ACIT, New Delhi V. M/s. HCL Comnet Ltd., New Delhi

ITA 321/DEL/2012

• Counselvise Citation: [2016] 131 COUNSELVISE.COM (IT) 7342 (ITAT-DELHI)
• Duration Of Justice: 4 year(s) 6 month(s) 30 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 19-08-2016
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: C
• Next Hearing Date: 27-07-2016
• Assessment Year: 2004-2005
• Appeal Filed On: 20-01-2012
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: A K SAROHA; AMRIT LAL
• Assessee Lawyers: ADITYA VOHRA AV
• Keywords: Business income; Depreciation; Double taxation relief; Earning of tax free income; Wrong claim; Corroborative evidences; Assessment record; Tax effect
• Section: 143(3); 14A; 145; 37; 144

Judgement Text

1 IN THE INCOME TAX APPELLATE TRIBUNAL DELHI BENCH C NEW DELHI BEFORE SHRI S.V. MEHROTRA : ACCOUNTANT MEMBER AND SHRI C.M. GARG : JUDICIAL MEMBER ITA NOS. 321/DEL/2012 (ASSTT. YR. 2004-05) 5651/DEL/2012 (ASSTT. YR. 2006-07) 6142/DEL/2012 (ASSTT.YR: 2009-10) ACIT, CIRCLE 12(1), VS. M/S HCL COMNET LTD., NEW DELHI. 806, SIDDHARTHA, 96 NEHRU PLACE, NEW DELHI. PAN: AAACH 9667 H AND ITA NOS. 5907/DEL/2010 (A.Y. 2006-07) (U/S 263 OF THE ACT.) 5898/DEL/2012 (A.Y. 2009-10) M/S HCL COMNET LTD., VS. ACIT, CIRCLE 12(1), NEW DELHI. NEW DELHI. (APPELLANT) ( RESPONDENT) DEPARTMENT BY : SHRI A.K. SAROHA CIT(DR) & SHRI AMRIT LAL SR. DR ASSESSEE BY : SHRI AJAY VOHRA SR. ADV. & SHRI ADITYA VOHRA AV. DATE OF HEARING : 27/07/2016. DATE OF ORDER : 19/08/2016. O R D E R PER S.V. MEHROTRA, A.M: ALL THE CAPTIONED APPEALS WERE HEARD TOGETHER AND A RE BEING DISPOSED OF THIS COMPOSITE ORDER, FOR THE SAKE OF CONVENIENC E. 2 ITA NO. 321/DEL/2012 ( REVENUES APPEAL FOR AY 2004 -05) : 2. THIS APPEAL, PREFERRED BY THE REVENUE, ARISES OU T OF CIT(A)-XXVII, NEW DELHIS ORDER DATED 31.10.2011 IN APPEAL NO. 18 0/09-10 RELATING TO AY 2004-05. 4. BRIEF FACTS OF THE CASE ARE THAT THE ASSESSEE CO MPANY WAS ENGAGED IN THE BUSINESS OF DESIGNING, DELIVERING, INSTALLATIO N AND COMMISSIONING OF NET WORKING SOLUTION AND PROVIDING PROFESSIONAL SERVICE S FOR MANAGEMENT AND MAINTENANCE OF NET WORKING SOLUTION. 4.1. THE ASSESSEE HAD FILED RETURN OF INCOME DECLAR ING INCOME OF RS. 15,28,572/-. THE ASSESSMENT WAS COMPLETED U/S 143(3 ) AT AN ASSESSED INCOME OF RS. 75,43,775/-. THEREAFTER, LD. CIT PASS ED AN ORDER DATED 17.3.2009 U/S 263 SETTING ASIDE THE ASSESSMENT ON T HE LIMITED ISSUE FOR CARRYING OUT NECESSARY VERIFICATION AND CROSS INQUI RY TO DETERMINE TRUE NATURE, CORRECTNESS AND ALLOWABILITY OF THE FOLLOWI NG ISSUES: I) THE ASSESSEE HAD MADE A PAYMENT FOR AMC OF RS. 255.58 LACS ON WHICH NO TAX WAS DEDUCTED AT SOURCE. SINCE THESE PAYMENTS WERE MADE TO THE NON RESIDENTS, TAX WAS RE QUIRED TO BE DEDUCTED AT SOURCE ON THE SAME. II) THE ASSESSEE HAS CLAIMED AND WAS WRONGLY ALLOWE D EXPENDITURE OF RS. 1,54,02,000/- TOWARDS PROVISION FOR WARRANTY. SINCE THIS WAS AN UNASCERTAINED LIABILITY IT SHOULD HAVE BEEN DISALLOWED AND ADDED TO THE INCOME OF THE ASSESSEE . 3 4.2. THE AO, AFTER CONSIDERING THE ASSESSES SUBMIS SIONS, MADE FOLLOWING DISALLOWANCES: A. DISALLOWANCE ON ACCOUNT OF NON-DEDUCTION OF TDS ON AMC CONTRACT RS. 2,55,57,990/- B. ADDITION ON ACCOUNT OF PROVISION FOR WARRANTEE RS. 1,54,02,000/-. 4.3. APROPOS NON-DEDUCTION OF TDS IN RESPECT OF AMC PAYMENTS, LD. CIT(A) HELD THAT THE SAME WAS NOT TAXABLE IN THE HA NDS OF NON-RESIDENT PAYEE, BECAUSE THAT WAS BUSINESS INCOME OF THE NON- RESIDENTS AND SINCE THEY HAD NO PE IN INDIA, THEREFORE, IN TERMS OF THE PROV ISIONS OF RELEVANT DTAA, THE SAME WAS NOT TAXABLE IN THE HANDS OF NON-RESIDE NT ASSESSEE. HE FURTHER HELD THAT THE AMC PAYMENT COULD NOT BE HELD TO BE I N THE NATURE OF FEE FOR TECHNICAL SERVICES AND, THEREFORE, NOT TAXABLE U/S 9(1)(VII). HE, ACCORDINGLY, HELD THAT THE PROVISIONS OF SECTION 195 WERE NOT AT TRACTED IN RESPECT OF AMC PAYMENTS AND CONSEQUENTLY THERE WAS NO QUESTION OF DISALLOWANCE U/S 40(A)(I). HE, THEREFORE, DELETED THE ADDITION OF RS . 2,55,57,990/-,. 4.4. AS REGARDS DISALLOWANCE OF PROVISION FOR WARRA NTY AMOUNTING TO RS. 1,54,02,000/-, LD. CIT(A) REFERRED TO THE DECISION OF THE ITAT IN ITA NO. 2195/DEL/2008 WHEREIN VIDE ORDER DATED 8.10.2010, T HE TRIBUNAL HAD SET ASIDE THE ORDER OF CIT PASSED U/S 263 IN RESPECT OF PROVISION FOR WARRANTY AFTER FOLLOWING THE DECISION OF THE HONBLE SUPREME COURT IN THE MATTER OF ROTORK CONTROLS INDIA PVT. LTD. 314 ITR 62 (SC). 4 5. BEING AGGRIEVED WITH THE ORDER OF LD. CIT(A), TH E DEPARTMENT IS IN APPEAL BEFORE US AND HAS TAKEN FOLLOWING GROUND OF APPEAL: WHETHER LD. CIT(A) WAS CORRECT ON FACTS AND CIRCUM STANCES OF THE CASE AND IN LAW IN DELETING THE ADDITION OF RS. 2,55,57,990/- MADE BY THE AO ON ACCOUNT OF PAYMENT UNDER AMC CONT RACT. 5.1. BRIEF FACTS APROPOS THIS ISSUE ARE THAT LD. CI T IN HIS ORDER PASSED U/S 263 DATED 18.3.2009 CONTAINED AT PAGE 131 ONWARDS O F THE PAPER BOOK, NOTED FROM THE NOTES TO ACCOUNT THAT ASSESSEE HAD MADE PA YMENT OF AMC OF RS. 255.58 LAKHS ON WHICH NO TAX WAS DEDUCTED. THIS PAY MENT WAS MADE TO FOLLOWING PERSONS: PARTICULARS COUNTRY AMOUNT PAID (RS) GILAT SATELLITE NETWORKS LIMITED ISRAEL 17,700,589 TELESYSTEMS INTERNATIONAL CORPORATION USA 2,769,374 AGILIS COMMUNICATION TECHNOLOGIES PTE LTD. SINGAPORE 4,673,272 GILAT SATELLITE NETWORKS LIMITED HOLLAND 113,150 MISCELLANEOUS 301,586 TOTAL 25,557,971 5.2. LD. CIT PASSED ORDER U/S 263 PRIMARILY ON THE GROUND THAT THIS ISSUE HAD NOT BEEN EXAMINED BY THE AO. AT HIS JUNCTURE WE MAY POINT OUT THAT TRIBUNAL VIDE ITS ORDER DATED 8.10.2010 HAS UPHELD THE ACTION OF LD. CIT ON THIS COUNT. ACCORDINGLY THE AO HAS PASSED THE IMPU GNED ASSESSMENT ORDER. 5 5.3. BEFORE AO, THE ASSESSEE, VIDE ITS LETTER DATED 15.10.2009, SUBMITTED THAT THE PAYMENT FOR AMC HAS BEEN MADE BY HCL TO VA RIOUS PARTIES BELONGING TO VARIOUS COUNTRIES. THE PAYMENT FOR AMC CONTRACT COMPRISED PAYMENT FOR WARRANTY CHARGES AND EXTENDED WARRANTY CHARGES, WHICH ARE IN THE NATURE OF REPAIR/ REPLACEMENT OF EQUIPMENTS. UN DER THE CONTRACT, EQUIPMENTS ARE SENT OUTSIDE INDIA FOR ANY REPAIR/ R EPLACEMENT AND ARE RE- IMPORTED IN INDIA. 5.4. AFTER CONSIDERING THE AFOREMENTIONED SUBMISSIO NS OF ASSESSEE, THE AO OBSERVED THAT IN VIEW OF SPECIFIC PROVISIONS LAID D OWN U/S 40(A)(I) OF THE I.T. ACT, 1961, DEDUCTION COULD NOT BE ALLOWED AS THE PA YMENT HAD BEEN MADE WITHOUT TDS. HE, ACCORDINGLY, MADE A DISALLOWANCE O F RS. 2,55,57,990/-. 5.5. BEFORE LD. CIT(A) THE ASSESSEE, INTER ALIA, SU BMITTED AS UNDER: (A) AO HAS NOT ANALYZED THE TAXABILITY OF AMC PAYMENTS UNDER THE PROVISIONS OF THE ACT AND DOUBLE TAXATION AVOIDANCE AGREEMENTS (HEREINAFTER REFERRED TO AS DTAA), ENTERED BETWEE N INDIA AND RESPECTIVE FOREIGN COUNTRY AND SUMMARILY DISALLOWED THE ENTIRE AMC PAYMENTS BY MERELY STATING THAT SINCE THESE PAYMENT S WERE MADE TO THE NON-RESIDENTS, TAX WAS REQUIRED TO BE DEDUCTED AT SOURCE ON THE SAME. (B) THE ASSESSEE REFERRED TO THE AGREEMENT WITH GILLETT E ISRAEL . LD. CIT(A) IN PARA 9 HAS NOTED THE VARIOUS SERVICES PRO VIDED TO ASSESSEE AND HAS POINTED OUT IN PARA 10 THAT THE EXTENDED MA INTENANCE AGREEMENT ENTERED INTO WITH GILLETTE ISRAEL COVER S SERVICES RELATING TO 6 ROUTINE MAINTENANCE OF THE EQUIPMENTS INCLUDING PRO DUCT REPAIRS AND REPLACEMENTS. THUS, THERE WAS NO TECHNICAL SERVICE PROVIDED TO THE ASSESSEE. THE SERVICES WERE PROVIDED OUTSIDE INDIA. (C) THE ASSESSEE FURTHER SUBMITTED THAT THE PROVISIONS OF SECTION 40(A)(I) OF THE ACT WOULD APPLY, INTER ALIA, IF: I) ANY INTEREST, ROYALTY, FEES FOR TECHNICAL SERVICES (FTS) OR OTHER SUM CHARGEABLE UNDER THIS ACT, WHICH IS PAYAB LE OUTSIDE INDIA, OR TO A NON RESIDENT IN INDIA; II) ON WHICH TAX HAS NOT BEEN DEDUCTED. III) IN ACCORDANCE WITH THE PROVISIONS OF CHAPTER XVII-B . 