M/s Honey well Electrical Devices and Systems India Ltd, CHENNAI V. Dy CIT Co Cle II (2), CHENNAI

ITA 2334/CHNY/2012

• Counselvise Citation: [2014] 140 COUNSELVISE.COM (IT) 73794 (ITAT-CHENNAI)
• Duration Of Justice: 1 year(s) 2 month(s) 23 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 21-03-2014
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: A
• Next Hearing Date: 25-02-2014
• Assessment Year: 2008-2009
• Appeal Filed On: 28-12-2012
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Keywords: Depreciation; Transfer pricing; International transaction; Rule of consistency
• Section: 143(3); 10B; 6

Judgement Text

, , IN THE INCOME TAX APPELLATE TRIBUNAL , A B ENCH, CHENNAI . , ! ' , # $ BEFORE SHRI A.MOHAN ALANKAMONY ACCOUNTANT MEMBER AND SHRI CHALLA NAGENDRA PRASAD, JUDICIAL MEMBER ./I.T.A.NO. 2334/MDS/2012 ( / ASSESSMENT YEAR : 2008-09) M/S. HONEYWELL ELECTRICAL DEVICES & SYSTEMS INDIA LTD. CRESCNDO 995, B-II AVENUE, ANNA NAGAR, CHENNAI-600 040. VS. THE DEPUTY COMMISSIONER OF INCOME TAX, COMPANY CIRCLE-II(2) M.G.ROAD, NEW BLOCK, 7 TH FLOOR, CHENNAI-600 034 . PAN:AAACM4378E ( /APPELLANT) ( /RESPONDENT) / APPELLANT BY : MS. KARISHMA PHATARPHEKAR, CA /RESPONDENT BY : MR. SHAJI P.JACOB, ADDL. CIT / DATE OF HEARING : 25 TH FEBRUARY, 2014 ! /DATE OF PRONOUNCEMENT : 21 ST MARCH, 2014 % / O R D E R PER CHALLA NAGENDRA PRASAD, JM: THIS APPEAL IS FILED BY THE ASSESSEE AGAINST THE ORDER OF THE DEPUTY COMMISSIONER OF INCOME TAX, COMPANY C IRCLE- II(2), CHENNAI DATED 30.10.2012 FOR THE ASSESSMENT YEAR 2008-09 PASSED UNDER SECTION 143(3) READ WITH SEC TION 144C(13) OF THE ACT ON THE DIRECTIONS OF THE DISPUT E RESOLUTION PANEL. ITA NO.2334/MDS/2012 2 2. GROUND NO.1 OF THE GROUNDS OF APPEAL OF THE ASSE SSEE IS A GENERAL GROUND AGITATING ADDITION OF ` 7,43,00,000/- BASED ON THE PROVISIONS OF CHAPTER X OF THE ACT AND ` 2,44,19,453/- BASED ON THE OTHER PROVISIONS OF THE ACT TO THE AS SESSEES TOTAL INCOME. 3. GROUND NOS.2 TO 7 OF THE GROUNDS OF APPEAL OF TH E ASSESSEE ARE AS UNDER:- ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE A ND IN LAW , THE TRANSFER PRICING OFFICER AND THE ASSE S SING OFFICER UNDER THE DIRECTIONS ISSUED BY HON'BLE DI S PUTE RESOLUTION PANEL ( ' DRP') : 2. ERR E D IN LAW AND IN FACT S BY ARBITRARILY SUB S TITUTING THE SEGMENTAL ANALYSIS PROVIDED BY THE APPELLANT W ITH AN ENTIT Y -WIDE AGGREGATED APPROACH TO TEST THE INTERNATIONAL TRANSACTION S OF THE APPELLANT . 3 E RRED IN LAW AND FACTS IN ADOPTING ENTIT Y LE V EL APPROACH WI THOUT CON S IDERING THE FUNCTION S OF THE APPELLANT W I TH REGARD TO THE MANUFACTURING AND DISTRIBUTION SEGMENTS. FURTHER , FAILED TO FOLLOW THE PRINCIPLE OF CONSISTENCY IN NOT TAKING COGNIZANCE O F THE FACT THAT SEGMENTED APPROACH WAS ACCEPTED IN AY 2005-06 . 4 E RRED I N FACT S IN MAKING ERRONEOUS OBSERVATION B Y PLACING RELIANCE ON THE SEGMENTED FINANCIAL S OF THE PRE V IOU S Y EAR IN REJECTING THE S EGMENTED ACCOUNTS OF THE APPELLANT . 5 ERRED IN FACTS IN IGNORING THE REASON FOR DIFFE RENCE IN PROPORTION OF COMMON EXPENSES ALLOCATED BETWEEN SEGMENTS IN REJECTING THE SEGMENTED ACCOUNT S . 