Ford India (p) Ltd, CHENNAI V. Dy CIT LTU, CHENNAI

ITA 2344/CHNY/2012

• Counselvise Citation: [2017] 128 COUNSELVISE.COM (IT) 4651 (ITAT-CHENNAI)
• Duration Of Justice: 4 year(s) 4 month(s) 12 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 12-05-2017
• Appeal Filed By: Assessee
• Bench Allotted: D
• Next Hearing Date: 28-02-2017
• Assessment Year: 2005-2006
• Appeal Filed On: 31-12-2012
• Court: TRIBUNAL
• Department Lawyers: PATHLAVATH PEERIYA
• Assessee Lawyers: ARVIND SONDE
• Keywords: Depreciation; Transfer pricing; Rectification of order; International transaction; Wholly owned subsidiary; Unabsorbed depreciation
• Section: 143(3); 145

Judgement Text

, , IN THE INCOME TAX APPELLATE TRIBUNAL D BENCH: CHENNAI . . . , '.. $ , ) BEFORE SHRI N.R.S. GANESAN, JUDICIAL MEMBER AND SHRI D.S.SUNDER SINGH, ACCOUNTANT MEMBER ./ ITA NOS.2344 & 2345/MDS/2012 * * /ASSESSMENT YEAR: 2005-06 & 2008-09 M/S.FORD INDIA PVT. LTD., S.P.KOIL POST, CHENGALPATTU-603 204. VS. THE DY. COMMISSIONER OF INCOME TAX, LARGE TAXPAYER UNIT, CHENNAI. [PAN: AAACM 4454 H ] ( - /APPELLANT) ( ./- /RESPONDENT) - 0 / APPELLANT BY : MR.ARVIND SONDE, ADVOCATE ./- 0 /RESPONDENT BY : MR.PATHLAVATH PEERIYA, CIT 0 /DATE OF HEARING : 28.02.2017 0 /DATE OF PRONOUNCEMENT : 12.05.2017 / O R D E R PER D.S.SUNDER SINGH , ACCOUNTANT MEMBER : THESE APPEALS ARE FILED BY THE ASSESSEE AGAINST TH E ORDERS PASSED BY THE DY.COMMISSIONER OF INCOME TAX, LARGE TAXPAYE R UNIT, CHENNAI U/S 143(3) R.W.S.144C/147 FOR THE A.Y 2005-06 DATED 29/ 10/2012 AND FOR THE A.Y 2008-09 ON 29/10/2012. SINCE THE COMMON ISSUES ARE INVOLVED IN BOTH THE APPEALS, BOTH ARE CLUBBED, HEARD TOGETHER AND DISPOSED OFF IN ITA NOS.2344 & 2345/MDS/2012 :- 2 -: COMMON ORDER FOR THE SAKE OF THE CONVENIENCE. SINCE THE FACTS OF BOTH THE ASSESSMENT YEARS ARE IDENTICAL THE RELEVANT INFORMA TION FROM THE A.Y.2005-06 ADOPTED FOR DECIDING THE APPEALS. 2.0 FORD IS ONE OF THE WORLDS LARGEST PRODUCE RS OF PASSENGER CARS AND TRUCKS WITH MANUFACTURING, ASSEMBLY OR SALES OP ERATIONS IN MORE THAN 200 MARKETS IN SIX CONTINENTS. FORD INDIA PVT. LIMI TED (FIPL) IS A WHOLLY OWNED SUBSIDIARY OF FORD MOTOR COMPANY, USA (FMC). IN FEBRUARY 1995, FORD PURCHASED 5.8% OF MAHINDRA & MAHINDRA (M&M) AN D IN SEPTEMBER 1995, FORD AND M&M SOUGHT THE APPROVAL FOR ESTABLIS HING A JOINT VENTURE COMPANY TO MANUFACTURE AND DISTRIBUTE VEHICLES AND SUBSEQUENTLY AFTER GETTING THE APPROVAL, THE JOINT VENTURE WAS ESTABLI SHED. IN MARCH 1998, THE EQUITY PATTERN CHANGED TO 70:30 WITH FORD HAVIN G THE MAJORITY STAKE AND THE COMPANY WAS RENAMED AS FORD INDIA PRIVATE L TD. (FIPL). THE EQUITY PATTERN CHANGED IN VARIOUS STAGES AND FINALL Y IN MARCH 2005, THE FORD INTERNATIONAL SERVICES PURCHASED THE REMAINING SHARES FROM M&M, THUS FIPL BECAME A WHOLLY OWNED SUBSIDIARY OF FMC. FIPL ESTABLISHED ITS FULLY INTEGRATED FACILITY IN CHENNAI IN 1999. 2.1 DURING THE ASSESSMENT PROCEEDINGS, THE AO FOUND TH E INTERNATIONAL TRANSACTION WITH THE A.E FOR RS.559.73 CRORES FOR T HE A.Y 2005-06 AND RS.835.83 CR. FOR THE A.Y 2008-09. THE DETAILS OF INTERNATIONAL TRANSACTION FOR THE AY 2005-06 ARE REPRODUCED HERE UNDER: ITA NOS.2344 & 2345/MDS/2012 :- 3 -: S. NO. DETAILS OF INTERNATIONAL TRANSACTIONS QUANTUM OF INTERNATIONAL & TRANSACTIONS (RS.) 1 EXPORT OF AUTO COMPONENTS AND SERVICE PARTS 14502 98239 2 IMPORT OF AUTO COMPONENTS AND SERVICE PARTS 38314 69511 3 IMPORT OF CARS 15932771 4 FUSION TECHNICAL SERVICE PUBLICATION 4502764 5 DEVELOPMENT COST OF BASE MANUAL 339708 6 ROYALTY 172524382 7 TECHNICAL TRAINING COST 172033 8 REIMBURSEMENT OF EXPENSES 114088961 9 TRAINING AND ROAD SHOW EXPENSES 8025798 TOTAL 5597354167 THE AO HAS REFERRED THE INTERNATIONAL TRANSACTIONS TO THE TPO FOR DETERMINING THE ALP. THE COMPANY HAS REPORTED THRE E DISTINCT ACTIVITIES NAMELY THE CONTRACT MANUFACTURING ACTIVITY DISTRIBUTION ACTIVITY AND ENTREPRENEURIAL ACTIVITY 2.2 CONTRACT MANUFACTURING INVOLVES A COMPANY (THE ENTREPRENEUR) THAT PRODUCES THE PRODUCTS TO SELL TO ITS CUSTOMERS BY H IRING A PROVIDER OF MANUFACTURING SERVICES (THE CONTRACT MANUFACTURER) TO ACTUALLY MAKE THE PRODUCTS. THE ESSENCE OF THE CONTRACT MANUFACTURI NG ACTIVITY IS THAT THE ENTREPRENEUR BEARS THE PRIMARY FINANCIAL RISKS AND THE MARKET RISKS ASSOCIATED WITH COMPETITION AND CUSTOMER ACCEPTANCE OF THE PRODUCT. THE CONTRACT MANUFACTURER IS MERELY A SERVICE PROVIDER THAT EARNS A SERVICE FEE AND BEARS NO DIRECT FINANCIAL OR MARKET RISKS WITH RESPECT TO THE PRODUCT IT MANUFACTURERS. ITA NOS.2344 & 2345/MDS/2012 :- 4 -: 2.3 THE ASSESSEE HAS ADOPTED THE TNMM AS THE MOST APP ROPRIATE METHOD FOR THE PURPOSE OF TRANSFER PRICING ANALYSIS OF MANUFACTURING ACTIVITY DONE BY THE ASSESSEE COMPANY. FOR THIS PUR POSE THE ASSESSEE COMPANY HAS BEEN SELECTED AS THE TESTED PARTY. THE ASSESSEE COMPANY CONDUCTED A WORLDWIDE SEARCH BASED ON FOREIGN DATAB ASE LIKE DISCLOSURES GLOBAL RESEARCH SEC, COMPUTSTAT DATA, MOVIES COMP ANY DATA AMADUS; FAME, ETC. THE SEARCH PROCESS USING PRIMARY SOURCES AND SECONDARY SOURCES YIELDED THOUSANDS NORTH AMERICAN, EUROPEAN AND ASIAN COMPANIES BEING IDENTIFIED AS POTENTIALLY ENGAGED I N CONTRACT MANUFACTURING. OUT OF THIS, BASED ON VARIOUS CRITER IA AS FILTERS, THE NUMBER OF CONTRACT MANUFACTURERS WAS RESTRICTED TO REASONA BLE NUMBERS IN THE THREE MARKETS MENTIONED ABOVE. THE ARMS LENGTH RAN GE FOR THIS ANALYSIS IS BASED ON THE FINANCIAL RESULTS FOR THE PREVIOUS YEARS. THE RETURN ON CAPITAL EMPLOYED (ROCE) WAS CHOSEN AS THE PLI. THE ASSESSES HAS ALSO ADOPTED OP TO COST AS THE ALTERNATIVE METHOD TO JUS TIFY THE ARMS LENGTH. 