5.6. AS REGARDS THE APPLICABILITY OF SECTION 195 OF THE ACT, THE ASSESSEE SUBMITTED THAT AS PER CHAPTER XVIIB, SECTION 195 OF THE ACT I S THE APPLICABLE SECTION FOR PAYMENTS MADE BY AN ASSESSEE TO A NON-RESIDENT OUTS IDE INDIA. THEREFORE, IN ORDER TO EXAMINE WHETHER PAYMENTS MADE BY ASSESSEE REQUIR ED DEDUCTION OF TAX AT SOURCE, IN TERMS OF SECTION 195 IT HAS TO BE EXAMIN ED WHETHER THE SUM PAID TO THE NON-RESIDENT PAYEE IS CHARGEABLE TO TAX IN INDIA IN THE HANDS OF NON-RESIDENT PAYEE OR NOT. THE APPLICABILITY OF SECTION 195 WILL BE DE CIDED ACCORDINGLY. RELIANCE WAS PLACED ON THE DECISION OF HONBLE SUPREME COURT IN THE CASE OF GEE INDIA TECHNOLOGY VS. CIT 327 ITR 456. 5.7. AS REGARDS THE CHARGEABILITY OF INCOME UNDER T HE PROVISIONS OF THE ACT IN RELATION TO A SUM PAID TO THE NON-RESIDENT ASSESSEE , THE ASSESSEE POINTED OUT THAT THE SAME IS TO BE DETERMINED ON THE BASIS OF PROVISIONS OF THE ACT AS WELL AS THE 7 PROVISIONS OF DTAA AND THE PROVISIONS OF THE ACT OR THE PROVISIONS OF THE DTAA, WHICHEVER IS MORE BENEFICIAL CAN BE RESORTED TO BY THE ASSESSEE. IN THIS REGARD RELIANCE WAS PLACED ON THE DECISION OF HONBLE SUPR EME COURT IN THE CASE OF HINDUSTAN OF INDIA AND ANOTHER VS. AZADI BACHAO AND OLAN & ANOTHER 263 ITR 706. THE ASSESSEE SUBMITTED THAT THE SAID SERVICES BEING IN THE NATURE OF ROUTINE REPAIRS/ REPLACEMENT AND MAINTENANCE, WERE NOT IN THE NATURE OF FTS SINCE THERE WAS NO TECHNICAL, MANAGERIAL OR CONSULTANCY SERVICES, WHIC H WAS BEING PROVIDED BY GILLETTE ISRAEL TO THE ASSESSEE. THEREFORE THE PAYM ENT DID NOT FALL WITHIN THE PROVISIONS OF EXPLANATION TO SECTION 9(1)(VII) . 5.8. IN THIS REGARD RELIANCE WAS PLACED ON THE ORDE R OF THE ITAT IN THE CASE OF LUFTHANSA CARGO INDIA (P) LTD. VS. DCIT (2004) 91 I TD 133 (DEL.), WHEREIN IT WAS, INTER ALIA, HELD THAT OVERALL REPAIRS INVOLVED ROUTINE MAINTENANCE REPAIRS AND, THEREFORE, IT COULD NOT BE SAID THAT FOREIGN COMPAN Y RENDERED ANY MANAGERIAL, TECHNICAL OR CONSULTANCY SERVICE TO THE ASSESSEE. THE ASSESSEE ALSO MADE DETAILED SUBMISSIONS IN REGARD TO TAXABILITY UNDER THE PROVI SIONS OF RELEVANT TAX TREATY/ DOUBLE TAX AVOIDANCE ACT AND POINTED OUT THAT SINCE THESE SERVICES WERE IN THE NATURE OF ROUTINE REPAIRS AND MAINTENANCE AND DID N OT MAKE AVAILABLE ANY TECHNICAL KNOWLEDGE, SKILL, EXPERIENCE, KNOW HOW ETC. TO THE ASSESSEE OR ITS EMPLOYEES, THEREFORE, THE SERVICES DID NOT COME WITHIN THE PUR VIEW OF THE TECHNICAL SERVICES ENVISAGED UNDER ARTICLE 13 OF THE DTAA READ WITH PR OTOCOL THEREOF, MEANING 8 THEREBY THAT THE PAYMENTS TOWARDS ANY SUCH SERVICES IN THE FORM OF AMC WERE NOT TAXABLE AS FTS AS DEFINED UNDER PARAGRAPH 3 OF ARTI CLE 13 OF THE DTAA BETWEEN INDIA AND ISRAEL AND, THEREFORE, THERE WAS NO LIAB ILITY TO WITH-HOLD TAX U/S 195 OF THE ACT. SIMILARLY, SUBMISSIONS WERE MADE IN RESPEC T OF OTHER CONTRACTS, WHICH HAVE BEEN NOTED BY LD. CIT(A) IN DETAIL IN HIS ORDE R. 5.9. AFTER CONSIDERING ALL THESE SUBMISSIONS LD. CI T(A) CONCURRED WITH THE SUBMISSIONS OF ASSESSEE AND HELD THAT NO TAX WAS D EDUCTIBLE U/S 195 OF THE ACT AND CONSEQUENTLY THERE WAS NO ELEMENT OF DISALLOWANCE U /S 40(A)(I). 6. LD. CIT(DR) SUBMITTED THAT EQUIPMENT WAS IN INDI A AND SERVICES HAVE BEEN RENDERED THROUGH COMMUNICATION IN INDIA, THEREFORE , LD. CIT(A) WAS NOT RIGHT IN HOLDING THAT SERVICES WERE RENDERED OUTSIDE INDIA. HE REFERRED TO PAGE 28 OF THE PB, WHEREIN THE EXTENDED MAINTENANCE AGREEMENT IS C ONTAINED AND REFERRED TO THE RECITAL RELATING TO MAINTENANCE SUPPORT SERVICE FOR ALL THE GILLETTE HUB STATION EQUIPMENT. HE REFERRED TO THE SECOND COVENANT WHERE IN THE NATURE OF SERVICES TO BE RENDERED BY GILLETTE ISRAEL ARE CONTAINED AND REFER RED TO FOLLOWING CLAUSES: 2.3.3 BUYER AGREES AND ACKNOWLEDGOS THAT GILAT MAY IN GLLAT'S ABSOTULE DISCRETION, DISPATCH TO BUYER'S HU B STATION SITE GILAT'S EMERGENCY PERSONNEL AS GILAT MAY DEEM NECE SSARY FROM TIME TO LIME FOR THE PURPOSE OF ASSISTING THE BUYER TO REMEDY THE MAJOR DEGRADATION. IF GILAT DISPATCHES S UCH A PERSON, BUYER SHALL PROVIDE TO SUCH PERSON ACCESS T O THE HUB STATION EQUIPMENT AND ALL ASSISTANCE NECESSARY OR DESIRABLE TO OVERCOME THE MAJOR DEGRADATION. 9 2.6 PRODUCT REPLACEMENT AND REPAIR: THROUGHOUT THE TERN OF THIS AGREEMENT, GILAT SHALL REPAIR OR REPLACE ANY F AILED OR DEFECTIVE PART OR PARTS OF THE HUB STATION EQUIPMEN T IN ACCORDANCE WITH THE PROVISIONS OF SUB-PARAGRAPHS 2. 6.1 THROUGH 2.6.4. 2.6.2 THE TIME WITHIN WHICH THE 'BUYER MUST SEND TO GILAT HUB STATION EQUIPMENT IN ACCORDANCE WITH SUB PARAGRAPH 2.6.1 IS THE EARLIER OF (I) THE BUYER ACCUMULATING DEFECTIVE PARTS CONSISTING OF TWENTY FIVE PERCENT (25%) OF THE BUY ER'S STOCK OF SPARE PARTS, AND (II) SIXTY (60) DAYS OF THE BUYE R DISCOVERING A DEFECT IN THE HUB STATION EQUIPMENT OR ANY PARTS THEREOF. 2.6.3 UPON RECEIPT BY GILAT OF SUCH DEFECTIVE HUB S TATION EQUIPMENT GILAT SHALL REPAIR OR REPLACE SUCH HUB ST ATION EQUIPMENT OR PARTS THEREOF FOUND BY GILAT TO BE DEF ECTIVE. GILAT SHALL DELIVER TO BUYER EACH REPAIRED OR REPLACEMENT UNIT OF HUB STATION EQUIPMENT ACCOMPANIED BY A WRITTEN 'FAILURE ANALYSIS' SETTING FORTH A DESCRIPTION OF THE FAULT FOUND AND THE CORRECTIVE ACTION TAKEN BY GILAT. GILAT SHALL BEAR THE COST OF RETURNING TO THE BUYER OF MUMBAI, INDIA THE REPAIRED OR REPLACE MENT HUB STATION EQUIPMENT WITHIN THIRTY (30) DAYS OF BUYER DELIVERING SUCH EQUIPMENT TO GILAT (CIF TEL AVIV), PROVIDED TH AT IF GILAT DETERMINES THAT SUCH EQUIPMENT IS NOT DEFECTIVE, BU YER SHALL PAY GILAT ALL COSTS OF HANDLING, TRANSPORTATION AND LABOR AT GILATS THEN PREVAILING RATES. 6.1. BY REFERRING TO THESE COVENANTS LD. CIT(DR) SU BMITTED THAT DELIVERY IS AT CIF MUMBAI. HE, THEREFORE, SUBMITTED THAT THE AMOUNTS W ERE TAXABLE IN INDIA. 7. LD. SR. COUNSEL FOR THE ASSESSEE RELIED ON THE D ECISION OF CIT(A) AND SUBMITTED THAT IN VIEW OF THE DECISION IN THE CASE OF GEE TECHNOLOGIES THE PROVISIONS OF SECTION 195 WERE NOT ATTRACTED. 10 8. WE HAVE CONSIDERED RIVAL SUBMISSIONS AND HAVE PE RUSED THE RECORD OF THE CASE. THE EXTENDED MAINTENANCE AGREEMENT HAS BEEN E NTERED INTO WITH GILAT SATELLITE NETWORKS LTD., A ISRAEL COMPANY, WITH T HE ASSESSEE FOR WARRANTY GRANTED TO ASSESSEE FOR THE EQUIPMENT SUPPLIED BY GILAT SAT ELLITE NETWORKS LTD. THE SECOND RECITAL OF THE AGREEMENT READS AS UNDER: WHEREAS, ACCORDING TO THE TERMS AND CONDITIONS OF P URCHASE THEREOF, THE WARRANTEE GRANTED TO BUYER (ASSESSEE) FOR SUCH EQUIPMENT EXPIRED AND BUYER (ASSESSEE) HAS THE RIGH T TO PURCHASE ANNUAL MAINTENANCE SUPPORT SERVICES ON THE EXPIRATION THEREOF . 8.1. THUS, IT IS EVIDENT THAT PRIMARILY THIS AGREEM ENT HAD BEEN ENTERED INTO FOR ANNUAL MAINTENANCE SUPPORT SERVICES. 