M/s. Thomson Holdings (India) Pvt. Ltd., Gurgaon V. DCIT, New Delhi

ITA 1093/DEL/2013

• Counselvise Citation: [2018] 125 COUNSELVISE.COM (IT) 1206 (ITAT-DELHI)
• Duration Of Justice: 5 year(s) 6 month(s) 11 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 07-09-2018
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: D
• Next Hearing Date: 12-07-2017
• Assessment Year: 2007-2008
• Appeal Filed On: 25-02-2013
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: S S TOMAR
• Keywords: Capital asset; Business expenditure; Retrospective amendment; Revenue expenditure
• Section: 11

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL DELHI BENCH D NEW DELHI BEFORE SHRI G.D. AGRAWAL, HONBLE PRESIDENT & SHRI AMIT SHUKLA, JUDICIAL MEMBER I.T.A. NO.841/DEL/2013 ASSESSMENT YEAR: 2007-08 ASST. CIT, CIRCLE-16(1), NEW DELHI. VS. M/S. THOMSON HOLDINGS (INDIA)LTD., 302 (3B), WORLD TRADE TOWER, BARAKHAMBA LANE, NEW DELHI. TAN/PAN: AACCT 0862G (APPELLANT) (RESPONDENT) I.T.A. NO.1093/DEL/2013 ASSESSMENT YEAR: 2007-08 M/S. THOMSON HOLDINGS (INDIA) LTD., 302 (3B), WORLD TRADE TOWER, BARAKHAMBA LANE, NEW DELHI. VS. DY.CIT, CIRCLE-16(1), NEW DELHI. TAN/PAN: AACCT 0862G (APPELLANT) (RESPONDENT) APPELLANT BY: SHRI AMIT JAIN, SR. D.R. RESPONDENT BY: S/SHRI VISHAL KALRA & S.S. TOMAR, ADV. DATE OF HEARING: 12 06 2018 DATE OF PRONOUNCEMENT: 07 09 2018 O R D E R PER AMIT SHUKLA, J.M.: THE AFORESAID CROSS APPEALS HAVE BEEN FILED BY THE ASSESSEE AS WELL AS BY THE REVENUE AGAINST THE IMPU GNED ORDER DATED 16.11.2012, PASSED BY THE CIT(APPEALS)- XII, NEW DELHI FOR THE QUANTUM OF ASSESSMENT PASSED U/S.143( 3) FOR I.T.A. NO.2513/DEL/2013 2 THE ASSESSMENT YEAR 2007-08. WE WILL FIRST TAKE UP THE ASSESSEES APPEAL WHEREIN THE ASSESSEE HAS RAISED T HE FOLLOWING GROUNDS: - 1. THAT ON THE FACTS AND CIRCUMSTANCES OF THE CAS E AND IN LAW, THE CIT(A) HAS ERRED IN UPHOLDING THE DISALLOWANCE ON A CCOUNT OF PROVISION MADE DURING THE YEAR FOR PRICE REDUCTION AMOUNTING TO RS.1,43,00,205/- HOLDING THAT THE LIABILITY HAD NOT ACCRUED DURING THE RELEVANT FINANCIAL YEAR. 2. NOTWITHSTANDING AND WITHOUT PREJUDICE TO THE ABO VE, THE CIT(A) ERRED IN NOT DIRECTING THE ASSESSING OFFICER TO ALL OW THE CLAIM FOR DEDUCTION IN RELATION TO PRICE REDUCTION AMOUNTING TO RS. 1,43,00,205/- IN THE PREVIOUS YEAR RELEVANT TO ASSE SSMENT YEAR 2008- 09 I.E. THE YEAR IN WHICH, THE PRICE REDUCTIO N WAS ADMITTEDLY PASSED ON TO THE PURCHASER. 2. THE FACTS IN BRIEF QUA THE AFORESAID ISSUE ARE THAT THE ASSESSEE-COMPANY IS ENGAGED IN THE BUSINESS OF WHOL ESALE TRADING OF SET TOP BOXES, PROVIDING MARKET SUPPORT AND WARRANTY SUPPORT SERVICES FOR ITS ASSOCIATED ENTERP RISES AND IN RESEARCH AND DEVELOPMENT ACTIVITIES FOR BROADBAN D AND BROADCAST RELATED EQUIPMENTS AND PRODUCTS SYSTEMS. DURING THE RELEVANT ASSESSMENT YEAR, ASSESSEE HAD SOLD SE T TOP BOXES TO M/S. TATA SKY LTD. IT HAS BEEN STATED THA T SET TOP BOXES KIT COMPRISED OF THREE COMPONENTS, NAMELY, TH E BASIC UNIT, THE REMOTE CONTROL UNIT AND THE MASTER CARTON PLUS BATTERIES. AS PER THE MOU BETWEEN THE ASSESSEE AND TATA SKY