M+W Singapore PTE.Limited, Hyderabad V. Dy.Director of Income-Tax-I, International Taxation, Hyderabad, Hyderabad

ITA 30/HYD/2015

• Counselvise Citation: 3022514 RSA 2015
• Duration Of Justice: 5 month(s) 25 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 30-06-2015
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: B
• Next Hearing Date: 12-05-2015
• Assessment Year: 2006-2007
• Appeal Filed On: 05-01-2015
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: C R PATID SUDHAKAR RAO
• Assessee Lawyers: S RAMA RAO
• Keywords: Transfer pricing; Opportunity of being heard
• Section: 143(3); 147

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL HYDERABAD BENCH B, HYDERABAD BEFORE SHRI P.M. JAGTAP, ACCOUNTANT MEMBER AND SHRI SAKTIJIT DEY, JUDICIAL MEMBER ITA NO. 30/HYD/2015 ASSESSMENT YEAR: 2006-07 M+W SINGAPORE PTE LTD., HYDERABAD. PAN AACCM4012H VS. DY. DIRECTOR OF INCOME-TAX I, INTERNATIONAL TAXATION, HYDERABAD (APPELLANT) (RESPONDENT) ASSESSEE BY : SHRI S. RAMA RAO REVENUE BY : SHRI C.R. PATI/D. SUDHAKAR RAO DATE OF HEARING 12-06-2015 DATE OF PRONOUNCEMENT 30-06-2015 O R D E R PER SAKTIJIT DEY, J.M.: THIS APPEAL BY ASSESSEE IS DIRECTED AGAINST THE FI NAL ASSESSMENT ORDER PASSED U/S 143(3) READ WITH SECTIO N 254 READ WITH SECTION 147 READ WITH SECTION 144C OF THE INCOME-TA X ACT, 1961, FOR THE AY 2006-07. 2. ASSESSEE HAS RAISED FIVE GROUNDS BEFORE US. GROU ND NOS. 1 & 5 BEING GENERAL IN NATURE, DO NOT REQUIRE ANY SPECIFI C ADJUDICATION. AS FAR AS GROUND NOS. 2, 3 &4 ARE CONCERNED, ONLY COMM ON ISSUE ARISING FROM THESE GROUNDS RELATE TO ADDITION OF AN AMOUNT OF RS. 4,03,29,682 BEING THE PROVISION MADE TOWARDS PURCHASES. 3. BRIEFLY THE FACTS RELATING TO THE ISSUE IN DISPU TE ARE, ASSESSEE IS A BRANCH OFFICE OF A COMPANY INCORPORATED IN SINGAP ORE. ASSESSEE IS BASICALLY ENGAGED IN THE BUSINESS OF EXECUTION OF W ORK CONTRACT IN INSTALLATION OF CLEAN ROOM AND AIR CONDITIONING SYS TEMS. FOR THE AY 2 ITA NO. 30 /HYD/2015 M + W SINGAPORE PTE LTD. UNDER CONSIDERATION, ASSESSEE FILED ITS RETURN OF I NCOME ON 30/11/2006 DECLARING A LOSS OF RS. 1,03,69,300. ASS ESSMENT IN CASE OF ASSESSEE WAS COMPLETED U/S 143(3) VIDE ORDER DAT ED 26/12/2008 DETERMINING THE TOTAL LOSS AT RS. 95,21,820 AFTER M AKING CERTAIN DISALLOWANCES. SUBSEQUENT TO THE COMPLETION OF ASSE SSMENT, IT WAS NOTICED BY AO THAT ASSESSEE HAS DEBITED AN AMOUNT O F RS. 4,03,29,682 AS PROVISION FOR PURCHASES IN THE P&L A /C. AO BEING OF THE VIEW THAT PROVISION OF EXPENDITURE IS NOT ALLOW ABLE, REOPENED THE ASSESSMENT U/S 147 OF THE ACT AND ULTIMATELY PASSED A DRAFT ASSESSMENT ORDER DISALLOWING THE EXPENDITURE OF RS. 4,03,29,682 TOWARDS PROVISION FOR PURCHASES AS DEBITED TO THE P &L A/C. OF COURSE, AO ALSO MADE ANOTHER DISALLOWANCE WITH WHICH WE ARE NOT CONCERNED IN THE PRESENT APPEAL. BEING AGGRIEVED OF THE DRAFT ASSESSMENT ORDER ASSESSEE FILED OBJECTIONS BEFORE THE DISPUTE RESOL UTION PANEL (DRP). SINCE DRP UPHELD THE DISALLOWANCE OF RS. 4,03,29,68 2, AO PASSED FINAL ASSESSMENT ORDER ACCORDINGLY. 