2.4 IN THE CASE OF DISTRIBUTION ACTIVITY SIMILAR E XERCISE WAS CARRIED OUT. IN THE CASE OF FORD COMPANY APART FROM ITS OWN DOME STIC MARKET, IN CASE OF OTHER MARKETS, THE VEHICLES ARE SOLD TO FORD AFF ILIATES CALLED NATIONAL SALES COMPANIES. THE PRIMARY FUNCTION OF AN NSC IS TO USE ITS FIELD SALES FORCE TO CALL ON THE INDEPENDENT DEALERS. ACCORDING LY THE FORD NSC IS FUNCTIONALLY COMPARABLE TO UNCONTROLLED WHOLESALE D ISTRIBUTORS DOING BUSINESS IN MANY PRODUCT INDUSTRIES. A DISTRIBUTOR IS ESSENTIALLY HERE THE SERVICE PROVIDER PROVIDING DISTRIBUTION SERVICES TO ITS SERVICE PROVIDER TO ITA NOS.2344 & 2345/MDS/2012 :- 5 -: EARN MARK UP ON ITS DISTRIBUTION COST AND ALSO A CO ST ON ITS CAPITAL INCURRED. THE TESTED PARTY IS THE NSC. AFTER CONDUC TING AN INDEPENDENT SEARCH THE ASSESSEE IDENTIFIED COMPARABLE COMPANIES IN NORTH AMERICA, EUROPE AND ASIA PACIFIC. VARIOUS ADJUSTMENTS WERE M ADE BY THE ASSESSES ON INVENTORY AND ACCOUNTS RECEIVABLE. OTHER ADJUSTM ENTS WERE MADE ON ADVERTISING AND OTHER DIRECT MARKETING EXPENSES. TH E ANALYSIS WERE CARRIED OUT DURING THE EARLIER YEAR PERIODS. FAR A NALYSIS WAS ALSO DONE ON THIS ACTIVITY. 2.5 THERE IS NO MENTION ABOUT THE ENTREPRENEURIAL SEGM ENT OF THE ASSESSEE COMPANYS ACTIVITIES, EVEN THOUGH THE VOLU ME OF SALES OF THIS SEGMENT IS SUBSTANTIAL. THERE IS NO FAR ANALYSIS OR ANY DESCRIPTION OF THE NATURE AND SCOPE OF THE ACTIVITY AND THE METHODOLOG Y TO BE ADOPTED FOR COMPARISON WITH UNCONTROLLED TRANSACTIONS. 2.6 THE TESTED PARTY ADOPTED BY THE ASSESSEE IN THE CAS E OF BOTH MANUFACTURING ACTIVITY AND DISTRIBUTION ACTIVITY IS THE ASSESSEE COMPANY ITSELF, A TESTED PARTY IS THE ONE WHICH HAS THE LEA ST COMPLEX OPERATIONS. THE TESTED PARTY IS THE PARTICIPANT IN A RELATED PA RTY TRANSACTION WHOSE PRICE IS OR WHOSE PROFIT MARGINS WILL BE TESTED USI NG THE MOST APPROPRIATE PRICING METHOD. THE TESTED PARTY IS ORDINARILY THE PARTY WHOSE PRICES OR PROFITS CAN BE VERIFIED USING THE MOST RELIABLE DAT A AND REQUIRING THE FEWEST AND MOST RELIABLE ADJUSTMENTS AND FOR WHICH RELIABLE DATA REGARDING UNCONTROLLED COMPARABLES CAN BE LOCATED. THE TESTED PARTY WILL ITA NOS.2344 & 2345/MDS/2012 :- 6 -: NOT OWN VALUABLE INTANGIBLE PROPERTY OR UNIQUE ASSE TS THAT DISTINGUISH IT FROM POTENTIAL UNCONTROLLED COMPARABLES. THE ASSESS EE BEING THE TESTED PARTY, CONSIDERING COMPARABLES IN NORTH AMERICA, EU ROPE AND ASIA PACIFIC REGION IS NOT CORRECT, AS PER THE INCOME TAX PROVIS IONS. THE TESTED PARTY I.E. FORD INDIA PVT LTD., BEING A RESIDENT INDIAN C OMPANY, COMPARABLE COMPANIES EXCLUSIVELY FROM INDIA BASED ON INDIAN DA TA BASES SHOULD BE ADOPTED. ON A PERUSAL OF THE TP DOCUMENT BY THE TPO, IT WAS SEEN THAT THE ASSESSEE COMPANY HAS TAKEN COMPARABLES RELATING TO THE EARLIER PERIOD. NO CONTEMPORANEOUS DATA RELATING TO THIS FINANCIAL YEAR HAS BEEN CONSIDERED BY THE ASSESSEE. MOREOVER, THE COMPARAB LES ADOPTED BY THE ASSESSEE ARE ALL FOREIGN COMPANIES WHICH IS NOT ACC EPTABLE, TO THE TPO, SINCE THE TRANSFER PRICE AROSE DURING THE COURSE OF TRANSACTIONS CARRIED OUT BY THE RESIDENT COMPANY I.E., FORD INDIA PRIVATE LI MITED. 3.0 THE TPO DID NOT ACCEPT THE TP STUDY OF THE ASSESSE E FOR THE REASONS DISCUSSED IN PARA 2.6 ABOVE STATING THAT THE TP STU DY CONDUCTED BY THE ASSESSEE IS UNRELIABLE AND UNACCEPTABLE. AN INDEP ENDENT SEARCH WAS CONDUCTED BY THE TPO AND FOUR COMPANIES WERE IDENTI FIED AS COMPARABLES AS UNDER: S.NO. NAME OF THE COMPANY PLI 1 GENERAL MOTORS INDIA PVT. LTD -0.60% 2 MAHINDRA & MAHINDRA LTD. 5.67% 3 MARUTI SUZUKI INDIA LTD 8.46% 4 TATA MOTORS LTD. 6.52% AVERAGE 5.01% ITA NOS.2344 & 2345/MDS/2012 :- 7 -: AND WORKED OUT THE AVERAGE MARGIN OF 5.01% OF THE COMPARABLES AGAINST THE ASSESSEES OPERATING MARGIN OF (-)1.27%. HENC E, THE AO WORKED OUT THE DIFFERENCE IN ALP TO RS.122.62 CR. IN ADDITION TO THE ALP DIFFERENCE THE TPO PROPOSED TO MAKE SEPARATE ADJUSTMENT ON ACCOUNT OF BRAND BUILDING ACTIVITIES, ADVERTISEMENT EXPENSES AND PRODUCT DEVE LOPMENT EXPENSES. ACCORDINGLY ISSUED THE SHOW CAUSE NOTICE TO THE ASS ESSEE AND THE ASSESSEE FILED REPLY TO THE SHOW CAUSE NOTICE OBJEC TING FOR THE TP STUDY MADE BY THE AO FOR SUBSTITUTING THE SINGLE YEAR DA TA INSTEAD OF MULTIPLE YEAR DATA ADOPTED BY THE ASSESSEE AND FOR SEPARATE ADJUSTMENTS ON ACCOUNT OF BRAND BUILDING, PRODUCT DEVELOPMENT, ADV ERTISEMENT AND MARKETING EXPENSES AND ALSO SOUGHT FOR SOME ECONOMI C ADJUSTMENTS. THE TPO REJECTED THE OBJECTIONS RAISED BY THE ASSESSEE AND DETERMINED THE ALP OF RS.1,744.24 CR. AND FOR THE ADJUSTMENT OF RS .122.62 CR TOWARDS THE ALP TRANSACTIONS FOR THE AY 2005-06 AS PER THE DETAILS GIVEN BELOW: OPER ATING INCOME 16216171090 OPERATING COST 16424047843 OPERATING PROFIT - 207876753 OP/COST - 1.27 PLI OF COMPARABLES 5.01% ALP OP/COST 6.28% ALP PROFIT 1018375544 ALP SALES (COST + ALP PROFIT) 17442423387 DIFFERENCE 1226252297 APART FROM THE ABOVE THE TPO SUGGESTED FOR THE FOL LOWING ADJUSTMENTS: ITA NOS.2344 & 2345/MDS/2012 :- 8 -: S.NO. NATURE OF ADJUSTMENT AMOUNT IN RS. IN CRORES 1 ARMS LENGTH ADJUSTMENT FOR INTERNATIONAL TRANSACT IONS 122.62 2 AMOUNT RECEIVABLE BY THE ASSESSEE FROM THE HOLDING COMPANY FOR BUILDING THE BRAND AND LOGO OF THE HOLDING COMPANY TO COMPENSATE THE ASSESSEE FOR DEPRIVING IT FROM DEVEL OPING A BRAND/LOGO LEGALLY AND ECONOMICALLY/OWNED BY ASSESS EE. 16.32 3 AMOUNT TOWARDS ADVERTISEMENT AND SALES PROMOTION EX PENSES INCURRED ON BEHALF OF THE HOLDING COMPANY WITH A PU RPOSE TO PROMOTE BUSINESS OF THE HOLDING COMPANY, HENCE RECE IVABLE BY THE ASSESSEE FROM THE HOLDING COMPANY 52.23 4 PRODUCT DEVELOPMENT EXPENSES TO BE RECOUPED BY FORD MOTOR COMPANY 10.57 TOTAL 201.74 THE AO ISSUED DRAFT ASSESSMENT ORDER PROPOSING TO MAKE THE TP ADJUSTMENT AS SUGGESTED BY THE TPO AMOUNTING TO RS. 201.74 CRORES AS ABOVE. 