6 ERRED IN MAKING ADJUSTMENT ON UNRELATED THIRD PARTY TRANSACTION S OF THE APPELLANT INSTEAD OF MAKING ADJU S TMENTS TO THE RELATED PART Y TRANSACTIONS ONLY . ITA NO.2334/MDS/2012 3 7 E RRED IN LA W IN REJECTING THE PLEA FOR USE OF MULTIPL E Y E AR DAT A A S S PECIFIED IN PRO V ISO T O RULE 10 B( 4 ) O F THE INCOME TAX RULES, 1962 WITHOUT ASSIGNING PROPER REASON S AND JUSTIFICATION . 4. COUNSEL FOR THE ASSESSEE SUBMITS THAT ASSESSEE I N ITS TP STUDY HAD FOLLOWED TRANSACTION BY TRANSACTION A PPROACH FOR BENCHMARKING ITS TRANSACTION OF SALES TO ITS AE AND HAD PROVIDED SEGMENTAL DETAILS TO THE TRANSFER PRICING OFFICER. THE TRANSFER PRICING OFFICER REJECTED THE SEGMENTAL DET AILS PROVIDED BY THE ASSESSEE AND FOLLOWED AN ENTITY LEV EL BENCHMARKING APPROACH. COUNSEL FOR THE ASSESSEE SUB MITS THAT THE TRIBUNAL HAS UPHELD THE ASSESSEES APPROAC H AND DELETED THE TRANSFER PRICING ADDITION IN THE ASSESS MENT YEAR 2007-08 BY ORDER DATED 12.12.2013 IN ITA NO.2152/MDS/2011 BY OBSERVING THAT SEGMENTAL DETAIL S PROVIDED BY THE ASSESSEE WHICH IS ACCEPTED BY THE DEPARTMENT FOR COMPUTATION OF SECTION 10B BENEFITS CANNOT BE IGNORED BY THE TRANSFER PRICING OFFICER. ONCE TH E SEGMENTAL DETAILS ARE ACCEPTED, AS MARGIN OF THE COMPARABLES IS LOWER THAN THAT OF THE ASSESSEES CO NTRACT MANUFACTURING SEGMENT, TRANSFER PRICING ADDITION IS DELETED. THE COUNSEL SUBMITS THAT NET COST PLUS MARGIN OF TH E ITA NO.2334/MDS/2012 4 CONTRACTUAL SEGMENT OF THE ASSESSEE WAS SHOWN AT 10 .77% WHEREAS COMPARABLES MARGIN WAS ONLY 9.55% AND THERE FORE ITS CONTRACT MANUFACTURING / EXPORT SALES IS AT AR MS LENGTH PRICE. SHE SUBMITS THAT TRANSFER PRICING OFFICER WR ONGLY COMPARED 9.60% I.E. COMPARABLES MARGIN WITH ENTITY LEVEL MARGIN OF 2.98% INSTEAD OF AE SEGMENT MARGIN OF 10. 77% AND MADE ADDITION OF ` 7.43 CRORES WHICH IS NOT AT ALL JUSTIFIED. THEREFORE, COUNSEL SUBMITS THAT THE ISSU E IN GROUNDS OF APPEAL NOS.2 TO 7 IS SQUARELY COVERED BY THE DE CISION OF THE CO-ORDINATE BENCH OF THIS TRIBUNAL IN ASSESSEE S OWN CASE FOR THE ASSESSMENT YEAR 2007-08 IN ITA NO.2152/MDS /2011 DATED 12.12.2013. 5. DEPARTMENTAL REPRESENTATIVE VEHEMENTLY SUPPORTED THE ORDER OF THE DRP AND THE ASSESSING OFFICER IN MAKIN G ADDITION OF ` 7.43 CRORES AS TRANSFER PRICING ADJUSTMENT TO THE TOTAL INCOME OF THE ASSESSEE. 6. HEARD BOTH SIDES. PERUSED ORDERS OF LOWER AUTHOR ITIES AND THE DECISION OF THIS TRIBUNAL FOR THE ASSESSMEN T YEAR ITA NO.2334/MDS/2012 5 2007-08. SIMILAR ISSUE CAME UP BEFORE THE TRIBUNAL FOR THE PRECEDING ASSESSMENT YEAR AND THE TRIBUNAL IN PARAS 17 TO 21 HELD AS UNDER:- 17. HEARD BOTH SIDES. PERUSED THE ORDERS OF LOWER AUTHORITIES AND THE CASE LAW RELIED ON. THE REASON GIVEN BY THE TRANSFER PRICING OFFICER AND DRP FOR NOT ACC EPTING THE SEGMENT RESULTS ARE THAT THE ASSESSEE HAS NOT SHOWN THE SAME IN THE AUDITED FINANCIAL ACCOUNTS AND THE SEGMENT REPORTING WAS DONE ONLY FOR TRANSFER PRICIN G PURPOSES. THEY HAVE ALSO STATED THAT ALLOCATION OF EXPENSES BETWEEN THE CONTRACT MANUFACTURING SEGMENT AND NON AE LOCAL/DOMESTIC SEGMENTS ARE ABNORMAL. IN SO FAR AS THE REASON THAT THE ASSESSEE HAS NOT SHOWN T HE SEGMENTAL REPORT/RESULTS IN AUDITED FINANCIAL ACCOU NTS AND THEREFORE, SUCH SEGMENTAL RESULTS CANNOT BE ACCEPTE D FOR ALP HAS NOT BEEN ACCEPTED BY THIS TRIBUNAL