HAWORTH INDIA PRIVATE LIMITED,CHENNAI V. DCIT CORPORATE CIRCLE 1(1), CHENNAI

ITTPA 79/CHNY/2024

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The case involves M/s. Haworth India Private Limited, a subsidiary of Haworth Inc, USA, engaged in the manufacture and sale of office furniture, which appealed against the order of the Deputy Commissioner of Income Tax concerning the Assessment Year 2021-22. The primary issues revolved around the transfer pricing adjustments made by the Transfer Pricing Officer (TPO) concerning Global Account Management (GAM) charges and intercompany purchase markups. The Tribunal examined whether these charges were integral to the business operations and should be considered under the TNMM method rather than being separately benchmarked. The Tribunal also considered the application of accounting standards in the treatment of lease equalization reserves and year-end accruals of rent expenses.

• Counselvise Citation: [2025] 140 COUNSELVISE.COM (IT) 791709 (ITAT-CHENNAI)
• Duration Of Justice: 1 year(s) 1 month(s) 1 day(s)
• Appeal Type: Income Tax (Transfer Pricing) Appeal
• Pronouncement Date: 09-12-2025
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: D
• Assessment Year: 2021-2022
• Appeal Filed On: 08-11-2024
• Other Referred Cases: Virtual Soft Systems Ltd vs. CIT, Mahindra and Mahindra Ltd vs. DCIT, MPS Ltd vs. DCIT, Siemens Gamesa Renewable Power (P.) Ltd vs. DCIT, Magneti Marelli Powertrain India Pvt. Ltd vs. DCIT, Bonfigioli transmissions Private Limited vs. DCIT, AVO Carbon India Private Limited vs. DCIT
• Laws Referred To: Income Tax Act
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: .V. SREENIVASAN; C.I.T
• Assessee Lawyers: S.P.CHIDAMBARAM
• Keywords: Set aside; Transfer pricing; International transaction; Cost of acquisition; Rule of consistency; TDS
• Section: 234B; 145; 40(a)(ia)

Judgement Text

" आयकर अपील य अ धकरण, ‘डी’ \u000eयायपीठ, चे\u000eनई IN THE INCOME TAX APPELLATE TRIBUNAL ‘D’ BENCH, CHENNAI \u0015ी मनु क ुमार ग\u0019र, \u000eया\u001aयक सद य एवं \u0015ी एस. आर. रघुनाथा, लेखा सद य क े सम$ BEFORE SHRI MANU KUMAR GIRI, JUDICIAL MEMBER AND SHRI S. R. RAGHUNATHA, ACCOUNTANT MEMBER आयकर अपील सं./IT(TP)A No.: 79/Chny/2024 \u001aनधा%रण वष% / Assessment Year: 2021-22 M/s. Haworth India Private Limited, Survey No.260, Vayalur Road, Kiloy Village, Kanchipuram, Chennai – 602 105. vs. DCIT, Corporate Circle -1(1), Chennai. [PAN: AAACH-8417-K] (अपीलाथ'/Appellant) (()यथ'/Respondent) अपीलाथ' क* ओर से/Appellant by : Shri. S.P. Chidambaram, Advocate ()यथ' क* ओर से/Respondent by : Shri. AR. V. Sreenivasan, C.I.T. सुनवाई क* तार ख/Date of Hearing : 21.10.2025 घोषणा क* तार ख/Date of Pronouncement : 09.12.2025 आदेश /O R D E R PER S. R. RAGHUNATHA, AM : This appeal is filed by the Assessee against the order bearing DIN & Order No. ITBA/AST/S/143(3)/2024-25/ 1068560006(1) dated 11.09.2024 of the Assessing Officer, for the Assessment Year (A.Y) 2021-22 passed in compliance to directions vide F.No.300 / DRP-2/Bang/2023-24 dated 21.08.2024 of the Ld.DRP. Printed from counselvise.com :-2-: IT(TP)A. No.:79 /Chny/2024 2. Ground No.1 is general in nature and no specific argument has been raised for these grounds by the Ld.AR. Hence, Ground No.1 of the Assessee does not call for any adjudication. 3. Ground Nos.2.1 to 2.19: Transfer Pricing adjustment towards payment of Global Account Management Charges (GAM) 4. The Ld.AR contended that GAM charges form part of the overall Management fees paid to its Associated Enterprise(AE). The Ld.AR also submitted that the impugned downward adjustment made by the Transfer Pricing Officer (TPO) has been erroneously confirmed by the Ld.DRP, arbitrarily and without considering the material evidence on record. The Ld.AR submitted that the issues are squarely covered by Assessee’s own case for A.Y.2020-21 and the facts are identical. 5. The brief facts of the case are that the Assessee company is a subsidiary of Haworth Inc, USA and is engaged in manufacture and sale of office furniture and modular workspaces. The Assessee has entered into multiple international transactions with AEs during the financial year ended 31.03.2021 (under manufacturing, trading and market support services segment) which broadly includes import of raw materials, finished goods and display materials, sale of finished goods, provision of market support services, payment of management charges, payment towards royalty, payment towards accounting ,selling and general administrative services and reimbursement of expenses paid and received. While arriving at the arm’s length price for the international transactions, Transactional Net Margin Method (“TNMM”) has been considered as most appropriate method for all the 3 segments. All the transactions except provision of market support services have been aggregated (including payment towards management charges- towards global account management and IT charges as it was intrinsically linked to business operations) under manufacturing & trading segment and “Return on operating income” has been selected as Profit level indicator(“PLI”). With regard to Comparables, Printed from counselvise.com :-3-: IT(TP)A. No.:79 /Chny/2024 companies were identified for each of the segments and since the margins of Assessee is higher