3.1 THE ASSESSEE MOVED PETITION BEFORE THE DRP AGA INST THE DRAFT ASSESSMENT ORDER U/S.144C OF THE ACT. BEFORE THE D RP, THE TPO RAISED THE OBJECTIONS REGARDING THE SELECTION OF COMPARABL ES IN RESPECT OF GLOBAL ENTITIES AND GLOBAL APPROACH FOR COMPARABLES AND F OR EXCLUSION OF SOME OF THE COMPARABLES SELECTED BY THE TPO, THE AMP EXPEN DITURE, BRAND DEVELOPMENT EXPENSES AND PRODUCT DEVELOPMENT EXPENS ES. THE DRP HAS OBSERVED THAT THE TPO HAS MADE THE ADJUSTMENT BOTH AT THE ENTITY LEVEL AS WELL AS ITEM WISE ADJUSTMENTS TOWARDS AMP AND PR ODUCT DEVELOPMENT EXPENSES AND BRAND DEVELOPMENT EXPENSES. HENCE, TH E DRP HAS CONFIRMED THE AMP, BRAND DEVELOPMENT AND PRODUCT DE VELOPMENT EXPENSES AND DIRECTED THE TPO TO EXCLUDE THE ENTITY LEVEL ADJUSTMENT. ITA NOS.2344 & 2345/MDS/2012 :- 9 -: ACCORDINGLY, THE TPO HAS PASSED MODIFICATION ORDER NO.F/101/TPO/1/AY 2005-06/RAV DATED 16.10.2012 PROPOSING TO MAKE THE ADJUSTMENT OF RS.79.12 CR. AS UNDER: AMP 52.32 CR. BRAND DEVELOPMENT 16.32 CR. PRODUCT DEVELOPMENT 10.57 CR. HOWEVER, TPO HAS SPECIFIED A CONDITION THAT IN THE EVENT OF DELETION AND ADDITION OF THE ABOVE THREE ADJUSTMENTS, THE MA RGIN ADJUSTMENT OF RS.33.91 CR. AT THE ENTITY LEVEL WILL STAY. ACCORD INGLY, THE AO PASSED THE ORDERS U/S U/S.143(3) R.W.S.144C AND 147 OF INCOME TAX ACT ON 29.10.2012 INCORPORATING THE ADJUSTMENT OF RS.79.1 2 CR. ON ACCOUNT OF TRANSFER PRICING AND OTHER CORPORATE ADDITIONS. AG AINST THE ORDER OF THE AO, THE ASSESSEE IS IN APPEAL BEFORE US. 4.0 THE ASSESSEE HAS RAISED 12 GROUNDS IN TOTAL IN THI S APPEAL. GROUND NO.1 TO 8 ARE RELATED TO THE TRANSFER PRICING ADJUS TMENTS. IN THE TRANSFER PRICING THE ASSESSEE RAISED THE ISSUES REGARDING, G LOBAL TP POLICY AND SEGMENTATION, COMPARABILITY ANALYSIS AND MARGIN ADJ USTMENT, AMP, BRAND DEVELOPMENT FEE AND PRODUCT DEVELOPMENT EXPENSES, ETC.., AND ARGUED AT LENGTH. 5.0 WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSED THE MATERIAL PLACED ON RECORD. ON GOING THROUGH THE DRP ORDER IN PAGE NO.4 THE DRP HAS GIVEN THE FOLLOWING DIRECTIONS TO THE AO/TPO. ITA NOS.2344 & 2345/MDS/2012 :- 10 -: IN ADDITION TO HIS REPORT DATED THE 4 TH JUNE 2012 AS MENTIONED ABOVE THE TRANSFER PRICING OFFICER ALSO ATTENDED AND PARTICIPATED DURI NG THE COURSE OF THE HEARINGS BEFORE THE DISPUTE RESOLUTION PANEL IN TERMS OF ORD ER SHEET ENTRY DATED THE 4 TH JUNE, 2012 WHEREIN HE WAS IN AGREEMENT WITH THE ADJ USTMENT DETAIL GIVEN BY THE ELIGIBLE ASSESSEE IN TERMS OF ANNEXURE-C OF ITS ADD ITIONAL SUBMISSIONS BEFORE THE TRANSFER PRICING OFFICER DURING THE COURSE OF THE P ROCEEDING BEFORE THE DISPUTE RESOLUTION PANEL AS DETAILED ABOVE. THE ASSESSING AUTHORITY AND THE TRANSFER PRICING OFFICER SHALL TAKE ANY FRESH POSITION FROM THOSE IN THE TRANSFER PRICING ORDER ONLY AFTER DUE VERIFICATION OF FACTS AN D CONTENTS AND WITH FULL JUSTIFICATION ON MERIT. CONSEQUENTLY THE TPO HAS PASSED AN ORDER ON 16/10/2012 MAKING AMENDMENT TO THE TPOS ORDER U/S 92CA(3) DATED 31/1 0/2011 SUBSTITUTING THE ENTITY LEVEL ADJUSTMENT TO RS.33.91 CRORES AND RESTRICTING THE ITEM WISE ADJUSTMENTS OF AMP, BRAND DEVELOPMENT AND PRO DUCT DEVELOPMENT EXPENSES AND CONVEYED TO THE AO. THE TPO ALSO PUT A CONDITION/ CAVEAT IN HIS AMENDMENT LETTER DATED 16/10/2012 AS UNDER: A CONDITION/CAVCAT IS HENCE APPLICABLE IN THE CONTE XT OF THE ADJUSTMENTS. THE ASSESSEE COMPANY WILL LIKELY FILE APPEALS BEFORE TH E ITAT OR BEFORE HIGHER LEGAL AUTHORITIES WITH RESPECT TO TP ADJUSTMENTS CONFIRME D BY DRP ON ALL GROUNDS. THERE IS THEN THE POSSIBILITY THAT DURING THE COURSE OF A NY APPELLATE OR OTHER FUTURE PROCEEDING RELATING TO THIS CASE, THE INSTANT 3 ADJ USTMENTS ON ACCOUNTS OF AMP, BRAND DEVELOPMENT FEES ARE DELETED/ REDUCED. IN SUCH EVENT OF DELETION OR REDUCTION OF THE AFORE SAID 3 ADJUSTMENTS, THE MARGIN ADJUSTMENT (NOW AT RS.33.91 CRORES) WILL STAY AND S TAND RESURRECTED AND MAY BE COMPUTED ON THE VALUE OF THE SPECIFIED INTERNATIONA L TRANSACTIONS (AS DIRECTED BY THE DRP IN ITS INSTANT ORDER REFERRED ABOVE). UNLES S OTHERWISE HELD BY THE ITAT OR HIGHER LEGAL AUTHORITY AS MAY BE THE CASE. IN THE E VENT OF A PARTIAL REDUCTION IN THE 3 ADJUSTMENTS, THE IMPACT ON THE TP ADJUSTMENT (MARGIN RELATED ADJUSTMENT) IS TO BE COMPUTED BY APPROPRIATELY USING THE REVISE D VALUES OF THE 3 ADJUSTMENTS. THE AO PASSED THE ASSESSMENT ORDER ON 29/102012 MA KING THE ADDITIONS AS SUGGESTED BY THE TPO AND INCORPORATING THE CAVEAT / CONDITION IMPOSED BY THE TPO. 5.1 FROM THE ABOVE IT IS CLEAR THAT THE DRP HAS REMITT ED THE MATTER BACK TO THE FILE OF TPO TO MAKE FRESH ASSESSMENT/DETERMI NATION OF TRANSFER ITA NOS.2344 & 2345/MDS/2012 :- 11 -: PRICING ISSUES WHICH WAS EXECUTED BY THE TPO AND CO MMUNICATED TO AO INSTEAD OF REFERRING THE MATTER BACK TO THE DRP TO GIVE APPROPRIATE DIRECTIONS TO THE AO. AS PER THE PROVISIONS OF SECT ION 144C OF IT ACT THE DRP HAS NO POWER O SET SIDE THE ISSUE OR THE REMIT THE MATTER BACK TO THE FILE OF TPO/AO. THE LD DRP HAS TO DECIDE THE ISSUE AND ISSUE DIRECTIONS TO THE AO. FOR READY REFERENCE WE EXTRACT THE RELEVANT PROVISIONS OF SECTION 144C OF IT ACT AS UNDER: [ REFERENCE TO DISPUTE RESOLUTION PANEL. 