GE India Industrial Private Ltd., Gurgaon V. DCIT, New Delhi

ITA 1684/DEL/2016

• Counselvise Citation: [2020] 110 COUNSELVISE.COM (IT) 5337 (ITAT-DELHI)
• Duration Of Justice: 4 year(s) 6 month(s) 8 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 08-10-2020
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: I2
• Next Hearing Date: 03-07-2017
• Assessment Year: 2011-2012
• Appeal Filed On: 30-03-2016
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Keywords: Depreciation; Transfer pricing; Opportunity of being heard; International transaction; Bad and doubtful debts; Set aside
• Section: 143(3); 144C; 43; 13; 22; 11

Judgement Text

1 IN THE INCOME TAX APPELLATE TRIBUNAL, DELHI I-2 B ENCH, NEW DELHI BEFORE SHRI N.K. BILLAIYA, ACCOUNTANT MEMBER, AND MS. SUCHITRA KAMBLE, JUDICIAL MEMBER ITA NO. 1684/DEL/2016 [A.Y 2011-12] GE INDIA INDUSTRIAL PVT LTD VS. THE DY. C.I.T BUILDING NO. 7A, 4TH FLOOR, CIRCLE - 10(1) DLF CYBER CITY, DLF PHASE III NEW DELHI SECTOR 25A, GURGAON PAN: AAACG 4901 D [APPELLANT] [RESPONDENT] ASSESSEE BY : SHRI SACHIT JOLLY, ADV SHRI AAYUSH NAGPAL, ADV REVENUE BY : SHRI ANUPAM KANT GAR G, CIT-DR DATE OF HEARING : 29.09.2020 DATE OF PRONOUNCEMENT : 08.10.2020 ORDER PER N.K. BILLAIYA, ACCOUNTANT MEMBER, THIS APPEAL BY THE ASSESSEE IS PREFERRED AGAINST TH E ORDER DATED NIL FRAMED U/S 143(3) R.W.S 144C OF THE INCOME TAX ACT, 1961 [HEREINAFTER REFERRED TO AS 'THE ACT' FOR SHORT] PE RTAINING TO AY 2011-12. 2 2. THE ASSESSEE HAS RAISED AS MANY AS 16 GROUNDS OF APPEAL WITH SUB-GROUNDS. HOWEVER, THE GRIEVANCES OF THE ASSESS EE CAN BE SUMMARISED AS UNDER: TRANSFER PRICING ISSUES A) NOT ALLOWING OF ADJUSTMENT ON ACCOUNT OF HIGHER IMP ORT CONTENT; B) NOT ALLOWING CAPITAL UTILIZATION ADJUSTMENT; C) NOT ALLOWING WORKING CAPITAL ADJUSTMENT; D) SAFE HARBOUR RULES ARE NOT APPLICABLE FOR THE YEAR UNDER CONSIDERATION; AND E) COMPARABLES SELECTED BY THE TPO ARE NOT VALID COMPA RABLES. 3. IN ADDITION TO THE ABOVE, THE ASSESSEE HAS ALSO CONTESTED DOMESTIC ISSUES WHICH RELATED TO: A) DISALLOWANCE OF WARRANTEE AND REPLACEMENT EXPENS ES; B) DISALLOWANCE OF CLAIM OF BAD DEBTS WRITTEN OFF; C) DENIAL OF DEPRECIATION OF WRITTEN DOWN VALUE [WD V] OF SOFTWARE EXPENDITURE; AND D) DENIAL OF DEPRECIATION OF WDV OF EXPENDITURE IN CURRED ON PURCHASE OF BUSINESS RIGHTS 4. REPRESENTATIVES OF BOTH THE SIDES WERE HEARD AT LENGTH, THE CASE RECORDS CAREFULLY PERUSED AND WITH THE ASSISTANCE O F THE LD. COUNSEL, WE HAVE CONSIDERED THE DOCUMENTARY EVIDENCES BROUGH T ON RECORD IN 3 THE FORM OF PAPER BOOK IN LIGHT OF RULE 18(6) OF IT AT RULES AND HAVE ALSO PERUSED THE JUDICIAL DECISIONS RELIED UPON BY BOTH THE SIDES. 5. IN ADDITION TO THE ORAL ARGUMENTS, THE REPRESENT ATIVES OF BOTH THE SIDES HAVE ALSO FURNISHED WRITTEN SUBMISSIONS WHICH HAVE BEEN DULY CONSIDERED. 6. FACTS ON RECORD SHOW THAT DURING THE YEAR UNDER CONSIDERATION, GEIIPL, THE APPELLANT, WAS ENGAGED IN THE FOLLOWIN G ACTIVITIES : 4 7. THE INTERNATIONAL TRANSACTIONS WERE REFERRED FOR DETERMINATION OF ARMS LENGTH PRICE TO THE TPO AND THE TPO PROPOS ED AN ADJUSTMENT OF RS. 46,82,16,277/- IN RESPECT OF CERTAIN INTERNA TIONAL TRANSACTIONS OF SOME OF THE DIVISIONS OF THE APPELLANT COMPANY V IDE ORDER DATED 30.01.2015. ACCORDINGLY, THE AO FRAMED DRAFT ASSES SMENT ORDER AGAINST WHICH THE ASSESSEE FILED OBJECTIONS BEFORE THE DISPUTE RESOLUTION PANEL [THE DRP FOR SHORT] AND THE DRP ISSUED ITS DIRECTIONS VIDE ORDER DATED 29.12.2015. FINALLY, T HE AO ISSUED THE FINAL ASSESSMENT ORDER IN ACCORDANCE WITH THE DIREC TIONS OF THE DRP VIDE ORDER DATED 28.01.2016. 8. WE WILL FIRST ADDRESS TO THE ISSUES RELATING TO TP ADJUSTMENT IN SOME OF THE DIVISIONS OF THE APPELLANT. I DIGITAL ENERGY [DISTRIBUTION ACTIVITY] 9. IN THIS DIVISION, THE APPELLANT IS ENGAGED IN DI STRIBUTION OF POWER QUALITY PRODUCTS, SUCH, AS UNINTERRUPTIBLE POWER SU PPLIES (UPS), BATTERIES AND RELAYS. IN THIS DIVISION, THE BONE O F CONTENTION IS THE CLAIM OF ADJUSTMENT ON ACCOUNT OF HIGHER IMPORT COS T. THE ASSESSEE CLAIMS THAT PERCENTAGE OF TOTAL IMPORTS TO TOTAL PU RCHASES OF THE ASSESSEE ARE 67.97% WHEREAS FOR COMPARABLE COMPANI ES, THE AVERAGE 5 TOTAL IMPORTS TO TOTAL PURCHASES IS 20.66%. IT IS THE CLAIM OF THE ASSESSEE THAT EVEN RULE 10B(3)(II) OF THE INCOME TA X RULES, 1962 (RULES, IN SHORT) STATES THAT REASONABLY ACCURATE A DJUSTMENTS ARE TO BE UNDERTAKEN TO IRON OUT THE DIFFERENCES THAT MATE RIALLY AFFECT THE PRICE OR COST CHARGED OR PAID OR PROFIT ARISING FRO M SUCH TRANSACTIONS IN THE OPEN MARKET. 10. PER CONTRA, THE LD. DR CONTENDS THAT WHAT IS ME NTIONED IN THE RULES IS COMPARABLE AND NOT IDENTICAL. THEREFO RE, ANY ADJUSTMENT WOULD DISTORT THE COMPARABILITIES. IT HAS BEEN CON TENDED BY THE REVENUE THAT ANY ADJUSTMENT, IF ANY, NEED TO BE CAR RIED OUT, ARE TO BE CARRIED OUT IN THE COMPARABLES AND NOT IN THE TE STED PARTY. 