IN THE C ASE OF 3I INFOTEC LTD. VS. ITO IN ITA NO.21/MDS/2013 VIDE ORDER DATED 7.5.2013. THIS TRIBUNAL IN THE ABOVE CITED CA SE HELD THAT EVEN THOUGH SEGMENTAL REPORTS ARE NOT SHOW IN AUDITED FINANCIAL ACCOUNTS, THEY HAVE TO BE ACCEPTE D. 18. THIS TRIBUNAL FURTHER HELD, IN VIEW OF THE DECI SION OF THE DELHI BENCH OF THE TRIBUNAL IN THE CASE OF D CIT VS. STRATEX NET WORKS (INDIA) PVT.LTD., (133 TTJ 365), THAT RATE OF PROFIT ACHIEVED IN OTHER COMPARABLE CASES ARE TO BE COMPARED WITH PROFIT LEVEL DECLARED BY THE ASSESSEE IN RESPECT OF ITS AE TRANSACTIONS AFTER EXCLUDING DOME STIC TRANSACTIONS. IN THE CASE OF 3I INFOTECH LTD., TH IS TRIBUNAL FOUND THAT ON COMPARING THE PROFIT ACHIEVED IN OTHE R COMPARABLE CASES TO THE PROFIT LEVEL DECLARED BY TH E ASSESSEE IN RESPECT OF THE AE TRANSACTIONS, PROFIT LEVEL DECLARED BY THE ASSESSEE WAS MORE THAN THE PROFIT L EVEL IN RESPECT OF COMPARABLE CASES FOUND BY THE TRANSFER P RICING OFFICER. HERE, IN CASE ON HAND, THE NET COST PLUS MARGIN REPORTED BY THE ASSESSEE IN RESPECT OF ITS CONTRACT MANUFACTURING SEGMENT STOOD AT 20.89% AND WHEREAS THE NET MARGIN OF THE EXTERNAL COMPARABLES SELECTED BY THE TRANSFER PRICING OFFICER STOOD AT 8.87%. THE DRP ON EXAMINING THE SEGMENTAL RESULTS PREPARED BY THE ASSESSEE OBSERVED IN PARA 7.2 OF THE ORDER AS UNDE R:- ITA NO.2334/MDS/2012 6 IT IS VERY PERTINENT TO OBSERVE HERE THAT THE TAX PAYER GENERATED REVENUES OF ` 22.35 CRORES IN ITS CONTRACT MANUFACTURING SEGMENT WITH EMPLOYEE COST OF ` 1.88 CRORES AND DEPRECIATION COST OF ` 18.50 CRORES, WHEREAS IT GENERATED OF ` 43.18 CRORES IN ITS LOCAL MANUFACTURING SEGMENT WITH EMPLOYEE COST OF ` 5.24 CRORES AND DEPRECIATION COST OF ` 1.15 CRORES. FURTHER, THE TAXPAYER COULD NOT SUBSTANTIATE HOW OTHER EXPENSES OF ` 0.59 CRORES AND ` 24.01 CRORES WERE ALLOCATED TO CONTRACT MANUFACTURING SEGMENT AND LOCAL MANUFACTURING SEGME NT RESPECTIVELY. FURTHER, THE LOW EMPLOYEE COST COMBIN E WITH HIGHER DEPRECIATION IN THE CONTRACT MANUFACTURING S EGMENT INDICATES THAT THE TAXPAYER DID NOT APPORTION THE E MPLOYEE COST TO CONTRACT MANUFACTURING SEGMENT APPROPRIATEL Y. THUS, IN THESE CIRCUMSTANCES, THE TRANSFER PRICING OFFICER HAS TO REJECT THE SEGMENTAL RESULTS PREPARED BY THE TAXPAYER. 19. AS COULD BE SEEN FROM THE ABOVE OBSERVATIONS O F THE DRP , THE TRANSFER PRICING OFFICER HAS REJECTED THE SEGMENTAL RESULTS PREPARED BY THE ASSESSEE, AS THE ASSESSEE COULD NOT SUBSTANTIATE AS TO HOW OTHER EXPENSES WERE ALLOCATED TO CONTRACT MANUFACTURING SEGMENT AND LOCAL MANUFACTURING SEGMENT. IT IS ALSO THE OBSERVATION OF THE DRP THAT LOW EMPLOYEE COST COMBI NED WITH HIGHER DEPRECIATION IN CONTRACT MANUFACTURING SEGMENT INDICATES THAT THE ASSESSEE DID NOT APPORTI ON THE EMPLOYEE COST TO CONTRACT MANUFACTURING SEGMENT APPROPRIATELY. IN THIS REGARD, WE FIND THAT THE FIG URES ADOPTED BY THE TRANSFER PRICING OFFICER / DRP IN TH EIR ORDERS IN ANALYZING THESE FACTS AND COMING TO THE DECISION/CONCLUSION TO REJECT THE SEGMENTAL RESULT S OF THE ASSESSEE IS WRONG. FOR EXAMPLE IN THE ABOVE EXTRAC TED PARA FROM DRP ORDER THE EMPLOYEE COST WAS TAKEN AT 1.88 CRORES AS AGAINST THE CORRECT FIGURE OF 2.10 C RORES. SIMILARLY, OTHER EXPENSES AND DEPRECIATION WAS