3 144C. (1) THE ASSESSING OFFICER SHALL, NOTWITHSTANDING ANY THING TO THE CONTRARY CONTAINED IN THIS ACT, IN THE FIRST INSTANCE, FORWA RD 3A A DRAFT OF THE PROPOSED ORDER OF ASSESSMENT (HEREAFTER IN THIS SECTION REFERRED TO A S THE DRAFT ORDER) TO THE ELIGIBLE ASSESSEE IF HE PROPOSES TO MAKE, ON OR AFTER THE 1ST DAY OF OCTOBER, 2009, ANY VARIATION IN THE INCOME OR LOSS RETURNED WHICH IS PREJUDICIAL TO THE INTEREST OF SUCH ASSESSEE. (2) ON RECEIPT OF THE DRAFT ORDER, THE ELIGIBLE ASSES SEE SHALL, WITHIN THIRTY DAYS OF THE RECEIPT BY HIM OF THE DRAFT ORDER, (A) FILE HIS ACCEPTANCE OF THE VARIATIONS TO THE ASSESS ING OFFICER; OR (B) FILE HIS OBJECTIONS, IF ANY, TO SUCH VARIATION WITH , (I) THE DISPUTE RESOLUTION PANEL; AND (II) THE ASSESSING OFFICER. (5) THE DISPUTE RESOLUTION PANEL SHALL, IN A CASE WH ERE ANY OBJECTION IS RECEIVED UNDER SUB-SECTION (2), ISSUE SUCH DIRECTIONS, AS IT THINK S FIT, FOR THE GUIDANCE OF THE ASSESSING OFFICER TO ENABLE HIM TO COMPLETE THE ASSESSMENT. (6) THE DISPUTE RESOLUTION PANEL SHALL ISSUE THE DIR ECTIONS REFERRED TO IN SUB-SECTION (5), AFTER CONSIDERING THE FOLLOWING, NAMELY: (A) DRAFT ORDER; (B) OBJECTIONS FILED BY THE ASSESSEE; (C) EVIDENCE FURNISHED BY THE ASSESSEE; (D) REPORT, IF ANY, OF THE ASSESSING OFFICER, VALUATION OFFICER OR TRANSFER PRICING OFFICER OR ANY OTHER AUTHORITY; (E) RECORDS RELATING TO THE DRAFT ORDER; (F) EVIDENCE COLLECTED BY, OR CAUSED TO BE COLLECTED BY , IT; AND (G) RESULT OF ANY ENQUIRY MADE BY, OR CAUSED TO BE MADE BY, IT. (8) THE DISPUTE RESOLUTION PANEL MAY CONFIRM, REDUCE OR ENHANCE THE VARIATIONS PROPOSED IN THE DRAFT ORDER SO, HOWEVER, THAT IT SHALL NOT SET ASIDE ANY PROPOSED VARIATION OR ISSUE ANY DIRECTION UNDER SUB-SECTION (5) FOR FURTHER ENQUIRY AND PASSING OF THE ASSESSMENT ORDER. 5.2 IN THE INSTANT CASE, THE DRP HAS REMITTED THE MATT ER BACK TO THE FILE OF TPO TO TAKE FRESH LOOK OF THE ISSUES AS DISCUSSE D ABOVE. AS DISCUSSED ITA NOS.2344 & 2345/MDS/2012 :- 12 -: EARLIER, THE DRP HAS NO POWER TO REMIT THE MATTER B ACK TO THE FILE OF THE TPO AND THE DRP ALONE HAS TO DETERMINE THE QUANTUM OF ADDITION OR RELIEF AND ISSUE DIRECTION TO THE ASSESSING OFFICER. THER EFORE, WE ARE OF THE CONSIDERED OPINION THAT THE ISSUE SHOULD BE REMITTE D BACK TO THE FILE OF DRP TO CONSIDER THE SUBMISSIONS MADE BY THE ELIGIBL E ASSESSEE AND TO DECIDE THE ISSUE AFRESH ON TRANSPRICING ADJUSTMENTS . ACCORDINGLY, WE SET ASIDE THE TRANSFER PRICING ISSUES AND REMIT THE MAT TER BACK TO THE FILE OF DRP TO DECIDE ALL THE TRANSFER PRICING ISSUES AFRES H ON MERITS. THE ASSESSEE IS FREE TO TAKE UP ALL THE TRANSFER PRICIN G ISSUES BEFORE THE DRP. THE ASSESSEES APPEAL ON TRANSFER PRICING ISSUES FO R THE A.Y 2005-06 AND 2008-09 STANDS DISPOSED OFF AND ALLOWED FOR STATISTICAL PU RPOSES. 6.0 GROUND NO.9 OF THE ASSESSS APPEAL FOR THE A.Y 2 005-06 IS ON OBSOLETE STOCK: THE AO PROPOSED FOR ADDITION OF RS.2,21,08,585/- O N ACCOUNT OF PROVISIONS MADE BY THE ASSESSEE FOR OBSOLETE STOCKS . THE ASSESSEE FILED OBJECTIONS BEFORE THE DRP AND THE DRP CONFIRMED PRO POSAL OF THE ADDITION MADE BY THE AO HOLDING THAT THE LIABILITY IS CONTIN GENT IN NATURE. 6.1 AGGRIEVED BY THE ORDER OF THE AO/ DRP, THE ASSESSE E IS IN APPEAL BEFORE US. THE LD.AR OF THE ASSESSEE VEHEMENTLY ARG UED OPPOSING THE ADDITION AND ALSO SUBMITTED THE WRITTEN SUBMISSIONS AS UNDER: THE APPELLANT HAD CREATED A PROVISION FOR STOCK OBS OLESCENCE AMOUNTING TO INR 22,108,585/- DURING AY 2005-06. ITA NOS.2344 & 2345/MDS/2012 :- 13 -: AO DISALLOWED PROVISION FOR STOCK OBSOLESCENCE TREAT ING IT AS A CONTINGENT LIABILITY AS THE SAME WAS MADE ON A PROVISIONAL BASIS AND COULD NOT BE CONSIDERED AS LIABILITY ACCRUED DURING THE YEAR. THE AO PLACED RELIANCE ON THE DECIS ION OF THE SUPREME COURT IN THE CASE OF INDIAN MOLASSES CO. LTD. V. CIT [ 959] 37 IT R 66 (SC). THE APPELLANT SUBMITS THAT PURSUANT TO STRINGENT NO RMS PRESCRIBED BY THE FORD GROUP FOR INVENTORY MONITORING, THE APPELLANT HAD CREATED THE SAID PROVISION FOR STOCK OBSOLESCENCE ON SCIENTIFIC BASIS, BY IDENTIFYING EA CH PART WHICH IS OBSOLETE, AT BOTH THE PLANT AS WELL AS VENDORS PLACE. IN ADDITION, THE APPELLANT SUBMITS THAT THE CREATIO N OF SUCH PROVISION WAS ACCEPTED BY THE STATUTORY AUDITORS AND TAX AUDITORS AS BEING IN LINE WITH ACCOUNTING STANDARD-2 ISSUED BY THE INSTITUTE OF CHARTERED ACCOUNTANTS OF INDIA AND SECTION 145 OF THE ACT RESPECTIVELY. IN THIS REGARD, RELIANCE HAS BEEN PLACED ON THE FOL LOWING DECISIONS TO SUBSTANTIATE THE APPELLANTS CLAIM: JUDICIAL PRECEDENTS PRINCIPLE/RULING CIT V. BECTON DICKINSON [2013] (ITA NOS.39-43 OF 2012) (DELHI HIGH COURT) THE DELHI TRIBUNAL HAD EXPRESSED A FINDING THAT THE ASSESSE HAD A FOOLPROOF METHOD OF IDENTIFICATION OF SLOW MOVING OR DEAD STOCK AND HAD PUT A REALIZABLE VALUE FOR THE PURPOSE OF VALUING THE SAME. FURTHER, THE TRIBUNAL HAD NOTED THAT THE ASSESSEE HAD CONSISTENTLY BEEN FOLLOWING THE SAME METHOD ACCOUNTING OVER A PERIOD OF TIME AND THE SAME WAS IN ACCORDANCE WITH THE COMMERCIALLY ACCEPTED ACCOUNTING PRINCIPLES OF VALUATION. THE DELHI HIGH COURT UPHELD THE FINDING AND VERDICT OF THE TRIBUNAL THAT THE PROVISION FOR STOCK OBSOLESCENCE CREATED BY THE ASSESSEE DURING THE YEAR WAS AN ALLOWABLE EXPENDITURE. IN ADDITION, RELIANCE IS ALSO PLACED ON THE FOLLOWI NG DECISIONS: CIT V. IBM INDIA LTD.[2015] 230 TAXMAN 544 (KARNAT AKA HIGH COURT) HOTLINE TELETUBE & COMPONENTS LTD. V. CIT [2008] 1 2 DTR 311 (DELHI HIGH COURT) THE APPELLANT ADDITIONALLY SUBMITS THAT THE FACTS I N THE DECISION RELIED UPON BY THE AO I.E. INDIAN MOLASSES CO. LTD. V. CIT [1959] 37 ITR 66 (SC ) IS DIFFERENT FROM THE FACTS OF FORD INDIAS CASE AND CONSEQUENTLY CANNOT BE APPLIED IN THE INSTANT CASE. ON THE OTHER HAND THE LD.DR SUPPORTED THE ORDERS O F THE LOWER AUTHORITIES. 