ACIT RG 10(1), MUMBAI V. KOTAK INDIA LTD, MUMBAI

ITA 1668/MUM/2009

• Counselvise Citation: [2014] 140 COUNSELVISE.COM (IT) 84300 (ITAT-MUMBAI)
• Duration Of Justice: 5 year(s) 8 month(s) 4 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 17-11-2014
• Appeal Filed By: Department
• Order Result: Partly Allowed
• Bench Allotted: K
• Next Hearing Date: 12-08-2014
• Assessment Year: 2004-2005
• Appeal Filed On: 13-03-2009
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: N PADMANABH
• Assessee Lawyers: P PARDIWALA
• Keywords: Business income; Depreciation; Transfer pricing; International transaction
• Section: 80HHC; 92

Judgement Text

, IN THE INCOME TAX APPELLATE TRIBUNAL K B ENCH, MUMBAI . . , . , ! BEFORE SHRI I.P. BANSAL, JM AND RAJENDRA, AM ./ I.T.A. NO.1630/MUM/2009 ( ' ' ' ' # # # # / ASSESSMENT YEAR : 2004-2005 KODAK INDIA PVT.LTD., (FORMERLY KODAKA INDIA LTD.) KALPATARU SYNDERGY, 2 ND FLOOR, OPP. GRAND HYATT, VAKOLA, SANTA CRUZ (EAST), MUMBAI 400 055 ' ' ' ' / VS. THE ADDL. COMM.M OF INCOME TAX RANGE 10(1), ROOM NO.454, AAYKAR BHAVAN, MK ROAD, MUMBAI 400 020 $ ./ % ./ PAN/GIR NO. : AAACK2171J ( $& / APPELLANT ) .. ( '($& / RESPONDENT ) ./ I.T.A. NO.1668/MUM/2009 ( ' ' ' ' # # # # / ASSESSMENT YEAR : 2004-2005 THE ADDL. COMM.M OF INCOME TAX RANGE 10(1), ROOM NO.454, AAYKAR BHAVAN, MK ROAD, MUMBAI 400 020 ' ' ' ' / VS. KODAK INDIA PVT.LTD., (FORMERLY KODAKA INDIA LTD.) KALPATARU SYNDERGY, 2 ND FLOOR, OPP. GRAND HYATT, VAKOLA, SANTA CRUZ (EAST), MUMBAI 400 055 $ ./ % ./ PAN/GIR NO. : AAACK2171J ( $& / APPELLANT ) .. ( '($& / RESPONDENT ) ASSESSEE BY: SHRI P. PARDIWALA REVENUE BY : SHRI N. PADMANABH ' ) *+ / DATE OF HEARING : 17/11/2014 ,-# ) *+ / DATE OF PRONOUNCEMENT : 17/11/2014 . / O R D E R ./ I.T.A. NO.1630&1668/MUM/2009 ( ' ' ' ' # # # # / ASSESSMENT YEAR : 2004-2005 2 PER I.P.BANSAL,J.M: THESE ARE CROSS APPEALS AND ARE DIRECTED AGAINST O RDER PASSED BY LD. CIT(A)XXXII, MUMBAI FOR THE ASSESSMENT YEAR 2004-0 5. GROUNDS OF APPEAL RAISED BY THE ASSSESSEE AS WELL AS REVENUE READ AS UNDER: GROUNDS OF REVENUES APPEAL: I. ON THE FACT AND IN THE CIRCUMSTANCES OF THE CASE AS WELL AS IN LAW ,THE LD.CIT(A) HAS ERRED IN DELETING THE ADJUSTMENT OF RS. 14.86 C RORES MADE TO THE PRICE OF INTERNATIONAL TRANSACTION OF PURCHASE OF TRADING GO ODS FROM ASSOCIATED ENTERPRISES WITHOUT APPRECIATING THE FACT THAT SWAD ESHI COMMERCIAL CO LTD WAS NOT ELIGIBLE FOR INCLUSION IN COMPARABLES AS THE SA ID COMPANY WAS CONSISTENTLY INCURRING LOSSES AND ITS INCLUSION WOULD HAVE INFLU ENCED THE CONCLUSIONS ADVERSELY. II. THE APPELLANT PRAYS THAT THE ORDER OF CIT(A) ON THE ABOVE GROUND BE SET ASIDE AND THAT OF THE ASSESSING OFFICER BE RESTORED III. THE APPELLANT CRAVES LEAVE TO AMEND OR ALTER A NY GROUNDS OR ADD A NEW GROUND WHICH MAY BE NECESSARY GROUNDS OF ASSESSEES APPEAL: 1. THE LEARNED COMMISSIONER OF INCOME-TAX (APPEALS) ERRED IN CONFIRMING THE DISALLOWANCE OF RS.2,50,00,000/- BEING WRITE OFF OF INVESTMENTS MADE IN KODAK NEPAL PVT. LTD. THE APPELLANT SUBMITS THE DISALLOWA NCE IS UNJUSTIFIED AND IS REQUIRED TO BE DELETED. 2. THE LEARNED COMMISSIONER OF INCOME-TAX (APPEALS) ERRED IN CONFIRMING THE DISALLOWANCE OF RS.2,04,63,000/- BEING PROVISION FO R WARRANTY FOR REPAIR! REPLACEMENT OF DAMAGED PARTS OF EQUIPMENT/CAMERAS. THE APPELLANT SUBMITS THE DISALLOWANCE IS UNJUSTIFIED AND IS REQUIRED TO BE D ELETED. 3. THE LEARNED COMMISSIONER OF INCOME-TAX (APPEALS) ERRED IN CONFIRMING THE TREATMENT OF INTEREST INCOME AS INCOME FROM OTHER SOURCES AS AGAINST THE APPELLANTS CONTENTION THAT THE SAME IS REQUIRED TO BE ASSESSED AS BUSINESS INCOME. 