than that of comparable companies, the international transactions with associated enterprises were concluded to be at arm’s length. The summary of economic analysis is as follows: Segment Method and PLI Appellant ’s margin Weighted average arithmetic mean of comparable companies No. of comparable companies Trading Segment TNMM (OP/OI) 13.6% 11.34% 3 Manufacturing Segment TNMM (OP/OI) 7.5% 5.31% 3 Market Support Services segment (MSS) TNMM (OP/OC) 16.30% 8.48% 4 6. The TPO in the Show Cause notice has questioned the need for payment towards IT charges to AE accepted the payment towards IT at arm’s length after considering the submissions of the Assessee. The TPO accepted the Assessee’s adoption of TNMM method as the most appropriate method for determination of the ALP and accepted the ALP of all other transactions at arm’s length in other segments as well except the payment of Global Account Management Services (GAM). The TPO separately benchmarked the payment of GAM holding “other method” as the most appropriate method. 7. The ld.AR for the Assessee submitted that out of the total management charges of Rs.9,39,71,457/-, the TPO disallowed only the payment of GAM amounting to Rs.5,01,17,864/-. In response to queries of TPO, as to why the ALP for the impugned management charges be not treated as Nil, the Assessee had provided detailed submissions along with evidence, cost allocation details, need benefit analysis as deemed necessary for the purpose. However, the TPO rejected the Assessee’s contentions and held that evidence furnished was vague and, in any event, the same can at the most be considered as Printed from counselvise.com :-4-: IT(TP)A. No.:79 /Chny/2024 stewardship activity. It was held that the same does not warrant a separate payment and made the impugned addition. The Ld.DRP confirmed the findings of the TPO in para 2.7 of its order it was concluded that the TPO has rightly rejected the TP analysis of the Assessee and proceeded to determine “Other method” as most appropriate method. 8. The Ld.AR invited our attention to the fact that, the Assessee avails management support services under a single agreement wherein the Assessee obtains Global Account Management (GAM) services as well as IT services from its Associate Enterprises (AEs). It was argued that the TPO has considered and allowed IT services but has not allowed Global Account Management services. The Ld.AR also submitted that under Global Account Management Service, the AE uses its global reputation and customer vendor relationship to identify new customers and provide the Group’s knowledge and expertise in securing orders from customers. Further it was argued that a mark- up of 5% has been placed qua, these services and that the same is applicable to all group entities as per the service agreement and the cost allocation. The Ld.AR argued that significantly the impugned support services i.e. GAM services help Assessee to augment higher sales and efficient running of the business and this revenue realized with the group support through GAM payments are connected to the core business operations of the Assessee. The Ld.AR also submitted that these services are totally integrated to the business operations of the Assessee and hence, only group company, will know of true business needs, would be in a position to support on the same. It was urged that any third-party service provider would not be in a position to provide said services as efficiently, professionally and productively as the AE, given its institutional knowledge. 9. The Ld.AR also submitted that the company earned around Rs.131.22 crores revenue through the customers identified globally by submitting a detailed listing of revenue earned with the support of its AE. The ld.AR placed Printed from counselvise.com :-5-: IT(TP)A. No.:79 /Chny/2024 on record that for the benefit of revenue of Rs.131.22 crores (revenue generated from GAM accounts) which is 44% (Page 122- 123 of the paper book Volume 1) of the total revenue received by the Assessee during the year, it has made only a payment of Rs.5.01 crores as management service charges. The Ld.AR for the Assessee confirmed that it had not paid any marketing commission separately in relation to these support services. The Ld.AR argued that even if the Assessee had engaged the services of a third party, they would have paid a minimum commission of 5% which translates to Rs.6.56 crores when compared with the total revenue but instead the assessee has paid only Rs.5.08 crores which is lesser. 10. Further the Ld.AR had submitted that detailed mail evidence were submitted to the TPO and the DRP demonstrating the nature of services obtained and the related benefits received (Paper book Volume 1 and Volume 2) which was conveniently brushed aside by the DRP and the TPO claiming that these evidence to be vague and mere communications and regarded them to be stewardship activities. 11. Per contra, the Ld.DR submitted that the agreement filed by the Assessee was an undated agreement and does not pertain to the current year. Further the Ld.DR also highlighted that the details of total cost incurred and cost wise allocation was not submitted by the Assessee. 