6.2 WE HEARD THE RIVAL SUBMISSIONS AND PERUSED THE MAT ERIAL PLACED ON RECORD. AS PER THE PROVISIONS OF THE INCOME TAX ACT, THE P ROVISIONS ARE NOT ALLOWABLE DEDUCTION SINCE THE EXPENDITURE IS OF CON TINGENT NATURE. THE ITA NOS.2344 & 2345/MDS/2012 :- 14 -: ASSESSEE HIMSELF HAS CLAIMED THE EXPENDITURE UNDER THE HEAD PROVISIONS WHICH IS THE LIABILITY CONTINGENT IN NATURE. THE A SSESSEE HAS NOT FURNISHED ANY EVIDENCE TO PROVE THAT THE EXPENDITURE WAS ASCE RTAINED AND ACCRUED FOR THE YEAR ENDING 31.03.2005 FOR THE RELEVANT YEA R. THE AO IN ASSESSMENT ORDER GIVEN A FINDING THAT THE ASSESSEE HAS MADE THE PROVISION FOR OBSOLETE STOCK ON PROVISIONAL BASIS. THE ASSESSEE RELIED ON THE DECISION OF THE HONBLE DELHI COURT WHERE IN HO NBLE HIGH COURT DECIDED THE ISSUE IN FAVOUR OF THE ASSESSEE. IN THE CITED CASE HONBLE HIGH COURT RELIED ON THE REASONING OF THE TRIBUNAL AS UNDER: THE ASSESSEE IS IN THE BUSINESS OF PHARMACEUTICAL P RODUCTS WHERE STRICT SUPERVISION OF THE QUALITY HAS TO BE ENSURED AND TH ESE PRODUCTS ARE MOSTLY SURGICAL NEEDLES AND MEDICAL CONSUMABLE AND IF SUCH FAST MOVING ITEMS ARE NOT SOLD FOR A CONSIDERABLY LENGTHY PERIOD. IT CAN BE S AFELY SAID THAT THEY HAVE LOST THEIR CONSUMABLE ACCEPTABILITY OVER A PERIOD OF TIM E, MAY BE DUE TO ADVENT OF NEW PRODUCTS. AFTER ALL, AS LONG AS THE ASSESSEE ACTED IN A BONA FIDE MANNER AND HAS APPRECIATED THE BUSINESS REALITIES IN WHICH HE IS P LACED, THE SAME SHOULD BE ACCEPTED. THE ASSESSEE HAS A FOOLPROOF METHOD OF ID ENTIFICATION OF SLOW MOVING OR DEAD STOCK AND HAS PUT THE REALIZABLE VALUE FOR THE PURPOSE OF VALUING THE SAME. IN FACT, THE PRINCIPLE OF VALUATION IS THE COST OR THE MARKET VALUE WHICHEVER IS LOWER. THE MARKET VALUE HERE BECOME OBSOLETE OR SLO W MOVING IT NATURALLY HAS A LOWER MARKET VALUE WHICH THE ASSESSEE HAS RECOGNIZE D. THE ASSESSEE HAS PROPERLY IDENTIFIED SUCH STOCK AND HAS ALSO FOLLOWED IN ACCO RDANCE WITH COMMERCIALLY ACCEPTED ACCOUNTING PRINCIPLES OF VALUATION. IN OUR VIEW, THE CIT(A) WAS CORRECT IN LAW AND ON FACTS TO HAVE DELETED THE ADDITION MADE BY THE AO WHICH WAS BASED NOT TAKING INTO CONSIDERATION THE HARD REALITIES OF ASSESSEE'S BUSINESS. THE ADDITION IN OUR VIEW, IS PROPERLY DELETED AND WE DE CLINE TO INTERFERE.' IN THE INSTANT CASE THE ASSESSEE HAS NOT ESTABLISH ED SUCH FOOL PROOF METHOD OF IDENTIFICATION OF SLOW MOVING AND DEAD ST OCK AND ASCERTAINED THE LIABILITY AS PER THE CONSISTENT RELIABLE SYSTEM . THEREFORE, THE FACTS OF THE CASE RELIED UPON BY THE ASSESSEE ARE NOT APPLIC ABLE AND THE ADDITION MADE BY THE AO IS CONFIRMED AND THIS GROUND OF APPE AL IS DISMISSED. ITA NOS.2344 & 2345/MDS/2012 :- 15 -: 7.0 GROUND NO.10 OF THE A.Y.2005-06 IS RELATED TO THE WARRANTY: DURING THE COURSE OF ASSESSMENT PROCEEDINGS, THE A O FOUND THAT THE ASSESSEE HAS DEBITED A SUM OF RS.16,58,15,554/- TOW ARDS THE PROVISIONS FOR WARRANTY EXPENSES. THE ASSESSEE EXPLAINED THAT THE CARS SOLD BY COMPANY CARRY A WARRANTY IN FAVOUR OF THE BUYER AS PER THE CONTRACTUAL AGREEMENT BETWEEN THE COMPANY AND THE BUYER IN TERM S OF WARRANTY GUIDE PROVIDED TO THE CUSTOMER AT THE TIME OF SALE. BY VIRTUE OF AGREEMENT COMPANY BINDS ITSELF TO RECTIFY THE DEFECTS ARISING OUT OF ANY MECHANICAL FAILURE, FREE OF ANY COST TO THE BUYER. THE ACCOUNT ING TREATMENT FOR THE PROVISION HAS BEEN FOLLOWED BY THE COMPANY CONSISTE NTLY OVER THE YEARS. HOWEVER, THE AO WAS NOT CONVINCED WITH THE EXPLANAT ION OFFERED BY THE ASSESSEE AND ALSO DISTINGUISHED THE DECISION OF HON BLE SUPREME COURT IN THE CASE OF ROTORITC CONTROLS INDIA PVT.. LTD., 314 ITR 62 (SC) AND DISALLOWED THE EXPENDITURE AND ADDED BACK TO THE IN COME. THE ASSESSEE FILED OBJECTIONS BEFORE THE DRP AND THE DPR CONFIRM ED THE ADDITION PROPOSED BY THE AO. ACCORDINGLY, THE AO MADE THE A DDITION AS PROPOSED IN THE DRAFT ASSESSMENT ORDER. AGAINST THE ORDER O F AO/DRP, THE ASSESSEE IS ON APPEAL BEFORE US. 7.1 THE LD.AR MADE ARGUMENTS AT LENGTH OPPOSING THE ADDITION AND MADE WRITTEN SUBMISSIONS AS UNDER: THE APPELLANT IS ENGAGED IN THE BUSINESS OF MANUFAC TURING AND SELLING CARS. IT IS COMMON KNOWLEDGE THAT THE CARS SOLD CARRY A WARRANT Y IN FAVOUR OF THE BUYER AS PER THE CONTRACTUAL AGREEMENT BETWEEN THE APPELLANT AND BUYER IN TERMS OF WARRANTY GUIDE PROVIDED TO THE CUSTOMER AT THE TIME OF SALE TO A MINIMUM PERIOD OF 1 YEAR AND MAY EXTEND UP TO 4 YEARS. ITA NOS.2344 & 2345/MDS/2012 :- 16 -: BY VIRTUE OF THIS AGREEMENT THE APPELLANT BINDS ITS ELF TO RECTIFY THE CONTRACTED DEFECTS ARISING IF ANY DURING THE CONTRACT PERIOD, FREE OF ANY COST TO THE BUYER. THE APPELLANT SUBMITS THAT THE PROVISION HAS BEEN C REATED ON A SCIENTIFIC AND SYSTEMATIC BASIS BACKED BY IN-DEPTH AND PRECISE ANA LYSIS AND CALCULATIONS ACCORDING TO THE PROCEDURES AND PRINCIPLES LAID DOWN BY THE P OLICY OF THE APPELLANT. THE HISTORIC TREND SUMMARY OF THE PROVISIONS CREATED AN D RELATED PAYMENTS MADE HAVE BEEN ENCLOSED IN PAGE 757 OF THE SUPPLEMENTARY PAPE R BOOK. FURTHER RELIANCE IS PLACED ON THE FAVOURABLE DECISI ON OF THE HONBLE CHENNAI INCOME-TAX APPELLATE TRIBUNAL IN THE APPELLANTS OW N CASE FOR AY 1999-00 AND AY 2004-05 (ENCLOSED IN CASE LAW PAPERBOOK) WHEREIN PRO VISION FOR WARRANTY HAS BEEN FINALLY ALLOWED AS A DEDUCTION. THE HONBLE TRIBUNA L OBSERVED THAT THE ISSUE WAS COVERED IN FAVOUR OF THE APPELLANT IN VIEW OF THE A PEX COURTS RULING IN THE CASE OF CIT V. ROTORK CONTROLS INDIA LIMITED (2009) 314 ITR 62. GIVEN THE ABOVE, IT IS REQUESTED THAT THE PROVISION CREATED TOWARDS WARRANTY BE CONSIDERED AS A DEDUCTIBLE EXPENDITURE UNDER THE PR OVISIONS OF THE ACT. NOTWITHSTANDING THE ABOVE, THE FOLLOWING CASE LAWS SUPPORT THE APPELLANTS POSITION: JUDICIAL PRECEDENTS PRINCIPLE/RULING BHARAT EARTH MOVERS V. CIT [2000] 245 ITR 428 (SC) IT WAS HELD THAT THE PROVISION CREATED BY THE ASSES SEE FOR MEETING THE LIABILITY INCURRED BY IT UNDER LEAVE EN CASHMENT SCHEME PROPORTIONATE TO THE ENTITLEMENT EARNED BY T HE EMPLOYEES WAS ENTITLED TO DEDUCTION OUT OF THE GROS S RECEIPTS FOR THE ACCOUNTING YEAR DURING WHICH THE PROVISION WAS MADE FOR THE LIABILITY AND IT WILL NOT TANTAMOUNT TO CON TINGENT LIABILITY ON ACCOUNT OF REASONABLE QUANTIFICATION O F THE SAME. 7.2 PER CONTRA THE LD.DR RELIED ON THE LOWER AUTHOR ITIES ORDERS. 