4. THE LEARNED COMMISSIONER OF INCOME-TAX (APPEALS) ERRED IN CONFIRMING THE REDUCTION OF 90% OF INTEREST INCOME WHILE COMPUTING DEDUCTION U/S.80-HHC. THE LEARNED COMMISSIONER OF INCOME-TAX (APPEALS) ERRED IN CONFIRMING THE REDUCTION OF 90% OF MISCELLANEOUS RECOVERIES RS.3,49,074/- AND R EIMBURSEMENT OF EXPENSES RS.3,65,522/- WHILE COMPUTING DEDUCTION U/S.80-HHC. 6. THE LEARNED COMMISSIONER OF INCOME-TAX (APPEALS) ERRED IN CONFIRMING THE DISALLOWANCE OF RS.4,07,694/- BEING EXPENDITURE INC URRED TOWARDS CORPORATE MEMBERSHIP/ANNUAL SUBSCRIPTION OF CLUBS. THE APPELL ANT SUBMITS THAT THE LEARNED COMMISSIONER OF INCOME-TAX (APPEALS) ERRED IN IGNOR ING ORDERS OF THE INCOME-TAX APPELLATE TRIBUNAL IN THE APPELLANTS OWN CASE ON T HIS ISSUE. THE APPELLANT SUBMITS THAT THE DISALLOWANCE IS UNJUSTIFIED AND IS REQUIRE D TO BE DELETED. 7. THE LEARNED COMMISSIONER OF INCOME-TAX (APPEALS) ERRED IN HOLDING THAT A REFERENCE TO THE TRANSFER PRICING OFFICER HAD BEEN VALIDLY MADE. ./ I.T.A. NO.1630&1668/MUM/2009 ( ' ' ' ' # # # # / ASSESSMENT YEAR : 2004-2005 3 8. THE LEARNED COMMISSIONER OF INCOME-TAX (APPEALS) ERRED IN HOLDING THAT ADEQUATE OPPORTUNITY HAD BEEN GRANTED BY THE TRANSFER PRICIN G OFFICER BEFORE MAKING A TRANSFER PRICING ADJUSTMENT. 9. THE LEARNED COMMISSIONER OF INCOME-TAX (APPEALS) ERRED IN CONFIRMING THAT THE TRANSFER PRICING OFFICER/ASSESSING OFFICER CAN MAKE AN ADJUSTMENT U/S.92CA(3) WITHOUT PROVIDING REASONS AS TO WHICH CONDITION OF SECTION 92C(3) HAD NOT BEEN SATISFIED. 10. THE LEARNED COMMISSIONER OF INCOME-TAX (APPEALS ) ERRED IN CONFIRMING THE TREATMENT OF EXCLUSION FROM THE CLOSING STOCK IN RE SPECT OF GAIN MADE OF FOREIGN EXCHANGE FLUCTUATION DURING THE YEAR. THE LEARNED C OMMISSIONER OF INCOME-TAX (APPEALS) FAILED TO CONSIDER THAT THE APPELLANT HAD FOLLOWED A CONSISTENT ACCOUNTING POLICY, CONFORMING TO ACCOUNTING STANDARDS AND HE S HOULD, THEREFORE, HAVE ACCEPTED THE CONTENTIONS OF THE APPELLANT. 2. THE ASSESSEE HAS ALSO FILED TWO SETS OF ADDITI ONAL GROUNDS, ONE RELATING TO THE TP ISSUE AND OTHER RELATING TO SECTION 80HHC O F THE INCOME TAX ACT, 1961(THE ACT). THESE ADDITIONAL GROUNDS READ AS UN DER: ADDITIONAL GROUNDS RELATING TO TP: 1. THE ASSESSING OFFICER/TRANSFER PRICING OFFICER ERRED IN NOT ALLOWING BENEFIT OF 5% MARGIN AS ENVISAGED BY PROVISO BELOW SECTION 92C(2) WHILE COMPUTING THE TRANSFER PRICING ADJUSTMENT IN RESPECT OF IMPORT OF FINISHED GOODS. 2. THE ASSESSING OFFICER/TRANSFER PRICING OFFICER O UGHT TO HAVE ALLOWED A STANDARD DEDUCTION OF 5% FROM THE ARITHMETIC MEAN OF ARMS L ENGTH PRICE DETERMINED BY HIM IN RESPECT OF IMPORT OF FINISHED GOODS FROM ASSOCIA TED ENTERPRISES. 3. THE ASSESSING OFFICER/TRANSFER PRICING OFFICER E RRED IN SELECTING THE FOLLOWING COMPANIES AS COMPARABLE COMPANY VIS-A-VIS THE TRADI NG SEGMENT OF THE APPELLANT: A. BARTRONICS INDIA LTD. B. CONTROL PRINT (INDIA) LIMITED C. ALLIED PHOTOGRAPHICS INDIA LTD. 4. WITHOUT PREJUDICE, THE ASSESSING OFFICER / TRANS FER PRICING OFFICER OUGHT TO HAVE GRANTED WORKING CAPITAL ADJUSTMENT IN RESPECT OF TH E FOLLOWING COMPANIES SELECTED AS COMPARABLES BY HIM: A. BARTRONICS INDIA LTD. B. CONTROL PRINT (INDIA) LIMITED 5. THE ASSESSING OFFICER/TRANSFER PRICING OFFICER E RRED IN MAKING A TRANSFER PRICING ADJUSTMENT IN RESPECT OF IMPORT OF FINISHED GOODS F ROM ASSOCIATED ENTERPRISES BASED ON AN ERRONEOUS WORKING OF THE SAID ADJUSTMENT. ADDITIONAL GROUNDS OF APPEAL: 1.THE ASSESSING OFFICER ERRED IN REDUCING 90% OF T HE INTEREST INCOME OF RS.2,60,90,335/- FROM THE PROFITS OF THE BUSINESS W HILE COMPUTING THE DEDUCTION ./ I.T.A. NO.1630&1668/MUM/2009 ( ' ' ' ' # # # # / ASSESSMENT YEAR : 2004-2005 4 UNDER SECTION 80 HHC, WHEN HE HAD ALREADY TREATED THE INTEREST INCOME AS INCOME FROM OTHER SOURCES. 