12. The Ld.AR responded to the Ld.DR’s contention that the agreement submitted by the Assessee was duly signed and dated and it was entered into in January 2019 (which was annexed in Pg 112-120 of Paper book Volume 1) and valid until termination by both parties to the agreement. Further the Ld.AR explained that global cost allocation was also submitted and the total cost incurred by the group was allocated on the basis of turnover among the group across locations. The Ld.AR contended that the details requested by the lower authorities were submitted by the Assessee as and when called for during assessment proceedings. Printed from counselvise.com :-6-: IT(TP)A. No.:79 /Chny/2024 13. We have heard rival submissions and the materials available on records and gone through the orders of the authorities along with the paper books filed. The management services which have been disallowed by the TPO and his decision has been affirmed by the ld.DRP. We have noted that disallowance of GAM charges which is pivotal to the controversy are integral to the business of the Assessee. It is not a case of any service or activity devised by the Assessee which is one of its types, over which any doubts can be cast. With the material evidence available on records, we are able to decipher that the Assessee has derived substantial benefit from its AE and such benefit is intrinsically linked to the core business activity of the Assessee. Therefore, we are also of the view that these charges will have to be aggregated like any other operating expenses and benchmarked under TNMM method instead of separately benchmarked under other method. Therefore, we do not approve the method adopted by the TPO which was upheld by the DRP. 14. Principle of Consistency demand that the same treatment is to be given, over the years to a set of transaction if facts are same. We have also noted that a co-ordinate Bench of this Tribunal in Assessee’s own case for AY 2020-21 in ITA No.23/Chny/2024 dated 20.08.2025 has ruled as under: - “5.0 We have heard rival submissions in the light of materials available on records. We have noted that disallowance of GAM charges which is seminal to the controversy are integrally related to conduct of any business activity of the type undertaken by the Assessee. It is not a case of any service or activity devised by the Assessee which is one of its type, over which any doubts can be caste. It is, in realty, a routine activity which comprises every business activity of the type pursued by the Assessee. We have noted that the Assessee, through its voluminous paper book, has brought on record agreement, invoices, various email communications establishing the receipt of services, break-up of cost incurred by AE, detailed break- up of revenue earned through AE’s support. All these evidences are substantial and do not confirm the Ld.TPO’s allegation of the same being vague. We also find sufficient force in the argument of the Ld AR that the present service cannot be classified as stewardship services as the services has actually benefitted the Appellant Assessee. Therefore, when the AE has performed active service, the Assessee is duty bound to compensate its AE. It has also been noted that the Assessee has not paid any commission separately. It appears that the Assessee instead of paying marketing commission it is paying GAM Charges. We note that the substance over form of the transaction merits consideration. The very fact that Printed from counselvise.com :-7-: IT(TP)A. No.:79 /Chny/2024 the revenue has allowed the charges in the past, their disallowance and that too on identical facts would not be a fair exercise. 6. This tribunal in the case of AVO Carbon India Private Limited (IT(TP)A No.82/Chny/2024), had held that “… We have noted that rival parties have concurred that there has been no distinguishment of facts of the present case viz a viz those available in AY 2012- 13 and AY 2015-16 for which this Tribunal has accorded relief to the Assessee. Accordingly, in adherence to the principles of consistency as well as in respectful compliance to the decision of Hon’ble co-ordinate Benches of this Tribunal in Assessee’s own case discussed supra, we set aside the order of lower authorities and direct the Ld.AO to delete the impugned addition of Rs.7,25,09,110/- on account of downward adjustment of payment of management fees. All the grounds of appeal raised by the Assessee on this issue are therefore allowed. Further, in the case of “Bonfigioli transmissions Private Limited Vs. DCIT, ITAT Chennai for AY 2013-14– [ITA No. 2977/CHNY/2017] it was held that “Admittedly the business of the Assessee is a consolidated one. The services referred under ‘Corporate Services” are intrinsically linked to its manufacturing and sales activity. These two services cannot be separately demarcated. Corporate services are the services rendered, which has helped the Assessee in generating the business in respect of marketing and trading. This being so, in view of the decision of Hon’ble Delhi High Court in the case of CIT vs. EKL Appliances Ltd., referred to supra, the Ld. Assessing Officer is directed to allow the Assessee’s claim of the Corporate Services expenditure incurred by Assessee”. 