LTD. DATED 17.01.2006 READ WITH ADDENDUM DATED 15.06.2006, THE PARTIES AGREED ON THE PRICE OF EACH OF THESE COMPONENTS. HOWEVER, THE ASSESSEE EVENTUALLY ENDED UP I.T.A. NO.2513/DEL/2013 3 CHARGING M/S. TATA SKY LTD A PRICE HIGHER THAN THE AGREED PRICE ON TWO OF THE COMPONENTS, NAMELY, REMOTE CONT ROL UNIT AND THE MASTER CARTON PLUS BATTERIES. AS A RESULT, THE PARTIES AGREED THAT THE ASSESSEE WOULD RETROSPECTIVELY PROV IDE THE DISCOUNT IN RESPECT OF EXTRA PRICE CHARGED ON THE S ET TOP BOX KITS. ACCORDINGLY, THE ASSESSEE ISSUED RELEVANT DEB IT NOTES AMOUNTING TO RS.14,300,205/- WHICH PERTAINED TO SAL E AFFECTED DURING THE YEAR 2007-08; AND ACCORDINGLY, CLAIMED THE PROVISION FOR PRICE REDUCTION OF THAT AMOUNT OU T OF SALES MADE DURING THE YEAR UNDER CONSIDERATION. BEFORE TH E ASSESSING OFFICER IN RESPONSE TO THE SHOW CAUSE NOT ICE, THE ASSESSEE SUBMITTED THAT THE PROVISION FOR PRICE RED UCTION PERTAINS TO THE SALE MADE DURING THE FINANCIAL YEAR 2006-07 AND SINCE IT FOLLOWS THE MERCANTILE SYSTEM OF ACCOU NTING, THEREFORE, THE SAID PROVISION IS TO BE ALLOWED, BEC AUSE AS PER THE MERCANTILE SYSTEM OF ACCOUNTING, COSTS DIRECTLY ASSOCIATED WITH THE REVENUE RECOGNIZED DURING THE RELEVANT PER IOD IRRESPECTIVE OF THE MONEY HAS BEEN PAID OR NOT ARE CONSIDERED AS EXPENSES AND CHARGED TO THE INCOME FOR THE RELEV ANT PERIOD. THE ASSESSEE ALSO SUBMITTED REVISED LETTER/ AGREEMENT BETWEEN THE PARTIES DATED 16.08.2007, WHEREIN THE A SSESSEE TO SUCH POST FACTO PRICE REDUCTION. THE CONTENT OF THE LETTER HAS BEEN REPRODUCED IN THE IMPUGNED ASSESSMENT ORDE R. THUS, IT WAS SUBMITTED THAT SUCH AN UNDERSTANDING O F PRICE REDUCTION WAS IN ACCORDANCE WITH ADDENDUM TO MOU AG REED BETWEEN THE PARTIES. HOWEVER, THE LEARNED ASSESSING OFFICER HELD THAT THE SET TOP BOXES SOLD TO M/S. TATA SKY LTD. AND I.T.A. NO.2513/DEL/2013 4 THE BILLS AND VOUCHERS REGARDING THE SAME HAS BEEN RAISED DURING THE RELEVANT FINANCIAL YEAR 2006-07 AND THE ENTRIES IN THE BOOKS OF ACCOUNT AND THE PAYMENTS HAVE BEEN REC EIVED AND DULY ENTERED INTO BOOKS OF ACCOUNT WHICH HAVE B EEN FINALIZED AFTER THE END OF THE FINANCIAL YEAR AS ON 31 ST MARCH, 2007. THE ASSESSEE HAS ENTERED POST FACTO CHANGE ON THE SALE PRICE AFTER THE CLOSURE OF THE BOOKS OF ACCOUNT AND HAS ADJUSTED THE SALE RECEIPTS WHICH CANNOT BE ACCEPTED ONCE THE BOOKS ARE CLOSED. EVEN THE AGREEMENT WITH THE PURCH ASER BY WAY OF ADDENDUM HAS BEEN ENTERED ON 01.06.2007, AND WHEREBY IT HAS MODIFIED THE SALE PRICE WHICH CANNOT BE ACCEPTED IN THE IMPUGNED FINANCIAL YEAR. ACCORDINGL Y, HE DISALLOWED THE ENTIRE PROVISION FOR PRICE REDUCTION OF RS.1,43,00,205/-. 3. LD. CIT (A) AFTER INCORPORATING THE ASSESSEES D ETAILED SUBMISSION HAS AFFIRMED THE FINDING OF THE ASSESSIN G OFFICER AND THE ADDITION HOLDING THAT LIABILITY DID NOT ACCRUE/CRYSTALLIZED BY 31 ST MARCH, 2007. 