The ACIT,GNR Circle, Gandhinagar V. M/s. Tudor India Ltd., Gandhinagar

ITA 1298/AHD/2012

• Counselvise Citation: [2015] 121 COUNSELVISE.COM (IT) 1228 (ITAT-AHMEDABAD)
• Duration Of Justice: 3 year(s) 2 month(s) 7 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 21-08-2015
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: B
• Next Hearing Date: 11-08-2015
• Assessment Year: 2006-2007
• Appeal Filed On: 14-06-2012
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: ARE BEING DISPOSED OF
• Keywords: Transfer pricing; Business expenditure; International transaction; Retrospective amendment; Bad and doubtful debts
• Section: 145; 37

Judgement Text

, , IN THE INCOME TAX APPELLATE TRIBUNAL B BENCH, AHMEDABAD , , BEFORE SHRI PRAMOD KUMAR, ACCOUNTANT MEMBER AND SHRI KUL BHARAT, JUDICIAL MEMBER 1. ./ I.T.A. NO.1298/AHD/2012 A.Y. 2006-07 2. ./ I.T.A. NO.1308/AHD/2011 A.Y. 2006-07 1. THE ACIT GANDHINAGAR CIRCLE GANDHINAGAR382011 2. M/S.TUDOR INDIA LTD GANDHINAGAR / VS. 1. M/S.TUDOR INDIA LTD. 1 ST FLOOR, SUMAN TOWER SECTOR-1, GANDHINAGAR 2. ADDL.CIT,GANDHINAGAR- RANGE, GANDHINAGAR ./ ./ PAN/GIR NO. AAACT 1681 R ( ' / APPELLANTS ) .. ( #' / RESPONDENTS ) REVENUE B Y : SHRI SHIVA SEWAK,SR.D.R. ASSESSEE B Y : SHRI SANJAY R.SHAH, CA $%& ' ( / DATE OF HEARING 11/08/2015 )*+ ' ( / DATE OF PRONOUNCEMENT 21/08/2015 / O R D E R PER SHRI KUL BHARAT, JUDICIAL MEMBER : THESE CROSS-APPEALS BY THE REVENUE AND THE ASSESSEE ARE DIRECTED AGAINST THE ORDER OF THE LD.COMMISSIONER OF INCOME TAX(APPEALS)- GANDHINAGAR [CIT(A) IN SHORT] DATED 21/03/2012 P ERTAINING TO ASSESSMENT YEAR (AY) 2006-07. THESE APPEALS WERE HEARD TOGETHER AND ARE BEING DISPOSED OF BY WAY OF THIS CONSOLIDATED O RDER FOR THE SAKE OF CONVENIENCE. ITA NO.1298/AHD/2012 (BY REVEN UE) AND ITA NO.1308/AHD/2012 (BY ASSESSEE) ADDL.CIT VS. M/S.TUDOR INDIA LTD. ASST.YEAR 2006-07 - 2 - 2. FIRST, WE TAKE UP THE ASSESSEES APPEAL IN ITA N O.1308/AHD/2012 FOR AY 2006-07. THE ASSESSEE HAS RAISED THE FOLLO WING GROUNDS OF APPEAL:- THE APPELLANT BEING DISSATISFIED WITH THE ORDER PAS SED BY THE COMMISSIONER OF INCOME TAX (APPEALS) GANDHINAGAR (LEARNED COMMISSIONER), PREFERS AN APPEAL AGAINST THE SAME O N THE FOLLOWING AMONGST OTHER GROUNDS, WHICH ARE WITHOUT PREJUDICE TO EACH OTHER. 1. THE ORDER PASSED BY THE LEARNED COMMISSIONER OF IN COME TAX (APPEALS) IS ERRONEOUS AND CONTRARY TO THE PROVISIO NS OF LAW & FACTS AND THEREFORE REQUIRES TO BE SUITABLY MODIFIED. IT IS SUBMITTED THAT IT BE SO DONE NOW. 2. THE LEARNED CIT(APPEALS) ERRED IN NOT ALLOWING THE INCENTIVES PAID TO DEALERS OF RS.57,66,297 CONSIDERING THE SAME TO BE PRIOR PERIOD EXPENSES. IT IS SUBMITTED IT BE SO HELD NOW. 2.1.LEARNED CIT(APPEALS) HAS ERRED IN NOT APPRECIAT ING THAT IN CASE OF CHANGE IN THE METHOD OF ACCOUNTING THERE IS BOUND T O BE SOME DISTORTION DURING THE YEAR WHEN THE CHANGE IS ADOPT ED. IT IS SUBMITTED IT BE SO HELD NOW. 3. LEARNED CIT(APPEALS) ERRED IN UPHOLDING THE DISALL OWANCE MADE U/S.37 IN RESPECT TO PAYMENT OF ADDITIONAL REMUNERA TION TO MANAGING DIRECTOR OF RS.4,95,192 ON THE GROUND THAT THE EXPENDITURE HAS NOT ACCRUED DURING THE YEAR UNDER C ONSIDERATION. IT IS SUBMITTED IT BE SO HELD NOW. 3.1 LEARNED CIT(A) ERRED IN APPRECIATING THAT THE A PPELLANT HAD APPLIED FOR THE APPROVAL OF THE CENTRAL GOVERNMENT DURING T HE CONCERNED YEAR ITSELF AND THE APPROVAL WAS GRANTED IN THE SUB SEQUENT YEAR WHICH WOULD RELATED BACK TO THE DATE OF APPLICATION . IT IS SUBMITTED IT BE SO HELD NOW. 4. LEARNED CIT(APPEALS) ERRED IN UPHOLDING THE DIS ALLOWANCE MADE IN RESPECT OF ADVANCE WRITTEN OFF OF RS.2,09,151 U/S.3 7 ON THE GROUND THAT APPELLANT FAILED TO SUBSTANTIATE NEXUS BETWEEN ADVANCE GIVEN AND BUSINESS OF ASSESSEE. IT IS SUBMITTED IT BE SO HELD NOW. ITA NO.1298/AHD/2012 (BY REVEN UE) AND ITA NO.1308/AHD/2012 (BY ASSESSEE) ADDL.CIT VS. M/S.TUDOR INDIA LTD. ASST.YEAR 2006-07 - 3 - YOUR APPELLANT PRAYS FOR LEAVE TO ADD, ALTER AND/OR AMEND ALL OR ANY OF THE GROUNDS BEFORE THE FINAL HEARING OF APPEAL. 