3. AS IT CAN BE SEEN FROM THE ABOVE, THE COMMON ISS UE RAISED BY BOTH THE PARTIES IS REGARDING TRANSFER PRICING ADJUSTMENT. 3.1 IN THE TP STUDY REPORT THE ASSESSEE REPORTED FO LLOWING INTERNATIONAL TRANSACTIONS: DESCRIPTION ASSOCIATED ENTERPRISE AMOUNT OF TRANSACTION (RS.) IMPORT OF RAW MATERIAL ANNEXURE-2 1,406,301,052 IMPORT OF FINISHED GOODS ANNEXURE 2A 2,560,732,8 15 EXPORTS OF GOODS ANNEXURE -2B 308,084,020 IMPORT OF CAPITAL GOODS ANNEXURE 2C 11,637 ,017 RECEIPT OF TECHNICAL SERVICES ANNEXURE 2 D 2,443,980 RECOVER OF EXPENSES ANNEXURE 2-E 34,915,195 REIMBURSEMENT OF EXPENSES ANNEUXRE-2F 6 90,590 3.2 THE DISPUTE IN THE PRESENT APPEAL IS REGARDING INTERNATIONAL TRANSACTION LISTED AT SL.NO.2 I.E. REGARDING IMPORT OF FINISHE D GOODS. ASSESSEES MARGIN HAS BEEN COMPUTED AT RS.2.68% AS PER FOLLOWING TABLE (R EFERENCE CAN BE MADE TO FIRST PAGE OF THE ORDER PASSED BY TPO) PARTICULARS TRADING (AMOUNT IN LAKHS) SALES 54189.68 SCRAP SALES - NET SALES 54189.68 COST OF SALES 46521.14 FACTORY OVERHEADS - SALARIES, WAGES AND OTHER SELLING AND ADMIN OVERHEA D (EXCLUDING ADVERTISING) 3743.77 ADVERTISING 2177.46 DEPRECIATION 296.40 OPERATING PROFITS 1450.91 OPERATING PROFIT % ON SALES 2.68% 3.3 THE TPO SELECTED COMPARABLES AND AS PER FOLLOWI NG TABLE ARITHMETIC MEAN OF COMPARABLE WAS COMPUTED AT 5.42%. ./ I.T.A. NO.1630&1668/MUM/2009 ( ' ' ' ' # # # # / ASSESSMENT YEAR : 2004-2005 5 S.NO. NAME OF THE COMPANY FYE 2004 OPERATING MARGINS9(OP/OPERATING INCOME) 1. ALLIED PHOTOGRAPHICS INDIA LTD. 10.19% 2. BATRONICS INDIA LTD. 20.06% 3. COMPUNICS INFORMATION SYSTEMS LTD. 0.37 % 4. CONTROL PRINT (INDIA) LTD. 14.50% 5. DHOOT INDUSTRIAL FINANCE LTD. 2.48 6. DRIVEINDIA.COM LTD. 3.84% 7. KISHORE TRADING CO. LTD. - 0.94% 8. P H I L SYSTEMS LTD. 1.24% 9. SPS INTERNATIONAL LTD. 3.07% 10. TECH PACIFIC (INDIA) LTD. 0.93% 11. VIPUL DYE CHEM LTD. 3.90% AVERAGE (ARITHMETIC MEAN) 5.42% 3.4 ACCORDINGLY, TP ADJUSTMENT OF RS.14.86 CRORES W AS MADE VIDE ORDER DATED 18/12/2006 PASSED UNDER SECTION 92CA(3) OF THE ACT. SUBSEQUENTLY, AS THERE WERE SOME MISTAKES IN THE ORDER DATED 18/12/2006, T HE TPO PASSED ANOTHER ORDER UNDER SECTION 92 CA(5) R.W.S. 154 OF THE ACT, COPY OF WHICH IS PLACED AT PAGE 183 AND 184 OF THE PAPER BOOK, ACCORDING TO WH ICH MEAN MARGIN OF THE COMPARABLES WAS WORKED OUT AT 5.11% AND ACCORDINGLY IMPUGNED TP ADJUSTMENT WAS REDUCED TO RS.13.18 CRORES IN PLACE OF RS.14.86 CRORES. 4. IT WAS THE SUBMISSION OF LD. SR. COUNSEL THAT IN VIEW OF SUBSEQUENT ORDER PASSED BY TPO UNDER SECTION 154 OF THE ACT, WHICH I S DATED 31/12/2007, COPY OF WHICH IS PLACED AT PAGE 183 AND 184 OF THE PAPER BO OK THE RECOMPUTED MEAN MARGIN OF COMPARABLES IS 5.11% AS AGAINST 5.42% WOR KED OUT IN THE INITIAL ORDER. IT WAS FURTHER SUBMITTED BY LD. AR THAT ACCORDING T O FOLLOWING CALCULATIONS, IF RECTIFIED MEAN MARGIN OF COMPARABLE IS TAKEN AGAINS T THE PROFIT MARGIN OF THE ASSESSEE OF 2.68%, THEN THE ALP WOULD BE WITHIN THE SAFE HARBOUR OF +/-5%. ASSESSMENT YEAR 2004-05: STATEMENT SHOWING HOW ASSESSEES MARGIN FALLS WITHI N +/- 5% RANGE OF ALP DETERMINED BY TPO IF ONLY AE PURCHASES ARE CONSIDER ED: 1. PROFIT LEVEL INDICATOR + OP/SALES 2. ASSESSEES MARGIN IN THE TRADING SEGMENT: PARTICULARS TOTAL LESS SALES OPERATING COST 100 97.32 ./ I.T.A. NO.1630&1668/MUM/2009 ( ' ' ' ' # # # # / ASSESSMENT YEAR : 2004-2005 6 PROFIT OF ASSESSEE 2.68 THEREFORE, ASSESSEES PROFIT MARGIN + 2.68% 3. ARMS LENGTH MARGIN OF TRADED GOODS BY TPO: PARTICULARS TOTAL LESS SALES ARMS LENGTH PRICE AS PER TPO @ 5.11% 100 5.11 ARMS LENGTH OPERATING COST 94.89 ALP OF TRADED GOODS + 5% AS PER PROVISO BELOW SECTI ON 92C(2) I.E. 94.89 + 4.74 (5% OF 94.89) = 99.63 THEREFORE, ASSESSEES TRANSACTION IS AT ARMS LENGTH . NOTE: OPERATING COST + COST OF SALES + SALARY, OTHER SELL ING AND ADMIN COST (EXCLUDING ADVERTISEMENT)+ ADVERTISEMENT + DEP RECIATION. 4. APPLYING THE ABOVE METHOD TO THE ACTUAL FIGURES : PARTICULARS AMOUNT (RS. IN LAKHS) AMOUNT (RS. IN LAKHS) LESS LESS: SALES OF AE SEGMENTS (55% OF RS.54,190 LAKHS) COST OF SALES B) PURCHASE FROM AE OPERATING COST(55% OFRS.6,218 LAKHS) PROFIRT FROM AE TRANSACTIONS (A)-(B) ALP PROFIT (5.11%) OF 29804.50)(C) THEREFORE, ALP OF COST OF SALES (A) (C) OPERATING COST ( NOT RELATED TO AE) ALP OF PURCHASE FROM AE 25,607 3,419.90 29,804.50 29,026.90 777.60 1,523.01 28,281.49 3,419.90 24,861.59 ALP OF PURCHASE FROM AE + 5% AS PER PROVISO BELOW S ECTION 92C(2) I.E. 24,861.59 + 1,243.08 (5% OF 24,861.59) = 26,104.67 THEREFORE, ASSESSEES PURCHASES FROM AE IS AT ARMS LENGTH. NOTE: SALES OF AE SEGMENT AND OPERATING COST ARE CO NSIDERED AT CONSIDERED AT 55% OF THE TOTAL SALES OF TRADING SEGMENT AND OPERATING COST OF TRAD ING SEGMENT AS THE AE PURCHASES (RS.25,607 LAKHS) ARE 55% OF THE TOTAL COST OF GOOD S SOLD OF THE TRADING SEGMENT (RS.46,521 LAKHS). PLEASE REFER PAGES 179 AND 182 OF THE COMP ILATION. ./ I.T.A. NO.1630&1668/MUM/2009 ( ' ' ' ' # # # # / ASSESSMENT YEAR : 2004-2005 7 4.1 IT WAS SUBMITTED BY LD. AR THAT WITHOUT GOING I NTO THE QUESTION OF EXCLUSION OF SWADESHI COMMERCIAL COMPANY LTD. FROM THE LIST OF COMPARABLES AS CONTENDED BY THE REVENUE IN ITS APPEAL, THE ASSESSE E IS ENTITLED TO GET RELIEF AS PER AFOREMENTIONED CALCULATION AS THE ALP WOULD FAL L WITHIN THE +/-5% RANGE. IT WAS SUBMITTED THAT THE ASSESSEE HAS RAISED THIS IS SUE IN THE PRESENT APPEAL IN THE ADDITIONAL GROUNDS OF APPEAL. IT WAS SUBMITTED THAT THE AFOREMENTIONED ADDITIONAL GROUNDS SHOULD BE ADMITTED AS THE CONSID ERATION OF ADDITIONAL GROUND WILL NOT REQUIRE ADDITIONAL FACTS TO BE PLACED ON R ECORD. COPY OF ABOVE CALCULATION WAS ALSO GIVEN TO LD. DR. LD. DR DID NOT OBJECT TO SUCH SUBMISSION OF LD. AR. 4.2 IN THIS VIEW OF THE SITUATION, WE ARE OF THE OP INION THAT ADDITIONAL GROUND RAISED BY THE ASSESSEE IN RESPECT OF TP ADJUSTMENT REQUIRES TO BE ADMITTED AND IT WILL SERVE THE INTEREST OF JUSTICE IF THE MATTER IS RESTORED BACK TO THE FILE OF AO/TPO FOR VERIFYING THE CORRECTNESS OF THE AFOREME NTIONED CALCULATION. ACCORDINGLY, WE DIRECT SO. IF THE AFOREMENTIONED C ALCULATION SUBMITTED BY THE ASSESSEE IS FOUND CORRECT THEN WE DIRECT THE AO TO ALLOW APPROPRIATE RELIEF TO ASSESSEE AS PER LAW. 4.3 IT MAY ALSO BE MENTIONED HERE THAT IT WAS POIN TED OUT BY LD. AR THAT THOUGH ASSESSEE IS ENTITLED TO COMPLETE RELIEF ON T HE BASIS OF ABOVE CALCULATION, HOWEVER, IN VIEW OF VARIOUS OTHER OBJECTIONS OF TH E ASSESSEE ON WHICH ALSO THE IMPUGNED ADDITION CAN NOT SURVIVE, IT SHOULD BE LE FT OPEN TO THE ASSESSEE TO RAISE THOSE GROUNDS ALSO IN THE RESTORED PROCEEDIN GS TO ENABLE THE ASSESSEE TO CONTEST THE IMPUGNED ADDITION ON OTHER GROUNDS ALSO IN CASE THE AFOREMENTIONED CALCULATION IS NOT FOUND CORRECT/ACCEPTABLE BY THE AO/TPO 4.4 WE HAVE CAREFULLY CONSIDERED THIS SUBMISSION OF THE LD. AR AND IN THE INTEREST OF JUSTICE WE HOLD THAT IN CASE AFTER VER IFYING THE CORRECTNESS