11. IT IS THE SAY OF THE LD. COUNSEL FOR THE ASSESS EE THAT THE DRP HAD STATED THAT CUSTOM DUTY WOULD BE BALANCED OUT BY NO T HAVING TO PAY EXCISE DUTY ON THE DOMESTIC PRODUCTION. THE LD. CO UNSEL FOR THE ASSESSEE, DRAWING OUR ATTENTION TO THE DECISION OF THE CO-ORDINATE BENCH IN THE CASE OF HONDA MOTOR INDIA PRIVATE LIMI TED [I.T.A .NOS. 1801, 6807/DEL/2014], POINTED OUT THAT THE TRIBUNAL IN THIS CASE HAD DIRECTED TO ALLOW ADJUSTMENT BY COMPUTING THE DIFFE RENCE BETWEEN 6 THE RATE OF CUSTOM DUTY AND RATE OF EXCISE DUTY FOR ADJUSTMENT ARE THUS, STATUTORY LEVIES. 12. WE FIND THAT THIS DIVISION IS DISTRIBUTION DIVI SION AND COMPARABLE COMPANIES ARE ALSO DISTRIBUTORS AND THEREFORE, THER E IS NO QUESTION OF ANY EXCISE DUTY. WE FIND THAT THE DRP HAS STATED T HAT THE ASSESSEE HAD FAILED TO FURNISH THE DATA AND SUBSTANTIATE ITS CLAIM FOR ADJUSTMENT. WE DO NOT FIND ANY FORCE IN THIS OBSER VATION OF THE DRP. THE ASSESSING OFFICER HAS FURNISHED THE FOLLOWING D ATA TO SUBSTANTIATE ITS CLAIM OF ADJUSTMENT: PARTICULARS AMOUNT [RS.] TOTAL PURCHASES [A] 43,15,57,719 IMPORTS [B] 29,35,48,437 % OF IMPORTS TO TOTAL PURCHASES [C=B/A] 67.97% CUSTOM DUTY PAID BY THE ASSESSEE [D] 7,21,59,562 % OF IMPORTS TO TOTAL PURCHASES COMPARABLES [E] [NOTE] 20.66% EXCESS IMPORTS [ F= C E ] 47.31% ADDITIONAL DUTY PAID [G = D/C*F] 5,02,26,125 7 PARTICULARS AMOUNT [RS.] SALE 44,58,41,783 COST OF GOODS SOLD 39,78,06,281 GROSS MARGIN [A] 4,80,35,502 GM% [BEFORE ADJUSTMENT] 10.77% ADD: IMPORT DUTY ADJUSTMENT [B] 5,02,26,125 REVISED GROSS MARGIN 9,82,61,627 REVISED GM% [AFTER ADJUSTMENT] 22.04% 13. IT CAN BE SEEN FROM THE AFOREMENTIONED CALCULAT ION PERCENTAGE OF IMPORTS TO TOTAL COST PURCHASES IN THE CASE OF T HE APPELLANT IS 67.97% AS AGAINST 20.66% IN THE CASE OF THE COMPARA BLES, WHICH MEANS THAT THE ASSESSEE IS SUBJECT TO HIGHER IMPORT S AT 47.31%. IN OUR CONSIDERED OPINION, ON THE GIVEN FACTS, THE ASSESSE E SHOULD GET BENEFIT OF ADJUSTMENT ON ACCOUNT OF HIGHER IMPORTS. 14. THE CLAIM OF THE LD. DR THAT ANY ADJUSTMENT SHO ULD BE MADE IN THE CASE OF COMPARABLES AND NOT IN THE HANDS OF THE TESTED PARTY CANNOT BE ACCEPTED BECAUSE THE CO-ORDINATE BENCH IN ASSESSEES OWN CASE IN ITA NO. 2210/AHD/2012 FOR A.Y 2004-05 ALL OWED ADJUSTMENT 8 ON ACCOUNT OF HIGH RAW MATERIAL COST TO THE MARGINS OF THE ASSESSEE. THE RELEVANT FINDINGS OF THE CO-ORDINATE BENCH READ A UNDER: 15. IN THE INSTANT CASE, WHAT IS BEING TESTED IS WHETHER PURCHASE FROM ASSOCIATED ENTERPRISES IS AT ARMS-LEN GTH OR NOT. ADMITTEDLY, SALES BY THE ASSESSEE IS NOT TO TH E ASSOCIATED PARTIES AND THEREFORE, IS UN-CONTROLLED TRANSACTION. IN VIEW OF ABOVE, IN THE LIGHT OF OECD GUIDELINES, WHILE WORKING OUT RATIO OF RAW-MATERIAL SHOULD BE WORKED OUT BY COMPARING THE RAW-MATERIAL VIS--VIS SALES. IN THIS VIEW OF THE MATTER, WE UPHOLD THE FINDING OF THE TPO FOR THE YE AR UNDER APPEAL WHEREIN HE ARRIVED AT THE CONCLUSION THAT TH E ASSESSEE SHOULD BE ALLOWED THE ADJUSTMENT OF 18.50% BECAUSE OF EXCESS CONSUMPTION OF RAW-MATERIAL. HOWEVER, IN OUR OPINION, WHILE GIVING THE ADJUSTMENT, THE ASSESSEE SHOULD BE ALLOWED THE ADJUSTMENT OF 18.50% OF THE SALES AND NOT OF TH E 18.50% OF THE RAW MATERIAL COST. WE, THEREFORE, DIRECT THE ASSESSING OFFICER TO ALLOW THE ADJUSTMENT OF 18.50% OF THE SA LES WHILE WORKING OUT THE OPERATING PROFIT AND IF, AFTER THE ABOVE ADJUSTMENT, THE OPERATING PROFIT OF THE ASSESSE WOR KS OUT TO MORE THAN 6.78% I.E. THE AVERAGE OF OPERATING PROFI T OF COMPARABLES, THEN NO ADJUSTMENT SHOULD BE MADE. WIT H THIS DIRECTION, WESET ASIDE THE ORDERS OF THE LOWER AUTH ORITIES AND RESTORE THE MATTER BACK TO THE FILE OF THE ASSESSIN G OFFICER. 9 15. CONSIDERING THE FACTS MENTIONED HEREINABOVE, IN THE LIGHT OF FINDINGS OF THE CO-ORDINATE BENCH [SUPRA], WE DIREC T THE ASSESSING OFFICER/TPO TO ALLOW ADJUSTMENT ON ACCOUNT OF HIGHE R IMPORT COST AND DECIDE THE ISSUE AFRESH. 16. SINCE WE HAVE DIRECTED FOR ALLOWANCE OF ADJUSTM ENT ON ACCOUNT OF HIGHER IMPORT COST, WE DO NOT FIND IT NECESSARY TO ALLOW ADJUSTMENT WITH REGARD TO WORKING CAPITAL IN THIS DIVISION. II POWER CONTROL DIVISION [MANUFACTURING SEGMENT] 17. IN THIS DIVISION, AN ADJUSTMENT OF RS. 4,79,51, 479/- HAS BEEN MADE BY NOT GRANTING COMPARABILITY ADJUSTMENT IN RE SPECT OF RISE IN COST OF RAW MATERIALS, NOT GRANTING COMPARABILITY A DJUSTMENT IN RESPECT OF UNDERUTILIZATION OF CAPACITY AND NOT GRA NTING ADJUSTMENT FOR VARYING LEVELS OF WORKING CAPITAL EMPLOYED AND TREATING PROVISIONS NO LONGER REQUIRED WRITTEN BACK BY THE ASSESSEE AS NON-OPERATING IN NATURE. 18. IN THIS DIVISION, THE ASSESSEE IS ENGAGED IN MANUFA CTURING OF LOW VOLTAGE ELECTRICAL PRODUCTS FOR SALE TO ITS CUSTOME RS. THESE PRODUCTS 10 INCLUDE MCCB, FUSE GEAR, CONTROL GEAR, SWITCHES, CA PACITORS, MCB AND ACB. 19. BEFORE THE TPO, THE ASSESSEE HAD CLAIMED ADJUST MENT WITH REGARD TO RISE IN PRICE OF RAW MATERIALS AND ADJUST MENT ON ACCOUNT OF UNDER UTILISATION OF CAPACITY. CLAIM OF UNDERUTILI SATION OF CAPACITY WAS REJECTED BY THE TPO ON THE GROUND THAT DURING T HE YEAR, THE ASSESSEE HAS INCREASED ITS INSTALLED CAPACITY FROM 300 PANELS TO 700 PANELS AND AS THE ASSESSEE IS A CAPTIVE CENTER OF ITS AE, THE AE HAD DECIDED TO INCREASE THE CAPACITY EXPECTING THE BUSI NESS AND SHOULD HAVE COMPENSATED THE ASSESSEE IN CASE OF NO BUSINES S. ACCORDING TO THE TPO, WHEN THE AE HAS NOT GRANTED ANY ADJUSTMENT , THE ASSESSEE SHOULD NOT EXPECT ANY ADJUSTMENT IN TP AUDIT. 