ACIT, CHENNAI V. FL Smidth Minerals Pvt Ltd., CHENNAI

ITA 1918/CHNY/2015

• Counselvise Citation: [2016] 132 COUNSELVISE.COM (IT) 9642 (ITAT-CHENNAI)
• Duration Of Justice: 7 month(s) 19 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 19-04-2016
• Appeal Filed By: Department
• Order Result: Partly Allowed
• Bench Allotted: B
• Next Hearing Date: 15-05-2017
• Assessment Year: 2005-2006
• Appeal Filed On: 31-08-2015
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Keywords: Transfer pricing; International transaction
• Section: 143(3)

Judgement Text

, , IN THE INCOME TAX APPELLATE TRIBUNAL C BENCH, CHENNAI , . ! , '!# BEFORE SHRI CHANDRA POOJARI, ACCOUNTANT MEMBER AND SHRI G. PAVAN KUMAR, JUDICIAL MEMBER ./ I.T.A. NO. 1918/MDS/2015 ' $ %$ / ASSESSMENT YEAR : 2005-2006. THE ASSISTANT COMMISSIONER OF INCOME TAX, CORPORATE CIRCLE 2(1) CHENNAI 600 034. VS. M/S. FL SMIDTH MINERALS PVT. LTD, 34, EGATOOR, KELAMBAKKAM, OMR CHENNAI 603 103. [PAN AAACF 1122D ] ( / APPELLANT) ( /RESPONDENT) &' ( ) / APPELLANT BY : SHRI. PATHLAVETH PEERYA, CIT *+&' ( ) /RESPONDENT BY : NONE ( , / DATE OF HEARING : 05-04-2016 -.% ( , / DATE OF PRONOUNCEMENT : 19-04-2016 / O R D E R PER G. PAVAN KUMAR, JUDICIAL MEMBER : THE REVENUE HAS FILED AN APPEAL AGAINST ORDER O F THE COMMISSIONER OF INCOME-TAX (APPEALS)-6, CHENNAI IN ITA NOS.124/CIT(A)-6/2008-09, DT. 20.03.2015 FOR THE AS SESSMENT YEAR 2005-2006 PASSED U/S. 143(3) AND 250 OF THE INCOME TAX ACT, 1961 (HEREIN AFTER REFERRED TO AS THE ACT). ITA NO.1918/MDS/2015 :- 2 -: 2. THE REVENUE HAS RAISED THE FOLLOWING GROUNDS OF APP EAL:- 2.1 THE LD. CIT(A) OUGHT TO HAVE APPRECIATED THAT A S PER THE APEX COURT DECISION RELIED ON ONLY PROVISIONS FOR W ARRANTY ARRIVED AT ON A SCIENTIFIC BASIS IS ALLOWABLE AND N OT ANY LUMPSUM PROVISION (UNCERTAIN LIABILITY) 2.2 THE LD. CIT(A) OUGHT TO HAVE APPRECIATED THAT THE P PROVISION MADE IS NOT SCIENTIFICALLY ARRIVED FIGUR E. 2.3 THE LD. CIT(A) OUGHT TO HAVE APPRECIATED THAT IN ORDER TO APPLY THE DECISION OF THE HONBLE APEX COURT IN THE CASE OF ROTORK CONTROLS, THE ASSESSEE SHOULD HAVE SATISFIED THE IMPORTANT ASPECTS OBSERVED BY THE HONBLE SUPREME COURT VIZ (I) PROVISIONING WHICH RELATES TO PRESENT OBLIGATION. (II) IT ARISES OUT OF OBLIGATING EVENTS. (III) IT INVOLVES OUTFLOW OF RESOURCE AND LASTLY. (IV) IT INVOLVES RELIABLE ESTIMATION OF OBLIGATION. 3. THE BRIEF FACTS OF THE CASE THE ASSESSEE IS IN THE BUSINESS OF DESIGN, MANUFACTURE, SUPPLY AND SUPERVISION OF EREC TION AND COMMISSIONING OF MACHINERY AND EQUIPMENTS FOR MINER ALS INDUSTRY. THE ASSESSEE COMPANY FILED RETURN OF INCOME ON 31. 