7.3 WE HEARD BOTH THE PARTIES AND PERUSED THE MATERI AL PLACED ON RECORD. ON SIMILAR FACTS, ITAT CHENNAI D BENCH IN ITA NO .2976 TO 2979/MDS/2014 FOR THE A.YS 1998-99, 2001-02 TO 2004 -05 DATED 26.06.2015 ALLOWED THE APPEAL OF THE ASSESSEE PLACI NG RELIANCE ON THE DECISION OF HONBLE SUPREME COURT IN 223 CTR 425. RESPECTFULLY FOLLOWING THE AFORESAID DECISI ON OF THIS TRIBUNAL WE ALLOW THE ASSESSEES APPEAL. ITA NOS.2344 & 2345/MDS/2012 :- 17 -: 8.0 GROUND NO.11 FOR THE A.Y. 2005-06 IS RELATED TO T HE DISALLOWANCE U/S.35D AMOUNT TO RS.10,01,086/- IN THE DRAFT ASSES SMENT ORDER, THE AO PROPOSED TO DISALLOW THE EXPENDITURE AMORTIZED U/S .35D OF IT ACT. THE LD.DRP AGREED WITH THE AOS PROPOSAL AND ISSUED DIR ECTIONS U/S144C OF IT ACT AND THE AO MADE THE ADDITION. 8.1 DURING THE APPEAL, THE LD.AR SUBMITTED THAT THE A SSESSEE IS CLAIMING THE SAID EXPENDITURE U/S.35D FROM THE AY 1997-98 AN D THE SUBJECT AY IS 9 TH YEAR OF THE CLAIM AND THE AO HAS NOT DISALLOWED TH E ABOVE EXPENDITURE DURING ANY OF THE PREVIOUS YEARS. IN HIS WRITTEN SU BMISSIONS THE A.R SUBMITTED AS UNDER: DURING THE FINANCIAL YEAR 1995-96, THE APPELLANT HA D INCURRED EXPENDITURE TOWARDS STAMP DUTY, REGISTRATION CHARGES FOR INCREASE IN AU THORIZED CAPITAL AND OTHER RELATED EXPENSES AGGREGATING TO INR 10,010,086. THE APPELLANT HAS BEEN CONSISTENTLY CLAIMING ONE-TE NTH OF THE GIVEN PRELIMINARY EXPENSES AS DEDUCTION UNDER SECTION 35D OF THE ACT EVERY YEAR FROM AY 1997-98 AND THE SUBJECT ASSESSMENT YEAR IS THE NINTH YEAR O F CLAIM. THE AO DISALLOWED THE GIVEN CLAIM ON THE PREMISE THA T THE EXPENDITURE INCURRED IS NOT RELATED TO THE EXPANSION OF THE INDUSTRIAL UNDE RTAKING. THE APPELLANT SUBMITS THAT THE AO HAD ERRONEOUSLY CO NSTRUED THAT THE EXPENDITURE HAD ARISEN SUBSEQUENT TO COMMENCEMENT OF BUSINESS A ND THAT HE HAS FAILED TO APPRECIATE THAT THE SAME HAD BEEN INCURRED AT THE T IME WHEN THE BUSINESS WAS NOT SET-UP. THE APPELLANT HAD SUBMITTED THAT THE AO HA S WRONGLY EXAMINED THE PRELIMINARY EXPENSES UNDER SECTION 35D (1)(II) AND N OT SECTION 35D(1)(I), AS IS APPLICABLE IN THE INSTANT CASE. ADDITIONALLY, IT IS SUBMITTED THAT THE CLAIM HAS NO T BEEN DISALLOWED DURING ANY OF THE PREVIOUS YEARS. GIVEN THAT THE EXPENDITURE HAD BEEN INCURRED BEFORE THE COMMENCEMENT OF BUSINESS, THE APPELLANT SUBMITS THAT THERE IS NO RE QUIREMENT FOR THE EXPENDITURE TO CORRELATE WITH EXPANSION OF THE UNDERTAKING TO VALI DATE DEDUCTIBILITY UNDER THE ACT. THE BREAKUP OF THE PRELIMINARY EXPENSES INCURRED BY THE APPELLANT DURING AY 1996- 97 HAS BEEN PROVIDED BELOW: NO. NATURE OF EXPENSES AMOUNT IN INR 1 STAMP DUTY FOR INCREASE IN AUTHORIZED CAPITAL 3,9 80,000 2 REGISTRATION CHARGES FOR INCREASE IN AUTHORIZED C APITAL 5,970,000 3 OTHERS (EG. FEES FOR REGISTRATION OF A COMPANY) 60 ,086 PRELIMINARY EXPENSES INCURRED IN AY 1996-97 10,010, 086 ITA NOS.2344 & 2345/MDS/2012 :- 18 -: 8.2 WE HEARD THE RIVAL SUBMISSIONS AND PERUSED THE MATERIAL PLACED ON RECORD. THE ASSESSEE IS ENTITLED FOR AMORTIZATION OF EXPENSES INCURRED BEFORE THE COMMENCEMENT OF BUSINESS AND AFTER COMMENCEMENT OF BUSINESS FOR EXTENSION OR IN CONNECTION WITH THE SETTING UP OF N EW UNIT. IN THIS CASE, THE ASSESSEE HAS INCURRED THE EXPENDITURE BEFORE SE TTING UP OF THE UNIT AS EVIDENCED FROM THE DETAILS AND NATURE OF EXPENDITUR E REFERRED ABOVE AND AS STATED BY THE ASSESSEE THE EXPENDITURE WAS INCUR RED IN 1996-97 RELEVANT TO THE AY 1997-98. THE ASSESSEE HAS MADE THE CLAIM FROM AY 1997-98 ONWARDS AND NO DISALLOWANCE WAS MADE DURING ANY OF THE PREVIOUS YEARS. THE AO HAS NOT BROUGHT ON RECORD A NY EVIDENCE CONTROVERT THE SUBMISSIONS MADE BY THE ASSESSEE. NO NEW FACT HAS BEEN BROUGHT ON RECORD TO DISALLOW THE EXPENDITURE IN TH E YEAR UNDER CONSIDERATION TO MAKE THE DISALLOWANCE, HAVING ALLO WED IN THE EARLIER ASSESSMENT YEARS. THEREFORE, WE HOLD THAT THE ASSES SEE IS ELIGIBLE FOR DEDUCTION U/S.35D AND ACCORDINGLY THE APPEAL OF THE ASSESSEE ON THIS ISSUE IS ALLOWED. 9.0 THE NEXT ISSUE IS CARRY FORWARD AND SET OFF OF U NABSORBED DEPRECIATION FOR THE AY 1997-98,1998-99 AND 1999-20 00. THIS ISSUES IS INVOLVED IN BOTH THE AYS 2005-06 & 2008-09. THE AO IN THE ASSESSMENT ITA NOS.2344 & 2345/MDS/2012 :- 19 -: ORDER, DID NOT ALLOW THE CARRY FORWARD AND SET OFF UNABSORBED DEPRECIATION LOSSES LOSS FOR THE AY 1997-98 AS PER THE FOLLOWING REASONS: IN THE STATEMENT OF TOTAL INCOME FILED ALONG WITH T HE RETURN, THE ASSESSEE CLAIMED THE UNABSORBED DEPRECIATION LOSSES OF FOLLOWING YEARS. ASSESSMENT YEAR 1997-98 : RS.4,05,34,542 ASSESSMENT YEAR I 998-99 : RS.3,31 27,564 ASSESSMENT YEAR 1999-00 : RS.8,27,63,426 AS PER PROVISIONS OF SEC.32(2) OF THE ACT, AS APPLIC ABLE FOR THE ABOVE ASSESSMENT YEARS, UNABSORBED DEPRECIATION CAN BE CARRIED FORWARD ONLY FOR A PERIOD OF SUBSEQUENT 8 ASSESSMENT YEARS AND CAN BE SET OFF ONLY AGAINST BU SINESS INCOME OF SUBSEQUENT YEARS. ONLY WITH EFFECT FROM ASST YEAR 2002-03, SEC.32(2) HA S BEEN AMENDED TO THE EFFECT THAT UNABSORBED DEPRECIATION LOSSES WOULD BE MERGED WITH SUBSEQUENT YEARS DEPRECIATION AND DEEMED TO BE PART OF THAT ALLOWANCE. THIS AMENDMENT IS APPLICABLE ONLY FROM ASST YEAR 2002-03 AND FOR THE ABOVE YEARS, VIZ., 1997-98 TO 1 999-2000, AS PER PROVISIONS OF SEC.32(2), THE UNABSORBED DEPRECIATION IS ALLOWED T O BE CARRIED FORWARD AND SET OFF AGAINST BUSINESS PROFITS OF SUBSEQUENT 8 ASST YEARS. OUT OF THE UNABSORBED DEPRECIATION OF RS.4,05,34,542 /- OF A.Y.1997-98, AN AMOUNT OF RS,1,85,57,771/- IS NOW SET OFF AGAINST PROFITS OF A.Y.2005-06, AS SHOWN ABOVE. THE BALANCE UNABSORBED DEPRECIATION OF RS.2,19,76,771/- PERTAINING TO A.Y.1997-98 CANNOT BE CARRIED FORWARD BEYOND ASST YEAR 2005-06 AS PER THE PROVISIONS OF SEC.32(2) OF THE ACT APPLICABLE FOR THIS YEAR. SIMILARLY, UNABSORBED DEPRECIATION OF AY.1998-99 (R S.3,31,27,564) AND A.Y.1999-2000 (RS.8,27,63,426) CANNOT BE CARRIED FORWARD BEYOND AS ST YEARS 2006-07 AND 2007-08 RESPECTIVELY, AS PER THE PROVISIONS OF SEC.32(2) OF THE ACT APPLICABLE FOR THESE ASSESSMENT YEARS. 