERED INTO BY THE ASSESSEE. THE AR OF THE ASSESSE E COMPANY APPEARED AND FURNISHED SOME INFORMATION AND THE TRA NSFER PRICING OFFICER, HYDERABAD PASSED AN ORDER DATED 18/02/2011 , U/S 92CA(3) OF THE ACT. 4. THE AO FOUND THAT THE ASSESSEE HAD DEBITED A SUM OF RS. 19,58,16,753/- TO P&L A/C TOWARDS WARRANTY AND GUAR ANTEE COSTS AGAINST SALE OF BATTERIES, WHICH INCLUDES PROVISION FOR WARRANTY EXPENSES AMOUNTING TO RS. 9,44,65,322/-. BASED ON T HIS, THE AO HAD WORKED OUT ACTUAL EXPENDITURE TO BE ALLOWED TOW ARDS WARRANTY, WHICH COMES TO RS. 10,13,51,431/- AND THE EXCESS DE BIT OF RS. 9,44,65,322/- WAS DISALLOWED BY OBSERVING THAT THIS IS ONLY A PROVISION BY REJECTING THE CASE LAWS CITED BY THE A SSESSEE. 5. AGGRIEVED, THE ASSESSEE CARRIED THE MATTER IN AP PEAL BEFORE THE CIT(A). 6. BEFORE THE CIT(A), THE ASSESSEE FILED STATEMENT OF FACTS, WHEREIN IT WAS STATED I) HOW THE ASSESSEE COMPANY C ALCULATES THE WARRANTY PROVISION, II) DETAILS OF WARRANTY PROVISI ON OF THE ASSESSEE ITA NO. 1231 /HYD/2012 & 135/HYD/12 M/S AMAR RAJA BATTERIES LTD. 3 FOR THE AY 2008-09, III) BREAK-UP OF WARRANTY PROVI SION ACCOUNTED FOR DURING THE PREVIOUS YEAR 2007-08. 7. THE AR OF THE ASSESSEE FURTHER SUBMITTED THAT TH E ASSESSEE HAD MADE A PROVISION FOR WARRANTY EXPENSES IN ITS B OOKS OF ACCOUNT FOR THE PREVIOUS YEAR 2007-08 AND THE ASSESSEE HAD MADE THE ABOVE PROVISION IN ACCORDANCE WITH THE REQUIREMENTS OF AC COUNTING STANDARD (AS) 29 PROVISIONS AND CONTINGENT LIABILI TIES GIVEN IN THE COMPANIES (ACCOUNTING STANDARD) RULES 2006 ISSUED B Y THE MINISTRY OF CORPORATE AFFAIRS AND INSTITUTE OF CHARTERED ACC OUNTANTS OF INDIA. 8. THE AR ALSO PLACED RELIANCE ON FEW CASE LAWS IN CLUDING THE DECISION OF THE HONBLE SUPREME COURT IN THE CASE O F ROTORK CONTROLS (P) LTD. VS. CIT, 314 ITR 62 [2009). THE ELABORATE SUBMISSIONS OF THE ASSESSEE UNDER THE SAID HEADS, EXTRACTED BY THE CIT(A) IN HIS ORDER AT PAGES 3 TO 10 PAGES. 9. FURTHER, THE AR OF THE ASSESSEE SUBMITTED THAT THE WARRANTY PROVISION WAS CALCULATED ON A VERY SCIENTIFIC AND R EASONABLE BASIS AND THE BASIS OF CALCULATION IS DERIVED FROM THE HI STORICAL DATA WHICH REPRESENTS THE PAST EXPERIENCE OF THE COMPANY IN RE CEIVING BATTERY FAILURES. IT WAS SUBMITTED THAT THERE IS NO ELEMENT OF CONTINGENCY INVOLVED IN WARRANTY PROVISION AND THE AMOUNT OF AC TUAL WARRANTY EXPENSES RECEIVED IN SUBSEQUENT YEARS ITSELF IS SUF FICIENT TO PROVIDE THAT THE WARRANTY PROVISION IS MADE ON REASONABLE B ASIS. IT WAS FURTHER SUBMITTED THAT AS PER MERCANTILE SYSTEM OF ACCOUNTING, THERE MUST A MATCHING BETWEEN THE EXPENSES AND INCOME. IT WAS SUBMITTED THAT IN ITS CASE, THE ASSESSEE SELLS THE BATTERY AND THE SALE PRICE INCLUDES THE COST OF WARRANTY EXPECTED T O ARISE ON THE ITA NO. 1231 /HYD/2012 & 135/HYD/12 M/S AMAR RAJA BATTERIES LTD. 4 SALE OF BATTERY AND ALSO THE WARRANTY ARISING IN TH E SUBSEQUENT YEARS IS ONLY OUT OF THE SALES MADE IN THE PREVIOUS YEARS, HENCE, IN ORDER TO MATCH THE INCOME RECEIVED WITH EXPENSES, W ARRANTY