4. AGAINST THE SAID FINAL ASSESSMENT ORDER, ASSESSE E PREFERRED APPEAL BEFORE THE ITAT. THE ITAT VIDE ORDER DATED 0 3/08/2012 PASSED IN ITA NO. 2095/HYD/2011 REMITTED THE MATTER BACK TO THE FILE OF AO WITH THE FOLLOWING OBSERVATIONS: 9. WE HAVE HEARD BOTH THE PARTIES AND PERUSED MATE RIAL ON RECORD. THE PRIMARY CONTENTION OF THE ASSESSEE IS THAT IT IS FO LLOWING PCM AND IT WAS NOT POSSIBLE TO BOOK THE REVENUE AS WELL AS EXPENSE S. CERTAIN LEVEL OF EXCESS WORK IS REQUIRED WHERE CERTAIN MISMATCH OF R EVENUE WILL BE THERE. BEING SO SOMETIMES HUGE EXPENSES ARE REQUIRED TO BE INCURRED FOR COMPLETION OF THE PROJECT THEN TO BE IN LINE WITH T HE CONCEPT OF MATCHING EXPENSES AND REVENUE IN ORDER TO RECOGNISE THE RELE VANT REVENUE, THE ASSESSEE MADE PROVISIONS IN THE BOOKS OF ACCOUNT TO WARDS FUTURE EXPENSES AND WILL BE REVERSED IN THE IMMEDIATE NEXT ASSESSMENT YEAR. THIS PRACTICE HAS BEEN FOLLOWED BY THE ASSESSEE YEA R TO YEAR AND THERE IS NO LOSS OF REVENUE TO THE DEPARTMENT. CONSIDERIN G THE ABOVE PRACTICE OF THE ASSESSEE-COMPANY, WE ARE INCLINED TO SET ASI DE THE ORDERS OF THE LOWER AUTHORITIES AND REMAND THE MATTER BACK TO THE FILE OF THE ASSESSING OFFICER WITH A DIRECTION TO VERIFY WHETHER THE ASSE SSEE IS FOLLOWING THIS ACCOUNTING METHOD CONSISTENTLY OR WHETHER IT IS A R EVERSAL OF PROVISIONS MADE FOR PURCHASES IN THE VERY NEXT ASSESSMENT YEAR AND IF IT IS SO, THE CLAIM OF THE ASSESSEE HAS TO BE ALLOWED. ACCORDINGL Y, THIS ISSUE IS 3 ITA NO. 30 /HYD/2015 M + W SINGAPORE PTE LTD. REMITTED BACK TO THE FILE OF THE ASSESSING OFFICER FOR FRESH CONSIDERATION AFTER PROVIDING REASONABLE OPPORTUNITY OF HEARING T O THE ASSESSEE. 5. IN COMPLIANCE TO THE DIRECTION OF THE ITAT, AO A GAIN INITIATED ASSESSMENT PROCEEDING BY CALLING UPON ASSESSEE TO S UBSTANTIATE ITS CLAIM THAT IT IS FOLLOWING SAME ACCOUNTING POLICY/M ETHOD IN ALL THE ASSESSMENT YEARS AND ALSO THE FACT THAT THE PROVISI ON FOR PURCHASES WERE REVERSED IN THE IMMEDIATELY NEXT AY. AS OBSERV ED BY AO IN THE DRAFT ASSESSMENT ORDER, ASSESSEE FAILED TO SUBSTANT IATE ITS CLAIM THAT IT IS FOLLOWING THE SAME ACCOUNTING METHOD AS FOLLO WED IN THE INSTANT AY CONSISTENTLY FOR ALL THE PRECEDING AYS. FURTHER, HE ALSO FAILED TO DEMONSTRATE THAT PROVISION MADE FOR PURCHASES WERE REVERSED IN THE IMMEDIATELY NEXT AY. ACCORDINGLY, AO PASSED DRAFT A SSESSMENT ORDER DISALLOWING THE AMOUNT OF RS. 4,03,29,682. ASSESSEE OBJECTED TO THE DISALLOWANCE MADE BY AO BEFORE THE DRP. DRP AFTER CONSIDERING THE SUBMISSIONS OF ASSESSEE VIS--VIS FACTS AND