2.1. BRIEFLY STATED FACTS ARE THAT THE CASE OF THE ASSESSEE WAS PICKED UP FOR SCRUTINY ASSESSMENT AND THE ASSESSMENT U/S.143( 3) OF THE INCOME TAX ACT,1961 (HEREINAFTER REFERRED TO AS THE ACT) WAS FRAMED VIDE ORDER DATED 24/12/2009, THEREBY THE ASSESSING OFFICER (AO IN SHORT) MADE ADDITION ON ACCOUNT OF DISALLOWANCE(S) FOR PROVISIO N FOR WARRANTEE OF RS.2,11,10,925/-, INCENTIVE TO DEALERS OF RS.56,50, 193/-, PENALTY FOR BREACH OF CONTRACT OF RS.65,52,000/-, ADDITIONAL RE MUNERATION PAID TO MD OF RS.4,95,192/- AND ADVANCES WRITTEN OFF OF RS.2,0 9,151/-. AGAINST THE SAID ASSESSMENT ORDER, THE ASSESSEE PREFERRED AN AP PEAL BEFORE THE LD.CIT(A), WHO AFTER CONSIDERING THE SUBMISSIONS OF THE ASSESSEE, PARTLY ALLOWED THE APPEAL; THEREBY THE LD.CIT(A) DELETED T HE ADDITION MADE ON ACCOUNT OF PROVISION FOR WARRANTY EXPENDITURE, CONF IRMED THE AMOUNT PAID AS INCENTIVE TO THE EXTENT OF RS.57,66,297/-, DELETED THE ADDITION MADE ON ACCOUNT OF DISALLOWANCE OF PENALTY OF RS.65 ,52,000/- AND CONFIRMED THE ADDITION MADE ON ACCOUNT OF DISALLOWA NCE OF PAYMENT OF SALARY TO MANAGING DIRECTOR OF RS.4,95,192/- AND AL SO CONFIRMED THE ADDITION MADE ON ACCOUNT OF ADVANCES WRITTEN OFF OF RS.2,09,151/-. AGAINST THE ORDER OF THE LD.CIT(A), NOW, BOTH THE REVENUE AND ASSESSEE ARE IN CROSS-APPEALS BEFORE US. ITA NO.1298/AHD/2012 (BY REVEN UE) AND ITA NO.1308/AHD/2012 (BY ASSESSEE) ADDL.CIT VS. M/S.TUDOR INDIA LTD. ASST.YEAR 2006-07 - 4 - 3. GROUND NOS.1 TO 2.1 ARE INTER-CONNECTED WHICH AR E AGAINST THE DISALLOWANCE OF INCENTIVE OF RS.57,66,297/- CONFIRM ED BY THE LD.CIT(A). THE LD.COUNSEL FOR THE ASSESSEE ARGUED AT LENGTH AN D SUBMITTED THAT THE ASSESSEE CHANGED IN THE METHOD OF ACCOUNTING FOR TH ESE EXPENSES FROM CASH TO MERCANTILE DURING THE YEAR UNDER APPEAL. T HEREFORE, THERE WAS SOME DISTORTION LIKELY TO BE HAPPED. IN THIS EVENT UALITY, THE EXPENDITURE SO CLAIMED ARE ALLOWABLE. THE LD.COUNSEL FOR THE ASSESSEE PLACED RELIANCE O THE JUDGEMENT OF HONBLE HIGH COURT OF B OMBAY RENDERED IN THE CASE OF MELMOULD CORPORATION VS. CIT REPORTED A T (1993) 202 ITR 0789(MUM.). 3.1. ON THE CONTRARY, LD.SR.DR VEHEMENTLY ARGUED TH AT THERE IS NO ILLEGALITY IN THE ORDER OF THE LD.CIT(A). HE PLACE D RELIANCE OF THE ASSESSMENT ORDER. 4. WE HAVE HEARD THE RIVAL SUBMISSIONS, PERUSED THE MATERIAL AVAILABLE ON RECORD AND GONE THROUGH THE ORDERS OF THE AUTHORITIES BELOW. WE FIND THAT THE LD.CIT(A) HAS GIVEN FINDING ON FAC T BY OBSERVING AS UNDER:- 6.3 I HAVE CONSIDERED THE FACTS PLACED BEFORE ME I N THIS REGARD, INTERESTINGLY, THE APPELLANT ON ONE HAND CLAIMS THA T IT HAS CHANGED THE METHOD OF ACCOUNTING FOR THESE EXPENSES FROM CASH T O MERCANTILE DURING THE YEAR; BUT STILL HAS ADMITTEDLY CLAIMED S OME OF THE EXPENSES ON CASH BASIS AND SOME OF THEM ON MERCANTILE BASIS DURING THE YEAR, ITSELF. ACCORDING TO SECTION 145 HYBRID SYSTEM OF ACCOUNTIN G IS NOT AT ITA NO.1298/AHD/2012 (BY REVEN UE) AND ITA NO.1308/AHD/2012 (BY ASSESSEE) ADDL.CIT VS. M/S.TUDOR INDIA LTD. ASST.YEAR 2006-07 - 5 - ALL ALLOWABLE NOW. THE AGREEMENTS WITH THE DISTRIBU TORS SHOW THAT THE DISTRIBUTORS ARE ENTITLED TO 1% OF THE SALES AS INC ENTIVE ON CONTRACTUAL BASIS. THEREFORE, I AGREE THAT AS THE PAYMENTS ARE NOT GRATUITOUS BUT CONTRACTUAL AND THEREFORE ACCRUE WITH THE SALES. SI MILARLY, THE PAYMENTS OF LAST YEAR'S SALES WOULD HAVE ACCRUED IN THAT YEA R ONLY. THE APPELLANT WAS ASKED VIDE ORDER SHEET ENTRY DATED 24/2/2012 THAT WHY THE PRIOR PERIOD EXPENSES WHICH ACCRUED I N EARLIER YEAR SHOULD NOT BE DISALLOWED AND ACCORDINGLY, THE INCOME BE