PROVISION IS ACCOUNTED. HE POINTED OUT THAT THIS ME THOD OF ACCOUNTING FOR WARRANTY IS PERMITTED AND ADOPTED BY VARIOUS COMPANIES TO MATCH THEIR COSTS WITH THE INCOME. HE, THEREFORE, SUBMITTED THAT THERE IS NO EXCESS PROVISIONING IN W ARRANTY EXPENDITURE. HE REFERRED THE FOLLOWING DETAILS OF A CTUAL WARRANTY EXPENDITURE AND PROVISION MADE IN THE SUBSEQUENT YE ARS: S.NO. PARTICULARS F.Y. 07-08 F.Y. 08-09 F.Y. 09-10 1 ACTUAL WARRANTY 87078248 299698077 236701287 2 WARRANTY PROVISION 108738505 (25269944) 177124956 3 TOTAL 195816753 274428133 413826243 REFERRING TO THE ABOVE, THE AR OF THE ASSESSEE SUBM ITTED THAT IT CAN BE WITNESSED THAT THE COMPANY PROVIDED FOR RS. 10.8 7 CRORES AS WARRANTY PROVISION DURING THE PREVIOUS YEAR 2007-08 AND THE ENTIRE WARRANTY PROVISION WAS MET BY ACTUAL EXPENDITURE DU RING THE SUBSEQUENT PREVIOUS YEAR 2008-089 AND, THEREFORE, F ROM THIS IT CAN BE STATED THAT THERE IS NO EXCESS PROVISIONING IN W ARRANTY. 10. AFTER CONSIDERING THE SUBMISSIONS OF THE ASSES SEE, THE CIT(A) DISCUSSED THE ISSUE ELABORATELY AND HELD THAT THE A PEX COURT IN THE CASE OF ROTORK CONTROLS INDIA PVT. LTD. (SUPRA), HA S RECOGNIZED THE RIGHT TO DEDUCTION OF WARRANTY PROVISION IN A GROUP OF CASES. THEREFORE, HE HELD THAT THE PROVISION IS NOT AGAIN ST A CONTINGENT LIABILITY IF THE PRESENT VALUE IS ASCERTAINED PROPE RLY ON SCIENTIFIC BASIS AND DISCOUNTED ON ACCRUAL BASIS AND THAT IT I S DEDUCTIBLE U/S ITA NO. 1231 /HYD/2012 & 135/HYD/12 M/S AMAR RAJA BATTERIES LTD. 5 37 OF THE IT ACT, 1961. HE FURTHER POINTED OUT THA T THE APEX COURT HAD OBSERVED THAT THE FACT THAT IT WOULD INVOLVE A SUBSTANTIAL DEGREE OF ESTIMATION SHOULD MAKE NO DIFFERENCE TO T HE CHARACTER OF THE PROVISION. 11. AGGRIEVED BY THE ORDER OF THE CIT(A), THE REVEN UE IS IN APPEAL BEFORE US AND HAS RAISED THE FOLLOWING GROUNDS OF A PPEAL: 1. THE ORDER OF THE CIT(A) IS ERRONEOUS BOTH IN LAW ON FACTS. 2. THE DECISION OF THE CIT(A) IS UNILATERAL AND NO OPPORTUNITY WAS GIVEN TO THE AO ON THE SUBMISSIONS MADE BY THE APPLICANT. 3. THE CIT(A) OUGHT TO HAVE UPHELD THE ORDER OF THE AO. THE AO ALLOWED THE ACTUAL EXPENDITURE TOWARDS WARRANTY AND DISALLOWED THE EXCESS AMOUNT TOWARDS PROVISION OF W ARRANTY EXPENSES DEBITED TO P&L A/C. 12. BEFORE US, THE LEARNED DR SHRI M. JAGADISH BABU SUBMITTED THAT THE THERE IS NO MISTAKE IN THE ORDER OF THE AO AS HE HAD ALLOWED THE ACTUAL EXPENDITURE TOWARDS WARRANTY AND DISALLOWED THE EXCESS AMOUNT TOWARDS PROVISION OF WARRANTY EXPENSE S DEBITED TO P&L A/C. HE FURTHER SUBMITTED THAT THE CIT(A) OUGHT TO HAVE GIVEN AN OPPORTUNITY TO THE AO TO EXAMINE THE SUBMISSIONS MADE BY THE ASSESSEE BEFORE HIM. 13. ON THE OTHER HAND THE LEARNED COUNSEL FOR THE A SSESSEE, SHRI E. PHALGUNA KUMAR, FILED A PAPER BOOK CONTAINING TH E FOLLOWING: 1. WRITTEN SUBMISSIONS 2-10 PAGES 2. ANNEXURE 1 CALCULATION OF WARRANTY PROVISIO N FOR AMARON AND POWERZONE (ABD) PAGE 11 3. ANNEXURE - 2 CALCULATION OF WARRANTY PROVISION FOR PVT. LABLE AND OEMS (AB) PAGE 12. 