Goodyear India Ltd., Faridabad V. DCIT, New Delhi

ITA 4360/DEL/2010

• Counselvise Citation: [2012] 140 COUNSELVISE.COM (IT) 66057 (ITAT-DELHI)
• Duration Of Justice: 2 year(s) 2 month(s) 20 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 14-12-2012
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: I
• Next Hearing Date: 20-11-2012
• Assessment Year: 2006-2007
• Appeal Filed On: 24-09-2010
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: PEEYUSH JAIN
• Keywords: Capital asset; Depreciation; Transfer pricing; Opportunity of being heard; International transaction; Rule of consistency; Cost of acquisition; Capital expenditure
• Section: 43B; 143(3)

Judgement Text

ITA NO. 4360/DEL/2010 1 IN THE INCOME TAX APPELLATE TRIBUNAL DELHI BENCH I, NEW DELHI BEFORE SHRI I.C. SUDHIR, JUDICIAL MEMBER AND SHRI SHAMIM YAHYA, ACCOUNTANT MEMBER I.T.A. NO. 4360/DEL/2010 A.Y. : 2006-07 GOODYEAR INDIA LIMITED, MATHURA ROAD BALLABGARH, DISTRICT FARIDABAD, HARYANA (PAN : AAACG3511H) VS. DY. COMMISSIONER OF INCOME TAX, CIRCLE 12(1), NEW DELHI (APPELLANT ) (APPELLANT ) (APPELLANT ) (APPELLANT ) (RESPONDENT ) (RESPONDENT ) (RESPONDENT ) (RESPONDENT ) ASSESSEE BY : SH. AJAY VOHRA, ADV. & SH. NEERAJ JAIN & SH. ABHISHEK AGGARWAL, CA DEPARTMENT BY : SH. PEEYUSH JAIN, C.I.T. (D.R.) ORDER ORDER ORDER ORDER PER SHAMIM YAHYA: AM PER SHAMIM YAHYA: AM PER SHAMIM YAHYA: AM PER SHAMIM YAHYA: AM THIS APPEAL BY THE ASSESSEE IS DIRECTED AGAINST TH E ORDER OF THE ASSESSING OFFICER U/S. 143(3) READ WITH SECTION 14 4C OF THE I.T. ACT FOR THE ASSESSMENT YEAR 2006-07. 2. THE GROUNDS RAISED READ AS UNDER:- 1. THAT THE ASSESSING OFFICER ERRED ON FACTS AND IN LAW IN COMPLETING THE ASSESSMENT UNDER SECTION 144C READ WI TH SECTION 143(3) OF THE INCOME-TAX ACT (THE ACT) AFTER MAKING ADDITIONS / DISALLOWANCES AGGREGATING TO RS. 2,31 , 90,973 TO THE INCOME RETURNED BY THE APPELLANT. 2. THAT THE ASSESSING OFFICER / TRANSFER PRICING OFFICER (TPO) ERRED ON FACTS AND IN LAW IN MAKING ADJUSTMENT OF R S. ITA NO. 4360/DEL/2010 2 1,13,13,182 ON ACCOUNT OF THE ALLEGED DIFFERENCES I N THE ARM'S LENGTH PRICE OF THE INTERNATIONAL TRANSACTION ENTERED INTO BY THE ASSESSEE WITH ITS ASSOCIATED ENTERPRISE . 2.1 THAT THE ASSESSING OFFICER / TPO ERRED ON FACT S AND IN LAW IN NOT REDUCING EXPORT INCENTIVE AMOUNTING TO RS.78,72,603 AND REBATE RECEIVED AMOUNTING TO RS.33,21,586 FROM THE COST OF GOODS SOLD FOR COMPUTING GROSS PROFIT MARGIN FOR DETERMINING THE ARM'S LENGTH PRICE. 2.2 THAT THE ASSESSING OFFICER / TPO ERRED ON FACT S AND IN LAW IN HOLDING THAT INCENTIVE RECEIVED IN RESPECT O F EXPORT OF FINISHED GOODS, SHOULD NOT BE TAKEN INTO ACCOUNT FOR DETERMINING THE PROFIT/COST IN RESPECT O F THE INTERNATIONAL TRANSACTION OF EXPORT. 