9.1 DURING THE APPEAL HEARING, THE AR OF THE ASSESSEE MADE THE FOLLOWING SUBMISSIONS ORALLY AS WELL AS IN WRITING: THE APPELLANT SUBMITS THAT THE AO HAS ERRED IN REST RICTING THE CARRY FORWARD OF UNABSORBED DEPRECIATION OF THE EARLIER YEARS BY ERRONEOUSLY IN TERPRETING THE PROVISIONS OF LAW ON THE AFOREMENTIONED CLAIM WITHOUT TAKING INTO COGNIZANCE THAT THE UNABSORBED DEPRECIATION OF ANY PRECEDING PREVIOUS YEAR(S) SHOULD BE CONSIDERED AS THE PREVIOUS YEARS DEPRECIATION AS PROVIDED UNDER SECTION 32(2) OF THE ACT (AMENDED BY THE FINANCE ACT, 2001). THE APPELLANT PLACES RELIANCE ON THE DECISION OF TH E JURISDICTIONAL TRIBUNAL IN THE CASE OF KMC SPECIALITY HOSPITALS INDIA LTD. [2014] 32 ITR(T ) 149 (CHENNAI TRIBUNAL) WHEREIN IT WAS HELD THAT THE INTERREGNUM RESTRICTION OF LIMITING T HE CLAIM FOR AN EIGHT-YEAR PERIOD DOES NOT TAKE AWAY THE RIGHT OF AN ASSESSEE TO CLAIM THE BAL ANCE OF UNABSORBED DEPRECIATION, FOREVER. FURTHER, BY VIRTUE OF THE AMENDMENT BOUGHT OUT BY THE FINANCE ACT 2001, THE UNABSORBED DEPRECIATION FOR THE INTERREGNUM PERIOD (AY 1997-98 TO AY 2001-02) WOULD REVIVE BACK INTO LIFE AND BECOME ELIGIBLE FOR CARRY FORWARD AND SET OFF FOR AN INDEFINITE PERIOD. FURTHER, IN THE CASE OF BEST & CROMPTON ENGINEERING LTD. [2014] 30 ITR(T) 638 (CHENNAI TRIBUNAL), THE HONBLE CHENNAI TRIBUNAL PLACED RELI ANCE ON THE DECISION OF THE GUJARAT HIGH COURT IN THE CASE OF GENERAL MOTORS INDIA (P.) LTD. V. DEPUTY COMMISSIONER OF INCOME-TAX [2012] 354 ITR 244 AND HELD THAT, THE UNABSORBED DE PRECIATION PRIOR TO AY 2002-03 I.E. FROM AY 1999-2000 TO AY 2001-02 WOULD BE AVAILABLE FOR CARRY FORWARD AND SET OFF AGAINST INCOME OF SUBSEQUENT YEARS WITHOUT ANY TIME LIMIT I N VIEW OF THE SECTION 32(2) AS AMENDED BY FINANCE ACT, 2001. ITA NOS.2344 & 2345/MDS/2012 :- 20 -: THE OBSERVATIONS MADE BY THE GUJARAT HIGH COURT IN THE CASE OF GENERAL MOTORS INDIA (P.) LTD (SUPRA) AND FOLLOWED BY THE CHENNAI TRIBUNAL IN THE CASE OF BEST & CROMPTON ENGINEERING LTD. (SUPRA) ARE ELUCIDATED BELOW: PRIOR TO THE FINANCE ACT NO.2 OF 1996, THE UNABSO RBED DEPRECIATION FOR ANY YEAR WAS ALLOWED TO BE CARRIED FORWARD INDEFINITELY AND BY A DEEMING FICTION BECAME ALLOWANCE OF THE IMMEDIATELY SUCCEEDING YEAR. THE FINANCE ACT NO.2 O F 1996 RESTRICTED THE CARRY FORWARD OF UNABSORBED DEPRECIATION AND SET-OFF TO A LIMIT OF 8 YEARS, FROM THE AY 1997-98. CBDT CIRCULAR NO.762, DATED 18 FEBRUARY 1998, IN THE FOR M OF EXPLANATORY NOTES CATEGORICALLY PROVIDED, THAT THE UNABSORBED DEPRECIATION ALLOWANC E FOR ANY PREVIOUS YEAR TO WHICH FULL EFFECT CANNOT BE GIVEN IN THAT PREVIOUS YEAR SHALL BE CARRIED FORWARD AND ADDED TO THE DEPRECIATION ALLOWANCE OF THE NEXT YEAR AND BE DEEM ED TO BE PART THEREOF. SO, THE UNABSORBED DEPRECIATION ALLOWANCE OF AY 1996-97 WOU LD BE ADDED TO THE ALLOWANCE OF AY 1997-98 AND THE LIMITATION OF 8 YEARS FOR THE CARRY -FORWARD AND SET-OFF OF SUCH UNABSORBED DEPRECIATION WOULD START FROM AY 1997-98. THE PROVISION OF SECTION 32(2) WAS INTRODUCED BY FINANCE (NO. 2) ACT, 1996 AND FURTHER AMENDED BY THE FINANCE ACT, 2000. THE PROVISION INT RODUCED BY FINANCE (NO. 2) ACT, 1996 WAS CLARIFIED BY THE FINANCE MINISTER TO BE APPLICA BLE WITH PROSPECTIVE EFFECT. THIS AMENDMENT HAS BECOME APPLICABLE FROM AY 2002-03 AND SUBSEQUENT YEARS MEANING THAT ANY UNABSORBED DEPRECIATION AVAILABLE TO AN ASSESSE E ON 1 ST DAY OF APRIL, 2002 (AY 2002- 03) WILL BE DEALT WITH IN ACCORDANCE WITH THE PROVI SIONS OF SECTION 32(2) AS AMENDED BY FINANCE ACT, 2001 AND NOT BY THE PROVISIONS OF SECT ION 32(2) AS IT STOOD BEFORE THE SAID AMENDMENT. IF THE INTENTION OF THE LEGISLATURE HAD BEEN TO ALLOW THE UNABSORBED DEPRECIATION ALLOWANCE WORKED OUT IN AY 1997-98 ONL Y FOR EIGHT SUBSEQUENT AYS EVEN AFTER THE AMENDMENT OF SECTION 32(2) BY FINANCE ACT, 2001 , IT WOULD HAVE INCORPORATED A PROVISION TO THAT EFFECT. HOWEVER, IT DOES NOT CONT AIN ANY SUCH PROVISION. HENCE, A PURPOSIVE AND HARMONIOUS INTERPRETATION HAS TO BE T AKEN KEEPING IN VIEW THE PURPOSE OF AMENDMENT OF SECTION 32(2). WHILE CONSTRUING TAXING STATUTES, RULE OF STRICT INTERPRETATION HAS TO BE APPLIED, GIVING FAIR AND REASONABLE CONST RUCTION TO THE LANGUAGE OF THE SECTION WITHOUT LEANING TO THE SIDE OF ASSESSEE OR THE REVE NUE. BUT IF THE LEGISLATURE FAILS TO EXPRESS CLEARLY AND THE ASSESSEE BECOMES ENTITLED F OR A BENEFIT WITHIN THE AMBIT OF SECTION BY THE CLEAR WORDS USED IN SECTION, THE BENEFIT ACC RUING TO THE ASSESSEE CANNOT BE DENIED. HOWEVER, CIRCULAR NO.14 OF 2001 HAD CLARIFIED THA T UNDER SECTION 32(2), IN COMPUTING THE PROFITS AND GAINS OF BUSINESS OR PROFESSION FOR ANY PREVIOUS YEAR, DEDUCTION OF DEPRECIATION UNDER SECTION 32 SHALL BE MANDATORY. THEREFORE, THE PROVISIONS OF SECTION 32(2) AS AMENDED BY FINANCE ACT, 2001 WOULD ALLOW THE UNABSO RBED DEPRECIATION ALLOWANCE AVAILABLE IN THE AYS 1997-98, 1999-2000, 2000-01 AN D 2001-02 TO BE CARRIED FORWARD TO THE SUCCEEDING YEARS, AND IF ANY UNABSORBED DEPRECI ATION OR PART THEREOF COULD NOT BE SET OFF TILL THE AY 2002-03 THEN IT WOULD BE CARRIED FO RWARD TILL THE TIME IT IS SET OFF AGAINST THE PROFITS AND GAINS OF SUBSEQUENT YEARS. IT IS HELD THAT ANY UNABSORBED DEPRECIATION AVAIL ABLE TO AN ASSESSEE ON 1 ST DAY OF APRIL, 2002 (A.Y 2002-03) WILL BE DEALT WITH IN ACCORDANCE WITH THE PROVISIONS OF SECTION 32(2) AS AMENDED BY FINANCE ACT, 2001. AND ONCE THE CIRCULAR NO.14 OF 2001 CLARIFIED THAT THE RESTRICTION OF 8 YEARS FOR CARRY FORWARD AND SET OF F OF UNABSORBED DEPRECIATION HAD BEEN DISPENSED WITH, THE UNABSORBED DEPRECIATION FROM AY 1997-98 UP TO THE AY 2001-02 GOT CARRIED FORWARD TO THE AY 2002-03 AND BECAME PART T HEREOF, IT CAME TO