OF THE AFOREMENTIONED CALCULATION, IF ADDITION SURVIVES THEN THE ASSESSEE WOULD BE ENTITLED TO RAISE OTHER ISSUES WHICH ARE RAISED IN THE GROUNDS OF APPEAL FILED BEFORE US AND AFTER CONSIDERING THE SAME AND AFTER GIVING THE ASSESSEE A REASONABLE OPPORTUNITY OF HEARING THE AO/TPO WOULD ALSO RE-DETERMINE THE ALP OF THE IMPUGNED TRANSACTION AS PER PROVISIONS OF LAW. WE DIRECT ACCORDINGLY. ./ I.T.A. NO.1630&1668/MUM/2009 ( ' ' ' ' # # # # / ASSESSMENT YEAR : 2004-2005 8 5. IN VIEW OF OUR ABOVE FINDINGS ON TP ISSUE, WE RE FRAIN OURSELVES TO GIVE SPECIFIC FINDING IN RESPECT OF EACH OF THE GROUNDS TAKEN BY BOTH THE PARTIES ON THESE ISSUES AND FOR STATISTICAL PURPOSES GROUNDS R ELATING TO TP ISSUE (SOLE GROUND RAISED BY THE REVENUE AND GROUNDS NO.7,8 & 9, IN THE APPEAL FILED BY THE ASSESSEE AND ADDITIONAL GROUNDS FILED BY THE A SSESSEE ON TP ISSUE) IN THE APPEALS FILED BY BOTH THE PARTIES ARE CONSIDERED TO BE ALLOWED FOR STATISTICAL PURPOSES. NON-TP ISSUES: 6. GROUND NO.1 WAS NOT PRESSED BY SR. COUNSEL, THER EFORE, DISMISSED BEING NOT PRESSED. 7. APROPOS GROUND NO.2, THIS ISSUE IS DISCUSSED BY THE AO IN PARA-5 OF THE ASSESSMENT ORDER. THE PROVISION HAS BEEN MADE BY T HE ASSESSEE FOR A SUM OF RS.204.63 LACS TOWARDS WARRANTY FOR REPAIRING OR RE PLACEMENT OF DAMAGED PARTS OF EQUIPMENTS AND CAMERAS SOLD. THE AO DISALLOWED THE SAME ON THE GROUND THAT THIS IS MERELY A PROVISION AND IT IS BASED ON ADHOC AMOUNTS MULTIPLIED BY NUMBER OF PIECES SOLD. ACCORDING TO A.O IT CAN BE DESCRIBED AS CONTINGENT EXPENDITURE AND CANNOT BE ALLOWED AS EXPENDITURE. LD. CIT(A)HAS SUSTAINED THE DISALLOWANCE. THE ASSESSEE IS AGGRIEVED AND HAS PR EFERRED GROUND NO.2. 7.1 IT WAS SUBMITTED BY SR. COUNSEL THAT FROM YEAR TO YEAR THE ASSESSEE IS MAKING SUCH PROVISION. FOR A.Y 2003-04 SIMILAR ADD ITION WAS DELETED BY LD. CIT(A) AND DEPARTMENT DID NOT CONTEST THE DELETION OF THE SAME. HE SUBMITTED THAT IN RESPECT OF A.Y 2005-06 ALSO SIMILAR ADDIT ION WAS MADE AND IT WAS DELETED BY LD. CIT(A). THE DEPARTMENT DESPITE HAVI NG FILED GROUNDS OF APPEAL ON OTHER ISSUES DID NOT CONTEST SUCH DELETION. REFER ENCE IN THIS REGARD WAS MADE TO THE FOLLOWING DOCUMENTS PLACED IN THE PAPER BOO K-III. 1. ORDER OF LD. CIT(A) DATED 17/3/2010 FOR A.Y 2003-0 4 PAGE 1 TO 11. ./ I.T.A. NO.1630&1668/MUM/2009 ( ' ' ' ' # # # # / ASSESSMENT YEAR : 2004-2005 9 2. ORDER OF LD. CIT(A) DATED 24/3/2010 FOR ASSESSMENT YEAR 2005-06 PAGE 12 TO 26. 3.DEPARTMENTAL APPEAL TO ITAT FOR A.Y 2005-06 PAGE- 26A & 26B. 7.2 REFERRING TO THE ORDER PASSED BY LD. CIT(A) IN RESPECT OF ASSESSMENT YEAR 2005-06, IT WAS SUBMITTED THAT WHILE GIVING RELIEF, LD. CIT(A) HAS CLEARLY FOUND THAT WARRANTY GIVEN BY THE ASSESSEE HAS IMPOSED LIA BILITY ON THE COMPANY WHICH ACCRUES ON THE DATE OF SALE THOUGH THE LIABILITY IS TO BE DISCHARGED AT A FUTURE DATE. THUS, IT IS AN ACCRUED LIABILITY AND THE EST IMATED EXPENDITURE WHICH WOULD BE INCURRED ON DISCHARGING THE SAME IS AN ALLOWABLE EXPENDITURE. LD. CIT(A) HAS FURTHER FOUND THAT THE MANNER OF MAKING THE PROVISI ON IS SCIENTIFIC AND IS BASED ON THE APPELLANTS OWN PAST EXPERIENCE ON WARRANTY EXPENDITURE AND IT IS NOT AN ADHOC PROVISION. EVEN IF THERE BE DIFFICULTY IN ESTIMATION, THAT DOES NOT CONVERT AN ACCRUED LIABILITY INTO A CONTINGENT ONE AND IN A CASE WHERE COMPANY FOLLOWS MERCANTILE SYSTEM OF ACCOUNTING, IT IS NECESSARY TO MAKE SUCH PROVISION IN ORDER TO ENSURE THAT COSTS ARE MATCHED AGAINST REVENUE AN D FOR ACCEPTING SUCH SUBMISSION OF THE ASSESSEE, LD. CIT(A) FOR ASSESSME NT YEAR 2005-06 HAS RELIED UPON THE DECISION OF