7.0 We have also noted that Principles of Consistency demand that same treatment is to be given, over the years to a set of transaction if substance transaction are same though different methods may be adopted to justify the same. The Ld. A.R submitted that as a rule of consistency the same should be followed in AY 2020-21 also. The Hon’ble Apex Court in the case of Radhasoami Satsang 193 ITR 321 has held: “13. We are aware of the fact that strictly speaking res judicata does not apply to income-tax proceedings. Again, each assessment year being a unit, what is decided in one year may not apply in the following year but a fundamental aspect premeating through different assessment years has been found as a fact one way or the other and parties have allowed that position to be sustained by not challenging the order, it would not be at all appropriate to allow the position to be changed in a subsequent year.” Therefore, as a matter of consistency the TPO having considered and accepted these charges in AY 2016-17 & 2017-18 cannot be allowed to take a different view in AY 2020-21. 8.0 We find sufficient force in the argument of the Assessee that since the Assessee is dependent on the Global Account Management support for manufacturing/trading, the said transaction is inextricably connected with core business operation and as such it cannot be segregated and benchmarked independently. We have noted the decision of this Tribunal in the case of Siemens Gamesa Renewable Power (P.) Ltd v. DCIT 155 taxmann.com 406 holding as under: Printed from counselvise.com :-8-: IT(TP)A. No.:79 /Chny/2024 “Admittedly the business of the Assessee is a consolidated one. The services referred under ‘Corporate Services” are intrinsically linked to its manufacturing and sales activity. These two services cannot be separately demarcated. Corporate services are the services rendered, which has helped the Assessee in generating the business in respect of marketing and trading. This being so, in view of the decision of Hon’ble Delhi High Court in the case of CIT vs. EKL Appliances Ltd., referred to supra, the Ld. Assessing Officer is directed to allow the Assessee’s claim of the Corporate Services expenditure incurred by Assessee” 9.0 Again, we have noted that in the case of Magneti Marelli Powertrain India Pvt. Ltd. Vs. DCIT, Delhi High court for AY 2008-09 – [ITA No. 350/2014] the Hon’ble Delhi High Court had held that “Here this court concurs with the Assessee that having accepted the TNMM as the most appropriate, it was not open to the TPO to subject only one element, i.e. payment of technical assistance fee, to an entirely different (CUP) method…. If this were to be disturbed, the end result would be distorted and within one ALP determination for a year, two or even five methods can be adopted. This would spell chaos and be detrimental to the interests of both the Assessee and the revenue …. therefore, answered in favour of the Assessee; the TNMM had to be applied by the TPO/AO in respect of the technical fee payment too.” 10.0 We have noted the facts of the present case are akin to those available in judicial precedence discussed herein above. Thus, as the Assessee’s core business activity and sale is inextricably linked/dependent on the Global Account Management service from its AEs, the payment of these charges cannot be segregated and benchmarked separately. The judicial precedence discussed hereinabove also support this line of thinking. Accordingly, in respectful compliance to the same, we hold that the Assessee has rightly aggregated and benchmarked this transaction under TNMM. Accordingly, we hold that the TPO having accepted the overall TNMM analysis, was not right in excluding Global Account Management charges for separate benchmarking analysis. Accordingly, we set aside the order of lower authorities and direct the Ld.AO to delete the impugned addition of Rs.5,08,36,826/- on account of downward adjustment of payment of management fees towards global account management charges.” 15. In light of the above in the Subject Assessment year also the Assessee has established the benefit with sufficient evidence and has also demonstrated that around 44% of the total turnover of the Assessee which is equivalent to Rs.131.22 crore was generated with the referrals and support provided by the AE. Therefore, we also re affirm that the GAM charges will have to be aggregated and benchmarked under TNMM method and since the margins of the Assessee under TNMM method has been accepted by the TPO we hold that there is no requirement to make any separate adjustment. We also noted that rival parties have concurred that there has been no distinguishment of facts Printed from counselvise.com :-9-: IT(TP)A. No.:79 /Chny/2024 of the present case vis a vis those available in A.Y.2020-21 for which this Tribunal has accorded relief to the Assessee. Accordingly, in adherence to the principles of consistency as well as in respectful compliance to the decision of Hon’ble co-ordinate Benches of this Tribunal in Assessee’s own case discussed supra, we set aside the order of lower authorities and direct the AO/TPO to delete the impugned addition of Rs.5,01,17,864/- on account of downward adjustment of payment of management fees. Accordingly, Ground no.2 is allowed in favor of the Assessee. 