TAK EN AT 0.59 CRORES AND 18.50 CRORES AS AGAINST THE CORRECT FIGURES OF ` 1.88 CRORES AND 0.58 CRORES RESPECTIVELY. THE TRANSFER PRICING OFFICER IN HIS ORDER AT PAGE 9 H AS TAKEN THE FIGURES OF MATERIAL COST, EMPLOYEE COST AND OTH ER EXPENSES AT ` 2.10 CRORES, ` 1.88 CRORES AND ` 0.59 CRORES AS AGAINST THE CORRECT FIGURES OF ` 1.39 CRORES, ` 2.10 CRORES AND ` 1.88 CRORES RESPECTIVELY FOR ANALYSIS. THE TRANSFER PRICING OFFICER AND DRP HAVE TAKEN WRONG FIGURES IN RESPECT OF THESE EXPENSES IN ANALYZING A ND REJECTING THE SEGMENTAL RESULTS. THE FIGURES TAKEN BY THE ITA NO.2334/MDS/2012 7 TRANSFER PRICING OFFICER / DRP IN RESPECT OF MATERI AL COST, EMPLOYEE COST, OTHER EXPENSES, DEPRECIATION ARE NOT MATCHING WITH THE FIGURES GIVEN BY THE ASSESSEE IN SEGMENTAL RESULTS APPEARING AT PAGE 138 OF THE PAPE R BOOK SUBMITTED BEFORE US. APPARENTLY, THE TRANSFER PRICING OFFICER / DRP HAVE ADOPTED WRONG FIGURES AND ANALY ZED WITH THESE FIGURES AND CAME TO A CONCLUSION THAT APPORTIONMENT OF EXPENSES WAS NOT PROPERLY DONE AND AT THE SAME TIME, WE FIND THAT THE ASSESSEE BY LETTER DATED 11.10.2010 SUBMITTED BEFORE THE TRANSFER PRICING OF FICER IN ANNEXURE A WHERE SEGMENTAL PROFITABILITY WAS S HOWN AND IT HAS MENTIONED IN THE NOTE THAT EMPLOYEE COST , OTHER EXPENSES AND DEPRECIATION INCLUDES DIRECT FACTORY C OST WHICH IS ALLOCATED BETWEEN CONTRACT MANUFACTURING AND LOCAL MANUFACTURING SEGMENTS WERE BASED ON THE RESPECTIVE SALES OF THE SEGMENTS. 20. IT IS NOT IN DISPUTE THAT TRANSFER PRICING OF FICER HAS ACCEPTED THE SEGMENTAL RESULTS OF THE ASSESSEE IN THE ASSESSMENT YEARS 2005-06 AND 2006-07 ON THE CONTRAC T MANUFACTURING TRANSACTIONS WITH THE AE FOR ARRIVING AT ALP WHILE COMPUTING THE RELIEF UNDER SECTION 10A OF THE ACT. THE TRANSFER PRICING OFFICER/ DRP HAS NOT GIVEN ANY REASON AS TO WHY SEGMENTAL RESULTS SHALL NOT BE CONSIDERED FOR DETERMINING ALP FOR TRANSACTIONS WIT H AE HAVING ACCEPTED VERY SAME SEGMENTAL RESULTS OF THE ASSESSEE FOR THE PURPOSE OF COMPUTING DEDUCTION UND ER SECTION 10B OF THE ACT. IN THE ABOVE FACTS AND CIRCUMSTANCES, WE DO NOT FIND ANY VALID REASON FOR NOT ACCEPTING THE SEGMENTAL REPORTS IN DETERMINING THE ALP ON THE AE SALES FOR THIS ASSESSMENT YEAR I.E. 2007 -08 HAVING ACCEPTED THE SEGMENTATION APPROACH FOR THE E ARLIER ASSESSMENT YEARS I.E. 2005-06 AND 2006-07 AND ESPECIALLY WHEN THERE IS NO CHANGE IN THE FACTS AND CIRCUMSTANCES OF THE CASE IN THE CURRENT YEAR. 21. WE ALSO FIND THAT THE TRANSFER PRICING OFFICER / DRPS APPROACH IN COMPARING EXTERNAL COMPARABLES MARGIN OF 8.87% WITH ENTITY LEVEL MARGIN OF THE AS SESSEE I.E. 1.08% IS WRONG, SINCE SEGMENTAL RESULTS ARE AV AILABLE AND AS PER THIS THE MARGIN IN CONTRACT MANUFACTURIN G SEGMENT IS 20.89% AND THIS MARGIN SHOULD HAVE BEEN COMPARED WITH THE COMPARABLE MARGIN OF 8.87% IN DETERMINING THE UPWARD ADJUSTMENT IN AE SALES. IN O UR VIEW SINCE THE NET COST PLUS MARGIN OF THE ASSESSEE IN CONTRACT MANUFACTURING SEGMENT IS 20.89% WHICH IS M ORE ITA NO.2334/MDS/2012 8 THAN THE OPERATING PROFIT OF 8.87% ON THE EXTERNAL COMPARABLES OF THE TRANSFER PRICING OFFICER, THERE IS NO NEED FOR ANY UPWARD ADJUSTMENT TO BE MADE ON THE AE SALES OF THE ASSESSEE. HENCE, WE DIRECT THE ASSESSI NG OFFICER TO DELETE THE ADDITION OF ` 7.18 CRORES MADE TOWARDS UPWARD ADJUSTMENT OF PURCHASE PRICE ON DETERMINATION OF ALP WITH ASSOCIATED ENTERPRISE. 