20. THE DRP CONFIRMED THE FINDINGS OF THE TPO. 21. BEFORE US, THE LD. COUNSEL FOR THE ASSESSEE ONC E AGAIN DREW OUR ATTENTION TO THE DECISION OF THE CO-ORDINATE BENCH IN ITA NO.2210/AHD/2012 [SUPRA] AND POINTED OUT THAT THE R AW MATERIAL ADJUSTMENT WAS ALLOWED ON ACCOUNT OF SIGNIFICANTLY HIGH CONSUMPTION OF RAW MATERIAL. 11 22. IN SO FAR AS THIS ADJUSTMENT IS CONCERNED, WE H AVE ALREADY EXTRACTED THE RELEVANT FINDINGS OF THE CO-ORDINATE BENCH AT PARA 14 HEREINABOVE. IN VIEW OF THE ABOVE, WE DIRECT THE A SSESSING OFFICER/TPO TO ALLOW ADJUSTMENT ON ACCOUNT OF HIGH RAW MATERIAL CONSUMPTION. 23. IN SO FAR AS ADJUSTMENT ON ACCOUNT OF UNDER UTI LISATION OF CAPACITY IS CONCERNED, WE FIND THAT CAPACITY UTILIS ATION BY THE ASSESSEE IS 43% WHEREAS COMPARABLE COMPANIES ARE WO RKING AT AN AVERAGE CAPACITY OF 53.58%. IN OUR CONSIDERED OPIN ION, THIS WIDE VARIATION MANDATES APPROPRIATE ADJUSTMENT TO IRON O UT DIFFERENCES BETWEEN THE ASSESSEE AND COMPARABLE COMPANIES. 24. OBSERVATION OF THE LOWER AUTHORITIES THAT THE A SSESSEE IS A CAPTIVE CENTER FOR ITS AE SEEMS TO BE INCORRECT. W E FIND THAT TOTAL REVENUE OF THE POWER CONTROL DIVISION IS RS. 2,08,46,83,619 /- , WHEREAS THE SALES MADE TO THE AES ARE ONLY RS. 17,1 4,01,378/ - WHICH MAKES IT TO 8.22% OF TOTAL SALES. THUS, IT CAN BE S EEN THAT THE ASSESSEE IS NOT A CAPTIVE CENTER FOR ITS AE. IN LI GHT OF THE ABOVE FACTS, WE DIRECT THE AO/TPO TO ALLOW ADJUSTMENT ON ACCOUNT OF UNDERUTILIZATION OF CAPACITY. 12 25. SINCE WE HAVE DIRECTED FOR ALLOWANCE OF HIGHER RAW MATERIAL CONSUMPTION AND UNDER UTILISATION OF CAPACITY, WE D O NOT FIND IT NECESSARY TO DWELL INTO THE CLAIM OF WORKING CAPITA L ADJUSTMENT. 26. ANOTHER CLAIM IN THIS DIVISION IS THAT THE PROVISIO NS NO LONGER REQUIRED WRITTEN BACK BY THE ASSESSEE WERE TREATED AS NON-OPERATING BY THE TPO. WE FIND THAT THE TREATMENT GIVEN BY THE TPO IS BASED UPON SAFE HARBOUR RULES. IN OUR CONSIDERED OPINION, SAFE HARBOUR RULES ARE NOT APPLICABLE FOR THE YEAR UNDER CONSIDE RATION AS THEY WERE INTRODUCED ON 18.09.2013, WHICH MEANS THAT THE SE PROVISIONS WERE NOT IN EXISTENCE AT THE TIME OF PREPARATION OF THE TP DOCUMENTATION. THE HON'BLE HIGH COURT OF DELHI IN T HE CASE OF FISERV INDIA PRIVATE LIMITED 17/2016 HAS HELD THAT SAFE HA RBOUR NOTIFICATION DATED 18.09.2013 IS PROSPECTIVE. IN LIGHT OF THE AB OVE, WE DO NOT FIND ANY REASON WHY THE PROVISIONS WRITTEN BACK SHOULD N OT BE TREATED AS OPERATING IN NATURE. WE DIRECT ACCORDINGLY. III BENTLEY NEVADA INDIA AND BENTLEY NEVADA SALES A ND SERVICE DIVISION [BNI/BNSS]. 27. IN THIS DIVISION THE ASSESSEE HAS CHALLENGED TH E ALP ADJUSTMENT OF RS.2,87,41,969/-. 13 28. FACTS ON RECORD SHOW THAT IN BNSS DIVISION, THE ASSESSEE IS ENGAGED IN PROVISION OF SOFTWARE DEVELOPMENT SERVIC ES TO ITS AES. THESE SERVICES ARE IN THE NATURE OF CUSTOMISATION O F CONDITION MONITORING SOFTWARE TO MEET SPECIFIC REQUIREMENTS O F CUSTOMERS AND CUSTOMERS AND BNI IS ENGAGED IN PROVIDING SOFTWARE DEVELOPMENT SERVICES ONLY TO ITS AES. BNI DEVELOPS CONDITION MO NITORING SOFTWARE, WHICH IS USED BY END CUSTOMER TO MONITOR THE CONDIT ION OF MACHINERY IN USE AND TAKE OPTIMAL BUSINESS DECISIONS REGARDIN G MACHINERY MAINTENANCE AND OPERATIONS. FROM THE LIST OF COMPAT IBLES, THE TPO/DRP DISREGARDED THE FOLLOWING COMPARABLE COMPAN IES FROM THE COMPARABLE SET ON ACCOUNT OF DIFFERENT F.Y: - R SYSTEMS INTERNATIONAL LIMITED - HELIOS & MATHESON INFORMATION TECHNOLOGIES LIMITED - MASCON GLOBAL LIMITED 29. WE FIND THAT THESE COMPANIES WERE ACCEPTED AS F UNCTIONALLY COMPARABLE WITH THE APPELLANT AND ONLY BECAUSE OF D IFFERENT F.Y., THESE COMPANIES WERE DISREGARDED BY THE TPO/DRP. IN OUR CONSIDERED OPINION, WHERE THE AUDITED QUARTERLY RESULTS ARE AV AILABLE IN THE PUBLIC DOMAIN, THERE SHOULD NOT BE ANY DIFFICULTY IN MAKIN G NECESSARY ADJUSTMENT IN RESPECT OF QUARTERLY RESULTS AND MAKI NG ACCOUNTING YEAR 14 SIMILAR TO THAT OF THE ASSESSEE. THIS PRINCIPLE HAS BEEN ACCEPTED IN A CATENA OF DECISIONS BY THE CO-ORDINATE BENCHES. TO NAME A FEW: - PANGEA3 LEGAL DATABASE SYSTEMS PRIVATE LIMITED (ITA NO. 484/MUM/2016 - AMERICAN EXPRESS (I) P LTD [ITA NO. 1426/DEL/2015 ] - CADENCE DESIGN SYSTEMS (INDIA) LTD [ITA NO.2074/D EL/2014] - MERCER CONSULTING HC [ITA NO. 101 OF 2015 30. WE ACCORDINGLY, DIRECT THE TPO TO CONSIDER THE QUARTERLY RESULTS AND WORK OUT PROPORTIONATE PROFIT MARGIN. THE ASSES SEE IS DIRECTED TO FURNISH NECESSARY DETAILS AND THE TPO IS DIRECTED T O VERIFY THE SAME. 31. THE OTHER DISPUTE RELATES TO INCLUSION OF INFOS YS TECHNOLOGIES LTD AND ACROPETAL TECHNOLOGIES LTD. THE MAIN CONTENTION OF THE ASSESSEE IS THAT THESE COMPANIES WERE INCLUDED BY CHERRY PICKIN G, WHICH IS AGAINST THE RULE OF THE TRIBUNAL IN THE CASE OF TOSHIBA IND IA LTD 3175/DEL/2007 WHEREIN IT HAS BEEN HELD THAT ALP MUST BE DETERMINE D BY A SYSTEMATIC APPROACH AND CHERRY PICKING OF COMPARABLES IS NOT A CCEPTABLE. 