MATERIA LS ON RECORD OBSERVED THAT ASSESSEE FAILED TO BRING ANY MATERIAL ON RECORD TO ESTABLISH THE FACT THAT IT IS FOLLOWING SIMILAR ACC OUNTING METHOD CONSISTENTLY OVER THE YEARS AND AS WELL AS IT HAS R EVERSED THE PROVISION MADE FOR PURCHASES IN THE IMMEDIATELY NEX T AY. ACCORDINGLY, LD. DRP SUSTAINED THE DISALLOWANCE MAD E BY AO. IN PURSUANCE TO THE ORDER PASSED BY LD. DRP, AO PASSED THE IMPUGNED ASSESSMENT ORDER MAKING ADDITION OF RS. 4,03,29,682 . 6. LD. AR MORE OR LESS REITERATING THE SUBMISSIONS MADE BEFORE THE DEPARTMENTAL AUTHORITIES SUBMITTED, ASSESSEE HA S BEEN FOLLOWING THE SAME ACCOUNTING METHOD OVER THE YEARS IN BOOKIN G THE PROVISION TOWARDS PURCHASES AND HAS REVERSED THE PROVISION MA DE TOWARDS PURCHASES IN THE AY WHEREIN ACTUALLY THE EXPENDITUR E WAS ACTUALLY INCURRED. IN THIS CONTEXT, HE DREW OUR ATTENTION TO A WORKING OF THE PROVISION OF PURCHASES MADE, A COPY OF WHICH IS AT PAGE 185 OF THE ASSESSEES PAPER BOOK. LD. AR SUBMITTED, SINCE THE TRIBUNAL HAS DIRECTED FOR ALLOWANCE OF THE PROVISION MADE, AO WA S NOT JUSTIFIED IN DISALLOWING THE SAME. 4 ITA NO. 30 /HYD/2015 M + W SINGAPORE PTE LTD. 7. LD. DR, ON THE OTHER HAND, STRONGLY RELYING UPON THE DISALLOWANCE MADE BY AO AND DRP SUBMITTED BEFORE US , NEITHER BEFORE AO NOR BEFORE DRP, ASSESSEE, WAS ABLE TO E STABLISH THE FACT THAT IT WAS CONSISTENTLY FOLLOWING THE SAME METHOD OF ACCOUNTING RELATING TO THE PROVISION MADE OF PURCHASES AND ALS O THE FACT THAT THE PROVISION MADE WAS REVERSED IN THE IMMEDIATELY NEXT AY. HE SUBMITTED, EVEN AFTER AVAILING AMPLE OPPORTUNITY, A S ASSESSEE COULD NOT ESTABLISH/SUBSTANTIATE ITS CLAIM BEFORE THE DEP ARTMENTAL AUTHORITIES, THE DISALLOWANCE MADE IS JUSTIFIED. 8. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS AND PER USED THE ORDERS OF THE DEPARTMENTAL AUTHORITIES AS WELL AS O THER MATERIALS ON RECORD. AS COULD BE SEEN, IT IS THE SECOND VISIT OF ASSESSEE TO THE TRIBUNAL. IN THE EARLIER ROUND OF LITIGATION BEFORE THIS TRIBUNAL WHEN THIS PARTICULAR ISSUE CAME UP FOR CONSIDERATION, A SPECIFIC PLEA WAS TAKEN BY ASSESSEE THAT IT IS FOLLOWING PERCENTAGE C OMPLETION METHOD FOR RECOGNIZING REVENUE AS WELL AS EXPENDITURE. HEN CE, FOLLOWING THE MATCHING PRINCIPLE, ASSESSEE MADE PROVISION IN THE BOOKS OF ACCOUNT TOWARDS FUTURE EXPENSES WHICH ACCORDING TO ASSESSEE WILL BE REVERSED IN THE SUCCEEDING AY. CONSIDERING THE AFOR ESAID SUBMISSIONS OF ASSESSEE, TRIBUNAL REMITTED THE MATT ER BACK TO AO WITH A DIRECTION TO ALLOW ASSESSEES CLAIM AFTER VE RIFYING FIRSTLY WHETHER ASSESSEE IS FOLLOWING THE ACCOUNTING METHOD CONSISTENTLY AND SECONDLY WHETHER IT HAS REVERSED THE PROVISION MADE FOR PURCHASES IN THE IMMEDIATELY NEXT AY. IN COURSE OF HEARING, WHEN THE BENCH CALLED UPON LD. AR TO DEMONSTRATE AS TO WHETHER PROVISION