16. Ground Nos.3.1 and 3.2, the Ld.AR submitted that under instructions from the Assessee he is not pressing the grounds of appeal and hence these grounds of appeal are dismissed. 17. Ground No.3.3: Disallowance of intercompany purchase mark-up: 17.1 The AO has disallowed the inter-company purchase markup expenses amounting to Rs.42,29,260/- u/s.37 of the Act, which was upheld by the DRP and the Assessee is in appeal before us. 18. The Ld.AR contended that one of the business activities of the Assessee includes trading business. The Assessee purchases goods, inter-alia, from its group companies for the purposes of sale to the customers in India i.e., for its trading business activity. The goods are imported from Haworth Inc, USA, Buzzispace NV, Netherlands, CAP Design S.P.A., Spain, Poltrona Frau, Italy and Haworth Gmbh, Germany. The Ld.AR submitted that the markup element is first removed from the cost of goods sold account and then classified in a separate account i.e., intercompany purchase markup account. The journal entry submitted by the Assessee is as under: Dr. GL Cost of Goods Sold (Expense) Cr. Intercompany Payables (Liability) (Accounting of entire purchase cost as per invoice raised) Printed from counselvise.com :-10-: IT(TP)A. No.:79 /Chny/2024 Dr. Intercompany purchase markup (Expense) Cr. GL Cost of Goods Sold (Expense) (Accounting of markup included in the purchases to separate account) 19. The Assessee submitted that since the markup element is first removed from cost of goods sold account and then accounted under the head intercompany purchase markup, there is no double deduction of same expenditure. The Ld.AR also submitted that the purchase price of goods is reported and subject to the transfer pricing provisions. The Ld.AR submits that the markup element is accounted vide a separate account for ease of consolidation during group reporting. Since markup is categorized under a separate ledger account, the same can be separately identified and removed while preparing the consolidated financial statements by the Assessee’s parent company i.e. Haworth Inc., USA. Referring to the details filed in the paperbook, the Ld.AR referred to the ledger account extract of the intercompany purchase markup amounting to Rs.42,29,260/-. The Ld.AR has also taken us through the journal entries and explained how the markup is accounted as above. 20. On the other hand, the Ld.DR for the Revenue relied on the order of the lower authorities and submitted that the inter-company markup expense amounting Rs.42,29,260/- should not be allowed as deduction. 21. We have heard the rival submissions along with the paper book filed. In the light of materials available on records, we note that the main contention of the AO for disallowing this amount is whether there is a double deduction of the quantum of ‘inter-company purchase mark-up’ debited to P&L account under a separate head. On perusal of the scheme of accounting and the relevant journal entries submitted on record, we find that the Assessee has merely classified the markup portion involved in the purchase price of imported goods into a separate account called the ‘inter company purchase markup’. The AO has not brought on record any material to suggest that the classification of this quantum into a separate account in the P&L account amounts to a double deduction of expense Printed from counselvise.com :-11-: IT(TP)A. No.:79 /Chny/2024 which is over and above the purchase cost. We are of the considered view that the treatment/ classification in accounts is the prerogative of the Assessee in accordance with the applicable standards for reporting and as such the AO cannot find fault with the treatment/ classification in the financial statements. Further, from the details filed we are able to infer that the cost of the goods is captured in the purchase account, whereas the markup element has been separately accounted as an independent line under the title ‘Intercompany purchase markup’ for ease of group reporting and related party disclosure. We also note that this transaction was also subject matter of consideration in the Transfer Pricing assessment and the TPO has not made any adverse remarks and hence we hold that disallowance of markup on the basis of conjectures and surmises is unwarranted and it is hereby deleted. Accordingly, this ground no.3.3 is allowed in favour of the Assessee. 22. Ground No.3.4 Disallowance of expenses/ statutory dues amounting to Rs.2,88,379/-: 22.1 The Ld.AR argued that the said disallowance consisted of two amounts. Firstly, a sum of Rs.70,641/- pertained to the difference between the closing liability u/s.194-I and 194J of the Act, and accordingly does not pertain to expenses on which TDS is not deducted. Secondly, on the sum of Rs.2,17,738/- the Ld.AR submitted that this represents a balance sheet item i.e. opening balance of statutory dues u/s.43B of the Act and hence the question of disallowance does not arise. 23. The Ld.DR supported the impugned order. 24. We have considered the rival submissions and gone through the orders of authorities. On perusal of material available on record, we find merit in the arguments of the Ld.AR wherein both Rs.70,641/- and Rs.2,17,738/- amounting to Rs.2,88,379/- is a balance sheet items representing opening balance of statutory dues as per the financial statements and hence question of disallowing Printed from counselvise.com :-12-: IT(TP)A. No.:79 /Chny/2024 an opening balance in the impugned year does not arise. Therefore, we direct the AO to delete the disallowance of Rs.2,88,379/-. Accordingly, this ground no.3.4 is allowed in favour of the Assessee. 