7. THIS TRIBUNAL HELD THAT THE TRANSFER PRICING OFF ICER HAS ACCEPTED THE SEGMENTAL RESULTS IN ASSESSMENT YEAR 2 005-06 AND 2006-07 ON THE CONTRACT MANUFACTURING TRANSACTI ONS WITH AE FOR ARRIVING AT ALP WHILE COMPUTING RELIEF UNDER SECTION 10B OF THE ACT. THE TRANSFER PRICING OFFICER / DRP HAS NOT GIVEN ANY VALID REASONS AS TO WHY SEGMENTAL RESULTS SHALL NOT BE CONSIDERED FOR DETERMINING ALP OF TRANSACTIONS W ITH AE HAVING ACCEPTED VERY SAME SEGMENTAL RESULTS OF THE ASSESSEE FOR THE PURPOSE OF COMPUTING DEDUCTION UND ER SECTION 10B OF THE ACT. THE TRIBUNAL CAME TO THE C ONCLUSION THAT THERE IS NO VALID REASON FOR NOT ACCEPTING THE SEGMENTAL REPORTS IN DETERMINING ALP ON THE AE SALES FOR THE ASSESSMENT YEAR 2007-08. THE TRIBUNAL FURTHER OBSER VED THAT TRANSFER PRICING OFFICER/ DRP APPROACH IN COMPARING EXTERNAL COMPARABLES MARGIN WITH ENTITY LEVEL MARGIN OF THE ASSESSEE IS WRONG SINCE SEGMENTAL RESULTS ARE AVAILABLE AND AS PER THE ITA NO.2334/MDS/2012 9 SEGMENTAL RESULTS THE MARGIN IN CONTRACT MANUFACTUR ING SEGMENT WAS AT 20.89% AND THIS MARGIN SHOULD HAVE BEEN COMPARED WITH THE MARGIN OF EXTERNAL COMPARABLES W HICH STOOD AT 8.87% INSTEAD OF THE ENTITY LEVEL MARGIN 1 .08% SINCE ENTITY SALES CONSISTS OF BOTH CONTRACT MANUFACTURIN G SEGMENT WHICH MEANT FOR EXPORT DONE AND LOCAL SEGMENT WHICH IS ENGAGED IN DOMESTIC SALES. IN THE CURRENT YEAR ALSO I.E. ASSESSMENT YEAR 2008-09, THE NET COST PLUS MARGIN O F THE ASSESSEE IN CONTRACT MANUFACTURING SEGMENT IS 10.77 % WHICH IS MORE THAN THE NET COST PLUS MARGIN OF 9.55% ON THE EXTERNAL COMPARABLES OF THE TRANSFER PRICING OFFICE R AND THEREFORE THERE IS NO NEED FOR UPWARD ADJUSTMENT TO BE MADE ON THE AE SALES OF THE ASSESSE. THEREFORE, WE DIREC T THE ASSESSING OFFICER TO DELETE THE ADDITION OF ` 7.43 CRORES MADE TOWARDS UPWARD ADJUSTMENT OF PURCHASE PRICE ON DETERMINATION OF ALP WITH AE. 8. THE NEXT GROUND OF APPEAL I.E. GROUND NO.8 IS WI TH REGARD TO PROVISION FOR DISCOUNT. AT THE TIME OF HE ARING, COUNSEL FOR THE ASSESSEE CONCEDES THAT THIS ISSUE I S DECIDED ITA NO.2334/MDS/2012 10 AGAINST THE ASSESSEE BY THE CO-ORDINATE BENCH OF TH IS TRIBUNAL IN ASSESSEES OWN CASE FOR THE ASSESSMENT YEAR 2007-08 AND 2005-06. 9. THE TRIBUNAL IN PARAS 22 TO 25 OF THE ORDER IN I TA NO.2152/MDS/2011 DATED 12.12.2013 CONSIDERED THIS ISSUE OBSERVING AS UNDER:- 22. GROUND NO.10 OF THE GROUNDS OF APPEAL IS WITH REGARD TO DISALLOWANCE OF PROVISION FOR DISCOUNT. A T THE TIME OF HEARING, LEARNED COUNSEL FOR THE ASSESSEE CONCEDES THAT THIS ISSUE IS DECIDED AGAINST THE ASS ESSEE BY THE CO-ORDINATE BENCH OF THIS TRIBUNAL IN THE ASSESSEES OWN CASE FOR THE ASSESSMENT YEAR 2005-06 IN ITA NO.1925/MDS/2010 DATED 30.06.2011. THE COUNSEL FURTHER SUBMITS THAT THIS TRIBUNAL SUSTAINE D THE DISALLOWANCE OF PROVISION FOR DISCOUNT CLAIMED AS DEDUCTION BY THE ASSESSEE HOLDING THAT IT IS UNASCERTAINED AND CONTINGENT EXPENSES. HOWEVER, THE COUNSEL SUBMITS THAT AN ADDITIONAL GROUND WAS PLACE D BEFORE THE DRP SUBMITTING THAT THE ASSESSEE DURING THE ASSESSMENT YEAR 2007-08 HAD