8.2. LD. CIT(DR) HAS REFERRED TO THE VARIOUS SERVIC ES, COVENANTS AND POINTED OUT THAT SERVICES HAD BEEN RENDERED BY COMMUNICATION ON LY IN INDIA. LD. CIT(DR)S CONTENTION CANNOT BE ACCEPTED IN VIEW OF SPECIFIC C OVENANT CONTAINED IN THE AGREEMENT, WHICH, INTER ALIA, INCLUDES COVENANT NO. 2.6, WHICH DEALS WITH PRODUCT REPLACEMENT AND REPAIR AS PER WHICH GILLETTE SHALL REPAIR OR REPLACE ANY FAILED OR DEFECTIVE PART OR PARTS OF THE HUB STATION EQUIPMEN T IN ACCORDANCE WITH THE PROVISIONS OF SUB PARA 2.6.1 TO 2.6.4. THEREFORE, I T IS NOT CORRECT TO SAY THAT THE ENTIRE SERVICES WERE RENDERED IN INDIA. AS A MATTER OF FACT THE REPLACEMENT COULD BE EFFECTED ONLY BY GILLETTE. IT IS NOT THE CASE OF AO THAT THE NON-RESIDENT PAYEE HAD ANY PE IN INDIA AND, THEREFORE, THE BUSINESS INCOME IN THE HANDS OF NON-RESIDENT 11 PAYEE COULD NOT BE TAXED IN INDIA. FURTHER, WE ARE IN AGREEMENT WITH THE DETAILED ANALYSIS CARRIED OUT BY LD. CIT(A) IN HOLDING THAT NO TECHNICAL SERVICES WERE PROVIDED TO THE ASSESSEE AND THE SERVICES WERE IN T HE NATURE OF NORMAL MAINTENANCE/ REPAIRS/ REPLACEMENT ETC., PERFORMED O UTSIDE INDIA. THEREFORE, SUCH PAYMENTS DID NOT FALL WITHIN THE PURVIEW OF EXPLANA TION 2 TO SECTION 9(1)(VII) OF THE ACT. FURTHER, WE ARE IN AGREEMENT WITH LD. CIT( A)S CONCLUSION REGARDING TAXABILITY UNDER THE PROVISIONS OF RELEVANT TAX TRE ATY/ DTAA, WHEREIN AFTER ELABORATE DISCUSSION HE HAS CONCLUDED THAT NO TECHN ICAL KNOWLEDGE WAS MADE AVAILABLE TO ASSESSEE. FROM THE ABOVE IT IS CLEAR T HAT THE AMOUNT PAID BY THE ASSESSEE TO NON-RESIDENT WAS NOT CHARGEABLE TO TAX IN TERMS OF THE PROVISIONS OF THE ACT OR DTAA. 8.3. IN VIEW OF ABOVE DISCUSSION, THE REVENUES APP EAL IS DISMISSED. ITA 5907/DEL/2010 (ASSESSEES APPEAL FOR AY 2006-07 U/S 263) : 9. THIS APPEAL, PREFERRED BY THE ASSESSEE, ARISES OUT OF CIT, DELHI-IVS ORDER DATED 30.09.2010 PASSED U/S 263 OF THE INCOME-TAX A CT, 1961, RELATING TO AY 2006- 07. 10. THE ASSESSEE CONTINUED TO CARRY ON THE SAME BUS INESS AS IN AY 2004-05. THE ASSESSEE HAD FILED RETURN OF INCOME DECLARING INCOM E OF RS. 22,83,76,292/- WHICH WAS SUBSEQUENTLY REVISED AT AN INCOME OF RS. 44,18, 870/-. THE ASSESSMENT WAS COMPLETED AFTER MAKING FOLLOWING THREE ADDITIONS: 12 (I) DISALLOWANCE U/S 14A (II) ADDITION ON ACCOUNT OF DIFFERENCE IN CREDITORS BALA NCE (III) WRONG CLAIM OF DEPRECIATION. 10.1. LD. CIT EXAMINED THE ASSESSMENT RECORDS OF AS SESSEE FROM WHICH IT TRANSPIRED THAT THE ASSESSEE HAD WRITTEN OFF RS. 45 8.13 LACS ON ACCOUNT OF COST OF GOODS OF MORE THAN 365 DAYS ON NOTIONAL BASIS AS A POLICY ON THE GROUND OF THEIR HAVING NIL MARKET VALUE AT THE END OF THAT PERIOD. 10.2. LD. CIT OBSERVED THAT SINCE THE LOSS CLAIMED WAS ONLY NOTIONAL LOSS, NOT BASED ON ANY ACTUAL VALUATION, THEREFORE, SHOULD HA VE BEEN DISALLOWED AND ADDED BACK TO THE INCOME OF THE ASSESSEE. THIS MISTAKE RE SULTED IN UNDER-ASSESSMENT OF RS. 458.13 LACS INVOLVING TAX EFFECT OF RS. 205.09 LACS INCLUDING INTEREST. LD. CIT OBSERVED THAT THESE ASPECTS WERE NEVER CONSIDERED B Y THE AO WHILE FRAMING THE ASSESSMENT ORDER. HE FURTHER OBSERVED THAT NO INQUI RY/ INVESTIGATION APPEARED TO HAVE BEEN CARRIED OUT WITH REGARD TO THIS ASPECT. T HUS, HE OBSERVED THAT IT WAS A CASE OF LACK OF INQUIRY/ INVESTIGATION, APART FROM THE UNDER ASSESSMENT OF INCOME. THUS, THE ORDER OF THE AO WAS ERRONEOUS AS WELL AS PREJUDICIAL TO THE INTERESTS OF REVENUE. LD. CIT ISSUED SHOW CAUSE NOTICE IN RESPON SE TO WHICH ASSESSEES REPRESENTATIVE FILED THE WRITTEN SUBMISSIONS. HOWEV ER, SINCE THE SAME WAS FOUND TO BE INADEQUATE, THEREFORE, LD. CIT(A) AGAIN GAVE OPP ORTUNITY TO ASSESSEE TO EXPLAIN ITS POSITION. HOWEVER, NONE APPEARED AND, THEREFORE , LD. CIT PROCEEDED TO PASS THE 13 REVISIONAL ORDER U/S 263. LD. CIT HAS REPRODUCED TH E WRITTEN SUBMISSIONS FILED BY ASSESSEE, IN WHICH PRIMARILY ASSESSEE DEMONSTRATED HOW THE SUM OF RS. 458.14 LACS WAS WRITTEN DOWN UNDER THE HEAD PURCHASES IN THE P& L A/C AS PER SCHEDULE 16 AND ALSO REFERRED TO THE QUERIES RAISED BY AO AND ASSES SEES REPLY IN THIS REGARD. ASSESSEE POINTED OUT THAT IT WAS EXPLAINED TO THE A O THAT THE METHOD OF WRITING OFF OF THE INVENTORIES WAS IN LINE WITH THE NORMAL ACCO UNTING PRACTICE FOLLOWED BY THE INDUSTRY AND IN LINE WITH ACCOUNTING PRACTICE OF WR ITING OFF THE INVENTORIES CONSISTENTLY FOLLOWED BY THE ASSESSEE IN THE EARLIE R ASSESSMENT YEARS ALSO. THE ASSESSEE SUBMITTED THAT ASSESSMENT U/S 143(3) WAS C OMPLETED WITHOUT DRAWING ANY ADVERSE INFERENCE IN THIS REGARD. THE ASSESSEE FURT HER POINTED OUT THAT AN AMOUNT OF RS. 561.92 LACS (WHICH WAS CHARGED TO P&L A/C UNDER THE HEAD COST OF GOODS AND SERVICES), REPRESENTED ONLY 25% OF THE COST OF SPARES AND ACCESSORIES, WHICH WAS WRITTEN OFF DURING THE FINANCIAL YEAR UNDER CON SIDERATION. FURTHER AN AMOUNT OF RS. 103.78 LAKHS (WHICH HAD BEEN WRITTEN OFF IN THE EARLIER YEAR), WAS WRITTEN BACK (I.E. IT WAS OFFERED AS INCOME), DURING THE FINANCI AL YEAR AND, HENCE, IT WAS ONLY THE NET AMOUNT OF RS. 458.13 LAKHS, WHICH WAS ULTIMATEL Y CHARGED TO THE P&L A/C. THE ASSESSEE FURTHER EXPLAINED AS UNDER: THE CUSTOMER CARE ORGANIZATION (COMPANY KNOWN AS CCO) SPARES COMPRISE OF VARIOUS SMALL VALUE ITEMS (SUCH AS CABLES, ROUTER AND MODEM PARTS, VSAT COMPONENTS) TH AT ARE REQUIRED FOR THE PURPOSE OF SERVICING THE ORIGINAL EQUIPMENTS LOCATED AT CUSTOMERS LOCATIONS AND ALSO LOCATED AT HCLS PREMISES. THE CCO INVENTORY COMPRISES OF SMALL VALU E ITEMS 14 BUT IS NUMEROUS IN QUANTITY, AND WIDELY ISSUED TO V ARIOUS LOCATIONS, DEPARTMENTS AND REGIONS. THE MAIN EQUIPM ENT FOR WHICH SUCH SPARES ARE MAINTAINED, IT IS EARNESTLY S UBMITTED, HAS A USEFUL LIFE OF 4/5 YEARS. 11. THE ASSESSEES MAIN PLANK OF ARGUMENT WAS THAT ACCOUNTING POLICY HAD BEEN CONSISTENTLY FOLLOWED BY THE ASSESSEE COMPANY AND T HE CHOICE OF THE METHOD OF VALUATION OF INVENTORIES RESTED WITH THE ASSESSEE. FURTHER, IT WAS SUBMITTED THAT EVEN IF TWO VIEWS WERE POSSIBLE ABOUT THE TAX DEDUC TIBILITY OF THE WRITTEN DOWN OF THE VALUE OF THE SPARES AND ACCESSORIES @ 25% ONLY REDUCED FROM CARRYING VALUE TO THE REALIZABLE VALUE, THE VIEW TAKEN BY THE AO WAS POSSIBLE VIEW. THE ASSESSEE HAD PLACED RELIANCE, INTER ALIA, O THE DECISION OF HON BLE SUPREME COURT IN THE CASE OF MALABAR INDUSTRIES VS. CIT 243 ITR 83. LD. CIT AFTE R CONSIDERING THE ASSESSEES SUBMISSION DID NOT ACCEPT THE SAME FOR THE FOLLOWIN G REASONS: (A) ALTHOUGH AO COLLECTED THE DETAILS FROM THE ASSESSEE DURING THE COURSE OF ASSESSMENT PROCEEDINGS BUT DID NOT RECORD THAT HE E XAMINED THE MATTER ON THE ISSUE OF ALLOWABILITY OF THE AMOUNT AS CLAIMED. HE POINTED OUT THAT AO DID NOT CRITICALLY EXAMINED THE SAME WITH REFERENCE TO THE APPROPRIATE LEGAL PROVISION AND, THEREFORE, THE ASSESSMENT ORDER WAS ERRONEOUS IN THE EYES OF LAW. (B) AS REGARDS THE ASSESSEES CLAIM THAT AO HAD TAKEN O NE POSSIBLE VIEW, LD. CIT POINTED OUT THAT SINCE THE ISSUES WERE NEVER CO NSIDERED BY THE AO DURING THE COURSE OF ASSESSMENT PROCEEDINGS, THERE WAS NO QUESTION OF AOS TAKING ANY VIEW ON THAT ISSUE. 15 (C) IT IS ESSENTIAL FOR THE PARTIES TO KNOW THE REASONS THAT HAD WEIGHED WITH THE ADJUDICATING AUTHORITIES IN COMING TO A CONCLUSION. THE ORDER PASSED BY THE AO SHOULD BE SELF CONTAINED ORDER, GIVING THE RELEV ANT FACTS AND REASONS FOR COMING TO THE CONCLUSION PASSED ON THOSE FACTS AND LAWS. LD. CIT RELIED ON VARIOUS CASE LAWS ON THIS ISSUE. LD. CIT CONCLUDED THAT ABSOLUTE SILENCE OF THE AO AS TO WHY HE ALLOWED THE ASSESSEES CLAIM IN THIS REGARD WOULD MEAN THAT THERE WAS NO APPLICATION OF MIND AT HIS LEVEL. HE SHOULD HAVE RECORDED REASONS FOR ALLOWING THE CLAIM. HE, ACCORDINGLY, SE T ASIDE THE ORDER OF AO TO HIS FILE FOR RECONSIDERATION OF THE SAME ON THE DIS PUTED ISSUE ALLEGED IN THE NOTICE. 11.1. LD. COUNSEL FOR THE ASSESSEE POINTED OUT THAT IT IS WELL SETTLED LAW THAT THE WAY THE ASSESSMENT ORDER IS DRAFTED IS NOT WITHIN THE ASSESSEES CONTROL. HE RELIED ON THE DECISION OF HONBLE PUNJAB & HARYANA HIGH CO URT IN THE CASE OF HARI IRON TRADING CO. VS. CIT 263 ITR 437 (P&H). HE FURTHER R ELIED ON THE DECISION IN THE CASE OF CIT VS. EICHER LTD. 294 ITR 310 (DEL.), WHE REIN IT WAS HELD THAT WHEN ALL THE MATERIAL FACTS WERE DISCLOSED BY ASSESSEE AND A O APPLIED HIS MIND THEN FAILURE TO RECORD FINDING IN ASSESSMENT ORDER DOES NOT ENTI TLE THE AO TO ISSUE NOTICE FOR REASSESSMENT. LD. COUNSEL REFERRED TO PAGE 28 OF TH E PB, WHEREIN THE ASSESSEES REPLY DATED 3.12.2008 TO THE AO IN CONNECTION WITH THE QUERIES RAISED IS CONTAINED IN WHICH ASSESSEE HAD GIVEN JUSTIFICATION FOR WRITI NG OFF OF STOCK AS PER THE BOOKS OF A/C AS UNDER: 6. JUSTIFICATION FOR THE WRITE OFF OF STOCK AS PER THE BOOKS OF ACCOUNTS. 