2.3 THAT THE ASSESSING OFFICER / TPO ERRED ON FACT S AND IN LAW IN HOLDING THAT THE APPROACH OF THE ASSESSEE IN CONSIDERING EXPORT INCENTIVE FOR COMPUTING COST OF GOODS SOLD WAS IN VIOLATION OF ITS GLOBAL TRANSFER PRICING POLICY. 2.4 THAT THE ASSESSING OFFICER / TPO ERRED ON FACT S AND IN LAW IN HOLDING THAT THE EXPORT INCENTIVE DOES NOT F ORM PART OF COST CALCULATION WHILE ARRIVING AT INVOICE PRICE OF GOODS SOLD AND HENCE THE SAME CANNOT BE REDUCED FROM THE COST OF GOODS SOLD. 2.5 THAT THE ASSESSING OFFICER I TPO ERRED ON FACTS AND IN LAW IN NOT REDUCING THE REBATE RECEIVED OF ITA NO. 4360/DEL/2010 3 RS.33,21,586 WHILE COMPUTING THE COST OF GOODS SOLD OF THE INTERNATIONAL TRANSACTION OF EXPORT ON THE FOLLOWING GROUNDS: (I) THIS ITEM OF REBATE DOES NOT FIND A PLACE III THE FINANCIALS ACCOMPANYING THE TRANSFER PRICING REPORT. (II) IN THE DETAILS FORWARDED BY THE ADDL. COMMISSIONER OF INCOME TAX (TRANSFER PRICING) PUNE, THERE IS NO REFERENCE TO ANY REBATE BEING ALLOWED B Y M/S. GOODYEAR SOUTH ASIA TYRE PRIVATE LTD. (III) THE REBATE CLAIMED DOES NOT SEEM TO APPEAR ANYWHERE IN THE AUDITED FINANCIALS OF THE ASSESSEE. 2.6 WITHOUT PREJUDICE THAT THE ASSESSING OFFICER I TPO ERRED ON FACTS AND IN LAW IN NOT ALLOWING BENEFIT O F +/ (-) 5% AS PER THE PROVISO TO SECTION 92C(2) OF THE ACT. NO ADJUSTMENT WAS REQUIRED WHILE COMPUTING THE ARM'S LENGTH PRICE OF THE INTERNATIONAL TRANSACTIONS OF EXPORT OF TRADED GOODS. 3. THAT THE ASSESSING OFFICER ERRED ON FACTS AND IN LAW III DISALLOWING RS.99,69,422 BEING 20% OF THE EXPENDITURE AMOUNTING TO RS 4,98,47,109 INCURRED TOWARDS REPAIR AND MAINTENANCE OF THE PLANT AND MACHINERY HOLDING THE EXPENDITURE TO THIS EXTENT TO BE OF CAPITAL IN NATURE. 3.1 THAT THE ASSESSING OFFICER ERRED ON FACTS AND IN LAW III MAKING AD-HOC DISALLOWANCE OF RS. 99,69,422 BEING 20% OF EXPENDITURE OR RS 4,98,47,109 INCURRED ON ITA NO. 4360/DEL/2010 4 REPAIR AND MAINTENANCE, HOLDING THAT SOME OF THE EXPENSES WERE CAPITAL IN NATURE WITHOUT POINTING OU T SPECIFIC ITEM OF EXPENDITURE AS BEING CAPITAL EXPENDITURE. 3.2 THAT THE ASSESSING OFFICER ERRED ON FACTS AND IN LAW IN NOT APPRECIATING THAT THE AFORESAID EXPENDITURE ON REPAIR AND MAINTENANCE OF PLANT AND MACHINERY DID NOT RESULT IN ACQUISITION OF BRINGING INTO EXISTEN CE ANY CAPITAL ASSET AND WERE NOT EXPENDITURE INCURRED IN THE CAPITAL FIELD. 3.3 THAT THE ASSESSING OFFICER ERRED ON FACTS AND IN LAW IN NOT APPRECIATING THAT SIMILAR ADHOC DISALLOWANCE OUT OF REPAIR AND MAINTENANCE EXPENSES WAS DELETED BY THE HON'BLE INCOME TAX APPELLATE TRIBUNAL IN APPELLANT'S OWN CASE IN THE EARLIER YEARS VIZ. ASSESSMENT YEARS 2003-04, 2004-05 . 3.4 WITHOUT PREJUDICE, THAT THE ASSESSING OF FICER ERRED ON FACTS AND IN LAW IN TREATING THE AFORESAID AMOUNT OF RS. RS.99,69,422 BEING CAPITAL EXPENDITURE AND THEREBY ALLOWING DEPRECIATION ON SAME. 4. THAT THE ASSESSING OFFER ERRED ON FACTS A ND IN LAW IN DISALLOWING THE SUM OF RS. 18,70,000 BEING THE PROVISION FOR WARRANTY HOLDING THE SAME TO BE CONTINGENT LIABILITY. 