10.2005 DECLARING TOTAL INCOME OF >16,05,36,225/- AND THE RETURN WAS PROCESSED U/S.143(1) OF THE ACT AND THE CASE WAS REFERRED TO TPO AND LD. TPO COMPLETED THE ASSESSMENT ACCEPTING THE ARMS LENGTH PRICE (ALP) FOR THE INTERNATIONAL TRANSACTIONS ENTERED INTO BY ASSE SSEE COMPANY WITH ITS ASSOCIATED ENTERPRISES. THE LD. ASSESSING OFFI CER PASSED ASSESSMENT U/S.143(3) OF THE ACT ON 31.12.2008 AND DETERMINED THE TOTAL INCOME AT >24,45,93,103/- BY DISALLOWING PRO VISION FOR WARRANTY >7,50,41,484/- AND OTHER DISALLOWANCE. THE LD. AUT HORISED ITA NO.1918/MDS/2015 :- 3 -: REPRESENTATIVE SUBMITTED THAT PROVISION FOR CONTRA CTUAL OBLIGATION REPRESENTS ESTIMATED EXPENSES FOR SITE RECTIFICATIO N COST, PROVISION FOR LIQUIDATED DAMAGES ON ACCOUNT OF DELAY IN DELIVERY AND PERFORMANCE OF THE EQUIPMENT SUPPLIED, AS PER THE TERMS OF CONTRAC T WITH THE CUSTOMER AND THUS THE ENTIRE AMOUNT IS AN ASCERTAI NED LIABILITY TO BE ALLOWED AS DEDUCTION. BUT THE LD. ASSESSING OFFICE R RELIED ON THE DECISION OF APEX COURT IN CIT VS ROTORK CONTROLS INDIA LTD 293 ITR 311 FOR DISALLOWANCE. AGGRIEVED BY THE ORDER, THE ASSE SSEE FILED AN APPEAL BEFORE COMMISSIONER OF INCOME TAX (APPEALS). 4. IN THE APPELLATE PROCEEDINGS, THE LD. COMMISSIONER OF INCOME TAX (APPEALS) CONSIDERED THE SUBMISSIONS AND GROUND S RAISED BY THE ASSESSEE FOR PROVISIONS FOR WARRANTY. THE ASSESSEE HAS MADE PROVISION FOR WARRANTY >7,50,41,484/- IN THE BOOKS OF ACCOUNT S AND THE AO OBJECTED THAT THE PROVISIONS FOR WARRANTY CREATED W ITHOUT ANY SCIENTIFIC REASONS AND DISALLOWED SAME. THE CONTENTION OF TH E ASSESSEE FOR PROVISION BEING ASCERTAINED LIABILITY WEREAS THE REVENUE OBSERVED IT AS CONTINGENT LIABILITY. THE LD. COMMISSIONER OF I NCOME TAX (APPEALS) HAS CONSIDERED THE FINDINGS OF THE ASSESSING OFFICE R AT PAGE 2 AND 3 OF HIS ORDER AND THE SUBMISSIONS OF THE ASSESSEE THAT WARRANTY WAS CREATED ON SCIENTIFIC BASIS AND ALLOWABLE U/S.37(1 ) OF THE ACT. THE LD. AUTHORISED REPRESENTATIVE FURTHER CONTENDED THAT JU RISDICTIONAL HIGH ITA NO.1918/MDS/2015 :- 4 -: COURT FOR THE ASSESSMENT YEAR 2003-04 IN ASSESSEES OWN CASE IN TCA NO.38 OF 2010 DATED 03.06.2013 ALLOWED THE PROVISIO NS FOR WARRANTY AND LD. COMMISSIONER OF INCOME TAX (APPEALS) OBSERV ED AT PARA 4.2 OF HIS ORDER AND ALLOWED THE APPEAL AS UNDER:- 4.1.2. I HAVE CONSIDERED THE ASSESSMENT ORDER OF THE ASSESSING OFFICER, THE CONTENTIONS OF THE ASSESSEE CAREFULLY. THE ISSUE OF PROVISIONS FOR WARRANTY IS A RECURRING ISSUE. THE HON'BLE MADRAS HIGH COURT, BY RELYING ON THE DECISION OF THE APEX COURT (IN THE C ASE OF ROTARK CONTROLS INDIA LTD V. CIT - 314 ITR 62), HAS HELD ISSUE IN FAVOUR OF THE ASSESSEE, VIDE TCA NO.38 OF 2010 DATED 03.06.2013, IN THE ASS ESSEE'S OWN A.Y.2003- 04. THEREFORE, RESPECTFULLY FOLLOWING THE ORDERS OF THE HIGH COURT IN THE ASSESSEE'S OWN CASE, I AM OF THE OPINI ON THAT THE PROVISION FOR WARRANTY IN THE CURRENT ASSESSMEN T YEAR 2005-06 IS ALSO ALLOWABLE. THE ASSESSING OFFICER IS DIRECTED TO ALLOW THE ASSESSEES CLAIM. THE ASSESS EE SUCCEEDS IN ITS APPEALS IN THIS REGARD. AGGRIEVED BY THE ORDER OF COMMISSIONER OF INCOME TA X (APPEALS), THE REVENUE ASSAILED AN APPEAL BEFORE TRIBUNAL. 