25. Ground No.3.5 Disallowance of reversal of leave encashment liability: 25.1 The Ld.AR submitted that the Assessee has reversed Leave Encashment liability to the extent of Rs.54,65,893/- during the subject AY. As the reversal was made by way of an audit entry as on 31.03.2021, the entry was not appearing in the leave encashment general ledger in view of the classification as per the accounting software used by the Assessee. As Leave Encashment expenses to the extent of Rs.54,65,893/- was already disallowed in the previous years prior to A.Y.2021-22, the Ld.AR submitted that Assessee has claimed the deduction u/s.43B of the Act in the subject A.Y.2021-22 based on the reversal entry passed. Assessee also submitted the details of leave encashment liability in the previous periods. The statement provided by the Assessee is extracted below: Years Disallowed as per tax memo (Rs.) Claimed as deduction as per tax memo (Rs.) AY 2014-15 19,68,406 - AY 2015-16 - 62,319 AY 2016-17 - 9,02,444 AY 2017-18 29,47,248 4,42,112 AY 2018-19 19,01,894 3,04,703 AY 2019-20 7,19,018 6,50,071 AY 2020-21 20,99,082 8,377 Total 96,35,648 23,70,026 Net disallowance made over the years 72,65,622 26. The Ld.AR for the Assessee submitted that a total amount of Rs.72,65,622/- on net basis were disallowed in the previous AY’s (i.e., net of Printed from counselvise.com :-13-: IT(TP)A. No.:79 /Chny/2024 deductions claimed). The claim of deduction made in subject A.Y. is within the net disallowed as on the beginning of the subject A.Y. i.e., as on 01.04.2020. The extract of audit entry of leave encashment liability passed on 31.03.2021 is enclosed below wherein P&L account is being credited with such reversal: Dr. Accr Leave Encashment (Liability) Rs. 57,15,013 Cr. Salary Fringes - Fixed (Expense) (Rs. 57,15,013) Narration: Provision for Compensated Absence (Accounting of reversal of leave encashment liability in FY 2020-21) 27. It was submitted before this Bench that the NaFAC has erroneously held that the reversal is made in the next A.Y.2022-23, without appreciating that the reversal entry was passed as on 31.03.2021. As the Assessee has credited the relevant expense accounts, the Assessee has now claimed the reversal of previous year liability as deduction u/s.43B of the Act since the leave encashment expense was previously disallowed by the Assessee in the preceding years prior to A.Y.2021-22. 28. Per contra, the Ld.DR relied on the order of the lower authorities and requested to uphold the order of the AO-NaFAC. 29. We have heard the rival arguments perused the material available on record and gone through the orders of the authorities along with the paper book filed. After going through the submissions made by the Assessee, we find sufficient force in the argument of the Assessee that the above claim made u/s.43B of the Act is on account of reversal of provisions made in earlier period which have suffered disallowance in the respective years. Accordingly, we direct the AO to delete the disallowance of Rs.54,65,893/- made in the impugned order. This ground of appeal is allowed. 30. Ground No.3.6 Disallowance of rent expenses: Printed from counselvise.com :-14-: IT(TP)A. No.:79 /Chny/2024 30.1 The Ld. AR submitted that the AO has disallowed the rent equalisation expense amounting to Rs.15,66,368/- and also disallowed the year-end accruals of rent amounting to Rs.36,83,601/-. 31. First, the Ld.AR argued on the grounds on disallowance of Rs.15,66,368/- pertaining to rent equalisation reserve debited to the P&L account during the year. The Ld.AR submitted that the Assessee has claimed the deduction in line with Accounting Standard 19 – Leases, which in accordance with the accounting standards regularly employed by the Assessee as per Section 145 of the Act. 32. The Ld.AR for the Assessee submitted that per clause 23 of AS-19, Companies are required to adopt straight lining of lease payments and charge the straight-lined lease expense to the P&L account. The Assessee had followed this treatment while recognizing the rent expense in its P&L account and as such created lease equalization reserve of Rs.15,66,368/- for the subject A.Y. For the subject, the Assessee has straight-lined the lease payments which are comprising for more than a year as per the rental agreements and as such created the equalization reserve during the subject A.Y. The Assessee also filed the various office/warehouse wise details of rent equalisation reserve along with the notes on arguments. For arriving at the deferred rent, the Assessee first computes the total rent pertaining to the lease period across various years. Then, the rent per year is arrived at by dividing the total rent expense as per the lease deeds by the number of months / year completed as of 31.03.2021. The difference between such rent per year and the actual rent payment made as of 31.03.2021 is accounted in the books as leave equalization reserve in accordance with AS-19 issued by the ICAI. For income tax purposes, the