ENHANCED. THIS WAS AN ENHANCEMENT NOTICE AND THE AR WAS SPECI FICALLY TOLD ABOUT MY PROPOSAL TO ENHANCE THE INCOME. THE A PPELLANT HAS ITSELF NOT DISPUTED [ACTUALLY IT HAS ASSERTED THAT THE EXP ENSES ARE CLAIMED ON CASH BASIS ALTHOUGH ACCRUED IN EARLIER YEAR(AS DISC USSED IN EARLIER PARAGRAPH)] AND EVEN TILL 20/03/2012 HAD NEITHER DI SPUTED THESE FACTS NOR SUBMITTED THE AGREEMENTS WITH DEALERS FOR EARLI ER YEARS. THEREFORE, I HOLD THE FOLLOWING ON THE ISSUE: - THAT ONLY MERCANTILE SYSTEM OF ACCOUNTING IS AL LOWED AS IT IS THE SYSTEM FOR ALL OTHER INCOMES AND EXPENSES; - THE SYSTEM HAS TO BE FOLLOWED FOR THE ENTIRE EXPE NSES INCLUDING THIS EXPENSE OF SALES INCENTIVES; - THE EXPENSES FOR PRESENT YEAR'S SALES HAVE ACCR UED BEING CONTRACTUAL LIABILITY ACCRUING WITH SALES AND THEREFORE, THE EX PENSES DISALLOWED BY THE AO TO THE EXTENT OF RS.56,50,193/- ARE HELD, AS ALLOWABLE ACCORDING TO MERCANTILE SYSTEM OF ACCOUNTING. - THE REMAINING EXPENSES CLAIMED UNDER THE HEAD I .E. RS.57,66,297/- (RS.1,14,16,490/- - RS.56,50,193)ARE DIRECTED TO BE DISALLOWED BEING PRIOR PERIOD EXPENSES ACCRUED IN EARLIER YEAR AND C LAIMED ADMITTEDLY AND ERRONEOUSLY ON CASH BASIS, IN EARLIER YEAR. THE INCOME IS DIRECTED TO BE ENHANCED, ACCORDINGLY. THE GROUND AND THE ENHANCEMENT NOTICE IS DECIDED AS DIRECTED ABOVE. 4.1. THE AFORESAID FINDING OF THE LD.CIT(A) HAS NOT BEEN CONTROVERTED BY THE LD.COUNSEL FOR THE ASSESSEE BY PLACING ANY C ONTRARY MATERIAL ON ITA NO.1298/AHD/2012 (BY REVEN UE) AND ITA NO.1308/AHD/2012 (BY ASSESSEE) ADDL.CIT VS. M/S.TUDOR INDIA LTD. ASST.YEAR 2006-07 - 6 - RECORD. ALTHOUGH THE ASSESSEE CHANGED THE METHOD OF ACCOUNT FOR THESE EXPENSES FROM CASH TO MERCANTILE DURING THE YEAR UN DER APPEAL, BUT STILL THE ASSESSEE HAS CLAIMED SOME OF THE EXPENSES ON CA SH BASIS AND SOME OF THEM ON MERCANTILE BASIS DURING THE YEAR ITSELF. A CCORDING TO SECTION 145 HYBRID SYSTEM OF ACCOUNTING IS NOT AT ALL ALLOWABLE NOW. THEREFORE, THE FINDING OF THE LD.CIT(A) IS HEREBY UPHELD. THUS, G ROUND NOS.1 TO 2.1 ARE DISMISSED. 5. GROUND NOS.3 & 3.1 ARE AGAINST CONFIRMATION OF DIS ALLOWANCE IN RESPECT OF PAYMENT OF ADDITIONAL REMUNERATION TO MA NAGING DIRECTOR OF RS.4,95,192/- ON THE GROUND THAT THE EXPENDITURE HA S NOT ACCRUED DURING THE YEAR UNDER APPEAL. THE LD.COUNSEL FOR THE ASSE SSEE SUBMITTED THAT THERE IS NO DISPUTE WITH REGARD TO THE GENUINENESS OF THE EXPENDITURE. THE EXPENDITURE HAS BEEN DISALLOWED ON THE GROUND T HAT THE EXPENDITURE DOES NOT PERTAIN TO THE YEAR UNDER APPEAL. THE LD. COUNSEL FOR THE ASSESSEE SUBMITTED THAT THE AMOUNT WAS SUBSEQUENTLY RECTIFIE D BY THE MINISTRY OF COMPANY AFFAIRS. 5.1. ON THE CONTRARY, LD.SR.DR SUBMITTED THAT APPRO VAL WAS ADMITTEDLY RECEIVED SUBSEQUENT TO THE FINANCIAL YEAR RELEVANT TO THE ASSESSMENT YEAR UNDER APPEAL. THEREFORE, THE AUTHORITIES BELOW WER E JUSTIFIED IN MAKING THE DISALLOWANCE AND CONFIRMING THE SAME. ITA NO.1298/AHD/2012 (BY REVEN UE) AND ITA NO.1308/AHD/2012 (BY ASSESSEE) ADDL.CIT VS. M/S.TUDOR INDIA LTD. ASST.YEAR 2006-07 - 7 - 6. WE HAVE HEARD THE RIVAL SUBMISSIONS, PERUSED THE MATERIAL AVAILABLE ON RECORD AND GONE THROUGH THE ORDERS OF THE AUTHORITIES BELOW. THE CONTENTION BEFORE THE AO WAS THAT THE REQUISITE APPROVAL BY THE CENTRAL GOVERNMENT (MINISTRY OF COMPANY AFFAIRS) WA S RECEIVED ON 17/05/2007. THE ASSESSEE HAS NOT PLACED ANY MATE RIAL ON RECORD SUGGESTING THAT THE APPROVAL SO MADE BY THE MINISTR Y OF COMPANY AFFAIRS WAS WITH RETROSPECTIVE EFFECT. THEREFORE, WE DO NO T SEE ANY REASON TO INTERFERE WITH THE ORDER OF THE LD.CIT(A), SAME IS HEREBY UPHELD. THUS, GROUND NOS.3 & 3.1 ARE DISMISSED. 