4. BEFORE US, THE LD. COUNSEL FOR THE ASSESSEE AFTE R EXPLAINING THE ENTIRE FACTS SUBMITTED THAT THE ACTU AL LIABILITY EXISTED AT THE END OF THE YEAR IN RESPECT OF SALES MADE DURING THE YEAR TO PASS ON THE BENEFIT OF PRICE REDUCTION TO THE TATA SKY. IT WAS ONLY THAT THE QUANTUM OF PRICE WAS CRYS TALLIZED IN THE NEXT FINANCIAL YEAR. THE AMOUNT WAS CRYSTALLIZE D ON 21 ST AUGUST, 2007 WHICH WAS MUCH BEFORE THE FINALIZATION OF THE FINANCIAL STATEMENT ON 18 TH OCTOBER, 2007 AND WAS ALSO I.T.A. NO.2513/DEL/2013 5 APPROVED BY THE BOARD OF DIRECTORS ON THAT DATE. HE ALSO REFERRED TO ACCOUNTING STANDARD AS-4 AND SUBMITTED THAT THE SAID PROVISION WAS IN ACCORDANCE WITH THE SAID STAN DARDS BECAUSE ASSETS AND LIABILITIES AS EXISTING ON THE B ALANCE SHEET DATE NEEDS TO BE ADJUSTED FOR THE SIGNIFICANT EVENT S OCCURRING BETWEEN THE BALANCE SHEET AND THE DATES ON WHICH FI NANCIAL STATEMENTS WERE APPROVED. THE EXISTENCE OR ABSENCE OF AN ACCOUNTING ENTRY FOR THE PROVISION WOULD NOT AFFECT THE DEDUCTIBILITY OF THE AMOUNT AS TAX IMPLICATION DEPE NDS UPON THE LEGAL POSITION AND NOT THE MANNER IN WHICH ACCO UNTING ENTRIES ARE PASSED. WITHOUT PREJUDICE, HE SUBMITTED THAT IN THE EVENT THE DISALLOWANCE IS UPHELD, THEN THE DIRE CTIONS MAY BE GIVEN TO ALLOW SUCH DEDUCTION IN RESPECT OF PRIC E REDUCTION IN ASSESSMENT YEAR 2008-09; AND HE ALSO DREW OUR AT TENTION TO THE ORDER OF LD. CIT(A) FOR ASSESSMENT YEAR 2008 -09 WHEREBY THE LD. CIT(A) HELD THAT SINCE THIS ISSUE I S PENDING FOR DISPOSAL BEFORE THE TRIBUNAL IN ASSESSMENT YEAR 200 7-08, THEREFORE, THE ASSESSING OFFICER WAS DIRECTED TO FO LLOW THE DIRECTION IN THIS REGARD AND IN CASE THIS MATTER IS DECIDED IN FAVOUR OF THE ASSESSEE FOR ASSESSMENT YEAR 2007-08, ASSESSING OFFICER WAS DIRECTED TO ALLOW THE CLAIM I N ASSESSMENT YEAR 2008-09. 5. ON THE OTHER HAND, LEARNED DEPARTMENT REPRESENTA TIVE HAS RELIED UPON THE ORDER OF THE ASSESSING OFFICER AS WELL AS LD. CIT (A) AND SUBMITTED THAT, SINCE THE ENTIRE EV ENT BY WHICH PRICE DEDUCTION WAS AGREED HAPPENED IN SUBSEQUENT Y EAR AND I.T.A. NO.2513/DEL/2013 6 WAS CRYSTALLIZED IN THE NEXT FINANCIAL YEAR, THEREF ORE, THE SAME CANNOT BE ALLOWED IN THIS YEAR. 6. WE HAVE HEARD THE RIVAL SUBMISSIONS AND ALSO PE RUSED THE RELEVANT FINDINGS GIVEN IN THE IMPUGNED ORDERS AS WELL AS THE MATERIAL PLACED ON RECORD. AS PER MOU DATED 17 TH JANUARY, 2006 THE ASSESSEE AND TATA SKY LTD. TO WHO M ASSESSEE HAD SOLD SET TOP BOXES AGREED ON PRICE O F EACH OF THE COMPONENTS. HOWEVER, THE PRICE OF THE VARIOUS COMPONENTS WERE REVISITED ON ACCOUNT OF CHANGES IN THE UNION BUDGET WHEREBY THERE WAS A DEDUCTION OF DUTY IN THE COMPONENTS OF THE SET TOP BOXES WHICH HAD AN IMPACT BY W.E.F. 1 ST MARCH, 2007. THE PRICE REDUCTION WAS IN PRINCIPLE AGREED BEFORE 31 ST MARCH, 2007. HOWEVER, THE EXACT PRICE OF REDUCTION HAPPENED POST 31 ST MARCH, 2007 WHICH IS EVIDENT FROM THE LETTER DATED 16.08.2007, WHEREBY THE PRICE REDUCTION WAS TO BE GIVEN RETROSPECTIVE EFFECT TO THE TATA SK Y LTD. IT IS AN UNDISPUTED FACT THAT PROVISION FOR PRICE REDUCTI ON PERTAINS TO THE SET TOP BOXES SOLD TO TATA SKY DURING THE FINANCIAL YEAR 2006-07 AND THE SALES WERE MADE PURSUANT TO TH E MOU ENTERED BETWEEN THE PARTIES ON 17 TH JANUARY, 2006, I.E., DURING THE FINANCIAL YEAR 2005-06. WHILE ENTERING I NTO MOU, THERE WAS A CLEAR CUT CLAUSE, (THE RELEVANT