32. MOREOVER, THE HON'BLE HIGH COURT OF DELHI IN TH E CASE OF AGNITY INDIA TECHNOLOGIES PVT LIMITED IN ITA NO. 1204/2011 HAS HELD THAT 15 INFOSYS TECHNOLOGIES LTD CANNOT BE COMPARED TO SOFT WARE SERVICE COMPANIES, AS INFOSYS IS ENGAGED IN THE TRADE MARKE D PRODUCTS AND INVESTMENT IN PRODUCT RESEARCH AND DEVELOPMENT CENT RE HAS BRAND VALUE AND HAS SUBSTANTIAL EXPENDITURE ON R&D ACTIVI TIES AND IS ALSO ENGAGED IN THE SALE OF SOFTWARE PRODUCTS AND SEGMEN T FOR SOFTWARE SERVICES IS NOT AVAILABLE. 33. IN FACT, THE COMPANYS SEGMENTS ARE BASED ON IN DUSTRIES AND GEOGRAPHY AND NOT ACTIVITIES. FOR THESE REASONS, TH E HON'BLE HIGH COURT OF DELHI IN THE CASE OF AGNITY INDIA TECHNOLOGIES P VT LTD[SUPRA] HAS DIRECTED FOR EXCLUSION OF INFOSYS TECHNOLOGIES FROM THE FINAL SET OF COMPARABLES. FOR SIMILAR REASONS, WE DIRECT THE ASS ESSING OFFICER/TPO TO EXCLUDE INFOSYS TECHNOLOGIES FROM THE FINAL SET OF COMPARABLES. 34. IN SO FAR AS ACROPETAL TECHNOLOGIES LTD IS CONC ERNED, THIS COMPANY IS ENGAGED IN THE BUSINESS OF ENGINEERING D ESIGN SERVICES, HEALTHCARE SERVICES, ENTERPRISE AND IT SERVICES, EN ERGY AND ENVIRONMENT SERVICES, IT INFRASTRUCTURE MANAGEMENT SERVICES AND IT CONSULTANCY SERVICES. 16 35. AS PER THE ANNUAL REPORT OF THIS COMPANY, ENGIN EERING DESIGN SERVICES SPAN ACROSS THE ENTIRE PRODUCT DEVELOPMENT . THIS COMPANY HAS IMPLEMENTED SEVERAL HEALTHCARE CASE MANAGEMENT AND PATIENT INFORMATION SYSTEM THAT MERGE SOPHISTICATED TECHNOL OGY WITH USER- FRIENDLY INTERFACES. THIS COMPANY ALSO PROVIDES END TO END SOLUTIONS IN MANY AREAS. THE ANNUAL REPORT FURTHER STATES THAT T HIS COMPANY IS COMMITTED TO DELIVER COST-EFFECTIVE SOFTWARE PRODUC TS, SERVICES AND SOLUTIONS TO ITS CUSTOMERS. 36. A CAREFUL PERUSAL OF THE ANNUAL REPORT OF THIS COMPANY SUGGESTS THAT THIS COMPANY IS SOFTWARE PRODUCT COMPANY AND H ENCE, CANNOT BE COMPARED TO THE APPELLANT. IN LIGHT OF THE FACTS DI SCUSSED HEREINABOVE, WE DIRECT FOR EXCLUSION OF THIS COMPANY. IV TRANSPORTATION DIVISION [MANUFACTURE OF TURBO CH ARGERS] 37. IN THIS DIVISION, THE ASSESSEE HAS CHALLENGED T HE ADJUSTMENT OF RS.5,17,67,019/-. THE MAIN CONTENTION BEFORE US IS THAT NO ADJUSTMENT FOR PAYMENT OF EXTRAORDINARY EXPENSES IN THE NATURE OF PROVISION FOR SALES TAX, RENT, GRATUITY, PAYMENT OF CONSULTANCY C HARGES, LIQUIDATING DAMAGES WERE PROVIDED FOR ADJUSTMENT. IN THIS DIVIS ION, THE ASSESSEE 17 SELLS LOCOMOTIVE PARTS, TURBOCHARGERS AND RAILWAY S IGNALLING EQUIPMENT IN INDIA. THE ASSESSEE IMPORTS LOCOMOTIVE PARTS, TU RBO PARTS AND SIGNALLING PANELS FROM ITS AFFILIATES IN US. THE LO COMOTIVES ARE SOLD DIRECTLY BY THE ASSESSEE TO CUSTOMERS INDIA WHEREAS THE COMPANY ASSEMBLES TURBO KITS INTO TURBOCHARGERS IN ITS ASSE MBLY FACILITY BEFORE SELLING TURBOCHARGERS FINALLY TO ITS CUSTOMERS. BEF ORE THE TPO/DRP THE ASSESSEE HAS CLAIMED THE ADJUSTMENT ON ACCOUNT OF E XTRAORDINARY EXPENSES. THE TPO REJECTED THE CLAIM ON THE GROUND THAT THESE ARE EXPENSES IN RELATION TO BUSINESS OPERATIONS. 38. BEFORE US, THE LEARNED COUNSEL FOR THE ASSESSEE POINTED OUT THAT TPO HIMSELF HAS PROVIDED ADJUSTMENT IN F.Y 200607. THEREFORE, THERE SHOULD NOT BE ANY REASON FOR DENYING SIMILAR ADJUST MENT FOR THE YEAR UNDER CONSIDERATION. 39. IN OUR CONSIDERED OPINION, IF WORKING CAPITAL A DJUSTMENT BRINGS PARITY IN COMPARABILITY AND CASE STRENGTH TO COMPAR ABILITY, WE DO NOT FIND ANY REASON WHY THE SAME SHOULD BE DENIED. ALL THAT THE TPO HAS TO DO IS TO SATISFY HIMSELF WITH THE WORKING OF THE AD JUSTMENTS AND POINT OUT ISSUES OF HIS DISSATISFACTION. WE, ACCORDINGLY, DIRECT THE AO/TPO TO 18 CONSIDER THE WORKING OF THE ADJUSTMENTS TO BE FURNI SHED BY THE ASSESSEE AND DECIDE THE ISSUE AFRESH. WE ORDER ACCO RDINGLY. V. WATER & PROCESSING TECHNOLOGY DIVISION [TRADI NG ACTIVITY] 40. IN THIS DIVISION, ADJUSTMENT OF RS.78,71,916/- IS CONTESTED BY THE ASSESSEE. THE MAIN CONTENTION IS THAT NO ADJUSTMENT WAS GIVEN WITH REGARD TO HIGH IMPORT CONTENT AND FURTHER NO ADJUST MENT WAS GIVEN FOR VARYING LEVELS OF WORKING CAPITAL EMPLOYED BY THE A SSESSEE VIS-A-VIS COMPARABLE COMPANIES. 41. IN SO FAR AS ADJUSTMENT ON ACCOUNT OF HIGHER IM PORT IS CONCERNED, WE HAVE ALREADY DECIDED THIS ISSUE AT PARA 14.FOR O UR DETAILED REASONING GIVEN THEREIN, WE DIRECT THE AO/TPO TO AL LOW ADJUSTMENT ON ACCOUNT OF HIGHER IMPORT. SINCE THE ADJUSTMENT ON A CCOUNT OF HIGHER IMPORT IS DIRECTED TO BE ALLOWED, WE DO NOT FIND IT NECESSARY TO ALLOW BENEFIT OF WORKING CAPITAL ADJUSTMENT. VI. WATER AND PROCESS TECHNOLOGY DIVISION [MANUFACT URING OF MEMBRANES] 42. IN THIS DIVISION, THE ASSESSEE MANUFACTURES SPE CIALTY CHEMICALS MORE SPECIFICALLY, WATER TREATMENT CHEMICALS AND PU LP AND PAPER PRODUCT CHEMICALS. IN THIS DIVISION, THE ASSESSEE H AS CHALLENGED 19 ADJUSTMENT OF RS.2,33,47,148/-. THE CHALLENGE OF TH E ASSESSEE RELATES TO NOT PROVIDING COMPARABILITY ADJUSTMENT OF SCRAP SALES AND NOT GRANTING WORKING CAPITAL ADJUSTMENT. 