7. GROUND NO.4 IS AGAINST UPHOLDING THE DISALLOWANC E MADE IN RESPECT OF ADVANCE WRITTEN OFF OF R.2,09,151/- U/S. 37 OF THE ACT. THE LD.COUNSEL FOR THE ASSESSEE SUBMITTED THAT THE LD.C TI(A) WAS NOT JUSTIFIED IN CONFIRMING THE DISALLOWANCE. THE LD.COUNSEL FOR THE ASSESSEE SUBMITTED THAT THE ADVANCES WERE GIVEN TO THE SUPPL IERS OF THE ASSESSEE- COMPANY IN NORMAL COURSE OF BUSINESS. HOWEVER, THE SAME COULD NOT BE RECOVERED DUE TO VARIOUS REASONS. THEREFORE, THE A MOUNT IS ALLOWABLE EXPENDITURE. HE SUBMITTED THAT BOTH THE AUTHORITIE S BELOW HAVE GROSSLY ERRED IN MAKING THE DISALLOWANCE AND CONFIRMING THE SAME. 8. WE HAVE HEARD THE RIVAL SUBMISSIONS, PERUSED THE MATERIAL AVAILABLE ON RECORD AND GONE THROUGH THE ORDERS OF THE AUTHORITIES BELOW. ITA NO.1298/AHD/2012 (BY REVEN UE) AND ITA NO.1308/AHD/2012 (BY ASSESSEE) ADDL.CIT VS. M/S.TUDOR INDIA LTD. ASST.YEAR 2006-07 - 8 - WE FIND THAT THE AO IN PARA-7.2 OF HIS ORDER HAS GI VEN REASONING FOR MAKING THE DISALLOWANCE, THE SAME IS REPRODUCED HER EUNDER:- 7.2. I HAVE CAREFULLY CONSIDERED THE SUBMISSION OF THE ASSESSEE AND FIND THAT ADVANCES WRITTEN OFF TO THE EXTENT OF RS. 2,09,151/- IN RESPECT OF 8 ENTRIES ARE NOT AN ALLOWABLE EXPENSES IN VIEW OF THE FACT THAT:- (I) THERE IS NOTHING ON RECORD WHICH SUGGEST THAT THES E ADVANCES HAVE ACTUALLY BECOME BAD WHICH NECESSITATES WRITTEN OFF. (II) THERE IS NOTHING ON RECORD WHICH SHOW THAT THE ASSE SSEE HAS MADE ANY EFFORT TO RECOVER THE AFORESAID ADVANCES. (III) ONE ENTRY VIZ., TDS ON CONTRACT U/S.194C OF RS.27,0 07/- IS ALSO CLAIMED AS WRITTEN OFF AMOUNT. THERE IS NO REASON AS TO WHY THE ASSESSEE WILL CHOOSE NOT TO CLAIM THE TDS. SIMILAR LY, ONE ENTRY RELATES TO OUTSTATION LIABILITY OF RS.31,129/-. TH ERE IS NO CLARITY FOR WRITING OFF THE EXPENSES. 8.1. HOWEVER, THE LD.CIT(A) CONFIRMED THE ADDITION BY HOLDING AS UNDER:- 9.3. I FIND THAT THE ADVANCES WRITTEN OFF DOES NTO REPRESENT BAD DEBTS COVERED U/S.36(1)(VII) AND HENCE DOES NOT COM E WITHIN PURVIEW OF 36(1)(VII). THEREFORE THE DECISION RELI ED UPON BY THE ASSESSEE IN CASE OF TRF LTD CANNOT BE APPLIED. ALS O THE ASSESSEE FAILED TO SUBSTANTIATE NEXUS BETWEEN THE ADVANCE GI VEN AND BUSINESS OF THE ASSESSEE AND HENCE CANNOT BE ALLOWE D U/S.37 OF THE ACT AND IN VIEW OF THAT AOS ADDITION IS UPHELD AND APPELLANTS GROUND IS DISMISSED. 8.2. THE CONTENTION OF THE ASSESSEE IS THAT THE ADV ANCES WERE GIVEN DURING THE COURSE OF BUSINESS, BUT THE SAME COULD N OT BE RECOVERED. THE LD.COUNSEL FOR THE ASSESSEE HAS DRAWN OUR ATTENTION TOWARDS PAGE NO.193 OF THE PAPER-BOOK, WHEREIN THE DETAILS SUBMITTED BE FORE THE AO IS GIVEN ITA NO.1298/AHD/2012 (BY REVEN UE) AND ITA NO.1308/AHD/2012 (BY ASSESSEE) ADDL.CIT VS. M/S.TUDOR INDIA LTD. ASST.YEAR 2006-07 - 9 - WITH REGARD TO THE ADVANCES. THE LD.COUNSEL FOR TH E ASSESSEE HAS PLACED RELIANCE ON THE DECISION OF HONBLE APEX COURT REND ERED IN THE CASE OF TRF LTD. VS. CIT REPORTED AT (2010) 323 ITR 397(S C). IN THE SAID CASE, THE HONBLE APEX COURT HAS HELD AS UNDER:- 4. THIS POSITION IN LAW IS WELL-SETTLED. AFTER 1ST APR IL, 1989, IT IS NOT NECESSARY FOR THE ASSESSEE TO ESTABLISH THAT TH E DEBT, IN FACT, HAS BECOME IRRECOVERABLE. IT IS ENOUGH IF THE BAD D EBT IS WRITTEN OFF AS IRRECOVERABLE IN THE ACCOUNTS OF THE ASSESSEE. H OWEVER, IN THE PRESENT CASE, THE AO HAS NOT EXAMINED WHETHER THE D EBT HAS, IN FACT, BEEN WRITTEN OFF IN ACCOUNTS OF THE ASSESSEE. WHEN BAD DEBT OCCURS, THE BAD DEBT ACCOUNT IS DEBITED AND THE CUS TOMER'S ACCOUNT IS CREDITED, THUS, CLOSING THE ACCOUNT OF THE CUSTO MER. IN THE CASE OF COMPANIES, THE PROVISION IS DEDUCTED FROM SUNDRY DE BTORS. AS STATED ABOVE, THE AO HAS NOT EXAMINED WHETHER, IN F ACT, THE BAD DEBT OR PART THEREOF IS WRITTEN OFF IN THE ACCOUNTS OF THE ASSESSEE. THIS EXERCISE HAS NOT BEEN UNDERTAKEN BY THE AO. HE NCE, THE MATTER IS REMITTED TO THE AO FOR DE NOVO CONSIDERAT ION OF THE ABOVE-MENTIONED ASPECT ONLY AND THAT TOO ONLY TO TH E