16 THE BREAKUP OF THE WRITE OFF AS INDICATED UNDER SCH EDULE 16 TO THE FINANCIALS IS FOLLOWS BREAK UP OF WRITE DOWN AMOUNT DESCRIPTION DEPRECIATION OF SPARES 56,191,665.00 NOTE 1 BELOW PROVISION OF INVENTORY PERTAINING TO MORE THAN 365 DAYS - 10,378,048.00 NOTE 2 BELOW NOTE 1 : AN AMOUNT OF R.S 5.61 CRORES, REPRESENT THE WRITE O FF OF SPARES AND ACCESSORIES REQUIRED TO SERVICE THE MAIN EQUIPM ENT THAT HAS BEEN INSTALLED AT CUSTOMER SITES ACROSS INDIA . THESE STORES AND SPARES ARE PURCHASED IN BULK AND KEPT IN THE ST ORES, AND THE COMPANY FOLLOWS A POLICY OF WRITING OFF25% OF THE C OSTS OF THESE SPARES ,ON A YOY BASIS .SINCE THESE SPARES HAD ALRE ADY BEEN DEPRECIATED BY 75% AS ON LST APRIL-05, THE REMAININ G 25% OF DEPRECIATION ON THESE SPARES HAD BEEN CHARGED TO CO GS AND IT IS THE VALUE HAS BEEN INCLUDED IN THE 4.85 CRORES . NOTE 2: IT IS A WELL KNOWN FACT THAT IT EQUIPMENT ARE SUBJE CT TO OBSOLESCENCE ON ACCOUNT OF RAPID CHANGE IN TECHNOLO GY AND METHODS. ON ACCOUNT OF THE ABOVE, THE HARDWARE ,SOFTWARE AND OTHER COMPONENTS UNSOLD FOR MORE THAN 365 DAYS ARE SUBJEC T TO WRITE OFF'S ON ACCOUNT OF THEIR BEING RENDERED OBSOLETE D UE TO TECHNOLOGY AND MARKET CHANGE AND ON ACCOUNT OF THEI R HAVING NIL MARKET VALUE AT THE END OF THAT PERIOD. THIS POLICY OF WRITE OFF'S HAS BEEN FOLLOWED YEAR A FTER YEAR BY THE COMPANY AND HAS BEEN ACCEPTED BY THE A.O IN THE ASSESSMENT OF THE EARLIER YEARS. THE BREAKUP OF THE REGION WISE WRITE OFF'S IS AS PE R ANNEXURE NO 8 TO THIS NOTE . 17 11.2. LD. COUNSEL FURTHER REFERRED TO THE COPY OF A UDITED ACCOUNTS, CONTAINED AT PAGES 68 TO 91 OF THE PB AND REFERRED TO SCHEDULE 16 TO P&L A/C OF THE COST OF GOODS AND SERVICES WHEREIN NOTE IN REGARD TO LOSS ON WRITING OF INVENTORIES TO NET REALIZABLE VALUE WAS GIVEN. LD. COUNSEL FURTHER SUBMITTED THAT ON MERITS ALSO THE ISSUE IS COVERED IN FAVOUR OF ASSESSEE. IN THIS REGARD HE REFERRED TO THE ORDER O F DELHI BENCH OF THE TRIBUNAL IN THE CASE OF HUGHES NETWORK SYSTEMS INDI A LTD. VS. DCIT RENDERED IN ITA NOS. 4611 AND 4595/DEL/2010 DATED 26.12.2011, CONTAINED AT PAGES 105 TO 127 OF PB. LD. COUNSEL PO INTED OUT THAT HUGHES NETWORK SYSTEMS INDIA LTD. WAS ENGAGED IN THE BUSIN ESS OF MARKET VSAT EQUIPMENT AND PROVIDING TELECOM RELATED SERVIC ES IN INDIA, AS ASSESSEE. HE POINTED OUT THAT IN THIS CASE ALSO GRO UND RAISED BEFORE THE TRIBUNAL WAS REGARDING SUSTENANCE OF PART DISALLOWA NCE TO THE EXTENT OF 25% OF TOTAL DISALLOWANCE MADE BY THE AO ON ACCOUNT OF PROVISION FOR IMPAIRMENT OF STOCK. LD. COUNSEL REFERRED TO PARAS 10 & 11 OF THE ORDER, WHEREIN THE TRIBUNAL HAS OBSERVED AS UNDER: 10. THE DEPARTMENT IS IN APPEAL AGAINST THE CIT(A) S ORDER IN GRANTING A RELIEF OF RS. 18,19,034/- OUT O F THE TOTAL ADDITION OF RS. 24,25,379/- MADE BY THE ASSES SING OFFICER WHILE THE ASSESSEE IS IN APPEAL IN SUSTAINI NG THE DISALLOWANCE TO THE EXTENT OF 25% OF THE TOTAL DISALLOWANCE MADE BY THE AO. 18 11. IN THE ASSESSMENT YEAR 2005-06, THE ASSESSEE HA D SHOWN THE VALUE OF INVENTORIES AFTER MAKING ADJUSTM ENT OF RS. 3,47,216/- ON ACCOUNT OF STOCK IMPAIRED DURI NG THE YEAR. IN THE LINE OF THE REASONS GIVEN BY THE AO IN THE AY 2004-05, THE ASSESSEES CLAIM ON ACCOUNT OF REDUCTI ON IN THE VALUE OF INVENTORIES ON ACCOUNT OF IMPAIRMENT O F STOCK TO THE EXTENT OF RS. 3,47,216/- HAS BEEN DISA LLOWED. ON AN APPEAL, THE LEARNED CIT(A) REDUCED THE DISALLOWANCE TO RS. 25% OF TOTAL DISALLOWANCE OF RS . 3,47,216/- MADE BY THE AO. 11.3. LD. COUNSEL REFERRED TO PARA 17 OF THE TRIBUN ALS ORDER WHEREIN THE TRIBUNAL HAD TAKEN NOTE OF VARIOUS DECISIONS RELATI NG TO VALUATION OF STOCK- IN-TRADE AT COST OR MARKET PRICE, WHICHEVER IS LOWE R, AND, HAD DELETED THE DISALLOWANCE OF ASSESSEES CLAIM TO THE EXTENT OF 2 5% SUSTAINED BY LD. CIT(A) AND ALLOWED THE ASSESSEES TOTAL CLAIM MADE IN THE RETURN OF INCOME. LD. COUNSEL FURTH4ER REFERRED TO THE DECISION OF HO NBLE DELHI HIGH COURT IN THE CASE OF M/S HUGHES COMMUNICATION INDIA LTD., WH EREIN ALSO THE ISSUE BEFORE THE HONBLE DELHI HIGH COURT WAS WHETHER LD. ITAT ERRED IN DELETING THE ADDITION OF RS. 90,35,298/- MADE BY THE AO ON A CCOUNT OF PROVISIONS FOR IMPAIRMENT OF STOCK. LD. COUNSEL REFERRED TO PARA 7 OF THE DECISION, WHEREIN THE HONBLE HIGH COURT, INTER ALIA, OBSERVED THAT O N A QUESTION OF VALUATION OF THE CLOSING STOCK ANY ALLEGED DIFFERENCE OR DISC REPANCY TENDS TO BALANCE ITSELF OUT OVER A PERIOD OF YEARS IF THE SAME METH OD IS CONSISTENTLY FOLLOWED. THIS IS BECAUSE THE CLOSING STOCK OF ONE YEAR BECOM ES THE OPENING STOCK OF THE SUCCEEDING YEAR AND ANY ADDITION MADE TO THE VA LUATION OF THE CLOSING 19 STOCK TO INCREASE THE PROFITS FOR THAT YEAR AUTOMAT ICALLY GETS NEUTRALIZED WHEN THE SAME FIGURE OF CLOSING STOCK IS TAKEN AS THE OP ENING STOCK OF THE SUCCEEDING YEAR. WHAT IS, THEREFORE, MORE IMPORTANT TO BE SEEN IS WHETHER THE SAME METHOD OF VALUATION OF STOCK IS FOLLOWED CONSISTENTLY BY THE ASSESSEE SO THAT THERE IS NO DISTORTION OF PROFIT. 11.4. WITH REFERENCE TO THESE DECISIONS, LD. COUNSE L SUBMITTED THAT THE ASSESSMENT ORDER CANNOT BE SAID TO BE ERRONEOUS SIN CE THE SAME IS IN CONSONANCE WITH THE JUDICIAL PRECEDENTS. IN THIS RE GARD LD. COUNSEL RELIED ON THE DECISION IN THE CASE OF K.N. AGRAWAL VS. CIT 18 9 ITR 769, WHEREIN IT WAS, INTER ALIA, HELD THAT ITO IS BOUND TO FOLLOW T HE ORDER OF APPELLATE AUTHORITY AND, THEREFORE, THE SAID ORDER CANNOT BE HELD TO BE ERRONEOUS EMPOWERING COMMISSIONER TO REVISE THE SAME. HE ALS O RELIED ON THE DECISION OF HONBLE CALCUTTA HIGH COURT IN THE CASE OF RUSSEL PROPERTIES PVT. LTD. VS. A. CHOUDRY ADDL. CIT 109 ITR 229FOR T HE SAME PROPOSITION. 12. PER CONTRA, LD. CIT(DR) SUBMITTED THAT HERE IS NOT A CASE OF TRADING STOCK BUT OF SERVICE STOCK. HE SUBMITTED THAT THE B ASIS ADOPTED BY ASSESSEE FOR DETERMINING THE NET REALIZABLE VALUE IS NOT COR RECT BECAUSE MARKET DOES NOT FLUCTUATE 25% EVERY TIME. 12.1. LD. CIT(DR) POINTED OUT THAT ASSESSEES CLAIM IS NEGATED BY THE FACT THAT NEXT YEAR ASSESSEE HAD ITSELF WRITTEN BACK 1.0 3 CRORES IN RESPECT OF 20 INVENTORY EXCEEDING ONE YEAR. HE SUBMITTED THAT THI S NEGATES THE ASSESSEES CONTENTION REGARDING 25% FALL IN THE VALUE OF INVEN TORY. LD. CIT(DR) FURTHER SUBMITTED THAT ASSESSEE HAD NOT GIVEN ANY SUPPORTI NG EVIDENCE REGARDING NET REALIZABLE VALUE OF STOCK. 12.2. LD. CIT(DR) REFERRED TO THE DECISION OF HONB LE DELHI HIGH COURT IN THE CASE OF HUGHES COMMUNICATION INDIA LTD., CONTAI NED AT PAGES 150 TO 156 OF THE PB, WHEREIN IN PARA 7 THE HONBLE HIGH C OURT, INTER ALIA, HAS OBSERVED AS UNDER: 7. THE FINDINGS RECORDED BY THE TRIBUNAL ARE NOT C HALLENGED. IN FACT THE LEARNED STANDING COUNSEL FAIRLY STATED THAT THE ASSESSEE CAN VALUE THE STOCK AT THE LOWER OF THE CO ST OR THE NET REALIZABLE VALUE AS IT IS A RECOGNIZED AND ACCEPTED METHOD. HE, HOWEVER, SUBMITTED THAT THE CLAIM OF THE ASSESSEE W AS NOT SUPPORTED BY ANY DETAILS. BUT THIS SUBMISSION IS CO NTRARY TO THE FINDING OF THE TRIBUNAL WHICH HAS REFERRED TO THE A SSESSEES LETTER DATED 27.12.2006 SUBMITTED BEFORE THE ASSESS ING OFFICER ALONG WITH THE NECESSARY DETAILS IN SUPPORT OF THE VALUATION. THESE DETAILS HAVE ALSO BEEN EXTRACTED BY THE TRIBU NAL IN PARA 11 OF ITS ORDER. WE ARE, THEREFORE, UNABLE TO ACCEP T THE CONTENTION OF THE REVENUE THAT THE CLAIM OF THE ASS ESSEE REMAINS UNSUPPORTED. 