43. THE ASSESSEE FURTHER CONTENDS THAT OPERATING MA RGIN OF COMPARABLE COMPANIES IS INCORRECTLY COMPUTED. IN SO FAR AS ADJUSTMENT ON ACCOUNT OF SCRAP SALES IS CONCERNED, THE SAME HA S BEEN DENIED ON THE GROUND THAT ADJUSTMENT CANNOT BE CARRIED OUT ON THE MARGINS OF THE ASSESSEE. THIS ISSUE HAS BEEN ELABORATELY DISCU SSED BY US IN PARA 15 WHEREIN WE HAVE REFERRED TO THE FINDINGS OF THE COO RDINATE BENCH. IN SAME LINES, WE DIRECT THE AO/TPO TO ALLOW ADJUSTMEN T ON ACCOUNT OF SCRAP OF SALES. 44. IN SO FAR AS INCORRECT COMPUTATION OF OPERATING MARGIN OF COMPARABLE COMPANIES IS CONCERNED, WE FIND THAT THE DRP HAD DIRECTED THE AO/TPO TO MAKE NECESSARY CORRECTIONS, WHICH HAVE NOT BEEN CARRIED OUT BY THE TPO. WE, ACCORDINGLY, DIREC T THE TPO/AO OR TO CARRY OUT THE DIRECTIONS OF THE DRP. 20 VII MARKETING SUPPORT SERVICES [RENDERED BY VARIOUS DIVISIONS] 45. MSD IS ENGAGED IN PROVIDING MARKETING SUPPORT S ERVICES TO MAJORITY OF BUSINESSES WITHIN GE, CLASSIFIED UNDER ENERGY INFRASTRUCTURE AND TECHNOLOGY INFRASTRUCTURE. MSD P ROVIDES MARKETING SUPPORT SERVICES EXCLUSIVELY TO ITS AES.GBS IS AN A DMINISTRATION SUPPORT SERVICES PROVIDER. IT IS ENGAGED IN PROVIDI NG THESE SERVICES ONLY TO ITS DOMESTIC AND FOREIGN AES. IN THIS DIVI SION, ALP ADJUSTMENT OF 26,01,40,955/- HAS BEEN CONTESTED BY THE ASSESSE E. 46. AT THE VERY OUTSET, WE HAVE TO STATE THAT OUT OF 19 COMPARABLE COMPANIES SELECTED BY THE ASSESSEE IN ITS TP STUDY, 18 COMPARABLES WERE REJECTED BY THE TPO. THIS ITSELF SHOWS THAT TH E TP STUDY IN THIS DIVISION WAS FLAWED. THE MAIN REASON FOR REJECTING THE COMPARABLES GIVEN BY THE TPO IS THAT THESE COMPARABLES WERE MAI NLY ENGAGED IN PROVIDING SECURITY SERVICES OR TRAVEL RELATED SERVI CES ETC WHICH ARE NOT AT ALL COMPARABLE TO THOSE SEGMENTS OF THE ASSESSEE WHICH IS BROADLY AN ADMINISTRATIVE SERVICE SEGMENT. SINCE THE 18 COM PARABLES WERE REJECTED BY THE TPO AND ONLY ONE VALID COMPARABLE S URVIVED, THE TPO HAD NO CHOICE BUT TO WORK OUT THE ALP ON THE BASIS OF FRESH SEARCH. 21 47. BEFORE US, THE ASSESSEE HAS CHALLENGED THE INCL USION OF THE FOLLOWING COMPARABLES: 1. TSR DARASHAW LIMITED IN HIS WRITTEN SUBMISSIONS, THE LEARNED COUNSEL HAS REITERATED WHAT HAS BEEN CONTENDED BEFORE THE TPO/DRP. 48. WE HAVE CAREFULLY GONE THROUGH THE WRITTEN SUBM ISSIONS. WE DO NOT FIND ANY FORCE IN THE CLAIM OF THE ASSESSEE. ON A PERUSAL OF THE ANNUAL REPORT OF TSR DARASHAW LTD, WE FIND THAT THIS COMPANY IS ENGAGED IN THE ACTIVITIES OF PAYROLL MANAGEMENT, TR ADITIONAL REGISTRY SERVICE AND RECORD MANAGEMENT ACTIVITY, WHICH ARE F UNCTIONALLY ADMINISTRATIVE AND MANAGEMENT ACTIVITIES AND, THERE FORE, FUNCTIONALLY COMPARABLE. ON THE CONTENTION OF THE A SSESSEE THAT THIS COMPANY IS ENGAGED IN DEVELOPMENT OF SOFTWARE, WE F IND THAT THE DEVELOPMENT OF SOFTWARE IS IN THE FINAL PHASE OF LA UNCHING AND HENCE DO NOT HAVE MUCH RELEVANCE FOR THE YEAR UNDER CONSI DERATION. WE, THEREFORE, DO NOT FIND ANY ERROR OR INFIRMITY IN TH E INCLUSION OF THIS COMPANY. THIS COMPANY WILL REMAIN IN THE FINAL SET OF COMPARABLES. THE ASSESSEE HAS REFERRED TO VARIOUS JUDICIAL DECIS IONS WHEREIN THE COORDINATE BENCHES HAVE REJECTED THE INCLUSION OF T SR DARASHAW LIMITED. WE ARE OF THE CONSIDERED VIEW THAT EACH CA SE HAS TO BE 22 CONSIDERED ON THE FACTS OF ITS OWN AND FACTS OF THE CASE IN HAND JUSTIFY THE INCLUSION OF TSR DARASHAWLTD IN THE FIN AL SET OF COMPATIBLES. WE ORDER ACCORDINGLY. 2. APTICO LIMITED 49. REFERRING TO THE INCOME FROM OPERATIONS OF THIS COMPANY, THE LEARNED COUNSEL POINTED OUT THAT APITCO LTD IS NOT RENDERING MARKET SUPPORT SERVICES BUT IS ENGAGED IN THE PROVISION OF TECHNICAL AND ENGINEERING CONSULTANCY SERVICES. WE DO NOT FIND AN Y FORCE IN THIS CONTENTION OF THE LEARNED COUNSEL. INCOME FROM OPER ATIONS OF THIS COMPANY IS AS UNDER: 50. A PERUSAL OF THE ABOVE SHOWS THAT THIS COMPANY IS NOT INTO ENGINEERING TYPE OF SERVICE BUT IS A CONSULTANCY EN TITY. THE REVENUE FROM NATURE OF SERVICES ARE EVIDENT FROM FIGURES GI VEN HEREINABOVE. 23 WE, THEREFORE, FIND NO REASON FOR THE EXCLUSION OF THIS COMPANY FROM THE FINAL SET OF COMPARABLES. WE, ACCORDINGLY, DIRE CT THE TPO/AO TO KEEP THIS COMPANY FROM THE FINAL SET OF COMPATIBLES . VARIOUS BENCHES OF THE TRIBUNAL MAY HAVE EXCLUDED THIS COMPANY ON T HE FACTS OF THOSE CASES BUT THE FACTS OF THE CASE IN HAND CLEARLY SUG GESTS THAT APTICO LIMITED REMAINS IN THE FINAL SET OF COMPARABLES. GLOBAL PROCUREMENT CONSULTANTS LIMITED 51. THE ANNUAL REPORT OF THIS COMPANY SUGGESTS THAT THIS COMPANY IS INDIRECTLY HELD BY THE GOVERNMENT AS EXPORT IMPORT BANK, WHICH IS A PUBLIC FINANCIAL INSTITUTION, HOLDING MORE THAN 25% OF THE SUBSCRIBED CAPITAL OF THIS COMPANY AND AS PER SECTION 224A OF THE COMPANIES ACT, 1956, SUCH COMPANY HAS TO APPOINT AUDITORS AS PER S PECIAL RESOLUTION, WHICH HAS BEEN FOLLOWED BY THIS COMPANY. BEING A PU BLIC SECTOR UNDERTAKING ITSELF IS A STRONG GROUND FOR EXCLUSION OF THIS COMPANY FROM THE FINAL SET OF COMPARABLES. WE DIRECT ACCORDINGLY . 