EXTENT OF THE WRITE OFF. 8.3. WE FIND THAT THE LD.CIT(A) HAS REJECTED THE PL EA OF THE ASSESSEE BY HOLDING THAT THE JUDGEMENT OF THE HONBLE APEX COUR T IS NOT APPLICABLE AS THE ASSESSEE FAILED TO SUBSTANTIATE NEXUS BETWEE N THE ADVANCE GIVEN AND BUSINESS OF THE ASSESSEE. HOWEVER, THE ASSESSE E HAS PLACED DETAILS WITH REGARD TO THE PARTIES TO WHOM THE ADVANCES HAV E BEEN GIVEN, THE AUTHORITIES BELOW HAVE NOT MADE ANY INQUIRY FROM SU CH PARTIES, THEREFORE, WE ARE OF THE CONSIDERED VIEW THAT THE DISALLOWANCE MADE CANNOT BE ITA NO.1298/AHD/2012 (BY REVEN UE) AND ITA NO.1308/AHD/2012 (BY ASSESSEE) ADDL.CIT VS. M/S.TUDOR INDIA LTD. ASST.YEAR 2006-07 - 10 - SUSTAINED IN VIEW OF THE JUDGEMENT OF THE HONBLE A PEX COURT RENDERED IN THE CASE OF TRF LTD.(SUPRA). THUS, THIS GROUND OF ASSESSEES APPEAL IS ALLOWED. AS A RESULT, ASSESSEES APPEAL IN ITA NO .1308/AHD/2012 FOR AY 2006-07 IS PARTLY ALLOWED. 9. NOW, WE TAKE UP THE REVENUES APPEAL IN ITA NO.1 298/AHD/2012, FOR AY 2006-07, WHEREIN THE FOLLOWING GROUNDS HAVE BEEN RAISED:- 1. THE LEARNED CIT(APPEALS) HAS ERRED IN LAW AND ON F ACTS IN DELETING THE ADDITION MADE BY THE AO ON PROVISION FOR WARRAN TY AMOUNTING TO RS.2,11,10,925/-. 2. THE LEARNED CIT(APPEALS) HAS ERRED IN LAW AND OANF ACTS IN DELETING THE ADDITION MADE BY THE AO OF RS.65,52,000/- IN RE SPECT OF PENALTY FOR BREACH OF CONTRACT. 3. ON THE FACTS AND CIRCUMSTANCES OF THE CASE THE LD. CIT(A) OUGHT TO HAVE UPHELD THE ORDER OF THE ASSESSING OFFICER. 4. IT IS THEREFORE PRAYED THAT THE ORDER OF THE LEARNE D CIT(APPEALS) MAY BE SET ASIDE AND THAT OF THE A.O. BE RESTORED TO TH E ABOVE EXTENT. 9.1. FIRST GROUND IN REVENUES APPEAL IS AGAINST DE LETION OF ADDITION MADE BY THE AO ON THE PROVISION FOR WARRANTY AMOUN TING TO RS.2,11,10,925/-. THE LD.SR.DR ARGUED AT LENGTH TO BUTTRESS THE CONTENTION THAT THE LD.CIT(A) WAS NOT JUSTIFIED IN DELETING THE ADDITION. HE SUBMITTED THAT THERE IS NO SCIENTIFIC METHOD ADO PTED BY THE ASSESSEE FOR THE PURPOSE OF MAKING PROVISION FOR WARRANTY EX PENSES. ITA NO.1298/AHD/2012 (BY REVEN UE) AND ITA NO.1308/AHD/2012 (BY ASSESSEE) ADDL.CIT VS. M/S.TUDOR INDIA LTD. ASST.YEAR 2006-07 - 11 - 9.2. ON THE CONTRARY, LD.COUNSEL FOR THE ASSESSEE S TRONGLY SUPPORTED THE ORDER OF THE LD.CIT(A) AND SUBMITTED THAT BEFORE TH E AUTHORITIES BELOW ALL DETAILS WERE FURNISHED AND IT WAS POINTED OUT THAT THIS KIND OF PROVISION MADE EVERY YEAR ON THE BASIS OF THE EXPERIENCE AND CLAIMS MADE BY THE CUSTOMERS. 10. WE HAVE HEARD THE RIVAL SUBMISSIONS, PERUSED TH E MATERIAL AVAILABLE ON RECORD AND GONE THROUGH THE ORDERS OF THE AUTHORITIES BELOW. WE FIND THAT THE LD.CIT(A) HAS GIVEN FINDINGS ON FA CT IN PARAS-5.3 TO 5.8 OF HIS ORDER, WHICH ARE REPRODUCED HEREUNDER:- 5.3 I HAVE GONE THROUGH THE FACTS OF THE APPELLANT 'S CASE, THE CONTENTIONS OF THE AO VIDE HIS ORDER OF ASSESSMENT AND THE SUBMISS IONS MADE BY THE APPELLANT CAREFULLY. IT IS IMPORTANT TO UNDERSTAND THAT WARRANTY EXPENSES CONSTITUTE INTEGRAL PART OF BUSINESS WHEN SOMEONE I S ENGAGED IN THE BUSINESS OF COMPLEX TECHNOLOGICAL INSTRUMENTS. APPELLANT BE ING ENGAGED IN THE SAME IS NO EXCEPTION. IT NEEDS TO PROVIDE FOR SUCH EXPENSES IN ACCORDANCE WITH GENERALLY ACCEPTED ACCOUNTING PRINCIPLES. OBVIOUSLY APPELLANT WOULD EMPLOY ITS BEST PRACTICES TO AVOID OR REDUCE PRODUCTION OF DEFECTIVE ARTICLES BUT THAT DOES NOT COMPLETELY ELIMINATE THIS POSSIBILITY. IN VIEW OF SUCH FACTS, IT IS REQUIRED TO PROVIDE CERTAIN AMOUNT IN BOOKS OF ACCO UNTS FOR THE PURPOSE OF MEETING SUCH LIABILITY. 