EXTRACT OF WHICH HAS BEEN INCORPORATED IN THE IMPUGNED APPELLATE ORD ER) WHICH STIPULATED AND AGREED BETWEEN THE PARTIES THAT THE ASSESSEE WILL PASS ON ALL THE BENEFITS RECEIVED IN RELATION TO ANY CHANGE IN TAXES AND DUTIES TO THE TATA SKY LTD. THIS IS EV IDENT FROM THE FOLLOWING CLAUSES. I.T.A. NO.2513/DEL/2013 7 1.1. FOR THE AVOIDANCE OF DOUBT, THE ABOVE STB PRIC ES ARE, OR COMPRISE OF (AS THE CASE MAY BE): (A) EX FACTORY FOR PRODUCT MANUFACTURED AS CKD (COMPLET E KNOCK-DOWN) IN INDIA AT EXCISE DUTY @ 0% IN WHICH CASE PRICING AS STATED IN SCENARIO (A) ABOVE TO APPLY OR EXCISE DUT Y @ 16% IN WHICH CASE PRICING AS STATED IN SCENARIO (B) ABOVE TO APP LY. IF MODIFICATION IN PREVAILING DUTIES AND TAXES OCCURS, THOMSON AGRE ES TO PROVIDE A DETAILED ANALYSIS OF THE EFFECT OF THE CHANGE ON TH E PRICE OF THE STB INCLUDING, BUT NOT LIMITED TO, SUBSTANTIATING DETAI LED DOCUMENTATION WHICH WILL ALLOW TATA SKY TO ASSESS THE MODIFICATIO N AND RESULTING PRICE EFFECT ON STBS. WHERE THE IMPOSITION OF EXCI SE DUTY ON STBS IS RE-ESTABLISHED, THOMSON MUST GIVE TATA SKY THE F ULL BENEFIT OF ANY OFFSETS AVAILABLE DUE TO ANY DUTIES OR TAXES PA ID IN THE PROVISION OF THE STBS. (B ................. ( C) .......... (D) INCLUSIVE OF ALL KNOWN STATE LEVIES LIKE CUSTOM S AND EXCISE DUTIES AS CURRENTLY APPLICABLE BUT EXCLUSIVE OF LOCAL SALE S TAX, VAT, OCTROI & ENTRY TAX. THESE WILL BE PAYABLE ADDITIONALLY COST WHEREVER APPLICABLE IN RESPECTIVE STATES. ANY CHANGE IN THESE LEVIES WILL BE CHARGED TO THE ACCOUNT OF TATA SKY. (E) .................. (F) ARE APPLICABLE FOR DELIVERIES IN ALL STATES ACR OSS INDIA ON A LOCAL SALES TAX OR VAT BILLING BASIS, AS MAY BE APPLICABL E. 6.1 THEREAFTER, THE PARTIES SIGNED AN ADDENDUM TO M OU ON 15 TH JANUARY, 2006 WHEREIN THE PRICE STIPULATED WERE TO BE REVISITED IF THE INPUT COSTS AND DUTIES IN RESPECT OF VARIOUS COMPONENTS OF THE SET TOP BOXES GOT CHANGED AND A NY REDUCTION IN SUCH COSTS/TAXES AND DUTIES WERE TO BE PASSED ON TO TATA SKY. AFTER THE SERIES OF DISCUSSION AND NEGOTIATION, I.T.A. NO.2513/DEL/2013 8 VIDE LETTER DATED 16 TH AUGUST, 2007, ASSESSEE AND TATA SKY AGREED ON THE DATES FROM WHICH REVISED PRICE WOULD TAKE EFFECT. THE BREAK-UP OF WHICH IS SUMMARIZED HEREUND ER:- PARTICULARS AMOUNT (IN US DOLLARS) EFFECTIVE DATE BASIC PRICE ( INCLUSIVE OF 16.48% EXCISE) 59.00 REMOTE CONTROL UNIT 2.91 JANUARY 1, 2007 MASTER CARTON + 2 BATTERIES 0.42 JUNE 30, 2006 IMPACT OF CHANGE IN SPECIFICATION (1.00) MAY 21, 2007 IMPACT OF BUDGET CHANGES (0.17) MARCH 1, 2007 TOTAL 61.16 6.2 THE DETAILED WORKING OF THE PRICE REDUCTION HA S BEEN PROVIDED IN THE PAPER BOOK AND ALSO THE DEBIT NOTES ISSUED AFTER THE AGREEMENT BETWEEN THE ASSESSEE AND THE TA TA SKY. IT IS ALSO NOT IN DISPUTE THAT THE SAID AMOUNT HAS ACT UALLY BEEN PASSED ON TO THE TATA SKY. SINCE, THERE WAS A RETRO SPECTIVE REDUCTION IN THE PRICE OF THE SET TOP BOX AGREED IN THE MONTH OF JUNE, I.E., MUCH PRIOR TO THE FINALIZATION OF AS SESSEES FINANCIAL STATEMENT FOR THE FINANCIAL YEAR 2006-07 WHICH WAS FINALIZED ON 18 TH OCTOBER, 2007, THE ASSESSEE MADE