52. ANOTHER CONTENTION OF THE LD. COUNSEL IS THAT T HERE IS AN ARITHMETICAL ERROR IN THE MARGIN OF CONCEPT COMMUNI CATIONS FOR WHICH THE DRP HAS ISSUED NECESSARY DIRECTIONS BUT HAVE NO T BEEN FOLLOWED BY 24 THE TPO. WE ACCORDINGLY DIRECT THE TPO TO GIVE EFFE CT TO THE DIRECTIONS OF THE DRP. 53. THE LEARNED COUNSEL HAS FURTHER BROUGHT TO OUR NOTICE THAT AFTER CHANGE IN REMUNERATION POLICY FROM COST +5% TO COST +25% MARKET TRANSACTIONS IN MSD AND OIL AND GAS DIVISION ARE AT ARMS LENGTH. IT IS THE SAY OF THE LEARNED COUNSEL THAT IF THE TPO/AO TAKE COGNIZANCE OF THE INCREASED MARK UP, THERE WOULD NOT BE ANY ADJUSTMEN T IN RESPECT OF THESE BUSINESS DIVISIONS. 54. WE ARE OF THE CONSIDERED VIEW THAT IF THERE IS CHANGE IN THE REMUNERATION POLICY BY WHICH COST +5% MARK-UP IS IN CREASED TO COST +25% MARK-UP, THE TPO/AO MUST EXAMINE THIS CHANGE I N THE REMUNERATION POLICY AND, IF FOUND CORRECT FOR THE Y EAR UNDER CONSIDERATION, THE SAME MAY BE GIVEN EFFECT TO AND THE ALP ADJUSTMENT SHOULD BE DECIDED AFRESH ACCORDINGLY. 55. TO SUM UP, FOR THE SAKE OF REPETITION, THE ASSE SSEE IS ENGAGED IN RENDERING MARKETING SUPPORT SERVICES AND COMPANIES UNDERTAKING SIMILAR BUSINESS OPERATIONS ARE NOT AVAILABLE IN TH E PUBLIC DOMAIN. THEREFORE, A PRAGMATIC APPROACH HAS TO BE UNDERTAKE N FOR SELECTING 25 THE MOST LIKELY COMPARABLE COMPANIES, AND SUCH COMP ANIES SHOULD BE SERVICE PROVIDERS AND ON THE BASIS OF THIS, WE HAVE GIVEN OUR FINDINGS HEREINABOVE. VII TECHNICAL SUPPORT [SENSING AND INSPECTION TECHN OLOGIES DIVISION] TECHNICAL SUPPORT [TRANSPORTATION DIVISION] AND TEC HNICAL SUPPORT [OIL GAS DIVISION] 56. UNDER TECHNICAL SUPPORT SENSING AND INSPECTION TECHNOLOGY DIVISION, SERVICE ENGINEERS ARE SENT TO CUSTOMER LO CATIONS IN INDIA TO PROVIDE TECHNICAL SUPPORT SERVICES. TECHNICAL SERVI CES PROVIDED TO AES THUS INCLUDE INSTALLATION, PRODUCT CLARIFICATION AN D BREAK DOWN/ MAINTENANCE VISITS. UNDER TECHNICAL TRANSPORTATION DIVISION, THE ASSESSEE PROVIDES TECHNICAL SUPPORT OR WARRANTY SUP PORT IN RELATION TO GE TRANSPORTATION PRODUCTS ON BEHALF OF THE AES AND UNDER TECHNICAL SUPPORT OIL AND GAS DIVISION, THE ASSESSEE ANALYSES TECHNICAL AND MATERIAL NON-CONFORMITIES COMING FROM THE SITES AND CLASSIFY AND PRIORITISE THEM. 26 57. AT THE VERY OUTSET, THE LEARNED COUNSEL FOR THE ASSESSEE REFERRED TO THE CHART OF COMPARABLE COMPANIES AS ANNEXURE -I AND POINTED OUT THAT THESE COMPANIES SHOULD HAVE BEEN INCLUDED BECA USE THEY ARE PERFORMING SIMILAR FUNCTIONS AS BY TWO COMPARABLE C OMPANIES CONSIDERED BY THE TPO. IT IS THE SAY OF THE LEARNED COUNSEL THAT THE CLAIM OF THE ASSESSEE HAS NOT BEEN PROPERLY APPRECI ATED BY THE DRP/TPO. 58. WE HAVE CAREFULLY CONSIDERED THE CHART AS REFER RED BY THE LEARNED COUNSEL. WE FIND THAT ALMOST ALL COMPARABLE COMPANIES HAVE BEEN REJECTED ON THE BASIS OF FUNCTIONAL DISSIMILAR ITY OR ON THE BASIS OF SOME FILTERS. IN OUR CONSIDERED OPINION, IT WOULD B E IN THE INTEREST OF JUSTICE TO REVISIT THE COMPARABILITIES OF THESE COM PANIES AS PER ANALYSIS GIVEN BY THE ASSESSEE IN THE FOLLOWING CHARTS: 27 28 29 30 31 32 59. THE TPO IS DIRECTED TO RE-EXAMINE THE ISSUES RA ISED BY THE ASSESSEE HEREINABOVE AND DECIDE THE ISSUE AFRESH AF TER GIVING REASONABLE OPPORTUNITY OF BEING HEARD TO THE ASSESS EE. CORPORATE TAX ISSUES DISALLOWANCE OF WARRANTY AND A REPLACEMENT EXPENSES . 60. WHILE SCRUTINISING THE RETURN OF INCOME, THE AS SESSING OFFICER NOTICED THAT THE ASSESSEE HAS DEBITED RS.3,28,17,16 7/- TO THE PROFIT AND LOSS ACCOUNT UNDER THE HEAD WARRANTY AND REPLA CEMENT 33 EXPENSES. THE ASSESSEE WAS ASKED TO SHOW CAUSE AS TO WHY THIS PROVISION SHOULD NOT BE DISALLOWED. 61. IN ITS REPLY, THE ASSESSEE STRONGLY CONTENDED T HAT WARRANTY COSTS ARE ESTIMATED BY MANAGEMENT ON THE BASIS OF TECHNIC AL EVALUATION OF AND PAST EXPERIENCE. IT WAS EXPLAINED THAT PROVISIO N IS MADE FOR ESTIMATED LIABILITY IN RESPECT OF WARRANTY COST IN THE YEAR OF SALE. FURTHER, PROVISION FOR WARRANTY IS UTILISED TO MAKE GOOD THE AMOUNT SPENT ON REPLACEMENT OF PARTS AND ACCESSORIES AND O THER RELATED EXPENSES ON THE EVENT OF FAILURE OF THE PRODUCT. IT WAS CLAIMED THAT THE LIABILITY FOR WARRANTY IS TRIGGERED ON SALE OF PRODUCTS ELIGIBLE FOR WARRANTY. IT WAS STRONGLY CONTENDED THAT THE SAID P ROVISION IS NOT CONTINGENT IN NATURE AND HENCE THE SAME SHOULD BE A LLOWED AS DEDUCTION. 62. THE ASSESSING OFFICER RUBBISHED THE CLAIM OF TH E ASSESSEE STATING THAT THE ASSESSEE HAS NOT GIVEN ANY DOCUMENTS TO PR OVE THAT THE PROVISION IS BASED ON SCIENTIFIC WORKING. THE AO FU RTHER OBSERVED THAT SIMILAR VIEW WAS TAKEN IN A.Y 2008-09,2009-10 AND 2 010-11. 63. OBJECTIONS RAISED BEFORE THE DRP WERE SIMILARLY DISMISSED. 34 64. BEFORE US, THE LEARNED COUNSEL FOR THE ASSESSEE REITERATED WHAT HAS BEEN STATED BEFORE THE LOWER AUTHORITIES. 65. PER CONTRA, THE LD. DR STRONGLY SUPPORTED THE F INDINGS OF THE ASSESSING OFFICER. 