ACTUALLY PASSED ON ` 2,73,03,455/- AS DISCOUNTS TO THE CUSTOMERS AND SUC H DISCOUNT WHICH WAS PASSED ON TO THE CUSTOMERS SHOUL D BE ALLOWED AS DEDUCTION. THE COUNSEL SUBMITS THAT D RP HAS NOT GIVEN ANY FINDING ON SUCH ADDITIONAL GROUND . THE COUNSEL PLACES COPY OF ASSESSMENT ORDER FOR THE ASSESSMENT YEAR 2009-10 DATED 13.05.2013 PASSED UNDER SECTION 143(3) READ WITH SECTION 144C(3) AND REFERRING TO PARA 3.4 OF THE ORDER SUBMITS THAT THE ASSESSING OFFICER ALLOWED THE PROVISION ON DISCOUNT S ACTUALLY PASSED ON TO THE CUSTOMERS DURING THE ASSESSMENT YEAR 2009-10. THEREFORE, HE PLEADS THAT A DIRECTION BE GIVEN TO ASSESSING OFFICER TO ALLOW TH E ACTUAL DISCOUNTS OF ` 2,73,03,455/-PASSED ON TO THE CUSTOMERS AS DEDUCTION FOR THE ASSESSMENT YEAR 2007-08 AS WAS ALLOWED IN THE ASSESSMENT YEAR 2009-10. 23. THE DEPARTMENTAL REPRESENTATIVE HAS NO SERIOUS OBJECTION IN DIRECTING THE ASSESSING OFFICER TO VER IFY AND ITA NO.2334/MDS/2012 11 ALLOW THE CLAIM OF THE ASSESSEE IN RESPECT OF ACTUA L DISCOUNT PASSED ON TO THE CUSTOMERS AS DEDUCTION, A S SIMILAR CLAIM WAS ALLOWED BY THE ASSESSING OFFICER IN THE ASSESSMENT YEAR 2009-10. 24. HEARD BOTH SIDES. PERUSED THE ORDERS OF THE LOW ER AUTHORITIES. AS FAR AS THE CLAIM OF THE ASSESSEE TH AT PROVISION FOR DISCOUNT SHOULD BE ALLOWED AS DEDUCTI ON IS CONCERNED, THE ISSUE IS DECIDED AGAINST THE ASSESSE E BY THE CO-ORDINATE BENCH OF THIS TRIBUNAL IN THE ASSES SEES OWN CASE FOR THE ASSESSMENT YEAR 2005-06, WHEREIN T HE TRIBUNAL HELD AS UNDER:- 6. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS AND HAVE FOUND THAT THE ASSESSEE CAN CLAIM SUCH A PROVISION ONLY IF IT SATISFIES THE FOLLOWING CONDITIONS: AN ENTERPRISE HAS A PRESENT OBLIGATION AS A RESUL T OF A PAST EVENT; IT IS PROBABLE THAT AN OUTFLOW OF RESOURCES WILL BE REQUIRED TO SETTLE THE OBLIGATION; AND A RELIABLE ESTIMATE CAN BE MADE OF THE AMOUNT OF THE OBLIGATION. 7. IN OUR OPINION, THESE ARE GENERAL OBSERVATION S MADE BY THE HON'BLE SUPREME COURT IN THE CASE OF HONDA S IEL POWER PRODUCTS LTD (SUPRA). IF THE DECISION IS READ IN TOTO, THESE CONDITIONS COULD BE GIVEN EFFECTIVE MEANING. 8. IN THE CASE OF METAL BOX COMPANY OF INDIA LT D (SUPRA), THE HON'BLE SUPREME COURT HAS HELD AS UNDE R: CONTINGENT LIABILITIES DISCOUNTED AND VALUED AS NE CESSARY, CAN BE TAKEN INTO ACCOUNT AS TRADING EXPENSES IF TH EY ARE SUFFICIENTLY CERTAIN TO BE CAPABLE OF VALUATION AND IF PROFITS CANNOT BE PROPERLY ESTIMATED WITHOUT TAKING THEM IN TO CONSIDERATION. AN ESTIMATED LIABILITY UNDER A SCHEM E OF GRATUITY, IF PROPERLY ASCERTAINABLE AND ITS PRESENT VALUE IS DISCOUNTED, IS DEDUCTIBLE FROM THE GROSS RECEIPTS W HILE PREPARING THE PROFIT & LOSS ACCOUNT. THIS IS RECOGN IZED IN TRADE CIRCLES AND THERE IS NOTHING IN THE BONUS ACT WHICH PROHIBITS SUCH A PRACTICE. SUCH A PROVISION PROVIDE S FOR AKNOWN LIABILITY OF WHICH THE AMOUNT CAN BE DETERMI NED ITA NO.2334/MDS/2012 12 WITH SUBSTANTIAL ACCURACY. IT CANNOT, THEREFORE, BE TERMED A RESERVE. THEREFORE, THE ESTIMATED LIABILITY FOR T HE YEAR ON ACCOUNT OF A SCHEME OF GRATUITY SHOULD BE ALLOWED T O BE DEDUCTED FROM THE GROSS PROFITS. THE ALLOWANCE IS N OT RESTRICTED TO THE ACTUAL PAYMENT OF GRATUITY DURING THE YEAR. 9. IN THE