THE PROVISION FOR THE SAID PRICE REDUCTION IN THE FINAN CIAL STATEMENT FOR THE YEAR ENDING 31 ST MARCH, 2007 ITSELF. THE DEPARTMENT HAS DISALLOWED THE SAID CLAIM FOR THE PR OVISION ON THE GROUND THAT; FIRSTLY , THE ASSESSEE WAS NOT AWARE OF ANY LIABILITY ON TH E LAST DATE OF FINANCIAL YEAR, I.E., 31 ST MARCH, 2007 AND; I.T.A. NO.2513/DEL/2013 9 SECONDLY , ASSESSEE HAS MADE A PROVISION AFTER THE END OF THIS YEAR AND THEREBY REVISING ITS ACCOUNT WHICH IS NOT PERMITTED. 6.3 IF THE ASSESSEE IS FOLLOWING MERCANTILE SYSTEM OF ACCOUNTING, THEN AS PER THE ACCOUNTING STANDARD-4, CONTINGENCIES AND EVENTS OCCURRING AFTER THE BALANC E SHEET DATE HAS BEEN PERMITTED TO BE ADJUSTED WHICH IS EVI DENT FROM THE RELEVANT PORTIONS OF THE AS-4 WHICH READS AS UN DER:- 13. ASSETS AND LIABILITIES SHOULD BE ADJUSTED FOR EVENTS OCCURRING AFTER THE BALANCE SHEET DATE THAT PROVIDE ADDITIONAL EVID ENCE TO ASSIST THE ESTIMATION OF AMOUNTS RELATING TO CONDITIONS EXISTI NG AT THE BALANCE SHEET DATE OR THAT INDICATE THAT FUNDAMENTAL ACCOUNTING A SSUMPTION OF GOING CONCERN (I.E. THE CONTINUANCE OF EXISTENCE OR SUBST RATUM OF THE ENTERPRISE) IS NOT APPROPRIATE. 6.4 THE BALANCE SHEET WAS DRAWN ON 31 ST MARCH, 2007 AND THE FINANCIAL STATEMENT WAS APPROVED BY THE BOARD O F DIRECTORS ON 18 TH OCTOBER, 2007 AND THERE WAS AN ACTUAL LIABILITY AS ON 31 ST MARCH, 2007 TO PASS ON THE BENEFIT OF REDUCTION IN PRICES TO TATA SKY IN RESPECT OF SALES MADE DURING THE FINANCIAL YEAR 2006-07; AND THE SUBSEQUE NT AGREEMENT WAS ONLY TO REAFFIRM THE EXISTENCE OF THE LIABILITY AND CRYSTALLIZATION OF THE EXACT AMOUNT AS ON 31 ST MARCH, 2007. THUS, THE PROVISION IS BASED ON ACTUAL QUANTI FICATION OF THE AMOUNT OF LIABILITY RATHER THAN BASED ON SOME E STIMATE BASIS OR CONTINGENT VALUE. OTHERWISE ALSO SECTION 2 11 OF THE COMPANIES ACT REQUIRES THAT EVERY PROFIT AND LOSS ACCOUNT OF A COMPANY SHOULD GIVE A TRUE AND FAIR VIEW OF THE P ROFIT AND I.T.A. NO.2513/DEL/2013 10 LOSS OF THE COMPANY FOR THAT FINANCIAL YEAR AND SEC TION 210 PROVIDES THAT EVERY PROFIT AND LOSS AND BALANCE SHE ET SHOULD COMPLY WITH THE ACCOUNTING STANDARD ISSUED BY ICAI. THE HON'BLE SUPREME COURT IN THE CASE OF CIT VS. WOODWARD GOVERNOR INDIA PVT. LTD., REPORTED IN (2009) 312 IT R 254 HAS HELD THAT WHEREBY FINANCIAL STATEMENTS HAVE BEE N DRAWN BY THE ASSESSEE AS PER THE ACCEPTED ACCOUNTING STAN DARDS, THEN THE SAME SHOULD BE PRESUMED TO BE CORRECT UNLE SS THE ASSESSING OFFICER ON THE BASIS OF REASONING COMES T O A CONCLUSION THAT FINANCIALS PREPARED DO NOT REFLECT TRUE AND CORRECT PROFITS. IT IS NOT AN ALLEGATION OF THE ASS ESSING OFFICER THAT SUCH A PRICE REDUCTION DID NOT PERTAIN TO THE SALES PERTAINING TO FINANCIAL YEAR 2006-07, ALBEIT SUCH A PRICE REDUCTION HAS BEEN CRYSTALLIZED POST 31 ST MARCH, 2007 WHICH IS MUCH BEFORE THE FINALIZATION OF THE FINANCIAL ST ATEMENT APPROVED BY THE BOARD OF DIRECTORS. UNDER THE MERCA NTILE SYSTEM OF ACCOUNTING COSTS DIRECTLY ASSOCIATED WITH THE REVENUE RECOGNIZED DURING THE RELEVANT PERIOD IRRES PECTIVE OF THE MONEY HAS BEEN PAID OR NOT HAVE TO BE CONSIDERE D AS