66. WE HAVE GIVEN CAREFUL CONSIDERATION TO THE ORDE RS OF THE AUTHORITIES BELOW. IT IS NOT IN DISPUTE THAT SIMILA R DISALLOWANCES WERE MADE IN A.Y 200607 AND 200708 AND THE MATTER TRAV ELLED UP TO THE TRIBUNAL AND THE COORDINATE BENCH IN ITA NOS. 3064 /A/10 AND 2749/A/11 HAS CONSIDERED THIS DISPUTE VIDE GROUND N O. 3 OF THAT APPEAL. THE RELEVANT FINDINGS OF THE COORDINATE BEN CH READ AS UNDER: 16. WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSE D THE MATERIAL ON RECORD. IT IS AN UNDISPUTED FACT THAT A SSESSEE HAS DEBITED EXPENSES ON ACCOUNT OF WARRANTY EXPENSES. T HE EXPENSES ARE WITH RESPECT TO WARRANTY IS AN UNDISPU TED FACT. THE H'BLE APEX COURT IN THE CASE OF ROTORK CONTROLS (SUPRA) HAS LAID DOWN THE CONDITIONS WHICH ARE REQUIRED TO BE SATISFIED FOR MAKING CLAIM IN RESPECT OF POST SALE CUSTOMER SERVICE AND HAS LAID DOWN THE PRINCIPLE PERTAINING TO THE SAME. 35 THE HON'BLE APEX COURT IN THAT CASE NOTED THAT PROV ISION MADE FOR WARRANTY @ 2% OF TURNOVER BASED ON PAST EXPERIENCE (HISTORICAL TREND) WAS MOST APPROPRIATE AS IT FULFILLED ACCRUAL CONCEPT AS WELL AS MATCHING CONCE PT. IT FURTHER HELD THAT 'FOR DETERMINING AN APPROPRIATE H ISTORICAL TREND, IT IS IMPORTANT THAT THE COMPANY HAS A PROPE R ACCOUNTING SYSTEM FOR CAPTURING THE RELATIONSHIP BE TWEEN THE NATURE OF THE SALES, THE WARRANTY PROVISIONS MADE A ND THE ACTUAL EXPENSES INCURRED AGAINST IT SUBSEQUENTLY. T HUS, THE DECISION ON THE WARRANTY PROVISION SHOULD BE BASED ON PAST EXPERIENCE OF THE COMPANY. A DETAILED ASSESSMENT OF THE WARRANTY PROVISIONING POLICY IS REQUIRED PARTICULAR LY IF THE EXPERIENCES SUGGESTS THAT I.T.A NOS.3064 /AHD/2010,2749/AHD/2011 A.Y. 2006-07 &2007-08 PAGE NO 12 GE INDIA INDUSTRIAL PVT. LTD. VS. DCIT WARRANTY PROVISIONS ARE GENERALLY REVERSED IF THEY REMAINED UNUTILIZED AT THE END OF THE PERIOD PRESCRIBED IN THE WARRANTY. THEREFORE , THE COMPANY SHOULD SCRUTINIZE THE HISTORICAL TREND OF W ARRANTY PROVISIONS MADE AND THE ACTUAL EXPENSES INCURRED AG AINST IT. 36 ON THIS BASIS A SENSIBLE ESTIMATE SHOULD BE MADE. T HE WARRANTY PROVISION FOR THE PRODUCTS SHOULD BE BASED ON THE ESTIMATE AT THE YEAR END OF FUTURE WARRANTY EXPENSE S. SUCH ESTIMATES NEED REASSESSMENT EVERY YEAR. AS ONE REAC HES CLOSE TO THE END OF THE WARRANTY PERIOD, THE PROBAB ILITY THAT THE WARRANTY EXPENSES WILL BE INCURRED IS CONSIDERA BLY REDUCED AND THAT SHOULD BE REFLECTED IN THE ESTIMAT ION AMOUNT. WHETHER THIS SHOULD BE DONE THROUGH A PRO R ATA REVERSAL OR OTHERWISE SHOULD REQUIRE ASSESSMENT OF HISTORICAL TREND. IF WARRANTY PROVISIONS ARE BASED ON EXPERIEN CE AND HISTORICAL TREND(S) AND IF THE WORKING IS ROBUST TH EN THE QUESTION OF REVERSAL IN THE SUBSEQUENT TWO YEARS, I N THE ABOVE EXAMPLE, MAY NOT ARISE IN A SIGNIFICANT WAY. IT IS IMPORTANT TO NOTE THAT THE THERE ARE FOUR IMPORTANT ASPECTS OF PROVISIONING. THEY ARE-PROVISIONING WHICH RELATES T O THE PRESENT OBLIGATION, IT ARISES OUT OF OBLIGATING EVE NTS, IT INVOLVES OUTFLOW OF RESOURCES AND, LASTLY, IT INVOL VES RELIABLE ESTIMATION OF OBLIGATION.' 37 17. WE FIND THAT IN THE PRESENT CASE THERE IS NO FI NDING WITH RESPECT TO THE COMPLIANCE OF AFORESAID GUIDELINES O F APEX COURT BY ASSESSEE IN THE ORDER OF AO OR DRP. WE ARE THEREFORE OF THE VIEW THAT THE MATTER NEEDS TO BE E XAMINED IN THE LIGHT OF THE PRINCIPLES LAID DOWN BY HON'BLE APEX COURT. WE THEREFORE REMIT THE MATTER TO THE FILE OF AO FOR DECIDING THE ISSUE AFRESH IN THE LIGHT OF THE DECISION OF HO N'BLE APEX COURT IN THE CASE OF ROTORK CONTROLS (SUPRA) AND AF TER GIVING A REASONABLE OPPORTUNITY OF HEARING TO THE ASSESSEE. THUS THIS GROUND OF ASSESSEE IS ALLOWED FOR STATISTICAL PURPO SES. 67. IN LIGHT OF THE FINDINGS GIVEN BY THE COORDINAT E BENCH [SUPRA] WE DIRECT ACCORDINGLY. GROUND NO. 14 IS ALLOWED FOR ST ATISTICAL PURPOSES. 68. GROUND NUMBER 15 RELATES TO DISALLOWANCE OF CLA IM OF BAD DEBTS WRITTEN OFF. 38 69. WHILE SCRUTINISING THE RETURN, THE ASSESSING OF FICER NOTICED THAT THE ASSESSEE HAS WRITTEN OFF BAD DEBTS AMOUNTING TO RS.6,94,01,066/-. THE ASSESSEE WAS ASKED TO PROVIDE DETAILS OF THESE BAD DEBTS. 70. IN ITS REPLY, THE ASSESSEE STATED THAT THESE DE BTS ARE ACTUALLY WRITTEN OFF AND STRONG RELIANCE WAS PLACED ON THE C ASE OF TRF LIMITED IN CIVIL APPEAL NO. 5293 AND 5294 OF 2003. 71. THE ASSESSEE WAS FURTHER ASKED TO FURNISH DETAI LS OF INCOME ACCOUNTED FOR TWO AMOUNT CLAIMED AS RETURN OFF. ON A PERUSAL OF THE DETAILS, THE ASSESSING OFFICER NOTICED THAT THE ASS ESSEE COULD FURNISH ONLY DETAILS IN RESPECT OF RS.5,35,56,246/-. THE AS SESSING OFFICER, ACCORDINGLY, DISALLOWED THE BALANCE OF RS.1,58,44,8 20/-. 72. WHEN OBJECTIONS WERE RAISED BEFORE THE DRP, THE DRP DIRECTED THE AO TO EXAMINE THE FACTS AND ALLOWED THE CLAIM T O THE EXTENT ALLOWABLE U/S 36(1)(VII) OF THE ACT. ACCORDINGLY, F RESH NOTICE WAS ISSUED TO THE ASSESSEE AND ONCE AGAIN WAS ASKED TO FURNISH DETAILS AND AFTER AGAIN PERUSING THE DETAILS, THE AO FINALLY CAME TO THE CONCLUSION THAT THE ASSESSEE COULD NOT EXPLAIN THE WRITE OFF AMOUNT ING TO RS.1,50,93,959/- AND MADE ADDITION. 39 73. BEFORE US, THE LEARNED COUNSEL FOR THE ASSESSEE DREW OUR ATTENTION TO THE DOCUMENTS EXHIBITED IN THE PAPER B OOK AND POINTED OUT THAT THE ASSESSEE HAD FURNISHED COMPLETE DETAIL S WHICH HAVE NOT BEEN PROPERLY APPRECIATED BY THE ASSESSING OFFICER. IT IS THE SAY OF THE LD. COUNSEL FOR THE ASSESSEE THAT THE ASSESSEE HAS FULFILLED ALL THE CONDITIONS SPECIFIED U/S 36(1)(VII) READ WITH SECTI ON 36(2) OF THE ACT AND PLEADED THAT ACTUAL WRITE OFF OF DEBTS SHOULD B E ALLOWED. 