CASE OF DY. CIT VS BEARDSELL LTD (SUP RA), HON'BLE JURISDICTIONAL HIGH COURT HAS HELD AS UNDER : HELD , THAT IF A DEBT HAD BECOME IRRECOVERABLE THE SAME COULD BE WRITTEN OFF AND DEDUCTED FROM THE PROFIT O F THE BUSINESS. A DEBT, THE RECOVERY OF WHICH WAS DOUBTFU L COULD NOT BE TERMED TO BE AN ASCERTAINED LIABILITY AS MEN TIONED UNDER SECTION 115J OF THE ACT AND COULD NOT BE EXCL UDED FROM THE BOOK PROFITS. ACCORDINGLY, THE CONCLUSION OF THE TRIBUNAL IN DIRECTING THE ASSESSING OFFICER TO RECT IFY THE ALLEGED MISTAKE OF INCLUSION OF THE UNASCERTAINED L IABILITY IN THE BOOK PROFIT COULD NOT BE UPHELD. 10. THUS, IT BECOMES EVIDENTIALLY CLEAR THAT WHEN THE LIABILITY IS ASCERTAINED AND NOT QUANTIFIABLE DURIN G THE YEAR AND IS SIMPLY A CONTINGENT BASED ON ESTIMATES, THE SAME CANNOT BE ALLOWED AS DEDUCTION. IN THE GIVEN CASE, THE ASSESSEES VERSION, AS PUT FORTH IN PARA 6.4 OF THE APPELLATE ORDER, CLEARLY STATES THAT THE ONLY REASO N FOR CREATING A PROVISION AND NOT CHARGING THE SAME AS A N EXPENSES IS BECAUSE OF THE FACT THAT THE EXACT QUANTIFICATION COULD NOT BE UNDERTAKEN FOR THE VARI OUS REASONS. IN OUR OPINION, THE BASIS FOR THE PROVISIO N IS SIMPLY ADHOC AND ARBITRARY. IT DEPENDS ON THE FACTS OF EACH AND EVERY CASE TO COME TO A CONCLUSION AS TO WHETHE R THE LIABILITY IS ASCERTAINED OR UNASCERTAINED ONE AND I T CANNOT BE GENERALISED. THE DISCOUNTS GIVEN TO MEET OUT A PARTICULAR TARGET TO THE CHANNEL PARTNERS AND FURTH ER DISCOUNTS GIVEN TO THE CUSTOMERS ARE NOT SPECIFICAL LY SPECIFIED AND NOBODY KNOWS AS TO WHAT WOULD BE THE EXACT POSITION WHEN TRANSACTIONS TAKE PLACE. THERE IS NO PAST HISTORY OF THIS ASSESSEE. THEREFORE, IN THESE CIRCUMSTANCES, WE ARE UNABLE TO ACCEPT THE VERSION OF THE ASSESSEE. WE, THEREFORE, SET ASIDE THE FINDINGS OF THE LD. ITA NO.2334/MDS/2012 13 CIT(A) AND REVERSE THE SAME. THE GROUNDS RAISED BY THE REVENUE, IN THIS REGARD, ARE ALLOWED. 25. THE FACTS AND CIRCUMSTANCES BEING SIMILAR IN TH E CURRENT ASSESSMENT YEAR ALSO, RESPECTFULLY FOLLOWIN G THE SAID DECISION, WE REJECT THE GROUND OF APPEAL OF TH E ASSESSEE ON THIS ISSUE. HOWEVER, IN RESPECT OF THE ALTERNATIVE CLAIM OF THE ASSESSEE THAT DEDUCTION FO R DISCOUNT ACTUALLY PASSED ON TO THE CUSTOMERS HAS TO BE ALLOWED AS DEDUCTION, WE SEE THAT THE ASSESSING OFF ICER IN SIMILAR CIRCUMSTANCES, ALLOWED THE CLAIM OF THE ASS ESSEE FOR THE ASSESSMENT YEAR 2009-10. KEEPING IN VIEW OF THE SAME, WE DIRECT THE ASSESSING OFFICER TO GRANT DEDU CTION FOR THE DISCOUNT ACTUALLY PASSED ON TO THE CUSTOMER S DURING THIS ASSESSMENT YEAR AFTER VERIFICATION OF T HE CLAIM OF THE ASSESSEE. THE ASSESSEE SHALL PROVIDE THE DET AILS OF DISCOUNTS ACTUALLY PASSED ON TO THE CUSTOMERS DURIN G THIS ASSESSMENT YEAR AND THE SAME SHALL BE VERIFIED BY THE ASSESSING OFFICER AND DECIDE ACCORDINGLY AFTER PROV IDING OPPORTUNITY TO THE ASSESSEE. 