4. ANNEXURE 3 CALCULATION OF WARRANTY PROVISIO N FOR IBD ITA NO. 1231 /HYD/2012 & 135/HYD/12 M/S AMAR RAJA BATTERIES LTD. 6 (INDUSTRIAL BATTERY DIVISION) - PAGES 13-14 5. ANNEXURE 4 CALCULATION OF ADDITIONAL WARRAN TY PROVISION PAGE 15. 14. THE LEARNED COUNSEL FOR THE ASSESSEE RELIED UPO N VARIOUS CASE LAWS IN SUPPORT OF ITS CASE INCLUDING THE DECISION OF THE HONBLE SUPREME COURT IN THE CASE OF ROTORK CONTROLS (P) LD . VS. CIT, 314 ITR 62 [2009], THE DETAILS OF WHICH ARE AVAILABLE A T PAGES 7 TO 10 OF THE PAPER BOOK. 15. WE HAVE HEARD THE ARGUMENTS OF BOTH THE PARTIES , PERUSED THE RECORD AND GONE THROUGH THE ORDERS OF THE AUTHORITI ES BELOW. THE GRIEVANCE OF THE REVENUE IS THAT THE CIT(A) DECIDED THE CASE UNILATERALLY WITHOUT PROVIDING AN OPPORTUNITY TO TH E AO TO VERIFY THE SUBMISSIONS MADE BEFORE THE CIT(A). WE ARE OF THE V IEW THAT THE CIT(A) SHOULD HAVE CALLED FOR REMAND REPORT FROM TH E ASSESSING OFFICER WITH REFERENCE TO THE SUBMISSIONS AND DOCU MENTARY EVIDENCE SUBMITTED BY THE ASSESSEE IN SUPPORT OF IT S CASE BEFORE THE CIT(A), AS THE SAME MIGHT NOT HAVE BEEN SUBMITTED BEFORE THE ASSESSING OFFICER. THE CIT(A) IS BOUND TO REMAND TH E SAME TO THE FILE OF THE AO FOR VERIFICATION/EXAMINATION BEFORE DECIDING THE CASE AS PER PROVISIONS OF RULE 46A OF IT RULES. THE CIT( A) FAILED TO DO SO IN THIS CASE. IN THESE CIRCUMSTANCES, WE SET ASIDE THE ORDER OF THE CIT(A) AND REMIT THE ISSUE TO THE FILE OF THE AO T O RE-DECIDE THE ISSUE IN ACCORDANCE WITH LAW AFTER EXAMINING THE SU BMISSIONS AND DOCUMENTARY EVIDENCE, IF ANY, FILED BEFORE THE CIT( A) AFTER PROVIDING REASONABLE OPPORTUNITY OF HEARING TO THE ASSESSEE. ITA NO. 1231 /HYD/2012 & 135/HYD/12 M/S AMAR RAJA BATTERIES LTD. 7 16. THE C.O. FILED BY THE ASSESSEE IS IN SUPPORT OF THE ORDER OF THE CIT(A) AND SINCE THE ORDER OF THE CIT(A) IS SET ASI DE AND THE MATTER HAS BEEN REMITTED TO THE FILE OF THE AO IN THE REVE NUES APPEAL (SUPRA), THE C.O. BECOMES INFRUCTUOUS AND THE SAME IS DISMISSED AS INFRUCTUOUS. 17. IN THE RESULT, APPEAL OF THE REVENUE IS ALLOWED FOR STATISTICAL PURPOSES AND THE C.O. FILED BY THE ASSESSEE IS DISM ISSED. PRONOUNCED IN THE OPEN COURT ON 27/11/2012. SD/- SD/- (CHANDRA POOJARI) (ASHA VIJAYARAGH AVAN) ACCOUNTANT MEMBER JUDICIAL MEMBE R HYDERABAD, DATED: 27 TH NOVEMBER, 2012. KV COPY TO:- 1) ACIT, CIRCLE 1(1), AAYAKAR BHAVAN, K.T. ROAD, TIR UPATHI 517 507. 2) M/S AMAR RAJA BATTERIES LTD., GIRI DRUSYA, KARAKAMA DI, RENIGUTA-KADAPA ROAD, TIRUPATHI. 3) THE CIT (A), GUNTUR 4) THE CIT, TIRUPATHI 5) THE DEPARTMENTAL REPRESENTATIVE, I.T.A.T., HYDE RABAD. S.NO. DESCRIPTION DATE INTLS 1. DRAFT DICTATED ON SR.P.S./P.S 2. DRAFT PLACED BEFORE AUTHOR SR.P.S/PS 3 DRAFT PROPOSED & PLACED BEFORE THE SECOND MEMBER JM/AM 4 DRAFT DISCUSSED/APPROVED BY SECOND MEMBER JM/AM 5 APPROVED DRAFT COMES TO THE SR.P.S./PS SR.P.S./P.S 6. KEPT FOR PRONOUNCEMENT ON SR. P.S./P.S. 7. FILE SENT TO THE BENCH CLERK SR.P.S./P.S 8 DATE ON WHICH FILE GOES TO THE HEAD CLERK 9 DATE OF DISPATCH OF ORDER