EXPENSES AND CHARGED TO THE INCOME FOR THE RELEVANT PERIOD AND SAME SHOULD BE ALLOWED IN THIS YEAR. IN ANY CAS E, IF IT IS NOT ALLOWED IN THIS YEAR, THE SAME HAS TO BE ALLOWE D IN ASSESSMENT YEAR 2008-09 FOR WHICH LD. CIT (A) HAD A LREADY GIVEN DIRECTION TO THE ASSESSING OFFICER IN CASE SU CH AN AMOUNT IS NOT ALLOWED IN THE IMPUGNED ASSESSMENT YE AR, THUS, IT DOES NOT IMPACT THE TAXABILITY. ACCORDINGL Y, THE GROUNDS RAISED BY THE ASSESSEE ARE TREATED AS ALLOW ED. I.T.A. NO.2513/DEL/2013 11 7. NOW WE WILL COME TO THE REVENUES APPEAL WHEREIN THE DEPARTMENT HAS RAISED FOLLOWING THREE GROUNDS. 1. 'ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE AND IN LAW THE LEARNED C1T(A) ERRED IN DELETING THE ADDITION OF RS.31,95,131/- MA DE BY THE AO BY TREATING THE RECRUITMENT EXPENSES AS CAPITAL IN NATURE SINCE THI S WAS INITIAL YEAR OF THE ASSESSEE COMPANY..' 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.8,97,920/- MAD E BY THE AO BY TREATING THE EXPENSES INCURRED FOR SOFTWARE AS CAPITAL IN NATURE SINCE AS PER INCOME TAX ACT READ WITH APPENDIX-1 OF THE INCOME TAX RULES, 1962 SOFTW ARE IS A DEPRECIABLE ASSET @ 60%.' 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.18,14,432/- MA DE BY THE AO BY DISALLOWING THE PROVISION FOR WARRANTY. THE CIT(A) FAILED TO APPREC IATE THAT THERE WAS NO BASIS FOR CALCULATING THIS PROVISION AS THIS WAS THE FIRST WO RKING YEAR OF THE ASSESSEE COMPANY..' 8. IN SO FAR AS THE ADDITION OF RS.31,95,131/- IS C ONCERNED, THE FACTS IN BRIEF ARE THAT THE ASSESSEE HAS INCURR ED AN AMOUNT OF RS.31,95,131/- AS PROFESSIONAL CHARGES REPRESENTING RECRUITMENT CHARGES/FEES PAID TO KORN FERRY INTERNATIONAL PVT. LTD. AND MAFOI CONSULTANTS FO R THE RECRUITMENT OF MANAGERIAL SECRETARIAL STAFF. THE SA ID CHARGES WERE CLAIMED AS DEDUCTION U/S. 37(1). HOWEVER, THE ASSESSING OFFICER DISALLOWED THE SAID AMOUNT ON THE GROUND TH AT SAME IS CAPITAL IN NATURE RELATING TO PRE-COMMENCEMENT P ERIOD AND IS GOING TO GIVE ENDURING BENEFIT TO THE ASSESSEE. THE MAIN INCOME WHICH HAS BEEN DERIVED TO THE ASSESSEE IS FR OM THAT PART OF THE BUSINESS WHICH WAS STARTED FROM JUNE, 2 006 AND ASSESSEE SINCE HAS INCURRED MOST OF HIS EXPENSES FO R THE FIRST I.T.A. NO.2513/DEL/2013 12 TIME RECRUITMENT OF THE MANAGERIAL SECRETARIAL STAF F THEREFORE, NEEDS TO BE CAPITALIZED, BECAUSE IT HAS BEEN INCURR ED PRIOR TO THE COMMENCEMENT OF THE BUSINESS. 9. LD. CIT (A) DELETED THE SAID DISALLOWANCE ON THE GROUND THAT NO CAPITAL ASSET HAS BEEN BROUGHT INTO EXISTEN CE AND IT IS REVENUE IN NATURE. 10. AFTER HEARING BOTH THE PARTIES AND ON PERUSAL OF THE RELEVANT FINDINGS GIVEN IN THE IMPUGNED ORDER, WE F IND THAT IT IS NOT IN DISPUTE THAT THE RECRUITMENT CHARGES PAID TO THE PROFESSIONAL RECRUITMENT CONSULTANTS FOR THE RECRUI TMENT OF MANAGERIAL AND SECRETARIAL STAFF DURING CARRYING OU T ITS BUSINESS. THE ASSESSEE HAS SET UP ITS BUSINESS IN I NDIA WAY BACK IN ASSESSMENT YEAR 2004-05 FOR TRADING IN SET TOP BOXES AND PROVIDING MARKET SUPPORT AND WARRANTY SUPPORT S ERVICES AND IN RESEARCH AND DEVELOPMENT ACTIVITIES FOR ITS GROUP ENTERPRISES IN