12.3. REFERRING TO THE AFOREMENTIONED OBSERVATIONS, LD. CIT(DR) SUBMITTED THAT IN ORIGINAL ASSESSMENT PROCEEDINGS, AO SHOULD HAVE DISCUSSED SUPPORTING EVIDENCE FOR VALUATION OF STOCK. THE VAL UATION COULD NOT BE MADE ON AD HOC BASIS. THUS, ASSESSMENT ORDER HAS BEEN PA SSED WITHOUT DUE APPLICATION OF MIND. 21 12.4. LD. CIT(DR) RELIED ON THE DECISION OF HONBLE SUPREME COURT IN THE CASE OF MALABAR INDUSTRIES AND ALSO REFERRED TO THE DECISION IN THE CASE OF NIIT 60 TAXMAN.COM 313, WHEREIN IT HAS BEEN HELD TH AT MERELY RAISING OF QUERY WOULD NOT BE SUFFICIENT WITHOUT PROPER APPLIC ATION OF MIND AND WHETHER PROPER APPLICATION OF MIND IS THERE OR NOT, IS TO BE DECIDED KEEPING IN VIEW THE LEVEL OF ENQUIRY EXPECTED FROM AN AUTHO RITY, CONVERSANT WITH NUANCES OF LAW. 13. LD. SR. COUNSEL, IN THE REJOINDER REFERRED TO P AGE 80 OF THE PB, WHEREIN SIGNIFICANT ACCOUNTING POLICIES ARE CONTAINED IN WH ICH, AS REGARDS INVENTORY, IT IS STATED AS UNDER: INVENTORIES ARE VALUED AT LOWER OF COST AND NET RE ALIZABLE VALUE. THE COST IS CALCULATED ON THE BASIS OF WEIGH TED AVERAGE PRICE METHOD AND INCLUDES SHARE OF ALLOCABLE OVERHE ADS. THE NET REALIZABLE VALUE IS DETERMINED WITH REFERENCE T O SELLING PRICES OF GOODS. THE COMPARISON OF COST AND NET REA LIZABLE VALUE IS MADE ON AN ITEM BY ITEM BASIS. 13.1. HE FURTHER REFERRED TO THE TAX AUDIT REPORT C ONTAINED AT PAGE 36 OF THE PB, WHEREIN AT SERIAL NO. 11, IT IS STATED AS UNDE R: 11. A) METHOD OF ACCOUNTING EMPLOYED IN PREVIOUS YEAR. MERCANTILE BASIS OF ACCOUNTING. B) WHETHER THERE HAS BEEN ANY CHANGE IN THE METHOD OF ACCOUNTING EMPLOYED VIS--VIS THE METHOD EMPLOYED IN THE THERE HAS BEEN NO CHANGE IN THE METHOD OF ACCOUNTING AS COMPARED TO THE METHOD OF ACCOUNTING EMPLOYED IN THE IMMEDIATELY PRECEDING PREVIOUS 22 IMMEDIATELY PRECEDING PREVIOUS YEAR. YEAR. C) IF ANSWER TO (B) ABOVE IS IN THE AFFIRMATIVE, GIVE DETAILS OF SUCH CHANGE AND THE EFFECT THEREOF ON THE PROFIT OR LOSS. NOT APPLICABLE D) DETAILS OF DEVIATION, IF ANY, IN THE METHOD OF ACCOUNTING EMPLOYED IN THE PREVIOUS YEAR FROM ACCOUNTING STANDARDS PRESCRIBED UNDER SECTION 145 AND THE EFFECT THEREOF ON THE PROFIT OR LOSS. THERE IS NO DEVIATION IN THE METHOD OF ACCOUNTING EMPLOYED IN THE PREVIOUS YEAR FROM THE ACCOUNTING STANDARDS PRESCRIBED UNDER SECTION 145 OF THE INCOME-TAX ACT, 1961. 13.2. LD. COUNSEL SUBMITTED THAT THERE IS NO CHANGE IN THE METHOD FOLLOWED. HE POINTED OUT THAT SINCE CONSISTENT METHOD IS BEIN G FOLLOWED, THEREFORE, THE SAME IS REVENUE NEUTRAL AND CANNOT BE DISTURBED IN ONE YEAR. HE POINTED OUT THAT ASSESSEE HAS ESTIMATED THE NET REALIZABLE VALU E AFTER TAKING INTO CONSIDERATION THE USAGE OF SPARES AS DETERMINED BY MANAGEMENT. HE POINTED OUT THAT SELLING PRICE HAS BEEN ESTIMATED BY MANAG EMENT. NO ADDITION HAS BEEN MADE IN EARLIER YEAR AND THE VALUATION ADOPTED IS IN LINE WITH INDUSTRIES PRACTICE. HE REFERRED TO THE ITAT DELHI BENCH C O RDER DATED 28.11.2008 IN THE CASE OF SAMSUNG INDIA ELECTRONICS LTD. VS. JCIT RENDERED IN ITA NOS. 3164/DEL/2000 AND OTHERS, CONTAINED AT PAGES 75 TO 80 OF THE PB, WHEREIN IN PARA 32 THE TRIBUNAL HAS OBSERVED AS UNDER: 23 32. IN THE APPEAL FILED BY THE REVENUE, GROUND BAS BEEN TAKEN FOR DELETING ADDITION OF RS. 1.20 CRORES MADE BY THE AO ON ACCOUNT OF REDUCTION IN VALUE OF CLOSINGS STOCK OF FINISHED GOODS. WE HAVE CONSIDERED THE RIVAL CONTENTIONS AND FOUND FROM THE RECORD THAT SINCE THE STARTS OF ITS OPERAT ION IN THE ASSESSMENT YEAR 1996-97, THE ASSESSEE COMPANY WAS CONSISTENTLY VALUING THE DEFECTIVE STOCK AT THE REA LIZABLE VALUE BEING LOWER THEN COST. SIMILAR WRITE DOWN IN THE V ALUATION OF SUCH STOCK WAS ALLOWED BY THE DEPARTMENT IN THE ASS ESSMENT YEAR 1996-97 AND 1997-98. HOWEVER, DURING THE YEAR UNDER CONSIDERATION, BY DISTURBING THE METHOD OF VALUATIO N THE AO MADE ADDITION. JURISDICTIONAL HIGH COURT IN CASE OF COMMERCIAL AND INDUSTRIAL LTD. (240 ITR 256) UPHELD THE ORDER OF THE TRIBUNAL ALONE CLAIMING THE LOSS ARISING OUT OF VALUATION .OF SLOW MOVING RAW MATERIAL AS ESTIMATED REALIZABL E VALUE. SINCE THE FINDING RECORDED BY THE CIT(A) HAS NOT BE EN CONTROVERTED BY LD. D.R. WE, THEREFORE, DO NOT FIND ANY REASON TO INTERFERE IN THE FINDING OF CIT(A) FOR DELETING THE ADDITION ON ACCOUNT OF VALUATION OF CLOSING STOCK OF FINISHED GOODS IN RESPECT OF ITS DEFECTIVE OBSOLETE STOCK. 13.3. LD. COUNSEL FURTHER REFERRED TO PAGE 142 OF T HE PB WHEREIN THE DECISION OF HONBLE DELHI HIGH COURT IN THE CASE OF CIT VS. SAMSUNG INDIA ELECTRONICS LTD. IS CONTAINED AND POINTED OUT THAT IN PARA 15 THE HONBLE HIGH COURT HAS, INTER ALIA, OBSERVED THAT THE METHO D OF VALUATION OF CLOSING STOCK CAN BE DISTURBED ONLY IF IT IS FOUND THAT THE METHOD OF VALUATION IS SUCH THAT TRUE PROFITS AND GAINS CANNOT BE DEDUCED THERE FROM. IN THIS REGARD HONBLE DELHI HIGH COURT HAS REFERRED TO THE DECISI ON IN THE CASE OF CIT VS. BHARAT COMMERCIAL AND INDUSTRIAL LTD. 240 ITR 256 W HEREIN THE LOSS ARISING OUT OF THE REDUCED VALUATION OF SLOW MOVING RAW MAT ERIAL ON THE BASIS OF ESTIMATED REALIZABLE VALUE WAS HELD ALLOWABLE. 24 13.4. LD. COUNSEL FURTHER REFERRED TO PAGE 77 OF PB , TO POINT OUT THAT OUT OF THE TOTAL REVENUE OF RS. 2538368049, THE REVENUE FR OM SERVICE WAS RS. 754735740/- WHICH WAS 1/3 RD OF THE TOTAL VALUE. THE ASSESSEE HAD TO KEEP SPARES FOR SERVICE TO CATER ITS REQUIREMENT OF REND ERING SERVICES. 13.5. LD. COUNSEL SUBMITTED THAT LD. CIT LOST OF CO NSISTENT METHOD BEING FOLLOWED BY ASSESSEE. 14. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS AND H AVE PERUSED THE RECORD OF THE CASE. IT IS WELL SETTLED LAW THAT IF THERE IS NO APPLICATION OF MIND BY AO IN RESPECT OF AN ISSUE, THEN NON-APPLICATION OF MIND MAKES THE ORDER ERRONEOUS. THERE IS NO GAIN SAYING THAT MERE ERRON EOUS ORDER DOES NOT EMPOWER LD. CIT TO EXERCISE HIS POWERS U/S 263 UNLE SS THE ORDER IS ALSO PREJUDICIAL TO THE INTERESTS OF REVENUE. 14.1. IN THE PRESENT CASE THE ASSESSEES REPLY DATE D 3.12.2008 IS CONTAINED AT PAGES 28 TO 30, THE CONTENTS FROM WHICH, IN REGARD TO JUSTIFICATION FOR WRITING OFF OF STOCK AS PER THE BOOKS OF A/C, HAVE BEEN RE PRODUCED EARLIER. FROM THE SAID REPLY IT IS EVIDENT THAT ASSESSEE IN ITS NOTE HAD POINTED OUT THAT AMOUNT OF RS. 5.61 CRORES REPRESENTED THE WRITE OFF OF SPA RES AND ACCESSORIES REQUIRED TO SERVICE THE MAIN EQUIPMENT THAT HAD BEE N INSTALLED AT CUSTOMERS SITES ACROSS INDIA. THESE STORES AND SPARES WERE PU RCHASED IN BULK AND KEPT IN THE STORES AND THE COMPANY FOLLOWED A POLICY OF WRITING OFF 25% OF THE 25 COSTS OF THESE SPARES ON A YOY BASIS. IT WAS FURTHE R STATED IN THE NOTE THAT SINCE THESE SPARES HAD ALREADY BEEN DEPRECIATED BY 75% AS ON 1.4.2005, THE REMAINING 25% OF DEPRECIATION ON THESE SPARES HAD B EEN CHARGED TO COGS. THIS NOTE SHOULD HAVE PROMPTED THE AO TO EXAMINE AS TO THE BASIS ON WHICH NET REALIZABLE VALUE OF THE INVENTORIES HAD BEEN AR RIVED AT BECAUSE AS RIGHTLY POINTED OUT BY LD. CIT(DR) THERE COULD NOT BE 25% F ALL IN THE MARKET VALUE OF INVENTORIES EVERY YEAR. MOREOVER, THIS POLICY HA D THE EFFECT OF WRITING OFF ENTIRE VALUE OF SPARES IN 4 YEARS WHEREAS IT IS EVI DENT FROM THE ASSESSEES OWN ACCOUNT THAT IN NEXT YEAR ASSESSEE HAD REALIZED THE VALUE OF THE SPARES TO THE EXTENT OF RS. 1.03 CRORES. THIS SHOULD HAVE PRO MPTED THE AO TO EXAMINE THE BASIS FOR ARRIVING AT NET REALIZABLE VALUE OF A SSET AND HOW THE