5.4 COMING TO THE OBSERVATION OF AO WHEREIN HE HELD THE SAME TO BE OF CONTINGENT NATURE, I BELIEVE THAT IT IS IMPORTANT H ERE TO UNDERSTAND THE MEANING OF CONTINGENT. CONTINGENT IS SOMETHING WHIC H IS DEPENDENT ON SOME OTHER THING. HERE THIS LIABILITY WILL ARISE ONLY IF CERTAIN BATTERIES COME OUT TO BE DEFECTIVE. OVER THE EXPERIENCE OF THE APPELLANT, IT HAS OBSERVED THAT EVERY YEAR CERTAIN CLAIMS ARE RECEIVED BY IT FOR DEFECTIV E BATTERIES AND IN VIEW OF SUCH EXPERIENCE, IT HAS STARTED PROVIDING CERTAIN A MOUNT IN ITS BOOKS FOR MEETING SUCH LIABILITY WHICH I BELIEVE IS COMMERCIA LLY EXPEDIENT AND ANY ITA NO.1298/AHD/2012 (BY REVEN UE) AND ITA NO.1308/AHD/2012 (BY ASSESSEE) ADDL.CIT VS. M/S.TUDOR INDIA LTD. ASST.YEAR 2006-07 - 12 - RATIONAL BUSINESS PERSON WOULD DO THAT. THE FACT TH AT WARRANTY PROVISION IS NOT A CONTINGENT LIABILITY AND AN ACCRUED LIABILITY HAS BEEN HELD BY THE HON'BLE SC VIDES ITS DECISION IN CASE OF ROTORK CON TROL. APEX COURT HELD THE FOLLOWING IN THIS REGARD: 'THE WARRANTY BECAME AN INTEGRAL PART OF THE SALE P RICE; IN OTHER WORDS, THE WARRANTY PROVISIONS HAD TO BE RECOGNIZED BECAUSE THE ASSESSEE HAD A PRESENT OBLIGATION AS A RESULT OF PA ST EVENTS RESULTING IN AN OUTFLOW OF RESOURCES AND A RELIABLE ESTIMATE COU LD BE MADE OF THE AMOUNT OF OBLIGATION. THEREFORE, THE ASSESSEE HAD I NCURRED A LIABILITY DURING THE ASSESSMENT YEAR WHICH WAS ENTITLED TO DE DUCTION UNDER SECTION 37 OF THE INCOME TAX ACT, 1961.' 5.5. THE ONLY FACTOR, AS PER THE SAID DECISION OF THE HON'BLE SUPREME COURT, WHICH REQUIRES DUE CONSIDERATION HERE IS AS TO WHETHER SUCH AMOUNT OF WARRANTY PROVISION HAS BEEN SCIENTIFICALLY AND STAT ISTICALLY DERIVED BY THE APPELLANT. IN THIS REGARD I HAVE CAREFULLY GONE THR OUGH AND DISCUSSED WITH THE APPELLANT THE WARRANTY PROVISION CALCULATION PROVID ED BY IT BEFORE AO AS WELL AS BEFORE ME. ON GOING THROUGH SUCH CALCULATION IN DETAIL IT IS FOUND THAT THERE IS A METHODICAL APPROACH FOLLOWED TO CALCULAT E THE PROVISION FOR WARRANTY AS EVEN THE RECOVERY MADE ON SALE OF LEAD OUT OF THE RETURNED BATTERIES IS ALSO REDUCED WHILE CALCULATING THE WAR RANTY COSTS INCURRED IN PAST YEARS. FURTHER, WARRANTY PROVISION IS MADE BASED ON PAST EXPERIENCES OF ACTUAL WARRANTY COSTS INCURRED BY THE APPELLANT IN PROPORTION TO ACTUAL SALES MADE BY IT. ALSO THE AMOUNT OF PROVISION NO LONGER REQUIRED IS WRITTEN BACK TO PROFIT AND LOSS ACCOUNT AND DULY OFFERED TO TAX. 5.6 AS REGARDS CALCULATION OF THE WARRANTY PROV ISION, THE SAME IS DONE AS PER A SYSTEMATIC METHOD WHEREIN THE AMOUNT HAS BEEN ARRIVED AT AFTER CONSIDERING PAST YEARS' EXPERIENCE. IT IS IMPORTAN T HERE TO MENTION THAT EVEN IF AO'S CONTENTION IS ACCEPTED THAT IT IS NOT POSSI BLE TO EXACTLY DETERMINE THE AMOUNT OF LIABILITY AND IF NO CLAIMS ARE LODGED WIT H THE ASSESSEE, NOTHING WOULD BE REQUIRED TO BE PAID, THEN ALSO I BELIEVE I N THAT CASE THE ASSESSEE WOULD WRITE BACK THE WHOLE AMOUNT OF PROVISION TO I TS PROFIT AND LOSS ACCOUNT AND THERE IS SECTION 41 IN THE STATUTE TO TAKE CARE OF SUCH AMOUNTS IF THE SAME IS GRANTED AS DEDUCTIBLE HERE. ITA NO.1298/AHD/2012 (BY REVEN UE) AND ITA NO.1308/AHD/2012 (BY ASSESSEE) ADDL.CIT VS. M/S.TUDOR INDIA LTD. ASST.YEAR 2006-07 - 13 - 5.7 FURTHER, GUJARAT HIGH COURT IN CASE OF CIT-II V S. INDUCTOTHERM (INDIA) PVT. LTD. IN TAX APPEAL NO. 2087 OF 2010 FOLLOWED T HE DECISION OF APEX COURT AS MENTIONED ABOVE AND DISMISSED THE APPEAL OF THE REVENUE. 5.8 IN VIEW OF ABOVE DISCUSSION, AO IS DIRECTED TO ALLOW THE CLAIM OF THE ASSESSEE AND DELETE THE ADDITION MADE IN THIS REGAR D. THIS GROUND OF APPELLANT IS ALLOWED. 10.1. THE LD.COUNSEL FOR THE ASSESSEE RELIED UPON T HE JUDGEMENT OF HONBLE JURISDICTIONAL HIGH COURT RENDERED IN THE C ASE OF CIT-II VS. INDUCTOTHERM (INDIA) PVT.LTD. IN TAX APPEAL NO.2087 OF 2010. THE LD.SR.DR COULD NOT DISTINGUISH THE FACTS. IN VIEW OF THE JUDGEMENT OF THE HONBLE HIGH COURT OF GUJARAT RENDERED IN THE CASE OF CIT VS. INDUCTOTHERM (INDIA) PVT.LTD.[SUPRA], WE DO NOT SEE ANY REASON TO INTERFERE WITH THE ORDER OF THE LD.CIT(A), SAME IS HEREBY UPHELD. THUS, GROUND NO.1 OF REVENUES APPEAL IS REJECTED. 11. GROUND NO.2 IS AGAINST DELETION OF ADDITION OF RS.65,52,000/- MADE ON ACCOUNT OF DISALLOWANCE OF PENALTY EXPENDIT URE FOR BREACH OF CONTRACT. THE LD.SR.DR ARGUED THAT THE LD.CIT(A) W AS NOT JUSTIFIED IN DELETING THE ADDITION. HE SUBMITTED THAT THE ASSES SEE-COMPANY WAS NOT THE PARTY TO THE CONTRACT, THEREFORE, THERE WAS NO REASON TO MAKE PAYMENT TO GROUP CONCERN BUT ONLY REIMBURSEMENT OF PENALTY AMOUNT. 11.1. ON THE CONTRARY, LD.COUNSEL FOR THE ASSESSEE SUBMITTED THAT THE ARGUMENT OF THE REVENUE IS FUNDAMENTALLY INCORRECT. HE DREW OUR ITA NO.1298/AHD/2012 (BY REVEN UE) AND ITA NO.1308/AHD/2012 (BY ASSESSEE) ADDL.CIT VS. M/S.TUDOR INDIA LTD. ASST.YEAR 2006-07 - 14 - ATTENTION TOWARDS CONTRACT BETWEEN DARAMIC, INC. AN D ITS AFFILIATES (DARAMIC) AND EXCIDE CORPORATION AND ITS AFFILIAT ES (EXCIDE) [AT PAGE 43 TO 53 OF THE PAPER-BOOK]. THE LD.COUNSEL F OR THE ASSESSEE POINTED OUT AS PER THE RECITALS, THIS AGREEMENT IS ENTERED BETWEEN DARAMIC, INC. AND ITS AFFILIATES (DARAMIC) AND EXIDE CORPORATIO N AND ITS AFFILIATES (EXIDE). HE FURTHER POINTED OUT THE DEFINITION S - AS USED HEREIN THE FOLLOWING TERMS SHALL HAVE THE FOLLOWING MEANINGS (ENCLOSED AT PAGE-43 OF THE PAPER-BOOK):- AFFILIATES SHALL MEAN ANY PERSON IN WHICH EITHER DARAMIC OR EXCIDE, DIRECTLY OR INDIRECTLY, OWNS OR CONTROLS FI FTY PERCENT (50%) OR MORE OF THE OWNERSHIP INDICIA, AS WELL AS ANY PE RSON WHICH, DIRECTLY OR INDIRECTLY, OWNS 50% OR MORE OF, OR OTH ERWISE CONTROLS THE MANAGEMENT DECISIONS OF EXIDE OR DARAMIC. 12. WE HAVE HEARD THE RIVAL SUBMISSIONS, PERUSED TH E MATERIAL AVAILABLE ON RECORD AND GONE THROUGH THE ORDERS OF THE AUTHORITIES BELOW. WE FIND THAT THERE WAS AUTOMOTIVE AND INDUSTRIAL SU PPLY CONTRACT ENTERED BETWEEN DARAMIC, INC. AND ITS AFFILIATES ( DARAMIC) AND EXCIDE CORPORATION AND ITS AFFILIATES (EXIDE). THE DEFIN ITIONS OF AFFILIATES AS PER THE CONTRACT MEANS ANY PERSON IN WHICH EITHER D ARAMIC OR EXCIDE, DIRECTLY OR INDIRECTLY, OWNS OR CONTROLS FIFTY PERC ENT (50%) OR MORE OF THE OWNERSHIP INDICIA, AS WELL AS ANY PERSON WHICH, DIR ECTLY OR INDIRECTLY, OWNS 50% OR MORE OF, OR OTHERWISE CONTROLS THE MANA GEMENT DECISIONS OF EXIDE OR DARAMIC. THE CONTENTION OF THE ASSESSEE I S THAT IT IS THE PART OF ITA NO.1298/AHD/2012 (BY REVEN UE) AND ITA NO.1308/AHD/2012 (BY ASSESSEE) ADDL.CIT VS. M/S.TUDOR INDIA LTD. ASST.YEAR 2006-07 - 15 - THE AGREEMENT, THEREFORE THE AO WAS NOT JUSTIFIED I N MAKING THE ADDITION. WE FIND THAT THE LD.CIT(A) HAS GIVEN FINDINGS IN PA RAS-7.3 TO 7.6 OF HIS ORDER, WHICH ARE IN THE FOLLOWING MANNER:- 7.3 I HAVE GONE THROUGH THE SUBMISSION MADE BY TH E AR. I FIND THAT THE PAYMENT HAS BEEN BY THE PARENT COMPANY OF THE APPEL LANT AND THE SAME IS RECOVERED FROM THE ASSESSEE. PROPER DEBIT NOTES ARE SUBMITTED BY THE ASSESSEE ON THE BASIS OF WHICH THE SAID PAYMENT WAS MADE. IT IS APPEARING FROM THE ASSESSMENT ORDER THAT AO HAS NOT SPECIFICALLY DEALT WITH THE SECTION IN WHICH THE SAME IS DISALLOWED BU T CONSIDERING THE OBSERVATIONS MADE BY AO IN SUPPORT OF DISALLOWANCES SIGNALS THAT AO IS TALKING ABOUT THE RESIDUARY SECTION 37. IN RELATION TO THE SAME I BELIEVE HERE THAT AO HAS ADOPTED CONTRADICTORY STAND WHILE PASSING ASSESSMENT ORDER IN RELATION TO AMOUNT DISCLOSED IN TAX AUDIT REPORT. WHILE DISALLOWING THE PROVISION FOR WARRANTY EXPENSES, AO GAVE A STRONG OBSERVATION THAT THE SAME WAS OF CONTINGENT NATURE DEPENDING UPON THE FACT DISCLOSED IN THE TAX AUDIT REPORT BUT WHILE DEALING WITH PAYMENT OF PENALTY, HE HAS NOT CONSIDE RED THE AMOUNT SHOWN IN TAX AUDIT REPORT IN THIS REGARD. THIS PAYM ENT HAS NOT BEEN PAID FOR ANY OFFENCE WHICH IS PROHIBITED BY LAW AND THE SAME HAS BEEN PAID IN NORMAL BUSINESS COURSE INCIDENTAL TO CARRYI NG ON THE BUSINESS AS DAMAGES FOR BREACH OF COMMERCIAL CONTRACT. HENCE I FIND THAT THE CONDITIONS OF THE RESIDUARY SECTION STANDS FULFILLE D. 7.4 IMPORTANTLY HERE THIS PAYMENT HAS BEEN SUBJ ECTED TO TP REGULATIONS TPO HAS, AFTER DETAILED SCRUTINY ACCEPT ED THE SAME TO BE AT ARM'S LENGTH PRICE AND NOT PROPOSED ANY ADJUSTMENT TO THE SAME. HERE THE CASE OF THE APPELLANT WAS REFERRED TO TPO FOR C OMPUTATION OF ARM'S LENGTH PRICE AND WHEN THE ORDER HAS BEEN PASSED BY THE TPO WITHOUT PROPOSING ANY ADJUSTMENTS, THE SAME SHOULD BE FOLLO WED BY THE AO. VIDE TRANSFER PRICING PROCEEDINGS TPO CATEGORICALLY SOUGHT THE INFORMATION WITH REGARD TO THIS INTERNATIONAL TRANS ACTION AND REPLY TO ITA NO.1298/AHD/2012 (BY REVEN UE) AND ITA NO.1308/AHD/2012 (BY ASSESSEE) ADDL.CIT VS. M/S.TUDOR INDIA LTD. ASST.YEAR 2006-07 - 16 - SAME EFFECT WAS ALSO FILED BEFORE THE TPO, THAT IS TO SAY THE TRANSACTION WAS CATEGORICALLY DEALT WITH BY THE TPO DURING THE COURSE OF THE TP PROCEEDINGS. HERE IT IS IMPORTANT TO QUOTE THE DECI SION OF DELHI ITAT IN CASE OF ORACLE INDIA PRIVATE LIMITED (ITA NO. 18/DE L/2007) WHEREIN IT HAS BEEN HELD THAT PROVISIONS OF 40A(2) CANNOT OVER RIDE THE TRANSFER PRICING PROVISIONS AND WHERE NO ADJUSTMENT HAS BEEN PROPOSED BY THE TPO, THEN THERE WAS NO JUSTIFICATION IN HOLDING THA T THE PAYMENT MADE WITH RESPECT TO INTERNATIONAL TRANSACTION WAS UNREA SONABLE. HERE IN THIS CASE, WHEN AO REFERRED THE MATTER TO TPO WHO DID NO T PROPOSE ANY ADJUSTMENT; AO SHOULD NOT GO INTO DISALLOWING THE P AYMENT. 7.5. IMPORTANTLY, AO HAS DISALLOWED THE EXPENDITU RE BASED ON HIS CONTENTION THAT THE CONCERNED EXPENDITURE WAS NOT A PRUDENT BUSINESS EXPENDITURE WHICH WOULD HAVE BEEN PAID BY ANY BUSI NESS MAN, IT IS HERE THAT I AGREE WITH THE CONTENTION OF THE APPELL ANT THAT ONCE AN EXPENDITURE WHICH HAS BEEN VOUCHED TO BE AT ARM'S L ENGTH BY TPO THE SAME CANNOT BE DISALLOWED BY THE AO BASED ON CONSID ERING IT TO BE A NOT-REQUIRED EXPENDITURE FROM THE POINT OF VIEW OF SECTION 37. WHEN EXPENDITURE HAS BEEN CONSTRUED TO BE AT ARM'S LENGT H BY THE TPO, IT SUGGESTS THAT TWO INDEPENDENT AND UNRELATED PARTIES IN THE OPEN MARKET WOULD HAVE MADE THE SAME PAYMENT. THEREFORE, THEN A O CANNOT DISALLOW THE EXPENDITURE CALLING THEM NOT-REQUIRED EXPENDITURE AS LAW VERY CLEARLY STATES THAT THE ORDER OF TPO IS BINDIN G ON THE AO. 7.6 IN VIEW OF ABOVE DISCUSSION, AO IS DIRECTED TO DELETE THE ADDITION AND GRANT DEDUCTION OF THE SAME TO THE ASSESSEE. 12.1. THERE IS NO DISPUTE WITH REGARD TO THE FACT T HAT THE PAYMENTS ARE AT ARMS LENGTH PRICE (ALP) AS HELD BY THE TPO. IT IS AN UNDISPUTED FACT THAT THE CONTRACT INCLUDED THE AFFILIATES. IT IS ALSO AN UNDISPUTED FACT THAT THE EXPENDITURE IS RELATED TO THE BUSINESS OF THE ASSESSEE. THEREFORE, WE DO NOT SEE ANY REASON TO INTERFERE WITH THE FIND INGS OF THE LD.CIT(A) ITA NO.1298/AHD/2012 (BY REVEN UE) AND ITA NO.1308/AHD/2012 (BY ASSESSEE) ADDL.CIT VS. M/S.TUDOR INDIA LTD. ASST.YEAR 2006-07 - 17 - ON THIS ISSUE, SAME ARE HEREBY UPHELD. THUS, GROU ND NO.2 OF REVENUES APPEAL IS REJECTED. 13. GROUND NOS.3 & 4 ARE GENERAL IN NATURE WHICH R EQUIRE NO INDEPENDENT ADJUDICATION. 14. IN THE RESULT, ASSESSEES APPEAL IS PARTLY ALLO WED, WHEREAS REVENUES APPEAL IS DISMISSED. ORDER PRONOUNCED IN THE COURT ON FRIDAY, THE 21 ST DAY OF AUGUST, 2015 AT AHMEDABAD. SD/- SD/- ( ) ( ) ( PRAMOD KUMAR ) ( KUL BHARAT ) ACCOUNTANT MEMBER JUDICIAL MEMBER AHMEDABAD; DATED 21/ 08 /2015 /(..$ , %.$../ T.C. NAIR, SR. PS !'#$#%! / COPY OF THE ORDER FORWARDED TO : 1. ' / THE APPELLANT 2. #' / THE RESPONDENT. 3. 012 3 / CONCERNED CIT 4. 3 ( ) / THE CIT(A)-GANDHINAGAR 5. 4%5 $12 , ( 12 + , 0 / DR, ITAT, AHMEDABAD 6. 578 9& / GUARD FILE. / BY ORDER, #4 //TRUE COPY// / ( DY./ASSTT.REGISTRAR) , / ITAT, AHMEDABAD