CREATED FOR PURCHASES IN THE IMPUGNED AY HAS BEEN REVERSED IN T HE SUCCEEDING AY, LD. AR SUBMITTED, IN THE IMMEDIATELY NEXT FY 20 06-07, ASSESSEE HAS REVERSED AN AMOUNT OF RS.1,43,70,885 THROUGH JO URNAL ENTRIES MADE ON 25/08/2006. IN THIS CONTEXT, HE DREW OUR AT TENTION TO LEDGER COPY OF OUTSTANDING PROVISIONS FOR PURCHASES FOR FY 2006-07. IT WAS FURTHER SUBMITTED, NECESSARY ENTRIES WERE ALSO MADE IN THE PURCHASES ACCOUNT DEBITING THE SAID AMOUNT AGAINST PURCHASES ACTUALLY MADE 5 ITA NO. 30 /HYD/2015 M + W SINGAPORE PTE LTD. DURING THE YEAR. IN SUPPORT OF SUCH CLAIM, ASSESSEE REFERRED TO THE LEDGER COPY OF THE PURCHASES MADE FROM 01/04/2006 T O 31/03/2007. LD. AR SUBMITTED, THE CLOSING BALANCE OF THE PROVIS IONS MADE FOR PURCHASES AMOUNTING TO RS. 2,59,58,797 AS ON 31/03/ 2007 WAS REVERSED IN THE FY 2007-08 BY DEBITING THE PURCHASE ACCOUNT. IN THIS CONTEXT, HE REFERRED TO THE LEDGER COPY OF OUTSTAND ING PROVISIONS FOR PURCHASE ACCOUNT FOR PERIOD OF 01/04/07 TO 31/03/08 , A COPY OF WHICH IS AT PAGE 301 OF ASSESSEES PAPER BOOK. THUS, FROM THE AFORESAID FACTS, AS IT APPEARS, ASSESSEE HAS REVERSED THE PRO VISIONS MADE FOR PURCHASES OF RS. 4,03,29,682 MADE IN THE IMPUGNED A Y IN TWO SUCCEEDING AYS I.E. RS. 1,43,70,885 IN AY 2007-08 A ND RS. 2,59,58,797 IN AY 2008-09. AT THIS JUNCTURE, IT NEE DS TO BE MENTIONED, THOUGH, ASSESSEE HAS SUBMITTED LEDGER COPY OF PURCH ASES MADE FOR AY 2007-08 SHOWING REVERSAL OF PROVISIONS MADE TO T HE EXTENT OF RS. 1,43,70,885, BUT, NO SUCH EVIDENCE IN RESPECT OF RE VERSAL OF PROVISIONS MADE FOR AN AMOUNT OF RS. 2,59,58,797 FO R AY 2008-09 HAS BEEN PRODUCED BEFORE US. THEREFORE, WITHOUT VERIFYI NG THE AUTHENTICITY OF ASSESSEES CLAIM, DEDUCTION CANNOT BE ALLOWED. I N VIEW OF THE AFORESAID FACT, WE ARE INCLINED TO REMIT THE MATTER BACK TO THE FILE OF AO TO VERIFY THE FACT AS TO WHETHER ASSESSEE HAS DE BITED THE AMOUNT OF RS.2,59,58,797 TO THE PURCHASES ACCOUNT IN A.Y. 2008-09 WHILE REVERSING PROVISIONS MADE FOR THE IMPUGNED AY AND I F IT IS FOUND TO BE SO, THEN, NO ADDITION IS REQUIRED TO BE MADE. WE MA KE IT CLEAR THAT AO MUST PROVIDE ADEQUATE OPPORTUNITY OF BEING HEARD TO ASSESSEE TO EXPLAIN ITS CASE. 9. IN THE RESULT, ASSESSEES APPEAL IS PARTLY ALLOW ED FOR STATISTICAL PURPOSES. PRONOUNCED IN THE OPEN COURT ON 30 TH JUNE, 2015. SD/- SD/- (P.M. JAGTAP) (SAKTIJIT DEY) ACCOUNTANT MEMBER JUDICIAL MEMBER HYDERABAD, DATED: 30 TH JUNE, 2015 KV 6 ITA NO. 30 /HYD/2015 M + W SINGAPORE PTE LTD. COPY TO:- 1) M+W SINGAPORE PTE LTD., C/O SHRI S. RAMA RAO, AD VOCATE, FLAT NO. 102, SHRIYAE ELEGANCE, 3-6-643, STREET NO. 9, HIMAYATNAGAR, HYDERABAD 500 029 2) DRP, HYDERABAD 3) ADDL. CIT, TRANSFER PRICING, HYDERABAD-500 004 4) CIT II, HYDERABAD 500 004. 4) THE DEPARTMENTAL REPRESENTATIVE, I.T.A.T., HYDE RABAD.