MANAGEMENT HAD ARRIVED AT THE USEFUL LIFE OF SPARE S. AS PER SIGNIFICANT ACCOUNTING POLICY, REPRODUCED EARLIER, THE NET REAL IZABLE VALUE WAS DETERMINED WITH REFERENCE TO SELLING PRICE OF GOODS AND THE COMPARISON OF COST AND NET REALIZABLE VALUE WAS MADE ON AN ITEM B Y ITEM BASIS. HOWEVER, AS PER NOTES TO ACCOUNT IMPAIRMENT IN STOCK WAS DET ERMINED @ 25%. BOTH THESE STATEMENTS ON SAME ACCOUNTS CANNOT BE RECONCI LED. 14.2. LD. COUNSEL HAS RELIED ON THE DECISION IN THE CASE OF M/S HUGHES NETWORK SYSTEMS (SUPRA). IN THIS CASE IN PARA 18 TH E TRIBUNAL HAS NOTED THAT THE ASSESSEE HAD FURNISHED THE DETAILS OF INVENTORY WITH THEIR RESPECTIVE NET 26 REALIZABLE VALUE AS AT THE END OF THE YEAR. THE AO HAD NOT POINTED OUT ANY DEFECT OR IRREGULARITY IN THE DETAILS OF RATE ADOPT ED BY THE ASSESSEE FOR VALUING THE STOCK AT NET REALIZABLE VALUE BY MAKING ANY QUE RY OR BY UNDERTAKING EXERCISE TO ASCERTAIN THE NET REALIZABLE VALUE AS A T THE END OF THE IRRESPECTIVE YEAR. FURTHER, AO FAILED TO POINT OUT ANY SPECIFIC ITEM IN RESPECT OF WHICH THE NET REALIZABLE VALUE ADOPTED BY THE ASSESSEE WA S FOUND TO BE NOT JUSTIFIED OR EXCESSIVE HAVING REGARD TO THE NATURE OF THE ITE M AND THE COST INCURRED BY THE ASSESSEE. THUS, IN THIS CASE SPECIFIC DETAILS R EGARDING NET REALIZABLE VALUE OF INVENTORY WAS MADE AVAILABLE BY ASSESSEE. THEREF ORE, THIS DECISION IS NOT APPLICABLE TO THE FACTS OF THE CASE BECAUSE IN THE PRESENT CASE THE ASSESSEE HAS SIMPLY REDUCED 25% VALUATION CONSIDERING THE SA ME AS TO REDUCE THE VALUE OF INVENTORY TO NET REALIZABLE VALUE. NO PROP ER ESTIMATE WAS PRODUCED BEFORE AO SO THAT HE COULD ARRIVE AT PROPER CONCLUS ION REGARDING NET REALIZABLE VALUE OF SPARE. FURTHER, IN THE CASE OF HUGHES COMMUNICATION INDIA LTD., HONBLE DELHI HIGH COURT IN PARA 4 HAS, INTER ALIA, NOTED THAT THE CLAIM WAS MADE ON THE FOOTING THAT THE NET REALIZAB LE VALUE OF THE STOCK HAD FALLEN BELOW EVEN THE COST PRICE AND IN RESPECT OF THE VALUATION THE ASSESSEE SUBMITTED THE BASIS OF THE ESTIMATE WHICH WAS PREPA RED BY ITS TECHNICAL DEPARTMENT. CERTAIN DETAILS WERE ALSO SUBMITTED REG ARDING CERTAIN ITEMS OF STOCK TOGETHER WITH THEIR REALIZABLE RATE AS ON 31. 3.2003 AND 31.3.2004. 27 THEREFORE, THIS DECISION IS ALSO NOT APPLICABLE TO THE PRESENT SET OF FACTS. ACCORDINGLY, THE ASSESSMENT ORDER WAS ERRONEOUS ON ACCOUNT OF NON- APPLICATION OF MIND TO RELEVANT ASPECT OF ARRIVING AT NET REALIZABLE VALUE. 14.3. NOW COMING TO THE ISSUE REGARDING ASSESSMENT ORDER BEING PREJUDICIAL TO THE INTEREST OF REVENUE OR NOT. ASSESSEES PLEA IS THAT THE WHOLE EXERCISE IS REVENUE NEUTRAL BECAUSE THE CLOSING STOCK OF ONE YE AR WILL BE THE OPENING STOCK OF SUBSEQUENT YEAR, THEREFORE NEUTRALIZING TH E EFFECT OF ADDITION IN ONE YEAR BY INCREASING THE COST IN SUBSEQUENT YEAR. IT IS WELL SETTLED LAW THAT THE METHOD OF ACCOUNTING EMPLOYED BY AN ASSESSEE SHOULD BE SUCH FROM WHICH TRUE PROFITS OF AN YEAR CAN BE DEDUCED. MERELY BECA USE THE ASSESSEE IS FOLLOWING A REGULAR METHOD OF ACCOUNTING BUT THE EF FECT OF WHICH IS NOT DEDUCING TRUE PROFITS FROM BUSINESS, THEN IT CANNOT BE SAID THAT CORRECTNESS OF METHOD CAN BE IGNORED BY AO, AS HAS BEEN HELD BY HO NBLE SUPREME COURT IN THE CASE OF BRITISH PAINTS 188 ITR 44, WHEREIN I T HAS BEEN HELD AS UNDER: THAT EVEN IF THE ASSESSEE HAD ADOPTED A REGULAR SY STEM OF ACCOUNTING, IT WAS THE DUTY OF THE ASSESSING OFFICER UNDER SECTION 145 OF THE INCOME-TAX ACT, 1961, TO C ONSIDER WHETHER THE CORRECT PROFITS AND GAINS COULD BE DEDUCED FROM THE ACCOUNTS SO MAINTAINED. IF HE WAS OF THE OPINION THAT THE CORRECT PROFITS COULD NOT BE D EDUCED FROM THE ACCOUNTS, HE WAS OBLIGED TO HAVE RECOURSE TO THE PROVISO TO SECTION 145 OF THE INCOME-TAX ACT, 1961. 14.4. THEREFORE, IT CANNOT BE SAID THAT BY ADOPTING AN AD HOC METHOD OF ARRIVING AT NET REALIZABLE VALUE BY IMPAIRING THE V ALUE OF SERVICE STOCK BY 28 25%, IN THE ABSENCE OF ANY DETAILED TECHNICAL ESTIM ATE, THE ASSESSEE HAD RESORTED TO CORRECT METHOD OF VALUATION. UNDER SUCH CIRCUMSTANCES, THE ASSESSMENT ORDER WAS PREJUDICIAL TO THE INTERESTS O F REVENUE. LD. CIT(A) COMPLETELY OVERLOOKED THE FACT THAT TRUE PROFITS OF AN YEAR COULD NOT BE DEDUCED WITHOUT RESORTING TO PROPER TECHNICA L ESTIMATE OF NET REALIZABLE VALUE. HE FAILED TO APPRECIATE THAT SPAR ES HAD NO SHELVED LIFE OF 4/5 YEARS INASMUCH AS ASSESSEE ITSELF HAD WRITTEN BACK CONSIDERABLE SUM BY WAY OF WRITE BACK. IT IS TRUE THAT IN THE LONG RUN THIS EXERCISE WILL BE REVENUE NEUTRAL KEEPING IN VIEW THE CONCEPT OF GOING CONCERN OF AN ORGANIZATIO N BUT THE MAIN OBJECT OF EMPLOYING CORRECT METHOD OF ACCOUNTING IS TO DETERM INE THE TRUE PROFITS OF AN YEAR. WE, ACCORDINGLY, UPHOLD THE ORDER PASSED BY LD. CIT U/S 263. 15. IN THE RESULT, ASSESSEES APPEAL IS DISMISSED. ITA NO. 5651/DEL/2012 ( REVENUES APPEAL FOR AY 200 6-07) : 16. THIS APPEAL, PREFERRED BY THE REVENUE, ARISES O UT OF CIT(A)-XVIII, NEW DELHIS ORDER DATED 24.08.2012 IN APPEAL NO. 23 3/11-12 RELATING TO AY 2006-07. 29 17. THE AO PASSED THE ASSESSMENT ORDER U/S 143(3) R EAD WITH SECTION 263 OF THE I.T. ACT, ON 9.12.2011, DETERMINING TOTAL IN COME AT RS. 29,36,07,013/- AS AGAINST THE RETURNED INCOME OF RS. 22,83,76,292/ -. 17.1. THE ASSESSMENT ORDER HAS BEEN PASSED IN PURSU ANCE TO THE ORDER OF LD. CIT U/S 263 DATED 30.9.2010, SETTING ASIDE THE ASSE SSMENT. 17.2. THE MAIN ISSUE FOR WHICH THE ASSESSMENT WAS S ET ASIDE, WAS REGARDING WRITING DOWN OF INVENTORIES OF RS. 458.14 LAKHS BY ASSESSEE, WHICH WAS ON THE BASIS OF IMPAIRMENT IN THE VALUE OF INVENTORY B Y 25% OF THE COST OF SPARES AND ACCESSORIES. THE AO, AFTER DETAILED DISC USSION, DISALLOWED THE ASSESSEES ENTIRE CLAIM OF RS. 458.13 LAKHS. IN BRI EF THE REASONS RECORDED BY AO WERE AS UNDER: I. THE ASSESSEE WAS NOT CONTESTING THE ISSUE THAT TH E WRITTING OFF HAD NOT BEEN DONE ON THE BASIS OF ESTIMATION AND ACTUA LLY THE GOODS WERE FUNCTIONAL AND OPERATING. THE ASSESSEE WAS ALS O NOT DISPUTING THE FACT THAT ALL THE GOODS WERE IN USE D URING THE YEAR AND AS A MATTER OF FACT THESE GOODS HAD NOT BEEN DELETE D FROM THE ACTUAL STOCK. II. THE ASSESSEE WAS FOLLOWING REGULAR POLICY TO DELE TE 1/4 TH OF SUCH FUNCTIONAL GOODS FROM ITS STOCK AND CLAIMING EXPEND ITURE IN THE P&L A/C UNDER THE HEAD GOODS WRITTEN OFF. THE CON TENTION OF ASSESSEE, THUS WAS THAT HE WAS REGULARLY FOLLOWING A METHOD OF ACCOUNTING IN WHICH GOODS WERE WRITTEN OFF ON PRESU MPTIVE BASIS. THE CONTENTION OF ASSESSEE WAS THAT SINCE SECTION 1 44 PROVIDED THAT 30 THE METHOD OF ACCOUNTING REGULARLY EMPLOYED U/S 14 5 SHALL BE ALLOWED TO THE ASSESSEE CONTINUOUSLY, THEREFORE, TH E ASSESSEES CLAIM SHOULD HAVE BEEN ACCEPTED. III. ALL THE ACCOUNTING STANDARD AND ACCOUNTING POLICIES NEVER PRESCRIBED ANY PRESUMPTIVE LOSS WHEN THE GOODS WERE ACTUALLY IN USE. IV. THE ASSESSEES CASE DID NOT FALL UNDER ANY OF THE APPROVED ACCOUNTING STANDARD OF METHOD OF ACCOUNTING. 17.3. AFTER ELABORATELY CONSIDERING SECTION 145, TH E AO FURTHER CONCLUDED AS UNDER: (A) AS PER PROVISO TO SECTION 145, THE METHOD EMPLOYED BY ASSESSEE SHOULD BE SUCH FROM WHICH, IN THE OPINION OF AO, TH E INCOME COULD PROPERLY BE DEDUCED AND IT IS THE DUTY OF THE AO TO EXAMINE WHETHER THE METHOD OF ACCOUNTING REGULARLY EMPLOYED BY THE ASSESSEE, WAS CORRECT AND FROM THAT METHOD THE INCOME, PROFITS AN D GAINS COULD BE CORRECTLY DEDUCED OR NOT. THE AO RELIED ON THE DECI SION OF HONBLE SUPREME COURT IN THE CASE OF CIT VS. BRITISH PAINTS INDIA LTD. 188 ITR 44 FOR THE PROPOSITION THAT IT IS INCORRECT TO SAY THAT THE OFFICER IS BOUND TO ACCEPT THE ASSESSMENT AND ACCOUNTING REGUL ARLY EMPLOYED BY ASSESSEE, THE CORRECTNESS OF WHICH HAD NOT BEEN QUE STIONED IN THE PAST. (B) WHERE ACCOUNTS ARE PREPARED WITHOUT DISCLOSING THE REAL WRITTEN DOWN VALUE ALBEIT NOTIONAL LOSS ON WRITTEN DOWN VALUE, I T IS DUTY OF AO TO DETERMINE THE TAXABLE INCOME BY MAKING SUCH COMPUTA TION AS HE THINKS FIT. 31 17.4. THE AO, AFTER DETAILED DISCUSSION MADE THE AD DITION OF RS. 458.13 LAKHS, INTER ALIA, OBSERVING THAT THE LOSS CLAIMED BY ASSESSEE WAS ON ACCOUNT OF PRESUMPTIVE WRITE OFF OF GOODS. 