Assessee has adopted the same approach as is adopted for the books of accounts which in accordance with Section 145 of the Act dealing with the accounting standards regularly employed by the Assessee. Printed from counselvise.com :-15-: IT(TP)A. No.:79 /Chny/2024 33. The Ld.AR relied on the decision of the Apex Court decision in the case of Virtual Soft Systems Ltd [2018] 92 taxmann.com 370. In this decision, the Apex Court held that where there being no express bar in Act regarding application of accounting standards prescribed by ICAI, such Guidance Note shall be used by the assessee to show fair and real income which is liable to tax under the Act. The relevant portion of the judgment is as under: “13. The method of accounting followed, as derived from the ICAI's Guidance Note, is a valid method of capturing real income based on the substance of finance lease transaction. The rule of substance over form is a fundamental principle of accounting, and is in fact, incorporated in the ICAI's Accounting Standards on Disclosure of Accounting Policies being accounting standards which is a kind of guidelines for accounting periods starting from 01.04.1991.” “16…… The main contention of the Revenue is that the Respondent cannot be allowed to claim deduction regarding lease equalization charges since as such there is no express provision regarding such deduction in the IT Act. However, it is apt to note here that the Respondent can be charged only on real income which can be calculated only after applying the prescribed method. The IT Act is silent on such deduction. For such calculation, it is obvious that the Respondent has to take course of Guidance Note prescribed by the ICAI if it is available. Only after applying such method which is prescribed in the Guidance Note, the Respondent can show fair and real income which is liable to tax under the IT Act. Therefore, it is wrong to say that the Respondent claimed deduction by virtue of Guidance Note rather it only applied the method of bifurcation as prescribed by the expert team of ICAI……..” 34. The Ld.AR also relied on the AP & Telangana HC in the case of Pact Securities & Financial Services Ltd. [2015] 61 taxmann.com 192 wherein the Court held that where assessee had maintained accounts as per guidance note on accounting for leases issued by ICAI, method of accounting followed by assessee could not be discarded and it was entitled for deduction. 35. On the contrary, the Ld. DR supported the contentions made in the impugned final assessment order and argued that any amount debited towards lease equalization reserve is only a notional amount and is not an allowable expenditure under the Act. 36. We have heard the rival arguments on this issue and gone through the material available on record. We find that this issue is squarely covered in favour of the Assessee by the decision of the Supreme Court in the case of Printed from counselvise.com :-16-: IT(TP)A. No.:79 /Chny/2024 Virtual Soft Systems Ltd (supra). Respectfully following the decision, we direct the AO to delete the disallowance of Rs.15,66,368/- made towards lease equalization reserve. 37. On year-end rent expense accruals amounting to Rs.36,83,601/-, it was submitted by the Ld.AR that the AO has disallowed the year-end accruals for rent expenses amounting to Rs.36,83,601/- u/s.37 of the Act on the ground that the same is notional in nature. In this regard, the Ld.AR contended that the expenditure is debited to P&L account as per Accounting Standard 29 – Provisions, Contingent Liabilities and Contingent Assets, in accordance with the accounting standards regularly employed by the Assessee as per Section 145 of the Act. The Ld.AR also submitted that the accruals are reversed in the month of April 2022 i.e., first month of the subsequent financial year and as such TDS compliance has been made on the actual invoices received by the Assessee. 38. The Ld.AR contended that merely because accrual entries are debited to the P&L account in accordance with the Accounting Standards and the said expenditure is not actually paid during the year, it would not mean that the expenditure is notional and fictitious in nature. The Ld.AR also contended that the accruals were reversed in the subsequent period. Since the same stands reversed immediately in the subsequent period in accordance with the accounting standards regularly employed by the Assessee, the Ld.AR submits that no disallowance should be made on account of year end accruals charged to the P&L account. 39. In this regard, the Ld.AR for the Assessee relied on the decision of Mahindra and Mahindra Ltd v DCIT (2020) [117 taxmann com 518] wherein the Mumbai ITAT held that when assessee made year end provisions representing cost of various activities carried out by company during relevant financial period though concerned parties had not submitted their bills or such bills were pending formal approval but same were ascertainable and not mere Printed from counselvise.com :-17-: IT(TP)A. No.:79 /Chny/2024 ad hoc provisions, same could not be disallowed for non-deduction of TDS. Further the Ld.AR also relied the decision of this Hon’ble Tribunal in the case of MPS Ltd ITA No.:761/CHNY/2017 dated 20.07.20222 wherein it was held that when the same amount stands reversed and offered to the tax in the immediately succeeding A.Y. in view of the accounting standards regularly employed by the Assessee, then the addition made in the subject A.Y. is unsustainable. 