HONBLE SUPREME COURT IN THE C ASE OF ROTORK CONTROLS INDIA PVT. LTD. VS. CIT, 314 ITR 62(SC). THUS, IT WAS SU BMITTED BY LD. SR. COUNSEL THAT THESE ARE THE BASIS ON WHICH LD. CIT(A) HAD A LLOWED RELIEF IN RESPECT OF A.Y 2005-06 AND DESPITE HAVING FILED AN APPEAL AGAINST THE IMPUGNED ORDER OF A.Y 2005-06, THE DEPARTMENT DID NOT CONTEST THE DELETIO N AND THE ONLY GROUND TAKEN BY THE DEPARTMENT IN THE APPEAL FOR A.Y 2005-06 IS REGARDING TP ADJUSTMENT OF RS.12.61 CRORES. LD. SR.COUNSEL REFERRED TO THE DE CISION OF HONBLE SUPREME COURT IN THE CASE OF SHIV SAGAR ESTATES, 257 ITR 59 (SC) AND CONTENDED THAT IN VIEW OF THE ACCEPTANCE OF DELETION BY THE REVENUE FOR A.Y 2003-04 AND 2005-06 THE UPHOLDING OF DISALLOWANCE FOR THE YEAR UNDER CO NSIDERATION BY THE LD. CIT(A) IS CONTRARY TO LAW. 7.3 ON THE OTHER HAND, LD. DR RELIED UPON THE ORDER PASSED BY LD. CIT(A), ACCORDING TO WHICH THE IMPUGNED ADDITION HAS BEEN U PHELD. ./ I.T.A. NO.1630&1668/MUM/2009 ( ' ' ' ' # # # # / ASSESSMENT YEAR : 2004-2005 10 7.4 WE HAVE HEARD BOTH THE PARTIES AND THEIR CONTEN TIONS HAVE CAREFULLY BEEN CONSIDERED. THE IMPUGNED ORDER PASSED BY LD. CIT(A ) IS DATED 26/9/2008. ON THE SAID DATE, WHEN HE PASSED THE ORDER, HE WAS NOT HAVING THE BENEFIT OF SIMILAR ISSUE DECIDED SUBSEQUENTLY BY LD. CIT(A) IN THE CAS E OF THE ASSESSEE IN RESPECT OF A.Y 2003-04 I.E. IMMEDIATE PRECEDING ASSESSMENT YEA R WHEN SIMILAR ADDITION WAS DELETED. SIMILAR ADDITION WAS ALSO DELETED IN RESP ECT OF A.Y 2005-06 BY ORDER DATED 24/03/2010. NO APPEAL WAS FILED BY THE REVEN UE IN RESPECT OF A.Y 2003- 04 AND THOUGH APPEAL WAS FILED BY THE REVENUE IN A. Y 2005-06 BUT NO APPEAL HAS BEEN PREFERRED AGAINST DELETION OF ADDITION OF WAR RANTY EXPENSES. KEEPING IN VIEW ALL THESE FACTS, IN ABSENCE OF DEMONSTRATION T HAT THE FACTS OF THE PRESENT YEAR ARE DIFFERENT FROM THE FACTS OF EARLIER AND SUBSEQU ENT YEAR, WE ARE OF THE OPINION THAT LD. CIT(A) HAS COMMITTED AN ERROR IN CONFIRMIN G THE ADDITION. THE ADDITION IS LIABLE TO BE DELETED FIRSTLY ON THE GROUND THAT SIMILAR DELETION WAS NOT AGITATED BY REVENUE IN RESPECT OF A.Y 2003-04 AND 2005-06. SECONDLY, NO MATERIAL HAS BEEN BROUGHT ON RECORD TO SUGGEST THAT THE FACTS O F THE PRESENT YEAR ARE IN ANY WAY DIFFERENT FROM A.Y 2003-04 AND 2005-06. SUCH V IEW IS SUPPORTED BY THE DECISION OF HONBLE SUPREME COURT IN THE CASE OF CI T VS. SHIV SAGAR ESTATE (SUPRA), THEREFORE, THIS GROUND IS ALLOWED. 8. APROPOS GROUND NO.5, IT WAS SUBMITTED BY LD. SR. COUNSEL THAT THE MATTER MAY BE RESTORED BACK TO THE FILE OF AO WITH A DIREC TION TO CONSIDER NETTING OF THE MISCELLANEOUS RECOVERY AND REIMBURSEMENT OF EXPENS ES IN THE LIGHT OF DECISION OF HONBLE SUPREME COURT IN THE CASE OF ACG ASSOCIATE D CAPSULES PVT. LTD. VS. CIT, 343 ITR 89, WHEREIN IT HAS BEEN HELD THAT ONLY 90% OF THE NET AMOUNT OF ANY RECEIPT OF THE NATURE MENTIONED IN CLAUSE(1), WHICH IS ACTUALLY INCLUDED IN THE PROFITS OF THE ASSESSEE IS TO BE DEDUCTED FROM THE PROFITS OF THE ASSESSEE FOR DETERMINING PROFITS OF THE BUSINESS OF THE ASSESS EE UNDER EXPLANATION (BAA) TO SECTION 80HHC OF THE ACT. 8.1 ON THE OTHER HAND, LD. DR RELIED UPON THE ORDER PASSED BY AO AND LD. CIT(A). ./ I.T.A. NO.1630&1668/MUM/2009 ( ' ' ' ' # # # # / ASSESSMENT YEAR : 2004-2005 11 8.2 WE HAVE HEARD BOTH THE PARTIES AND THEIR CONTEN TIONS HAVE CAREFULLY BEEN CONSIDERED. AFTER DUE CONSIDERATION, ACCEPTING THE REQUEST OF LD. SR.COUNSEL WE RESTORE THIS ISSUE TO THE FILE OF AO FOR RE-ADJUDIC ATION OF THE SAME IN THE LIGHT OF AFOREMENTIONED DECISION OF HONBLE SUPREME COURT IN THE CASE OF ACG ASSOCIATED CAPSULES PVT. LTD.