17.5. LD. CIT(A) AFTER CONSIDERING DETAILED SUBMISS IONS, AS REPRODUCED IN HIS ORDER, DELETED THE ADDITION FOR FOLLOWING REASO NS: (I) THE INVENTORY USED FOR THE PURPOSE OF SERVICING ORI GINAL EQUIPMENT COMPRISED OF SMALL VALUE ITEMS BUT ENORMOUS IN QUAN TITY ISSUED TO VARIOUS LOCATIONS, DEPARTMENTS AND REGIONS. THE ASS ESSEE VALUED SUCH INVENTORY AT THE LOWER OF COST OR NET REALIZAB LE VALUE, WHICH EVER WAS LESS EVERY YEAR IN ACCORDANCE WITH THE ACC OUNTING STANDARD II, ISSUED BY THE INSTITUTE OF CHARTERED A CCOUNTANTS OF INDIA. (II) THE ASSESSEE ESTIMATED 4-5 YEARS AS USUAL ACADEMIC LIFE OF THESE SPARE PARTS AS PER INDUSTRY NORMS AND, ACCORDINGLY, EVERY YEAR 25% OF THE VALUE OF THESE SPARE PARTS WAS WRITTEN DOWN TO THE P&L A/C. (III) AS PER AS-2, ISSUED BY THE INSTITUTE OF CHARTERED ACCOUNTANTS OF INDIA, NET REALIZABLE VALUE IS THE ESTIMATED SELLIN G PRICE IN THE ORDINARY COURSE OF BUSINESS LESS THE ESTIMATED COST OF COMPLETION AND THE ESTIMATED COST NECESSARY TO MAKE THE SAME. (IV) THE ASSESSEE HAD FOLLOWED THIS METHOD CONSISTENTLY. THE ASSESSEE OPERATED IN A HIGHLY SOPHISTICATED AND TECHNOLOGICA L PLACE WHEREIN, OWING TO RAPID TECHNICAL ADVANCES, THE OBSOLESCENCE WAS VERY HIGH AND THE VALUE OF SPARES OF A FEW YEAR AGO, WERE REN DERED WORTHLESS BECAUSE OF TECHNOLOGICAL CHANGES. 32 (V) NO FAULT COULD BE FOUND WITH THE METHOD ADOPTED BY THE ASSESSEE WHICH WAS AN ACCEPTED PRACTICE IN THE INDUSTRY TO V ALUE THE INVENTORY OF NET REALIZABLE VALUE. (VI) AS PER THE PROVISO OF SECTION 145(3) AS SUBSTITUTED BY THE FINANCE ACT, 1995 W.E.F. 1.4.1997, THERE WERE TWO OPTIONS A VAILABLE TO THE AO, EITHER TO ACCEPT THE BOOKS OF A/C MAINTAINED BY THE ASSESSEE OR ALTERNATIVELY TO REJECT THE BOOKS OF A/C MAINTAINED BY ASSESSEE IF THE CASE OF THE ASSESSEE FALLS WITHIN THE EVENTUALITY A S ENVISAGED IN SUB-SECTION (3) OF SECTION 145 OF THE ACT AND DO TH E BEST JUDGMENT ASSESSMENT U/S 144. (VII) THE AO COULD NOT REJECT THE VALUATION OF THESE INVE NTORIES AND OTHERWISE ACCEPT THE BOOK RESULTS DECLARED BY ASSES SEE. THIS IS PERMISSIBLE IN LAW, IN SUPPORT OF WHICH HE REFERRED TO THE JUDGMENT OF THE HONBLE MADRAS HIGH COURT IN THE CASE OF CIT VS. SAS HOTEL & ENTERPRISES LTD. 334 ITR 194. 18. LD. CIT(DR) SUBMITTED THAT ASSESSEE HAD RESORTE D TO REDUCE 25% OF THE VALUE EVERY YEAR OF SPARES AND STOCKS, WHICH I S NOT THE CORRECT METHOD OF ARRIVING AT NET REALIZABLE VALUE OF SPARES. HE SUBM ITTED THAT ASSESSEE SHOULD HAVE BACKED ITS CLAIM BY SOME EVIDENCE REGARDING NE T REALIZABLE VALUE. THUS, HE POINTED OUT THAT THE VALUATION IS NOT BASE D ON ANY PROPER TECHNICAL ESTIMATION. 19. LD. COUNSEL FOR THE ASSESSEE REITERATED THE SUB MISSIONS ADVANCED BEFORE LD. CIT(A) AND SUBMITTED THAT ASSESSEE WAS F OLLOWING A PRACTICE 33 WHICH WAS PREVALENT IN THE INDUSTRY AND, THEREFORE, ASSESSEES CLAIM SHOULD HAVE BEEN ALLOWED. HE RELIED ON THE DECISIONS WHICH HAVE BEEN REFERRED IN THE APPEAL RELATING TO CHALLENGE OF THE 263 PROCEED INGS. 20. WE HAVE CONSIDERED THE SUBMISSIONS OF BOTH THE PARTIES AND HAVE PERUSED THE RECORD OF THE CASE. WE HAVE DISCUSSED I N DETAIL THE DECISIONS RELIED UPON BY LD. COUNSEL FOR THE ASSESSEE, FROM W HICH IT IS EVIDENT THAT THE CLAIM WAS ADVANCED IN BOTH TH CASES ON THE BASIS OF PROPER ESTIMATION ON TECHNICAL BASIS RESORTED BY ASSESSEE AND NOT ON AD HOC BASIS AS HAS BEEN DONE IN THE PRESENT CASE. WE ARE IN AGREEMENT WITH THE C ONTENTION OF LD. COUNSEL FOR THE ASSESSEE THAT THE AOS CONCLUSION THAT THER E WAS NO FALL AT ALL IN THE VALUE OF SPARES ALSO IS NOT CORRECT BECAUSE IT CAN NOT BE HELD THAT THERE WAS NO DECLINE IN THE NET REALIZABLE VALUE OF SPARES. HOWEVER, ESTIMATION SHOULD HAVE PROPER TECHNICAL BACKING. 20.1. WE ARE IN AGREEMENT WITH THE CONTENTION OF LD . CIT(DR), IN VIEW OF THE DECISION OF HONBLE SUPREME COURT IN BRITISH PA INTS (SUPRA), THAT IF A METHOD EMPLOYED BY ASSESSEE IS NOT RESULTING INTO C OMPUTATION OF TRUE PROFITS OF BUSINESS OF AN YEAR THEN THE SAME CAN BE IGNORED BY AO. IN VIEW OF SECTION 145(3), THE AO IS REQUIRED TO EXAMINE TH E CORRECTNESS OF METHOD EMPLOYED BY ASSESSEE IN PREPARATION OF ITS ACCOUNTS . THE METHOD EMPLOYED BY ASSESSEE SHOULD BE SUCH FROM WHICH TRUE PROFITS OF AN YEAR CAN BE 34 DEDUCED. HOWEVER, IN THE PRESENT CASE SINCE THE ASS ESSEE HAS DEBITED THE P&L A/C MERELY ON PRESUMPTIVE BASIS, THEREFORE, WE RESTORE THE MATTER TO THE FILE OF AO FOR PROVIDING THE ASSESSEE AN OPPORTUNIT Y TO FURNISH THE DETAILS OF NET REALIZABLE VALUE OF SPARES BACKED WITH PROPER E VIDENCE IN ORDER TO SUBSTANTIATE ITS CLAIM. 21. IN THE RESULT, APPEAL IS ALLOWED FOR STATISTICA L PURPOSES. ITA NO. 5898 (ASSESSEES APPEAL FOR AY 2009-10) : 22. THIS APPEAL, PREFERRED BY THE ASSESSEE, ARISES OUT OF CIT(A)-XIII, NEW DELHIS ORDER DATED 17.09.2012 IN APPEAL NO. 232/11 -12, RELATING TO AY 2009-10. 23. BRIEF FACTS OF THE CASE ARE THAT DURING THE YEA R THE ASSESSEE COMPANY CARRIED ON THE SAME BUSINESS AS WAS IN EARLIER YEAR . ASSESSEE HAD FILED RETURN OF INCOME DECLARING INCOME OF RS. 19,31,49,431/- IN CLUDING SHORT TERM AND LONG TERM CAPITAL GAINS OF RS. 3,86,61,878/- AND RS . 1,58,29,030/- RESPECTIVELY. AO NOTICED THAT ASSESSEE HAD EARNED T AX FREE INCOME AND FOR THE PURPOSE, THE COMPANY HAD MADE INVESTMENT OF RS. 109,71,54,427/-. HE FURTHER NOTICED THAT COMPANY HAD PAID INTEREST AMOU NTING TO RS. 4,52,44,722/-. HE SHOW CAUSED THE ASSESSEE TO EXPLA IN AS TO WHY DISALLOWANCE U/S 14A NOT MADE. 35 23.1. AFTER CONSIDERING THE ASSESSEES SUBMISSIONS, THE AO COMPUTED THE DISALLOWANCE UNDER RULE 8D AT RS. 1,06,61,713/-. AP ART FROM THIS, THE AO ALSO DISALLOWED THE ASSESSEES CLAIM OF LOSS OF RS. 4,72,76,410/- ON ACCOUNT OF WRITING OFF OF INVENTORY. 23.2. LD. CIT(A) WHILE PARTLY ALLOWING THE ASSESSEE S APPEAL, DELETED THE DISALLOWANCE ON ACCOUNT OF WRITE DOWN OF INVENTORIE S AND PARTLY ALLOWING THE ASSESSEES CLAIM REGARDING DISALLOWANCE MADE U/S 14 A. BEING AGGRIEVED, BOTH THE ASSESSEE AND THE DEPARTMENT ARE IN APPEAL BEFORE US . FIRST WE TAKE UP THE ASSESSEES APPEAL, WHEREIN FOLLOWING GROUNDS ARE RAISED: 1. THAT IN THE FACTS & CIRCUMSTANCES OF THE CASE TH E LD. COMMISSIONER OF INCOME TAX (APPEALS) ERRED IN LAW I N SUSTAINING THE DISALLOWANCE OF EXPENDITURE AMOUNTIN G TO RS. 27,42,886/- UNDER SECTION 14A OF THE INCOME-TAX ACT , 196 I ('THE ACT') READ WITH RULE 8D (2) (III) OF THE INCO ME-TAX RULES, 1962 ('THE RULES'). 1.1 THAT IN THE FACTS & CIRCUMSTANCES OF THE CASE THE LD. COMMISSIONER OF INCOME TAX (APPEALS) ERRED IN LAW I N CONFIRMING THE DISALLOWANCE UNDER SECTION 14A OF TH E ACT WITHOUT APPRECIATING THE FACT THAT NO EXPENSE WAS I NCURRED IN CONNECTION WITH EARNING OF TAX FREE DIVIDEND INCOME . 1.2 THAT IN THE FACTS & CIRCUMSTANCES OF THE CASE THE LD. COMMISSIONER OF INCOME-TAX (APPEALS) ERRED IN LAW I N IGNORING THE FACT THAT WHILE MAKING THE DISALLOWANCE UNDER S ECTIONS 14A (2) AND 14A (3) OF THE ACT READ WITH RULE 8D, THE A SSESSING OFFICER HAS FAILED TO DISCHARGE THE STATUTORY ONUS OF RECORDING 36 THE FINDING THAT ANY EXPENSE WAS, IN FACT, INCURRED IN CONNECTION WITH EARNING OF TAX FREE DIVIDEND INCOME. 