40. Per contra the Ld. DR for the Revenue relied on the final assessment order of the NaFAC and prayed that the disallowance of disallowance of year end accruals of rent be upheld. 41. We have heard the contentions of both the parties. Firstly, we are cautious of the fact that these year end provisions are relating to the expense of the subject A.Y. but the Assessee would not have received the invoices and/or initiated the payment. Therefore, these year end provisions are created and then reversed immediately in the succeeding financial year. These accounting treatments are done on the basis of the Accounting Standards prescribed by ICAI to reflect the true and correct picture in the financial statement of a particular year. We are also of view that year end provisions, other than ad hoc provisions, are allowable as deduction as long as they are reversed in the immediately succeeding financial year. Further, though these provisions are created, the respective parties account is not credited and therefore the question of TDS does not arise. We also rely on the co-ordinate bench decision in the case of Mahindra & Mahindra Mumbai ITAT supra. “7.3 This action of the ld. AO was upheld by the ld. DRP. We find that this Tribunal in assessee's own case for the A.Y. 2009-10 vide para 23 had deleted the disallowance made under section 40(a)(ia) of the Act. The copy of the order was placed on record by the ld. AR. The ld. DR submitted that the assessee has not submitted the break-up of Rs. 33.78 crores being year end provision made for various expenses. But we find that the entire break-up had been duly submitted by the assessee before the lower authorities and the same are enclosed in page 234 of the paper book and the figures mentioned thereon are fairly ascertainable and are not mere ad hoc provisions. Respectfully following the said decision of the Tribunal in assessee's own case for A.Y. 2009-10, we Printed from counselvise.com :-18-: IT(TP)A. No.:79 /Chny/2024 have no hesitation in directing the ld. AO to delete the disallowance under section 40(a)(ia) in the sum of Rs. 33,78,54,976. Accordingly, the concise ground No. 5 raised by the assessee is allowed.” 42. Similarly, the jurisdictional Tribunal in the case of MPS Ltd has held as under: “The learned Counsel for the Assessee stated that the Assessee has to mandatorily follow the Accounting Standards (AS) issued by the Institute of Chartered Accountants of India (ICAI) and by virtue of the provisions of the Companies Act, it was obliged to make a market valuation of the forward contract covers as on the reporting date and account for the same in the books to comply with the accounting standards. Accordingly, the Assessee had recognized and accounted for the MTM loss of Rs.3,38,70,000/- in the books of accounts for the year ending 31.03.2012. 15.1 The learned Counsel for the Assessee relied on the decision of the Hon’ble Supreme Court in the case of Commissioner of Income Tax Vs. Woodward Governor India Private Limited reported in [2009] 312 ITR 254 (SC). The learned Counsel for the Assessee stated that the Assessee has been consistently following this approach and in fact, the very same amount is reversed and offered to tax in the Assessment Year 2013-2014. The Assessee enclosed the Cash-Flow Statement from the Annual Report, wherein it is apparently evident that the same amount is shown as negative figure as on 31.03.2013 and as a positive figure as on 31.03.2012. 16. On the other hand, the learned CIT-DR, Shri. M. Murali relied on the order of the TPO and that of the DRP. 17. We have heard the rival contentions and had gone through the facts and circumstances of the case. It is clear that the Assessee has reversed the loss claimed in the next year and offered to tax. On this very count, the addition cannot be made.” 43. Respectfully following the above decisions, we hereby conclude that the year end provisions, other than ad-hoc provisions, is allowable as deduction. Accordingly, this ground of appeal of the assessee is allowed. 44. Ground No.3.7: levy of interest under section 234B of the Act: 44.1 The Ld.AR for the Assessee relied on the grounds of appeal raised and requested that suitable directions be issued to the NaFAC to recompute the interest u/s.234B of the Act. We hereby direct the AO to recompute the Printed from counselvise.com :-19-: IT(TP)A. No.:79 /Chny/2024 assessed income in view of the decision on the issues as aforesaid and recompute the interest u/s.234B of the Act in accordance with law. 45. In the result, the appeal of the Assessee is partly allowed. Order pronounced in the open court on 09th December, 2025 at Chennai. Sd/- Sd/- (मनु क ुमार ग\u0019र) (MANU KUMAR GIRI) \u000eया\u001aयक सद य/Judicial Member (एस. आर. रघुनाथा) (S. R. RAGHUNATHA) लेखा सद य/Accountant Member चे\u000eनई/Chennai, /दनांक/Dated, the 09th December, 2025 SP आदेश क* (\u001aत1ल2प अ3े2षत/Copy to: 1. अपीलाथ'/Appellant 2. ()यथ'/Respondent 3.आयकर आयु4त/CIT– Chennai/Coimbatore/Madurai/Salem 4. 2वभागीय (\u001aत\u001aन ध/DR 5. गाड% फाईल/GF Printed from counselvise.com "