(SUPRA). WE DIRECT ACCORDINGLY. FOR STATISTICAL PURPOSES THIS GROUND IS CONSIDERED TO BE ALLOWED IN THE MANNER AF ORESAID. 9. APROPOS GROUND NO.6, AFTER HEARING BOTH THE PART IES, WE FOUND THAT THIS ISSUE IS COVERED IN FAVOUR OF THE ASSESSEE BY THE D ECISION OF HONBLE BOMBAY HIGH COURT IN THE CASE OF ASSESSEE ITSELF FOR A.Y 2002- 03. IT IS AN ORDER DATED 26/8/2009 IN IT APPEAL (L) NO.1907 OF 2009, WHEREIN THEIR LORDSHIPS HAVE DISMISSED THE DEPARTMENTAL APPEAL FOLLOWING THE EAR LIER DECISION OF BOMBAY HIGH COURT IN THE CASE OF OTIS ELEVATOR COMPANY (I) LTD. VS. CIT, 195 ITR 682 (BOM). COPY OF THIS ORDER IS FILED AT PAGE 27 OF PAPER BOO K III. ACCORDINGLY, THE ADDITION CONFIRMED BY LD. CIT(A) IS DELETED AND THIS GROUND IS ALLOWED. 10. APROPOS GROUND NO.10, THE ISSUE IS COVERED IN F AVOUR OF THE ASSESSEE BY THE EARLIER ORDERS OF THE TRIBUNAL. REFERENCE CAN BE MADE TO THE FOLLOWING DECISIONS, COPY OF WHICH ARE FILED IN THE PAPER BOO K. (I) CONSOLIDATED DECISION DATED 31/5/2010 IN RESP ECT OF A.Y 1996-97 TO 2001-02 IN ITA NO.4543/MUM/2011, 4574/MUM/2003, 3196/MUM/20 02, 3314/MUM/2002 AND 8923/MUM/2004, COPY OF THIS DECIS ION IS FILED AT PAGES 33 TO 53 OF THE PAPER BOOK. RELEVANT PARAS ARE PARA 1 1 TO 15. THE RELEVANT OBSERVATIONS OF THE TRIBUNAL ARE AS UNDER: 13. WE HAVE HEARD THE RIVAL CONTENTIONS, PERUSED TH E MATERIAL ON RECORD AND DULY CONSIDERED FACTUAL MATRIX OF THE CASE AS ALSO THE A PPLICABLE LEGAL POSITION. 1.4. WE FIND THAT THE ISSUE IN APPEAL IS NOW SQUARE LY COVERED BY HONBLE SUPREME COURTS JUDGMENT IN THE CASE OF CIT VS WOODWORTH GO VERNOR INDIA P.LTD., 312 ITR 254, WHEREIN THEIR LORDSHIPS HAVE HELD THAT ADDITIO NAL EXPENDITURE ON ACCOUNT OF FOREIGN FLUCTUATION IN RESPECT OF PURCHASES AND EST IMATED LOSS ON THAT ACCOUNT AT THE YEAR END IS TO BE ALLOWED AS AN EXCHANGE LOSS IN T HE PROFIT AND LOSS ACCOUNT AND IS AGAINST THE COST OF RAW MATERIALS. THEIR LORDSHIPS HAVE GIVEN A SPECIFIC ILLUSTRATION AT PAGE 266 OF THE REPORT WHICH UNAMBIGUOUSLY DEMON STRATES THE ACCOUNTING TREATMENT OF SUCH LOSS. IT IS THUS FREE FROM ANY DO UBT THAT THE ESTIMATED CONTRACTS WHICH HAVE NOT MATURED BY THE YEAR END IS ALSO BE A LLOWED AS A DEDUCTION IN ./ I.T.A. NO.1630&1668/MUM/2009 ( ' ' ' ' # # # # / ASSESSMENT YEAR : 2004-2005 12 COMPUTATION OF BUSINESS INCOME. THE REASONS IS ELEM ENTARY. ONE OF THE FUNDAMENTAL ACCOUNTING PRINCIPLE IS THAT OF CONSERV ATISM WHICH REQUIRES ALL ANTICIPATED LOSSES TO BE TAKEN INTO ACCOUNT WHILE C OMPUTING PROFITS AND LOSSES OF BUSINESS, BUT PROHIBITS ANY ANTICIPATED INCOME TO B E TAKEN INTO ACCOUNT FOR THE SAID PURPOSE UNLESS IT ACTUALLY ACCRUES. HONBLE SUPREME COURT HAS RECOGNISED THIS PRINCIPLE IN THE CASE OF CHAINRUP SAMPATRAM VS CIT, 24 ITR 481 AND OBSERVED THAT THIS IS THE THEORY UNDERLYING THE RULE THAT THE CL OSING STOCK IS TO BE VALUED AT COST PRICE OR MARKET PRICE WHICHEVER IS LESS. AS REGARD S THE QUESTION WHETHER THE SAID AMOUNT IS REQUIRED TO BE TAKEN INTO ACCOUNT FOR COM PUTATION OF CLOSING STOCK VALUE, WE FIND THAT ONCE THE SAID EXPENDITURE IS NOT TO BE TAKEN INTO ACCOUNT FOR COMPUTATION OF COST OF PURCHASES, THESE CANNOT BE A N OCCASION FOR EXCLUDING THE SAME FROM TRADING ACCOUNT BY TAKING IT INTO ACCOUNT FOR COMPUTING THE CLOSING STOCK VALUE. A CO-ORDINATE BENCH OF THIS TRIBUNAL; IN THE CASE OF IBM GLOBAL SERVICES INDIA P. LTD. VS DCIT, 114 ITD 265, HAS EVEN AFTER TAKING INTO MANDATORY ACCOUNTING STANDARD - 2, HELD THAT THE VALUE OF CLOSING STOCK IS NOT TO INCLUDE THE LIABILITY ON ACCOUNT OF