10. FOLLOWING THE ABOVE ORDER OF THE CO-ORDINATE BE NCH OF THIS TRIBUNAL, WE DECIDE THIS ISSUE AGAINST THE ASS ESSEE. HOWEVER, COUNSEL SUBMITS THAT ASSESSEE HAS REVERSED EXCESS PROVISION AMOUNTING TO ` 37,30,788/- WHICH WAS DISALLOWED IN EARLIER YEAR. THEREFORE, SHE SUBMITS THAT AS THE PROVISION WAS DISALLOWED IN EARLIER YEAR, REVERSAL MADE DURING THIS ASSESSMENT YEAR OUGHT TO BE ALLOWED AS DEDUCT ION WHILE COMPUTING TOTAL INCOME OF THE YEAR. WE DIRECT THE A SSESSING OFFICER TO VERIFY THE CLAIM OF THE ASSESSEE AND DEC IDE THE ISSUE IN ACCORDANCE WITH LAW. ITA NO.2334/MDS/2012 14 11. GROUNDS OF APPEAL NO.9 IS IN RESPECT OF RECOM PUTATION OF PROFITS OF CONTRACT MANUFACTURING UNIT BY ALLOCA TING EXPENSES TO THE CONTRACT MANUFACTURING UNIT ON THE BASIS OF ARMS LENGTH SALES DETERMINED BY TRANSFER PRICING OFFICER. SINCE WE HAVE DELETED THE UPWARD ADJUSTMENT OF ` 7.43 CRORES MADE TOWARDS ALP OF AE SALES, QUESTION OF AL LOCATION OF EXPENSES TO CONTRACT MANUFACTURING UNIT ON THE B ASIS OF ALP SALES DOES NOT ARISE AND THIS GROUND BECOMES INFRUCTUOUS. THUS, GROUNDS OF APPEAL OF THE ASSESSE E ON THIS ISSUE IS DISMISSED AS INFRUCTUOUS. 12. THE LAST ISSUE IN THE GROUNDS OF APPEAL OF THE ASSESSEE IS THAT ASSESSING OFFICER AND DRP ERRED IN REDUCING PERSONAL EXPENSES INCURRED IN FOREIGN CURRENCY FOR THE PURPO SE OF TRAINING AND MARKETING / BUSINESS PROMOTION FROM EX PORT TURNOVER ON THE ASSUMPTION THAT THE SAID EXPENSES W ERE INCURRED IN CONNECTION WITH RENDERING OF TECHNICAL SERVICES OUTSIDE INDIA. ITA NO.2334/MDS/2012 15 13. COUNSEL FOR THE ASSESSEE SUBMITS THAT THIS ISSU E IS COVERED IN FAVOUR OF THE ASSESSEE BY THE ORDER OF T HIS TRIBUNAL IN ASSESSEES OWN CASE FOR THE ASSESSMENT YEAR 200 7-08 IN ITA NO.2152/MDS/2011 DATED 12.12.2013. 14. THE CO-ORDINATE BENCH OF THIS TRIBUNAL IN PARA 28 OF THE ABOVE ORDER DECIDED THE ISSUE OBSERVING AS UNDER:- 28. THE LAST ISSUE IN THE GROUNDS OF APPEAL OF THE ASSESSEE IS WITH REGARD TO EXCLUSION OF TRAVELLING EXPENSES INCURRED IN FOREIGN CURRENCY FROM EXPORT TURNOVER AND INCLUDED IN TOTAL TURNOVER FOR COMPUTI NG DEDUCTION UNDER SECTION 10A OF THE ACT. SIMILAR IS SUE HAS BEEN DECIDED IN ASSESSEES OWN CASE FOR THE ASSESSMENT YEAR 2005-06 BY THE CO-ORDINATE BENCH O F THIS TRIBUNAL IN ITA NO.1925/MDS/2010, WHEREIN THE TRIBUNAL FOLLOWING THE SPECIAL BENCH DECISION OF CH ENNAI BENCH IN THE CASE OF SAK SOFT LTD. 313 ITR (TRIB) 353(CHENNAI)(SB) HELD THAT SUCH TRAVEL EXPENSES INCURRED IN FOREIGN CURRENCY HAVE TO BE EXCLUDED BO TH FROM EXPORT TURNOVER AS WELL AS FROM TOTAL TURNOVE R FOR THE PURPOSE OF COMPUTING RELIEF UNDER SECTION 10A O F THE ACT. RESPECTFULLY FOLLOWING THE DECISION OF THE SPE CIAL BENCH IN THE CASE OF SAK SOFT LTD. (SUPRA), WE DIRE CT THE ASSESSING OFFICER TO EXCLUDE THE TRAVEL EXPENSES INCURRED IN FOREIGN EXCHANGE FROM EXPORT TURNOVER A S WELL AS TOTAL TURNOVER FOR THE PURPOSE OF COMPUTING RELI EF UNDER SECTION 10A OF THE ACT. 15. RESPECTFULLY FOLLOWING THE ABOVE ORDER, WE DIRE CT THE ASSESSING OFFICER TO EXCLUDE TRAVELLING EXPENSES IN CURRED FOR ITA NO.2334/MDS/2012 16 FOREIGN EXCHANGE FROM EXPORT TURNOVER AS WELL AS TO TAL TURNOVER FOR THE PURPOSE OF COMPUTING RELIEF UNDER SECTION 10B OF THE ACT. 16. IN THE RESULT, APPEAL OF THE ASSESSEE IS PARTLY ALLOWED. ORDER PRONOUNCED IN THE OPEN COURT ON FRIDAY, THE 21 ST DAY OF MARCH, 2014 AT CHENNAI. SD/- SD/- (A.MOHAN ALANKAMONY) (CHALLA NAGEN DRA PRASAD) ACCOUNTANT MEMBER JUDI CIAL MEMBER CHENNAI, DATED THE 21 ST MARCH, 2014. SOMU COPY TO: (1) APPELLANT (4) CIT(A) (2) RESPONDENT (5) D.R (3) CIT (6) G.F.