INDIA. DURING THE YEAR UNDER CONSIDE RATION, ASSESSEE HAS PROVIDED MARKET SUPPORT SERVICES TO IT S GROUP ENTITY IN FRANCE FOR SALE OF ITS EQUIPMENT IN INDIA AND ALSO PERFORMED RESEARCH AND DEVELOPMENT ACTIVITIES FOR I TS AES. HENCE, IT CANNOT BE PRESUMED OR HELD THAT ASSESSEE HAD NOT SET UP ITS BUSINESS, AND THEREFORE, THE RECRUITMENT CHARGES WILL LIABLE TO BE DISALLOWED AS PRE-COMMENCEMENT EX PENSES. THE SET TOP BOX BUSINESS WAS MERELY AN EXTENSION OF ITS EXISTING BUSINESS WHICH HAVE COMMENCED ITS OPERATIO N MUCH BEFORE; AND MOREOVER, IF THERE IS A COMMON CONTROL AND MANAGEMENT AND BOTH THE ACTIVITIES ARE UNDER THE UL TIMATE I.T.A. NO.2513/DEL/2013 13 CONTROL AND MANAGEMENT OF SINGLE BOARD OF DIRECTORS AND THERE IS A COMMON BUSINESS ORGANIZATION UNDER THE S AME ORGANIZATION STRUCTURE HAVING COMMON FUNDS, THEN RECRUITMENT OF SUCH RECRUITMENT EXPENSES CANNOT BE SAID TO BE PRE-COMMENCEMENT OF SOME NEW BUSINESS LINE IN A DIFFERENT SET UP. THUS, SUCH EXPENDITURE IS CLEARLY A REVENUE EXPENDITURE WHICH NEEDS TO BE ALLOWED IN THE YEAR I N WHICH IT HAS BEEN INCURRED. THUS, GROUND NO.1 RAISED BY THE REVENUE IS DISMISSED. 11. COMING TO THE ISSUE OF ADDITION OF RS.8,97,920/ - INCURRED FOR SOFTWARE WHICH HAS BEEN HELD TO BE CAP ITAL IN NATURE. THE ASSESSEE HAS INCURRED SUM OF RS.8,97,92 0/- AS PROFESSIONAL CHARGES REPRESENTING SAP FEES PAID TO SEIMENS INFORMATION PVT. LTD. FOR ONSITE SUPPORT OF INSTALL ATION ERP. THE ASSESSING OFFICER HAS DISALLOWED THE SAID PAYME NT OF FEES ON THE GROUND THAT ITS CAPITAL IN NATURE AS THE EXP ENDITURE INCURRED WAS IN RELATION TO INITIAL INSTALLATION OF SAP SOFTWARE. 12. THE LD. CIT (A) HAS DELETED THE SAID DISALLOWAN CE HOLDING THAT EXPENSES DID NOT PROVIDE ANY ENDURING BENEFIT TO THE ASSESSEE. 13. AFTER CONSIDERING THE RIVAL SUBMISSIONS AND ON PERUSAL OF THE RELEVANT MATERIAL PLACED ON RECORD, IT IS SE EN THAT THE EXPENDITURE PERTAINS TO CONSULTANCY CHARGES PAID TO SEIMENS INFORMATION SYSTEMS LTD. FOR ADDITIONAL SUPPORT IN RELATION TO SAP SOFTWARE ALREADY INSTALLED AND NOT TOWARDS PURC HASE OR INITIAL INSTALLATION OF THE SOFTWARE. SUCH CHARGES PAID FOR I.T.A. NO.2513/DEL/2013 14 ADDITIONAL SUPPORT HAS BEEN INCURRED DURING THE NOR MAL COURSE OF BUSINESS AND FOR CARRYING OUT BUSINESS OP ERATION MORE EFFICIENTLY AND IN NO WAY SUCH EXPENDITURE BRI NG INTO EXISTENCE ANY CAPITAL ASSET OF ENDURING NATURE. THE NATURE OF ADVANTAGE IS PURELY FOR THE BUSINESS OPERATION AND ENABLING THE MANAGEMENT TO CARRY ON MORE EFFICIENTLY AND MOR E PROFITABLY LEAVING THE FIXED CAPITAL UNTOUCHED AND HENCE SUCH EXPENDITURE IS TO BE RECKONED AS REVENUE ACCOUNT. E VEN THOUGH THE ADVANTAGE MADE ENDURING FOR CERTAIN PERI OD OF TIME. THUS SUCH A DISALLOWANCE HAS RIGHTLY BEEN DEL ETED BY THE LD. CIT (A). 