5. BEFORE US, THE LD. DEPARTMENTAL REPRESENTATIVE ARG UED THE GROUNDS AND THE FINDINGS OF THE ASSESSING OFFICER A T PAGE 3 OF ASSESSMENT ORDER THAT WARRANTY IS PURELY AN CONTING ENT LIABILITY AND RELIED ON THE DECISION OF ROTORK CONTROLS INDIA LTD (SUPRA) W ERE IT WAS HELD THAT PROVISION FOR WARRANTY IS A CONTINGENT L IABILITY AND NOT AN ASCERTAINED LIABILITY. THE ASSESSEE COULD NOT BE E XPLAINED THE CRYSTALLIZED OF LIABILITY AND THERE IS NO JUSTIFIC ATION ON TREATMENT. THE LD. COMMISSIONER OF INCOME TAX (APPEALS) THOUGH CON CURRED WITH THE ITA NO.1918/MDS/2015 :- 5 -: FINDINGS OF THE ASSESSING OFFICER ON THE METHOD AD OPTED DOES NOT HAVE SCIENTIFIC BASIS AND ASSESSEE SHOULD SATISFY AND EXPLAIN WHETHER THE PROVISIONS RELATED TO PRESENT OBLIGATION INVOLV ES OUTFLOW OF RESOURCES AND RELIABLE ESTIMATION OF OBLIGATION BUT ALLOWED THE DEDUCTION AND THE LD. DEPARTMENTAL REPRESENTATIVE P RAYED FOR SET ASIDE OF THE COMMISSIONER OF INCOME TAX (APPEALS) O RDER. 6. NONE APPEARED ON BEHALF OF THE ASSESSEE. 7. WE HEARD THE SUBMISSIONS OF LD. DEPARTMENTAL REPRES ENTATIVE AND THE ONLY DISPUTED ISSUE BEING PROVISION FOR WAR RANTY TAKES A CHARACTERISTIC OF AN ASCERTAINED LIABILITY OR CONTI NGENT LIABILITY. THE ASSESSEE COMPANY HAS PROVIDED IN THE BOOKS OF ACCOU NTS AS IN EARLIER YEARS. IN THE ASSESSMENT PROCEEDINGS, THE ASSESSEE COULD NOT EXPLAIN THE METHODOLOGY AND CALCULATION OF PROVISIONS ON TH E BASIS OF THE SATISFACTORY ASPECTS OF APEX COURT IN THE CASE OF ROTORK CONTROLS INDIA LTD (SUPRA ). THE LD. DEPARTMENTAL REPRESENTATIVE SUBMITTED THAT COMMISSIONER OF INCOME TAX (APPEALS) HAS OVERLOOKED THE FINDINGS OF THE ASSESSING OFFICER WERE A LUMPSUM PROVISION WAS MADE IN THE BOOKS OF ACCOUNT IN THE NATURE OF CONTINGENT LIABIL ITY. FURTHER ON PERUSAL OF THE ASSESSMENT ORDER WE FIND THERE IS N O METHODOLOGY EXPLAINED BY ASSESSING OFFICER BASED ON THE SUBMISS IONS OF THE ASSESSEE ON THE SCIENTIFIC BASIS. EVEN THE LD. COM MISSIONER OF INCOME ITA NO.1918/MDS/2015 :- 6 -: TAX (APPEALS) HAS NOT BROUGHT ON RECORD THE METHODO LOGY OF PROVISION FOR WARRANTY CLAIMS IN THE BOOKS OF ACCOUNTS ON ANY REASONABLE SCIENTIFIC METHOD. CONSIDERING THE APPARENT FACTS, WE ARE OF THE OPINION THAT THE MATTER HAS TO BE RE-EXAMINED ON ME THODOLOGY ADOPTED FOR CREATING PROVISION AND COMPLY OBSERVAT IONS OF APEX COURT. THEREFORE, WE SET ASIDE THE ORDER OF THE COMMISSION ER OF INCOME TAX (APPEALS) AND REMIT THE DISPUTED ISSUE TO THE FILE OF THE ASSESSING OFFICER FOR RE-EXAMINATION AND ASSESSEE SHALL BE P ROVIDED WITH ADEQUATE OPPORTUNITY OF HEARING. 8. IN THE RESULT, THE APPEAL OF THE DEPARTMENT IN ITA NO.1918/MDS/2015 IS PARTLY ALLOWED FOR STATISTICAL PURPOSE. ORDER PRONOUNCED ON TUESDAY, THE 19TH DAY OF A PRIL , 2016, AT CHENNAI. SD/- SD/- ( ) (CHANDRA POOJARI) / ACCOUNTANT MEMBER ( . ! ) (G. PAVAN KUMAR) /JUDICIAL MEMBER / CHENNAI 0 / DATED:19.04.2016 KV 1 ( *',23 43%, / COPY TO: 1 . &' / APPELLANT 3. 5, () / CIT(A) 5. 389 *',' / DR 2. *+&' / RESPONDENT 4. 5, / CIT 6. 9:$ ; / GF