1.3 THAT IN THE FACTS & CIRCUMSTANCES OF THE CASE THE LD. COMMISSIONER OF INCOME-TAX (APPEALS) ERRED IN LAW I N SUSTAINING THE DISALLOWANCE U/S 14A READ WITH RULE 8D DESPITE THE FACT THAT THE CALCULATION OF DISALLOWANCE AS PE R THE FORMULA PRESCRIBED UNDER RULE 8D WOULD BE 'NI L' 1.4 WITHOUT PREJUDICE TO THE ABOVE GROUNDS AND IN THE ALTERNATIVE, THE LD . COMMISSIONER OF INCOME-TAX (A PPEALS) ERRED IN LAW, IN THE FACTS & CIRCUMSTANCES OF THE C ASE IN SUSTAINING THE DISALLOWANCE OF RS. 27,42,886/- BY I GNORING THE FACT THAT IN NO VIEW OF THE MATTER, THE MAXIMUM AMO UNT OF DISALLOWANCE BY CONSIDERING THE AVERAGE OF THE VALU E OF THE RELEVANT INVESTMENTS, SHOULD NOT EXCEED RS. 7,50,00 0/- ONLY. 24. APROPOS GROUND NO. 1, AS AGAINST DISALLOWANCE O F RS. 1,06,61,713/- MADE BY AO U/S 14A LD. CIT(A) RESTRICTED THE DISALLOWANCE T O RS. 27,42,886/- BEING 0.5% OF AVERAGE INVESTMENT OF RS. 54,85,77,213/- HOLDING THAT THE DISALLOWANCE WAS WARRANTED UNDER RULE 8D(2)(III). 25. LD. COUNSEL FOR THE ASSESSEE REFERRED TO PAGE 3 4 OF CIT(A)S ORDER THAT DIVIDEND INCOME EARNED WAS RS. 4,10,000/- AND, THER EFORE, DISALLOWANCE SHOULD BE RESTRICTED TO RS. 4,10,000/- ONLY AS THE SAME CANNO T EXCEED THE DIVIDEND INCOME, WHICH IS EXEMPT U/S 10(34). 37 26. HAVING HEARD BOTH THE PARTIES WE FIND THAT IN V IEW OF THE DECISION OF HONBLE DELHI HIGH COURT IN THE CASE OF JOINT INVESTMENTS P . LTD. VS. CIT, RENDERED IN ITA NO. 117/2015 DATED 25.2.2015, DISALLOWANCE IS TO BE RESTRICTED TO RS. 4,10,000/-. IN THE RESULT, ASSESSEES APPEAL IS PARTLY ALLOWED. 6142/DEL/2012 (DEPARTMENTS APPEAL FOR AY 2009-10) : 27. THE DEPARTMENT HAS TAKEN FOLLOWING GROUNDS OF A PPEAL: 1. ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND I N LAW, THE LD. CIT(A) HAS ERRED IN DELETING THE ADDITION O F RS.4,N, 76,410/- MADE BY THE AO. IN RESPECT OF LOSS CLAIMED BY THE ASSESSEE ON A/C OF WRITE DOWN OF INVENTORIES TO NET REALIZABLE VALUE I.E. @ 25% ON ESTIMATED BASIS DESPITE THE FAC T THAT THE SAID ITEMS WERE IN USE DURING THE YEAR. 2. ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND I N LAW, THE LEARNED CIT(A) HAS FILED TO APPRECIATION THE FA CTS THAT THE SPARES OF THE VALUE OF RS.152.29 LACS WHICH ARE MEA NT TO BE USED IN CONNECTION WITH THE VSAT EQUIPMENTS AND ARE SOLD TO CUSTOMERS ON OUTRIGHT BASIS, HAVE BEEN WRITTEN OFF ONLY ON THE BASIS THAT IF THE SPARES REMAINS UNSOLD BEYOND A PE RIOD OF 365 DAYS ITS ACTUAL COST IS FULLY WRITTEN OFF. 3. ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND I N LAW, THE LD. CIT (A) HAS ERRED IN HOLDING THAT THE ACTIO N OF THE AO, REJECTING THE METHOD OF ACCOUNTING WAS IN CLEAR VIO LATION OF SECTION 145(3) OF THE I. T. ACT. 38 4. ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND I N LAW, THE LD. CIT(A) HAS ERRED IN HOLDING THAT NO INVESTM ENT WAS MADE OUT OF INTEREST BEARING FUNDS, THEREBY DELETIN G THE DISALLOWANCE OF RS.79,18,827 /- MADE U/S 14A RELATI NG TO INTEREST PORTION. 5. THE APPELLANT CRAVES LEAVE, TO ADD, ALTER OR AME ND ANY GROUND OF APPEAL RAISED ABOVE AT THE TIME OF THE H EARING. 28. GROUND NOS. 1,2 & 3: FOR THE REASONS GIVEN IN I TA NO. 5651/DEL/ THESE GROUNDS ARE ALLOWED AND THE MATTER IS RESTORED BACK TO THE FILE OF AO. 29. GROUND NO. 4: LD. CIT(DR) SUBMITTED THAT ONUS W AS ON ASSESSEE TO PROVE THAT INVESTMENTS WERE OUT OF NON-INTEREST BEARING F UNDS. 30. LD. COUNSEL FOR THE ASSESSEE REFERRED TO THE DE CISION IN ASSESSEES OWN CASE FOR AY 2007-08 AND 2008-09, CONTAINED AT PAGE 147 O NWARDS OF THE PB AND POINTED OUT THAT IN AY 2008-09 THE GROUND RAISED BY REVENUE WAS DISMISSED, INTER ALIA, OBSERVING THAT REVENUE HAD NOT PLACED ANY MAT ERIAL EVIDENCING THAT BORROWED FUNDS HAD ACTUALLY BEEN UTILIZED IN MAKING INVESTME NT. HE, THEREFORE, SUBMITTED THAT AS REGARDS DISALLOWANCE MADE ON ACCOUNT OF INT EREST UNDER RULE 8D WAS CONCERNED, SINCE THE SAME INVESTMENT CONTINUED IN AY 2009-10, THEREFORE, NO DISALLOWANCE COULD BE MADE IN THIS YEAR ALSO. 31. WE HAVE CONSIDERED THE SUBMISSIONS OF BOTH THE PARTIES AND HAVE PERUSED THE RECORD OF THE CASE. LD. CIT(A) HAS NOTICED THAT THE ASSESSEE HAD RAISED FUNDS OF RS. 14761.18 LAKHS WHICH WERE OUTSTANDING AS ON 31. 3.2008. THESE FUNDS WERE RAISED FROM FOLLOWING PARTIES: 39 CATEGORY NATURE OF LOAN TAKEN AMOUNT OUTSTANDING AS ON 31.10.2008 (RS. / LACS) AMOUNT OUTSTANDING AS ON 31.10.2009 (RS. / LACS) RELATED INTEREST COST INCURRED DURING THE RELEVANT FY UNDER CONSIDERATION (RS./LACS) PURPOSE FOR WHICH LOAN WAS TAKEN SUPPORTING DOCUMENTS 1 LOAN TAKEN FROM CISCO SYSTEMS (INDIA) PRIVATE LIMITED 841.93 4757.38 219.00 LOAN WAS TAKEN IN CONNECTION WITH ONE OF THE PROJECTS OF THE APPELLANT CALLED NSE (NATIONAL STOCK EXCHANGE) PROJECT. SINCE THE MONEYS SO BORROWED WERE UTILIZED WHOLLY AND EXCLUSIVELY FOR THE BUSINESS PURPOSE ONLY, INTEREST COST ASSOCIATE WITH THESE LOANS IS NOT WARRANTED TO BE CONSIDERED FOR THE PURPOSE OF MAKING ANY DISALLOWANCE U/S 14A OF THE ACT. DETAILS OF THE LOANS OUTSTANDING AS ON 31.3.2008 AND 31.03.2009 ALONG WITH THE SAMPLE RELEVANT LOAN AGREEMENTS ARE ENCLOSED AS ANNEXURE-2 II SHORT TERM FOREIGN CURRENCY LOAN TAKEN FROM HSBC AND SOCIETE GENERALE 4,799.29 NIL 52.48 THESE LOANS WERE TAKEN IN FOREIGN CURRENCY AND THE SAME, BEING IN THE NATURE OF BUYERS CREDIT, WERE UTILIZED FOR THE BUSINESS PURPOSE. AS A RESULT, NO PART OF INTEREST COST ASSOCIATED WITH THESE LOANS CAN BE DEEMED TO HAVE BEEN INCURRED IN CONNECTION WITH EXEMPT DIVIDEND INCOME. DETAILS OF THE LOANS OUTSTANDING AS ON 31.03.2008 AND 31.03.2009 ARE ENCLOSED AS ANNEXURE-2 III INTEREST FREE LOAN TAKEN FROM THE HOLDING COMPANY (I.E. HCL COMNET SYSTEMS & SERVICES LIMITED) 9,085.44 18,4111.84 NO INTEREST COST WAS INCURRED BY THE APPELLANT IN RESPECT OF THIS LOAN AND AS SUCH, IT IS NOT LIABLE TO BE CONSIDERED. - IV FINANCE LEASE OBLIGATIONS 34.52 25.47 3.20 SINCE THE LOAN WAS TAKEN AND UTILIZED EXCLUSIVELY FOR HE PURPOSE OF PURCHASING THE VEHICLES, INTEREST COST ASSOCIATED WITH THESE LEASE OBLIGATION CANNOT BE CONSIDERED FOR THE PURPOSE OF MAKING ANY DISALLOWANCE U/S 14A OF THE ACT. - TOTAL 14,761.18 23,194.69 274.68(*) 40 31.1. FROM THIS HE OBSERVED THAT THE INTEREST OF RS . 274.68 LAKHS WAS PAID FOR THE LOANS TAKEN FROM CISCO SYSTEMS AND HSBC FOR UTILIZ ATION OF THE SAME FOR NSE PROJECT AND FOR BUSINESS PURPOSES. THE ASSESSEE ALS O PAID INTEREST OF RS. 3.20 LAKHS FOR VEHICLES TAKEN ON LEASE. APART FROM THE ABOVE, THE ASSESSEE HAD PAID RS. 147.47 LAKHS ON ACCOUNT OF BANK CHARGES DURING THE PERIOD. HE POINTED OUT THAT NONE OF THE FINANCIAL CHARGES WERE RELATED TO THE INVESTMENT M ADE BY THE ASSESSEE AND INVESTMENT IN DIVIDEND YIELDING ASSETS WAS MADE O UT OF ASSESSEES OWN FUNDS OR FUNDS BORROWED FROM THE HOLDING COMPANY AND NO PART OF THE INTEREST EXPENDITURE COULD BE HELD AS INCURRED FOR EARNING EXEMPT INCOME . THIS SPECIFIC FINDING OF LD. CIT(A) HAS NOT AT ALL BEEN CONTROVERTED BY THE DEPA RTMENT BY BRINGING ANY EVIDENCE ON RECORD AND, THEREFORE, WE CONFIRM THE F INDINGS OF LD. CIT(A) IN DELETING THE DISALLOWANCE OF RS. 79,18,827/- MADE O N ACCOUNT OF INTEREST EXPENDITURE RELATABLE TO EARNING OF EXEMPT INCOME B Y AO. IN THE RESULT THIS GROUND IS DISMISSED. 32. IN THE RESULT, APPEAL IS PARTLY ALLOWED FOR STA TISTICAL PURPOSES. ORDER PRONOUNCEMENT IN OPEN COURT ON 19/08/2016. SD/- SD/- ( C.M. GARG ) (S.V. MEHROTRA) JUDICIAL MEMBER ACCOUNTANT MEMBER DATED: 19/08/2016. *MP* COPY OF ORDER TO: 1. ASSESSEE 2. AO 3. CIT 4. CIT(A) 5. DR, ITAT, NEW DELHI.