BE GOVERNED BY THE PROVISIONS OF SECTION 32(2) AS AMENDED BY FINANCE A CT, 2001 AND WERE AVAILABLE FOR CARRY FORWARD AND SET OFF AGAINST THE PROFITS AND GAINS O F SUBSEQUENT YEARS, WITHOUT ANY LIMIT WHATSOEVER. THE AFORESAID PRINCIPLES HAVE BEEN REITERATED AND R ELIED ON BY THE FOLLOWING JUDICIAL PRECEDENTS CIT V. GUJARAT THEMIS BIOSYN LTD. [2014] 228 TAXM AN 359 (GUJARAT HIGH COURT) ARC FINE CHEMICALS PRIVATE LIMITED V. ACIT [PTA N O. 2414/2415/2012] (MUMBAI TRIBUNAL) CONFIDENCE PETROLEUM INDIA LTD V. OCIT [PTA NO. 19 37/ 2012] (MUMBAI TRIBUNAL) DCIT V. BAJAJ HINDUSTAN LTD. [2014] 149 ITD 709 ( MUMBAI TRIBUNAL) SMITH & NEPHEW HEALTHCARE (P.) LTD. V. DCIT [2014 ] 32 ITR(T) 208 (MUMBAI TRIBUNAL) HINDUSTAN UNILEVER LTD. V. ACIT [2012] 22 ITR(T) 737 (MUMBAI TRIBUNAL) ITA NOS.2344 & 2345/MDS/2012 :- 21 -: IN ADDITION TO THE ABOVE, THE JURISDICTIONAL MADRAS HIGH COURT IN THE CASE OF CIT V. S & S POWER SWITCHGEAR LTD. [2009] (218 CTR 701) (MADRAS) HAD UPHELD THE PRINCIPLE THAT THAT THE UNABSORBED DEPRECIATION ALLOWANCE OF ONE YEAR S HALL BE ADDED TO THE DEPRECIATION ALLOWANCE OF THE NEXT YEAR AND WILL BE DEEMED TO BE THE ALLOWANCE OF THAT YEAR. FURTHERMORE, THE HONBLE CHENNAI TRIBUNAL IN THE CA SE OF DCIT V. TAMIL NADU STATE TRANSPORT CORPORATION (VILLUPURAM) LIMITED [2012] I .T.A. NO. 1713/MDS/2011 HAD PLACED RELIANCE ON CIRCULAR 762 (SUPRA) AND THE AFORESAID RULING AND HELD AS UNDER: IN VIEW OF THE ABOVE CIRCULAR, AND ALSO IN VIEW OF THE DECISION OF THE JURISDICTIONAL HIGH COURT, IN THE CASE OF CIT V. S & S POWER SWITCHGEAR LTD., (218 CTR 701) (MADRAS) THE ENTIRE DEPRECIATION THAT WAS BROUGHT FORWARD TO THE AY 1996-97 AND THE NET UNABSORBED DEPRECIATION COMPUTED FOR THE AY 1996-97 AND CARRIE D FORWARD TO THE AY 1997-98 BECOMES THE DEPRECIATION ALLOWANCE OF AY 1997-98. THE UNABS ORBED DEPRECIATION ALLOWANCE AFTER SET OFF AGAINST THE INCOME OF THE CURRENT YEAR, WILL BE COME THE UNABSORBED DEPRECIATION ALLOWANCE OF AY 1997-98 AND THE LIMITATION OF 8 YEA RS, AS PER THE AMENDED PROVISIONS OF SEC.32(2), STARTS FROM THE AY 1997-98. THEREFORE, A LL THE DEPRECIATION ALLOWANCES THAT ARE BROUGHT FORWARD FROM THE EARLIER YEARS AND WERE AVA ILABLE DURING THE AY 1997-98 CAN BE CARRIED FORWARD FOR ANOTHER PERIOD OF 8 YEARS I.E., UP TO AY 2005-06. IN ANY CASE, WITH THE CHANGE IN THE PROVISIONS OF SECTION.32(2) W.E.F. 01 .04.2002 THE UNABSORBED DEPRECIATION ONCE AGAIN WAS MADE AVAILABLE TO THE ASSESSE INDEFI NITELY BY CLUBBING WITH THE CURRENT DEPRECIATION ALLOWANCE. IN LIGHT OF THE ABOVE JURISDICTIONAL DECISIONS, THE APPELLANT HAD SUBMITTED THAT THE BROUGHT FORWARD UNABSORBED DEPRECIATION OF AY 1997-98, 1998 -99 AND 1999-2000, TO THE EXTENT NOT SET-OFF AGAINST THE INCOME OF AY 2005-06, BE AL LOWED TO BE CARRIED FORWARD TO THE FUTURE YEARS FOR AN INDEFINITE PERIOD. 9.2 WE HEARD THE RIVAL SUBMISSIONS AND PERUSED THE MATERIAL PLACED ON RECORD. THE LD.AR RELIED ON THE DECISION OF THIS T RIBUNAL IN OF DCIT V. TAMIL NADU STATE TRANSPORT CORPORATION (VILLUPURAM) LIMITED [2012] I.T.A. NO. 1713/MDS/2011 CIRCULAR NO.14 OF 2001 AND JURISD ICTIONAL HIGH COURT OF MADRAS CITED SUPRA. THIS ISSUE IS SQUARELY COVERED BY THE DECISION OF THIS TRIBUNAL AND THE CASE LAW RELIED UPON BY THE ASSESS EE CITED SUPRA. 9.3 RESPECTFULLY FOLLOWING THE ORDER OF THIS TRIB UNAL IN THE CITED CASE WE DIRECT THE AO TO ALLOW THE UNABSORBED DEPRECIATI ON OF AY 1997-98, 1998-99, 1999-2000 TO THE EXTENT NOT SET OFF AGAINS T THE INCOME OF THE AY 2005-06 FOR FUTURE YEARS. THE APPEALS OF THE ASSES SEE ON THIS ISSUE FOR THE AY 2005-06 & 2008-09 ARE ALLOWED. ITA NOS.2344 & 2345/MDS/2012 :- 22 -: 10.0 THE NEXT GROUND FOR THE AY 2008-09 WAS DEPRECIATI ON ON UPS: THE AO DISALLOWED THE DEPRECIATION ON UPS AMOUNTIN G TO RS.6,47,180/- HOLDING THE UPS AS GENERAL PLANT AND MACHINERY THE ASSESSEE CLAIMED THE DEPRECIATION @60% TREATING THE UPS AS A PART OF COMPUTER. THE HONBLE ITATC BENCH, CHENNAI IN ITA N.O1774/MDS/2012 IN THE CASE OF SUNDARAM ASSET MANAGEMENT CO. LTD VS DCIT HELD THAT UPS IS AN INTEGRAL PART OF COMPUTER AND ELIGIBLE FOR DE PRECIATION @60%. RESPECTFULLY FOLLOWING THE DECISION OF THIS TRIBUNA L IN CASE CITED (SUPRA) WE DIRECT THE AO TO ALLOW THE DEPRECIATION ON COMPUTER @60%. IN THE RESULT, THE ASSESSEES APPEAL IS ALLOWED. 11.0 THE NEXT ISSUE IN GROUND NO.9 FOR AY 2008-09 IS DISALLOWANCE OF RS.44,11,27,098/- RELATING TO THE REVERSAL OF THE P ROVISION FOR NON- DEDUCTION OF TAX AT SOURCE. THE LD.AR SUBMITTED DU RING THE HEARING THAT THE AO HAS PASSED NECESSARY RECTIFICATION ORDER ON 16.10.2014 ON APPLICATION FILED BY THE ASSESSEE. THEREFORE, THIS GROUND IS DISMISSED AS INFRUCTUOUS. 12.0 GROUND NO.10 FOR THE AY 2008-09 IS CREDIT FOR T AX WITHHELD AT SOURCE AMOUNTING TO RS.74674/- THE AO IS DIRECTED T O ALLOW THE CREDIT FOR THE TAX WITHHELD AFTER MAKING DUE VERIFICATION.THIS GROUND OF APPEAL IS ALLOWED FOR STATISTICAL PURPOSES. ITA NOS.2344 & 2345/MDS/2012 :- 23 -: 13.0 GROUND NO.12 IS RELATED TO THE REFUND DUE TO THE C OMPANY ON WITHHOLDING TAX. THE AO ALLOWED THE INTEREST ON REF UND DUE TO THE COMPANY AS PER THE CREDIT AVAILABLE ACCORDING TO NS DL RECORDS BUT NOT ON THE ACTUAL TDS RECEIVABLES CLAIMED BY THE COMPANY. THE AO IS DIRECTED TO VERIFY THE RECEIVABLES AND ALLOW INTEREST AS PERMIT TED BY THE LAW. THIS GROUND OF APPEAL IS ALLOWED FOR STATISTICAL PURPOSE S. 14.0 IN THE RESULT, THE APPEAL OF THE ASSESSEE IS PARTL Y ALLOWED. ORDER PRONOUNCED IN THE OPEN COURT ON 12 TH MAY, 2017, AT CHENNAI. SD/- SD/- ( . . . ) (N.R.S. GANESAN) /JUDICIAL MEMBER ( ' . . $ ) (D.S.SUNDER SINGH) /ACCOUNTANT MEMBER /CHENNAI, 5 /DATED: 12 TH MAY, 2017. TLN 0 .$6 76 /COPY TO: 1. - /APPELLANT 4. 8 /CIT 2. ./- /RESPONDENT 5. 6 . /DR 3. 8 ( ) /CIT(A) 6. * /GF