74. PER CONTRA THE LD. DR SUPPORTED THE FINDINGS OF THE ASSESSING OFFICER. 75. WE HAVE CAREFULLY CONSIDERED THE ORDERS OF THE AUTHORITIES BELOW AND THE SUBMISSIONS MADE BY THE LD. REPRESENTATIVES . WE HAVE ALSO PERUSED THE RELEVANT DOCUMENTARY EVIDENCES REFERRED TO BY THE LEARNED COUNSEL WHICH ARE EXHIBITED IN THE PAPER BO OK. IN OUR CONSIDERED OPINION, IF THE DEBTS ARE ACTUALLY WRITT EN OFF FROM THE BOOKS, THE RATIO LAID DOWN BY THE HON'BLE SUPREME C OURT IN CASE OF TRF [SUPRA] SQUARELY APPLIES, WHICH IS ALSO ACKNOWLEDGE D BY CBDT IN ITS CIRCULAR NO. 551 DATED 22.012019. ONCE THE DEBTS HA VE BEEN ACTUALLY WRITTEN OFF, THE SAME HAS TO BE ALLOWED. WE, ACCORD INGLY, DIRECT THE 40 ASSESSING OFFICER TO DELETE THE ADDITION OFRS.1,50, 93,959/-. GROUND NO.15 IS, ACCORDINGLY, ALLOWED. 76. GROUND NO. 16 RELATES TO DISALLOWANCE OF CLAIM OF ADVANCES WRITTEN OFF. 77. THE ASSESSING OFFICER NOTICED THAT THE ASSESSE E HAS CLAIMED RS.80,39,243/- AS ADVANCES WRITTEN OFF. THE ASSESSE E WAS ASKED TO FURNISH THE COMPLETE DETAILS. THE ASSESSEE FURNISHE D THE DETAILS WHICH WERE DISMISSED BY THE ASSESSING OFFICER. THE ASSESS ING OFFICER WAS OF THE OPINION THAT THE ASSESSEE HAS NOT SUBMITTED ANY FACTUAL DETAILS OF SUCH ADVANCES WRITTEN OFF, THAT IS, PARTY WISE BREA K UP, PURPOSE OF ADVANCE, DATE AND YEAR OF SUCH ADVANCE MADE AND WHY THE SAME HAS BEEN WRITTEN OFF. THE ASSESSING OFFICER WAS OF THE FURTHER BELIEF THAT SUCH A WRITE OFF OF ADVANCES ARE IN THE NATURE OF D EBTS AND THEREFORE, THE SAME HAS TO BE CONSIDERED IN THE LIGHT OF SECTI ON 36(1)(VII) READ WITH SECTION 36(2) OF THE ACT. THE ASSESSING OFFIC ER MADE AN ADDITION OF RS. 80,39,243/-, WHICH WAS CONFIRMED BY THE DRP. 78. BEFORE US, THE LEARNED COUNSEL FOR THE ASSESSEE DREW OUR ATTENTION TO THE DETAILS OF ADVANCES WRITTEN OFF WH ICH ARE EXHIBITED IN 41 THE PAPER BOOK. IT IS THE SAY OF THE LD. COUNSEL TH AT ADVANCES ARE IN THE NATURE OF TRADE ADVANCES, WHICH WERE MADE IN REGULA R COURSE OF BUSINESS AND SINCE ADVANCES WERE FOUND TO HAVE BECO ME IRRECOVERABLE, THE SAME WERE WRITTEN OFF. 79. PER CONTRA, LD. DR SUPPORTED THE FINDINGS OF TH E ASSESSING OFFICER. 80. WE HAVE CAREFULLY CONSIDERED THE ISSUE. A PERUS AL OF THE RELEVANT PAGES EXHIBITED IN THE PAPER BOOK SHOWS THAT THESE ADVANCES WERE IN THE NATURE OF TRADE ADVANCES, WHICH WERE MADE IN RE GULAR COURSE OF BUSINESS AND WERE GIVEN TO SUPPLIERS IN THE NORMAL COURSE OF BUSINESS AND SOME ARE EARNEST MONEY DEPOSITS AND SOME ARE GU ARANTEE DEPOSITS, WHICH WERE FURNISHED IN FURTHERANCE OF BU SINESS OF THE ASSESSEE. IN OUR CONSIDERED OPINION, SUCH ADVANCES BEING DIRECTLY RELATED TO THE BUSINESS ACTIVITIES OF THE ASSESSEE, WRITE OFF OF THE SAME SHOULD BE ALLOWED. WE ACCORDINGLY DIRECT THE ASSESS ING OFFICER TO DELETE THE ADDITION OF RS.80,39,243/-. GROUND NO. 1 6 IS, ACCORDINGLY, ALLOWED. 81. GROUND NOS. 17 AND 18 RELATE TO THE CLAIM OF DE PRECIATION@ OF 60% ON WDV OF SOFTWARE AND 25% ON WDV OF CAPITAL EX PENDITURE. WE FIND THAT THE DRP HAS GIVEN A CATEGORICAL DIRECTION TO THE ASSESSING OFFICER TO ALLOW DEPRECIATION ON WDV. HOWEVER, WE F IND THAT THE TPO 42 HAS NOT FOLLOWED THE DIRECTIONS OF THE DRP. IN OUR CONSIDERED OPINION, DIRECTIONS OF THE DRP ARE MANDATORY FOR THE ASSESSI NG OFFICER AND THE ASSESSING OFFICER SHOULD HAVE FOLLOWED THE DIRECTIO NS. WE, ACCORDINGLY, DIRECT THE ASSESSING OFFICER TO FOLLOW THE DIRECTIO NS OF THE DRP AND ALLOW CLAIM OF DEPRECIATION. GROUND NOS. 17 AND 18 ARE, ACCORDINGLY, ALLOWED FOR STATISTICAL PURPOSES. 82. THE ONLY GRIEVANCE WHICH REMAINS TO BE ADJUDICA TED IS THAT THE ASSESSING OFFICER HAS NOT GRANTED SELF-ASSESSMENT T AX. WE DIRECT THE ASSESSING OFFICER TO ALLOW CREDIT OF SELF-ASSESSMEN T TAX AS PER PROVISIONS OF THE LAW. 83. IN THE RESULT, THE APPEAL FILED BY THE ASSESSEE IN ITA NO. 1684/DEL/2016IS ALLOWED IN PART FOR STATISTICAL PUR POSES. THE ORDER IS PRONOUNCED IN THE OPEN COURT ON 08.10 .2020. SD/- SD/- [ SUCHITRA KAMBLE ] [N.K. BILLAIYA] JUDICIAL MEMBER ACCOUNTANT MEMBER DATED: 08 TH OCTOBER, 2020 VL/ 43 COPY FORWARDED TO: 1. APPELLANT 2. RESPONDENT 3. CIT 4. CIT(A) 5. DR ASST. REGISTRAR, ITAT, NEW DELHI DATE OF DICTATION DATE ON WHICH THE TYPED DRAFT IS PLACED BEFORE THE DICTATING MEMBER DATE ON WHICH THE TYPED DRAFT IS PLACED BEFORE THE OTHER MEMBER DATE ON WHICH THE APPROVED DRAFT COMES TO THE SR.PS /PS DATE ON WHICH THE FAIR ORDER IS PLACED BEFORE THE DICTATING MEMBER FOR PRONOUNCEMENT DATE ON WHICH THE FAIR ORDER COMES BACK TO THE SR.P S/PS 08.10.2020 DATE ON WHICH THE FINAL ORDER IS UPLOADED ON THE WEBSITE OF ITAT 08.10.2020 DATE ON WHICH THE FILE GOES TO THE BENCH CLERK 08.10.2020 DATE ON WHICH THE FILE GOES TO THE HEAD CLERK THE DATE ON WHICH THE FILE GOES TO THE ASSISTANT RE GISTRAR FOR SIGNATURE ON THE ORDER DATE OF DISPATCH OF THE ORDER