14. LASTLY, COMING TO THE ISSUE OF PROVISION FOR WA RRANTY AMOUNTING TO RS.18,14,432/-. THE FACTS IN BRIEF ARE THAT THE ASSESSEE HAS INCURRED WARRANTY EXPENDITURE AMOUNTIN G TO RS.29,91,951/- IN RESPECT OF SET TOP BOXES SOLD TO TATA SKY DURING THE YEAR UNDER CONSIDERATION. OUT OF THE SAI D EXPENDITURE, AN AMOUNT OF RS.11,77,519/- WAS ACTUAL LY PAID TO THE VENDOR TO WHOM WARRANTY SERVICES WERE OUTSOU RCED AND THE BALANCE AMOUNT PAYABLE AMOUNTING TO RS.18,14,43 2/- WAS PROVIDED AND WAS CLUBBED UNDER THE HEAD SUNDRY CREDITORS. THE LD. ASSESSING OFFICER HELD THAT THE PROVISION MADE BY THE ASSESSEE IS NOT BASED ON ITS HISTORICAL STATISTICAL DATA AND VALUATION AND ACCEPTED EXPENSES. THE ESTIM ATE MADE BY THE ASSESSEE IS NOT SCIENTIFIC AND APPEARS TO BE ON HIGHER SIDE AND ACCORDINGLY DISALLOWED THE SAID PRO VISION. I.T.A. NO.2513/DEL/2013 15 15. LD. CIT(A) FOLLOWING THE ORDER OF THE HON'BLE S UPREME COURT IN THE CASE OF ROTORK CONTROLS INDIA (P) LTD. VS. CIT, REPORTED IN (2009) 314 ITR 62 (SC) HELD THAT THE SAID PROVISION IS NOT IN THE NATURE OF UNASCERTAINED OR CONTINGENT LIABILITY IS DEDUCTIBLE AS BUSINESS EXPENDITURE. 16. BEFORE US, IT IS SUBMITTED BY THE LEARNED COUNS EL THAT THE AMOUNT SET ASIDE ON ACCOUNT OF WARRANT EXPENSES WAS NOT ASCERTAINED OR CONTINGENT LIABILITY; RATHER IT WAS ENTIRELY BASED ON INVOICES/DEBIT NOTES WHICH HAVE BEEN RECEIVED IN THE SUBSEQUENT FINANCIAL YEAR, AND THEREFORE, THE WARRA NTY EXPENDITURE WHICH IS BASED ON ACTUAL BILLS AND INVO ICES SHOULD BE ALLOWED AND ALSO DREW OUR ATTENTION TO TH E DEBIT NOTES APPEARING IN THE PAPER BOOK FROM PAGE 220 ONW ARDS HE POINTED OUT THAT THIS IS NOT PROVISION PER SE BUT ACTUAL WARRANTY COST. 17. ON THE OTHER HAND, LEARNED DEPARTMENT REPRESENT ATIVE HAS STRONGLY RELIED UPON THE ORDER OF THE ASSESSING OFFICER. 18. AFTER CONSIDERING THE RIVAL SUBMISSIONS AND ON PERUSAL OF THE IMPUGNED ORDER AS WELL AS THE MATERIAL REFER RED TO BEFORE US, IT CANNOT BE DISPUTED THAT WARRANTY IS A N EXPENDITURE WHICH IS TO BE INCURRED IN FUTURE WITH RESPECT TO THE SALES MADE DURING THE RELEVANT PREVIOUS YEAR. T HE ASSESSEE HAS TWO ACCOUNT FOR SUCH AN EXPENSE IN ACC ORDANCE WITH MERCANTILE SYSTEM OF ACCOUNTING REGULARLY FOLL OWED SUCH A PROVISION DEBITED TO THE P & L ACCOUNT SHOULD NOT BE IN THE NATURE OF UNASCERTAINED OR CONTINGENT LIABILITY ALB EIT SHOULD I.T.A. NO.2513/DEL/2013 16 BE BASED ON SOME SCIENTIFIC AND HISTORICAL BASIS. T HE ASSESSEES CASE BEFORE US IS THAT THE PROVISION MAD E IS ACTUALLY BASED ON THE ACTUAL BILLS RECEIVED IN THE SUBSEQUENT YEAR, AND THEREFORE, IT CANNOT BE HELD TO BE CONTIN GENT AT ALL. ONCE SUCH A WARRANTY EXPENSE HAS ACTUALLY BEEN INCU RRED FOR WHICH BILLS/DEBIT NOTES HAVE BEEN RAISED, THEN IT C ANNOT BE HELD THAT THE AMOUNT DEBITED UNDER THE HEAD WARRAN TY EXPENSES IS UNASCERTAINED OR CONTINGENT LIABILITY. ACCORDINGLY, ASSESSING OFFICER IS DIRECTED TO ALLOW THE PROVISIO N FOR WHICH THE ACTUAL BILLS HAVE BEEN FURNISHED WHEREBY ASSESS EE HAS INCURRED SUCH WARRANTY EXPENSES. THUS, GROUNDS NO.1 AND 2 OF THE REVENUE IS DISMISSED AND GROUND NO.3 IS PART LY ALLOWED FOR STATISTICAL PURPOSES. 19. IN THE RESULT, THE APPEAL OF THE ASSESSEE IS AL LOWED AND REVENUES APPEAL IS PARTLY ALLOWED FOR STATISTICAL PURPOSES. ORDER PRONOUNCED IN THE OPEN COURT ON 7 TH SEPTEMBER, 2018. SD/- SD/- [G.D. AGRAWAL] [AMIT SHUKLA] PRESIDENT JUDICIAL MEMBER DATED: 7 TH SEPTEMBER, 2018 PKK: