M/s. Aditya Auto Products & Engineering (I) Pvt. Ltd., Bangalore V. DCIT, Bangalore

ITA 1344/BANG/2010

• Counselvise Citation: [2011] 140 COUNSELVISE.COM (IT) 51299 (ITAT-BANGALORE)
• Duration Of Justice: 9 month(s) 25 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 26-09-2011
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: A
• Next Hearing Date: 26-09-2011
• Assessment Year: 2006-2007
• Appeal Filed On: 01-12-2010
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Section: 143(3); 10B

Judgement Text

PAGE 1 OF 11 ITA NOS.1344 & 1348/BANG/2010 1 IN THE INCOME TAX APPELLATE TRIBUNAL, BANGALORE BENCH A BEFORE SHRI N BARATHVAJA SANKAR, VICE PRESIDENT AND SHRI GEORGE GEORGE K, J.M ITA NO.1344/BANG/2010 (ASSESSMENT YEAR 2006-07) M/S ADITYA AUTO PRODUCTS & ENGINEERING (I) PVT. LTD. , PLOT NO.13E, KIADB INDUSTRIAL AREA, DODDABALLAPUR, BANGALORE. - APPELLANT PA NO.AABCA 7045H VS THE DEPUTY COMMISSIONER OF INCOME TAX, CIRCLE-11(1), BANGALORE. - RESPONDENT ITA NO.1348/BANG/2010 (BY DEPARTMENT) DATE OF HEARING : 26/09/2011 DATE OF PRONOUNCEMENT : 26/09/2011 APPELLANT BY : MRS. KAVITHA P, C.A. RESPONDENT BY : SHRI UMAPATHI ORD ER PER GEORGE GEORGE K : THESE TWO APPEALS, ONE PREFERRED BY THE ASSESSEE (IT A NO.1344-10) AND THE ANOTHER BY THE DEPARTMENT (ITA N O.1348-10) ARE DIRECTED AGAINST THE CONSOLIDATED ORDER OF THE CIT( A)-I, BANGALORE DATED 15.9.2010. THE RELEVANT ASST. YEAR IS 2006-0 7. PAGE 2 OF 11 ITA NOS.1344 & 1348/BANG/2010 2 2. SINCE THESE APPEALS PERTAIN TO THE SAME ASSESSE E AND ARISE OUT OF THE CONSOLIDATED ORDER OF THE CIT(A), THEY ARE DISPOSED OFF TOGETHER FOR THE SAKE OF CONVENIENCE AND BREVIT Y. 3. FIRST LET US TAKE THE APPEAL OF THE ASSESSEE (I TA NO.1344/10). THE SOLITARY ISSUE THAT IS RAISED IN THIS APPEAL IS WHETHER THE FREIGHT CHARGES BE REDUCED FROM BOTH TH E EXPORT TURNOVER AND THE TOTAL TURNOVER FOR THE PURPOSE OF COMPUTING DEDUCTION U/S 10B OF THE ACT. 3.1 BRIEF FACTS IN RELATION TO THE ABOVE ISSUE ARE AS FOLLOWS:- FOR THE CONCERNED ASST. YEAR, RETURN OF INCOME WAS FILED ON 30.11.2006 DISCLOSING AN INCOME OF RS.4,97,76,17 8/-. ASSESSMENT WAS TAKEN UP FOR SCRUTINY BY ISSUANCE OF NOTICE U/S 143(2) OF THE ACT AND THE ASSESSMENT WAS COMPLETED U/S 143(3) OF THE ACT VIDE ORDER DATED 26.12.2008. THE ASSESSEE COMPANY IN THE RETUR N OF INCOME HAD CLAIMED DEDUCTION U/S 10B OF THE ACT. FOR COMPUTIN G DEDUCTION U/S 10B OF THE ACT, THE ASSESSEE HAD REDUCED FREIGHT CH ARGES FROM BOTH THE EXPORT TURNOVER AND THE TOTAL TURNOVER AMOUNTIN G TO RS.1,08,19,846/- ATTRIBUTABLE TO THE DELIVERY OF GOO DS OUTSIDE INDIA. THE AO HOWEVER REDUCED THE ABOVE SAID FREIGHT CHARG ES ONLY FROM THE EXPORT TURNOVER AND ACCORDINGLY COMPUTED DEDUCTI ON U/S 10B OF THE ACT. 3.2 ON FURTHER APPEAL, THE VIEW OF THE AO WAS CONF IRMED BY THE CIT(A). PAGE 3 OF 11 ITA NOS.1344 & 1348/BANG/2010 3 3.3 THE ASSESSEE BEING AGGRIEVED IS IN APPEAL BEFO RE US. 3.4 IN THE COURSE OF HEARING, IT IS ARGUED BY THE L EARNED AR THAT THE ISSUE IN QUESTION IS SQUARELY COVERED BY THE JUDGEMENT OF THE HONBLE BOMBAY HIGH COURT IN THE CASE OF CIT V GEM P LUS JEWELLERY INDIA LTD. 330 ITR 175 AND THE ORDER OF THE SPECIAL BENCH IN THE CASE OF ITO V M/S SAK SOFT LTD. 313 ITR 353. 3.5 THE LEARNED DR WAS UNABLE TO CONTROVERT THE CO NTENTION OF THE LEARNED AR. 3.6 WE HAVE HEARD THE RIVAL SUBMISSION AND PERUSED THE MATERIAL ON RECORD. THE HONBLE MUMBAI HIGH COURT IN THE CASE OF GEM PLUS JEWELLERY INDIA LTD. (SUPRA), IN IDENTICAL CIRCUMSTANCES, HELD THAT SINCE THE EXPORT TURNOVER FORMS PART OF THE TO TAL TURNOVER, IF AN ITEM IS EXCLUDED FROM THE EXPORT TURNOVER, THE SAME SHOULD ALSO BE REDUCED FROM THE TOTAL TURNOVER TO MAINTAIN PARITY B ETWEEN NUMERATOR AND DENOMINATOR WHILE CALCULATING DEDUCTI ON U/S 10A OF THE ACT. THE RELEVANT FINDING OF THE HONBLE MUMBAI HI GH COURT READS AS FOLLOWS:- HELD : THE TOTAL TURNOVER OF THE BUSINESS CARRIED ON BY THE UNDERTAKING WOULD CONSIST OF THE TURNOVER FROM EXPORT AND THE TURNOVER FROM LOCAL SALES. THE EXPORT TURNOVER CONSTITUTES THE NUMERATOR IN THE FORMULA PRESCRIBED BY SUB-SECTION (4). EXPORT TURNOVER ALSO FORMS A CONSTITUENT ELEMENT OF THE DENOMINATOR IN AS MUCH AS THE EXPORT TURNOVER IS A PART OF THE TOTAL TURNOVER. THE EXPORT TURNOVER, I N THE NUMERATOR MUST HAVE THE SAME MEANING AS THE EXPORT TURNOVER WHICH IS CONSTITUENT ELEMENT OF THE PAGE 4 OF 11 ITA NOS.1344 & 1348/BANG/2010 4 TOTAL TURNOVER IN THE DENOMINATOR. THE LEGISLATURE HAS PROVIDED A DEFINITION OF THE EXPRESSION EXPORT TURNOVER IN EXPLN.2 TO S.10A WHICH THE EXPRESSION IS DEFINED TO MEAN THE CONSIDERATION IN RESPECT OF EXPORT BY THE UNDERTAKING OF ARTICLES, THINGS OR COMPUTER SOFTWARE RECEIVED IN OR BROUGHT INTO INDIA BY THE ASSESSEE IN CONVERTIBLE FOREIGN EXCHANGE BUT SO AS NOT TO INCLUDE INTER ALIA FREIGHT, TELECOMMUNICATION CHARGES OR INSURANCE ATTRIBUTABLE TO THE DELIVERY OF THE ARTICLES, THINGS OR SOFTWARE OUTSIDE INDIA. THEREFORE IN COMPUTING THE EXPORT TURNOVER THE LEGISLATURE HAS MADE A SPECIFIC EXCLUSION OF FREIGHT AND INSURANCE CHARGES. THE SUBMISSION WHICH HAS BEEN URGED ON BEHALF OF THE REVENUE IS THAT WHILE FREIGHT AND INSURANCE CHARGES ARE LIABLE TO BE EXCLUDED IN COMPUTING EXPORT TURNOVER, A SIMILAR EXCLUSION HAS NOT BEEN PROVIDED IN REGARD TO TOTAL TURNOVER. THE SUBMISSION OF THE REVENUE, HOWEVER, MISSES THE POINT THAT THE EXPRESSION TOTAL TURNOVER HAS NOT BEEN DEFINED AT ALL BY PARLIAMENT FOR THE PURPOSES OF S.10A. HOWEVER, THE EXPRESSION EXPORT TURNOVER HAS BEEN DEFINED. THE DEFINITION OF EXPORT TURNOVER EXCLUDES FREIGHT AND INSURANCE. SINCE EXPORT TURNOVER HAS BEEN DEFINED BY PARLIAMENT AND THERE IS A SPECIFIC EXCLUSION OF FREIGHT AND INSURANCE, THE EXPRESSION EXPORT TURNOVER CANNOT HAVE A DIFFERENT MEANING WHEN IT FORMS A CONSTITUENT PART OF THE TOTAL TURNOVER FOR THE PURPOSES OF THE APPLICATION OF THE FORMULA. UNDOUBTEDLY, IT WAS OPE N TO PARLIAMENT TO MAKE A PROVISION WHICH HAS BEEN ENUNCIATED EARLIER MUST PREVAIL AS A MATTER OF CORRECT STATUTORY INTERPRETATION. ANY OTHER INTERPRETATION WOULD LEAD TO AN ABSURDITY. IF THE CONTENTION OF THE REVENUE WERE TO BE ACCEPTED, THE SAME EXPRESSION VIZ. EXPORT TURNOVER WOULD HAVE A DIFFERENT CONNOTATION IN THE APPLICATION OF THE SAM E FORMULA. THE SUBMISSION OF THE REVENUE WOULD LEAD PAGE 5 OF 11 ITA NOS.1344 & 1348/BANG/2010 5 TO A SITUATION WHERE FREIGHT AND INSURANCE, THOUGH THESE HAVE BEEN SPECIFICALLY EXCLUDED FROM EXPORT TURNOVER FOR THE PURPOSES OF THE NUMERATOR WOULD BE BROUGHT IN AS PART OF THE EXPORT TURNOVER WHEN IT FORMS AN ELEMENT OF THE TOTAL TURNOVER AS A DENOMINATOR IN THE FORMULA. A CONSTRUCTION OF A STATUTORY PROVISION WHICH WOULD LEAD TO AN ABSURDITY MUST BE AVOIDED. MOREOVER, A RECEIPT SUCH AS FREIGHT AND INSURANCE WHICH DOES NOT HAVE ANY ELEMENT OF PROFIT CANNOT BE INCLUDED IN THE TOTAL TURNOVER. FREIGHT AND INSURANCE CHARGES DO NOT HAV E ANY ELEMENT OF TURNOVER. FOR THIS REASON IN ADDITIO N, THESE TWO ITEMS WOULD HAVE TO BE EXCLUDED FROM THE TOTAL TURNOVER PARTICULARLY IN THE ABSENCE OF A LEGISLATIVE PRESCRIPTION TO THE CONTRARY CIT V SUDARSHAN CHEMICALS INDUSTRIES LTD. (2000) 163 CTR (BOM) 596: (2000) 245 ITR 769 (BOM) APPLIED; CIT V LAKSHMI MACHINE WORKS (2007) 210 CTR (SC) 1: (2007) 290 ITR 667 (SC) AND CIT V CATAPHARMA (INDIA) (P) LTD. (2007) 211 CTR (SC) 83: (2007) 292 ITR 641 (SC) RELIED ON 3.7 IN THE CASE OF SAK SOFT LTD. (SUPRA), THE ASSE SSEE WAS ENGAGED IN THE BUSINESS OF EXPORTING COMPUTER SOFTW ARE AND CLAIMED DEDUCTION U/S 10B OF THE ACT. IN COMPLETING THE AS SESSMENT U/S 143(3) OF THE ACT, THE AO REDUCED THE EXPENDITURE I NCURRED IN FOREIGN EXCHANGE IN PROVIDING THE TECHNICAL SERVICE S OUTSIDE INDIA, FROM THE EXPORT TURNOVER WITHOUT CORRESPONDING REDU CTION FROM TOTAL TURNOVER, THEREBY REDUCING THE DEDUCTION CLAIMED BY T HE ASSESSMENT U/S 10B OF THE ACT. PAGE 6 OF 11 ITA NOS.1344 & 1348/BANG/2010 6 3.8 IN LIGHT OF THE ABOVE FACTS, THE SPECIAL BENCH HELD AS UNDER:- FOR THE ABOVE REASONS, WE HOLD THAT FOR THE PURPOS E OF APPLYING THE FORMULA UNDER SUB-SECTION (4) OF SECTION 10B, THE FREIGHT, TELECOM CHARGES OR INSURANCE ATTRIBUTABLE TO THE DELIVERY OF ARTICLES O R THINGS OR COMPUTER SOFTWARE OUTSIDE INDIA OR THE EXPENSES, IF ANY, INCURRED IN FOREIGN EXCHANGE IN PROVIDING THE TECHNICAL SERVICES OUTSIDE INDIA ARE TO BE EXCLUDED BOTH FROM THE EXPORT TURNOVER AND FROM THE TOTAL TURNOVER, WHICH ARE THE NUMERATOR AND THE DENOMINATOR RESPECTIVELY IN THE FORMULA. THE APPEALS FILED BY THE DEPARTMENT ARE THUS DISMISSED. FURTHER, IN THE CASE OF JAIPURIA SILK MILLS (P) LTD . V ACIT (ITA NO.1112/BANG/2009), THE BANGALORE TRIBUNAL HAD PLAC ED RELIANCE ON THE DECISION OF CHENNAI SPECIAL BENCH IN THE CASE O F SAK SOFT LTD. (SUPRA) AND HAD CONCLUDED THAT THE FREIGHT AND INSU RANCE EXPENSES ARE TO BE REDUCED BOTH FROM THE EXPORT TURNOVER AND TOTAL TURNOVER WHILE COMPUTING THE DEDUCTION U/S 10B OF THE ACT. 3.9 IN THE LIGHT OF THE ABOVE REASONING, WE REVERS E THE ORDERS OF THE CIT(A) AND DIRECT THE AO TO EXCLUDE T HE ABOVE MENTIONED EXPENSES BOTH FROM THE EXPORT TURNOVER AS WELL AS FROM THE TOTAL TURNOVER WHILE CALCULATING DEDUCTION U/S 10B OF THE ACT. 3.10 IN THE RESULT, THE APPEAL FILED BY THE ASSESSE E IS ALLOWED. PAGE 7 OF 11 ITA NOS.1344 & 1348/BANG/2010 7 DEPARTMENTS APPEAL (ITA NO.1348-10) 4. THE SOLITARY ISSUE THAT IS RAISED IN THIS APPEAL IS WHETHER THE CIT(A) IS JUSTIFIED IN DELETING THE ADDITION OF RS.27,85,418/- MADE BY THE AO ON ACCOUNT OF PROVISION FOR WARRANTY. 4.1 BRIEFLY STATED THE FACTS ARE AS FOLLOWS:- DURING THE RELEVANT ASST. YEAR, A PROVISION OF RS.27,85,418/- WAS CREATED TOWARDS EXPECTED WARRANT Y CLAIM. THIS CLAIM OF THE ASSESSEE WAS DISALLOWED BY THE AO FOR T HE FOLLOWING REASONS:- A) THE ASSESSEE COMPANY HAS NOT SUBSTANTIATED ITS CLAIM OF WARRANTY EXPENSES WITH ANY MATERIAL EVIDENCE TO THE TUNE OF RS.27,85,418/-. HOWEVER, FROM THE WARRANTY CLAIMS LEDGER IT IS OBSERVED THAT IT HAS SETTLED WARRANTY CLAIMS ONLY TO THE TUNE OF RS. NIL. B) UNDER THE INCOME TAX ACT, PROVISIONS MADE FOR EXPENSES CANNOT BE ALLOWABLE UNLESS AND OTHERWISE THEY ARE CRYSTALLIZED. ACCORDINGLY, THE ASSESSEE COMPANY HAS RECEIVED A CRYSTALLIZED WARRANTY CLAIM OF RS. NIL. C) WHEN THE ACTUAL EXPENSES OF WARRANTY CLAIM MADE BY THE ASSESSEES CUSTOMERS ARE ALLOWED, THE QUESTION OF ALLOWING OVER AND ABOVE THE CLAIM AND DEBITING IT A S EXPENDITURE DOES NOT ARISE AT ALL BECAUSE THERE IS NO SUCH LIABILITY OUTSTANDING AS ON 31.3.2006. D) THERE IS NO SCIENTIFIC METHOD OF WORKING OF WARRANT Y CLAIM MADE BY THE ASSESSEE WHICH HAS BEEN SUBMITTED FOR EXAMINATION. THUS, WITHOUT ANY BASIS, MERELY DEBITING A SUM OF RS.27,85,418/- CANNOT BE ALLOWED AS ACTUAL WARRANTY CLAIM. E) WITH DUE REGARDS TO THE DECISIONS OF VARIOUS JUDICI AL AUTHORITIES WHICH THE ASSESSEE HAS CITED, I ADHERE TO PAGE 8 OF 11 ITA NOS.1344 & 1348/BANG/2010 8 THE PROVISIONS OF THE I T ACT AS PER WHICH, ANY PROVISION IS NOT AN ALLOWABLE EXPENDITURE. F) UNDER THE CIRCUMSTANCES, THE EXCESS CLAIM WHICH IS IN THE FORM OF PROVISION, AMOUNTING TO RS.27,85,418/- IS DISALLOWED AND BROUGHT TO TAX. 4.2 THE ASSESSEE BEING AGGRIEVED, CARRIED THE MATT ER IN APPEAL BEFORE THE FIRST APPELLATE AUTHORITY. 4.3 THE FIRST APPELLATE AUTHORITY ALLOWED THE APPEA L OF THE ASSESSEE. THE RELEVANT FINDING OF THE CIT(A) READS AS FOLLOWS:- 5. THE ABOVE WAS EXAMINED. IT IS SEEN THAT THE ACTUAL WARRANTY CLAIM EXCEPT THE INITIAL YEAR OF FY 2004-05 IS ALWAYS HIGHER THAN THE PROVISION MADE FOR THE YEAR SO AS TO ESTABLISH THAT THE PART OF THE OPENING BALANCES ARE ALSO BEING UTILIZED BY THE APPELLANT WHICH SHOWS THAT THE ASSESSEE HAS NO INTENTION OF MAKING UNNECESSARY HIGH PROVISIONS AND THEREBY REDUCE THE PROFIT AND PAY LESS TAX. THE TREND ABOVE SHOWS NO MALAFIDE INTENTION OF THE ASSESSEE. SO FAR AS CLAIM OF PROVISION FOR WARRANT Y IS CONCERNED, LIKE EVERY MANUFACTURER SELLER, THIS COMPANY HAS GIVEN WARRANTY TO ITS PURCHASERS FOR MAKING GOOD THE DEFAULT AT THE TIME OF SALE, IF ANY DETECTED WITHIN THREE YEARS BY REPAIR OR REPLACEMENT OF THE PARTS INVOLVED AND RECORD SHOWS IT IS ALSO DOING SUCH REPAIRS. THE ANALYSIS O F THE ABOVE TABLE SHOWS THAT THE PROVISION MADE OF RS.27,85,418/- FOR AY 2006-07 BEING 0.52% OF SALES IS SCIENTIFIC AND THEREFORE FOLLOWING THE RAT IO OF THE DECISION IN THE CASE OF ROTOR CONTROLS INDIA (P) LIMITED V CIT (2009) 314 ITR 62 (SC) PAGE 9 OF 11 ITA NOS.1344 & 1348/BANG/2010 9 THE PROVISION IS TREATED AS ASCERTAINED ONE THEREFORE ALLOWED. APPEAL IS ALLOWED ON THIS ISSUE . 4.4 THE REVENUE BEING AGGRIEVED IS IN APPEAL BEFOR E US. 4.5 THE LEARNED DR SUBMITTED THAT WHILE DELETING T HE ADDITION ON ACCOUNT OF WARRANTY PROVISION, THE LEARN ED CIT(A) HAS FAILED TO APPRECIATE THE FACT THAT THE PROVISION FO R WARRANTY HAS NOT BEEN CREATED IN A SCIENTIFIC MANNER BASED ON PAST E XPERIENCE. HE ALSO SUBMITTED THAT THE LEARNED CIT(A) HAS ALSO FAILED T O APPRECIATE THAT THE ENTIRE PROVISION CREATED IN A PARTICULAR YEAR SH OULD HAVE BEEN EXHAUSTED WITHOUT CARRYING FORWARD THE SAME TO THE N EXT YEAR AND THE ASSESSEE HAD NOT FURNISHED RELEVANT FACTS AND D ETAILS WITH REFERENCE TO THE INVOICES RAISED FOR THE ASST. YEAR IN QUESTION AND THE EARLIER ASST. YEARS TO ARRIVE AT THE CONCLUSION THAT THE ASSESSEE IS FOLLOWING A SCIENTIFIC METHOD FOR MEASURING THE FUT URE LIABILITY ON ACCOUNT OF WARRANTY. IT WAS FURTHER SUBMITTED THAT FOR THE IMMEDIATELY PRECEDING ASST. YEAR, (VIZ. ASST. YEAR 200 5-06), ON THE VERY SAME ISSUE, THE TRIBUNAL RESTORED THE MATTER BA CK TO THE AO FOR NECESSARY VERIFICATION. IT WAS SUBMITTED THAT SIMIL AR COURSE OF ACTION OUGHT TO BE ADOPTED IN THIS CASE ALSO. 4.6 THE LEARNED AR FAIRLY SUBMITTED THAT THE MATTER CAN BE REMITTED BACK TO THE FILE OF THE AO SINCE FOR THE P REVIOUS ASST. YEAR, THE ISSUE IS PENDING CONSIDERATION BEFORE THE AO. 4.7 WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSE D THE MATERIAL ON RECORD. THE TRIBUNAL IN ASSESSEES OWN CASE FOR THE ASST. PAGE 10 OF 11 ITA NOS.1344 & 1348/BANG/2010 10 YEAR 2005-06 HAD RESTORED THE MATTER TO THE AO FOR F RESH EXAMINATION. THE RELEVANT FINDING OF THE TRIBUNAL READS AS FOLLOWS:- THE AO WILL VERIFY THE ACTUAL WARRANTY CLAIMS IN RESPECT OF PRODUCTS SOLD IN THE FY 2004-05 AND SATISFIED THAT THE WARRANTY CLAIMS SETTLED IN SUBSEQUENT YEARS TO THE CUSTOMERS IN RESPECT OF SALES OF FY 2004-05. IN CASE THE VERIFICATION SHOWS THAT THE WARRANTY CLAIMS IN SUBSEQUENT YEARS RELATED TO THE PRODUCT SOLD DURING THE FY 2004-05 THEN THE PROVISION TO THAT EXTENT WILL BE ALLOWED. HENCE, TO THIS EXTENT THE ISSUE IS RESTORED BACK TO THE FILE OF ASSESSING OFFICER. 4.8 IN THE LIGHT OF THE SUBMISSIONS MADE BY BOTH TH E PARTIES, THE ISSUE IS REMITTED TO THE FILE OF THE AO SINCE I DENTICAL MATER IS PENDING BEFORE HIM FOR THE IMMEDIATELY PRECEDING ASS T. YEAR. THE AO SHALL CONSIDER THE PRECEDENT ON THE SUBJECT AND TAK E A DECISION IN ACCORDANCE WITH LAW. 4.9 IN THE RESULT, THE APPEAL FILED BY THE REVENUE IS ALLOWED FOR STATISTICAL PURPOSES. THE ORDER PRONOUNCED ON THE 26 TH DAY OF SEPTEMBER, 2011 AT BANGALORE. SD/- SD/- (N BARATHVAJA SANKAR) (GEORGE GEORGE K) VICE PRESIDENT JUDICIAL MEMBER PAGE 11 OF 11 ITA NOS.1344 & 1348/BANG/2010 11 COPY TO : 1. THE REVENUE 2. THE ASSESSEE 3. THE C IT CONCERNED. 4. THE CIT(A) CONCERNED. 5. DR 6. GF MSP/ BY ORDER ASST. REGISTRAR, ITAT, BANGALORE.