EXCHANGE VALUATION. WE ARE NOT INCLINED TO TAKE ANY OTHER VIEW OF THE MATTER THAN THE VIEW SO TAKEN BY THE CO-ORDINATE B ENCH WHICH IS SQUARELY APPLICABLE ON THE FACTS OF THE PRESENT CASE RESPEC TFULLY FOLLOWING THE HONBLE SUPREME COURT JUDGMENT IN THE CASE OF WOODWORTH GO VERNOR (SUPRA) AND CO- ORDINATE BENCH DECISION IN THE CASE OF IBM GLOBAL SERVICES (SUPRA), WE UPHOLD THE GRIEVANCE OF THE ASSESSEE. ACCORDINGLY, WE DIRECT T HE ASSESSING OFFICER TO DELETE THE IMPUGNED ADDITIONS OF RS.25,91,000/- AND RS.1,01,38 ,710/-. THE ASSESSEE GETS THE RELIEF ACCORDINGLY. (II) ORDER DATED 18/5/2011 IN ITA NO.7306/MUM/2003 IN RESPECT OF A.Y 2000-01, COPY OF THIS ORDER IS FILED AT PAGES 54 TO 73. IN THIS CASE, FOLLOWING THE AFOREMENTIONED DECISION, THE ISSUE HAS BEEN DECIDED IN FAVOUR OF THE ASSESSEE. 10.1 IN THIS VIEW OF THE SITUATION, AFTER HEARING B OTH THE PARTIES, RESPECTFULLY FOLLOWING THE AFOREMENTIONED DECISION OF THE TRIBUN AL IN ASSESSEES OWN CASE, WE DELETE THIS ADDITION AND THIS GROUND OF THE ASSESSE E IS ALLOWED. 11. APROPOS ADDITIONAL GROUND ON NON-TRANSFER PRIC ING ISSUE, IT WAS THE CONTENTION OF LD. SR.COUNSEL THAT WHILE COMPUTING B USINESS PROFIT FOR THE PURPOSE OF DEDUCTION UNDER SECTION 80 HHC, COMPUTAT ION MADE BY THE AO IS INCORRECT AS IN THE MANNER AO HAS COMPUTED THE SAME IT WOULD RESULT INTO DOUBLE ADDITION. WHEN IT WAS POINTED OUT THAT IF S UCH IS THE POSITION, THEN IT IS ONLY A MATTER OF RECTIFICATION BY THE AO UNDER THE PROVISIONS OF SECTION 154 OF THE ACT. LD. AR SUBMITTED THAT SINCE NOW LD. CIT(A) H AS CONFIRMED THE CALCULATION MADE BY THE AO, THEN AO WILL NOT RECTIFY THE SAME. LD. SR.COUNSEL SUBMITTED ./ I.T.A. NO.1630&1668/MUM/2009 ( ' ' ' ' # # # # / ASSESSMENT YEAR : 2004-2005 13 THAT THE MATTER MAY BE RESTORED BACK TO THE FILE OF AO WITH A DIRECTION TO RE- COMPUTE THE BUSINESS PROFIT AS WELL AS DEDUCTION UN DER SECTION 80 HHC WITH REGARD TO COMPONENT OF INTEREST INCOME AFTER GIVIN G THE ASSESSEE A REASONABLE OPPORTUNITY OF HEARING. 11.1 WE HAVE HEARD BOTH THE PARTIES AND THEIR CONTE NTIONS HAVE CAREFULLY BEEN CONSIDERED. THE DEDUCTION UNDER SECTION 80 HHC O N INTEREST COMPONENT HAS TO BE COMPUTED AS PER PROVISIONS OF LAW. IF THERE IS ANY MISTAKE IN COMPUTING THEN THE SAME IS REQUIRED TO BE CORRECTED. THEREFORE, W E ARE OF THE OPINION THAT IT WILL SERVE THE INTEREST OF JUSTICE IF THE MATTER IS REST ORED BACK TO THE FILE OF AO WITH A DIRECTION TO RE-COMPUTE THE DEDUCTION UNDER SECTION 80 HHC SO AS IT RELATES TO COMPONENT OF INTEREST INCOME AFTER GIVING THE ASSES SEE A REASONABLE OPPORTUNITY OF HEARING. WE DIRECT ACCORDINGLY. THIS ADDITIONA L GROUND IS CONSIDERED TO BE ALLOWED FOR STATISTICAL PURPOSES IN THE MANNER AFOR ESAID. 12. IN THE RESULT, APPEAL FILED BY THE ASSESSEE AND REVENUE ON THE TP ISSUES ARE CONSIDERED TO BE ALLOWED FOR STATISTICAL PURPOS ES. ON NON-TP ISSUE THE APPEAL FILED BY THE ASSESSEE IS PARTLY ALLOWED IN THE MAN NER AFORESAID. ORDER PRONOUNCED IN THE OPEN COURT ON 17/11/201 4 . . ) ,-# / 0'1 17/11//2014 - ) 2 SD/- SD/- (RAJENDRA) . . (I.P.BANSAL) /ACCOUNTANT MEMBER /JUDICIAL MEMBER MUMBAI; 0' DATED 17/11/2014 ./ I.T.A. NO.1630&1668/MUM/2009 ( ' ' ' ' # # # # / ASSESSMENT YEAR : 2004-2005 14 . . . . ) )) ) '*3 '*3 '*3 '*3 43#* 43#* 43#* 43#* / COPY OF THE ORDER FORWARDED TO : 1. $& / THE APPELLANT 2. '($& / THE RESPONDENT. 3. 5 ( ) / THE CIT(A)- 4. 5 / CIT 5. 362 '*' , , / DR, ITAT, MUMBAI 6. 27 8 / GUARD FILE. .' .' .' .' / BY ORDER, (3* '* //TRUE COPY// 9 99 9 / : : : : (DY./ASSTT. REGISTRAR) , / ITAT, MUMBAI . ' . .VM , SR. PS