4.1 THAT THE ASSESSING OFFICER ERRED ON FACTS AND IN LAW IN NOT APPRECIATING THAT THE PROVISION FOR WARRANTY IS AN ITA NO. 4360/DEL/2010 5 ASCERTAINED LIABILITY INCURRED AT THE TIME OF SALES AND IS NOT A CONTINGENT LIABILITY. 5. THAT ON THE FACTS AND CIRCUMSTANCES OF THE CASE THE ASSESSING OFFICER OUGHT TO HAVE ALLOWED DEDUCTION F OR EXCISE DUTY ON CLOSING STOCK AMOUNTING TO RS. 1,05,415 DISALLOWED IN THE PRECEDING PREVIOUS YEAR ON PAYMENT IN THE RELEVANT YEAR AS PER THE PROVISIONS O F SECTION 43B OF THE ACT. THE APPELLANT CRAVES LEAVE TO ADD, ALTER, AMEND OR V ARY FROM THE AFORESAID GROUNDS OF APPEAL BEFORE OR AT TH E TIME OF HEARING. 3. TRANSFER PRICING ISSUE:- THE ASSESSEE IS A PUBLIC LIMITED COMPANY ENGAGED IN T HE BUSINESS OF MANUFACTURE AND SALE OF AUTOMOBILE TYRES , TUBES AND FLAPS IN THE BRAND NAME OF 'GOODYEAR'. THE ASSESSEE IS A SUBSIDIARY COMPANY OF GOODYEAR TYRE AND RUBBER COMPAN Y (GTRC), USA. THE ASSESSEE DURING THE RELEVANT PREVIOUS YEAR, INT ER-ALIA, ENTERED INTO INTERNATIONAL TRANSACTIONS OF EXPORT O F FINISHED GOODS TO ITS ASSOCIATED ENTERPRISES OF RS.32,65,88,813, C OMPRISING OF EXPORT OF MANUFACTURED PRODUCTS OF RS.21,58,31,755 AND EXPORT OF TRADED PRODUCTS OF RS. 11,07,57,058. THE ASSESSE E HAS PURCHASED FINISHED GOODS, VIZ., CERTAIN VARIETIES O F TYRES FROM GOOD YEAR SOUTH ASIA TYRES PVT. LTD. (GSATL) FOR EXP ORT TO THE ASSOCIATED ENTERPRISES (AES). ITA NO. 4360/DEL/2010 6 THE ASSESSEE HAS EXPORTED FINISHED GOODS, VIZ., TYR ES PURCHASED FROM GSA TL AMOUNTING TO RS. 11,07,57,058 TO THE AES AT A MARK-UP OF 5% OVER THE COST OF GOODS SOLD AS FOLLOWS: PARTICULARS PARTICULARS PARTICULARS PARTICULARS AMOUNT IN RS. AMOUNT IN RS. AMOUNT IN RS. AMOUNT IN RS. PURCHASE PRICE OF GOODS 11,07,19,519 LESS: EXPORT INCENTIVES (78,72,603) ADD: FREIGHT COST 55,37,853 LESS: REBATE / DISCOUNT RECEIVED (33,21,586) TOTAL COGS 10,50,63,183 ADD: 5% MARK-UP 52,53,159 ARM'S LENGTH PRICE OF EXPORT SALE OF TRADED GOODS TO GROUP COMPANIES 11,03,16,342 TRANSFER PRICE OF EXPORT SALES OF TRADED GOODS TO GROUP COMPANIES 11,07,57,058 IT WAS SUBMITTED BEFORE THE TPO THAT FOR COMPUTING THE GROSS PROFIT MARGIN OR THE MARK-UP FROM SUCH INTERNAT IONAL TRANSACTIONS OF EXPORT OF TRADED GOODS TO THE AES, THE EXPORT INCENTIVE AMOUNTING TO RS.78,72,603 AND REBATE/DISCO UNT AMOUNTING TO RS.33,21,586 RECEIVED IN RESPECT OF SUC H PURCHASES FROM GSATL IN TERMS OF THE OFF-TAKE AGREEMENT DATED 0 1-09-2001 IS TO BE DEDUCTED FROM THE COST OF GOODS SOLD. 4. THE TPO HOWEVER, DID NOT ACCEPT THIS CONTENTION. TPO REFERRED TO THE FOLLOWING GLOBAL TRANSFER PRICING POLICY FOLLOWE D BY THE ASSESSEE AS UNDER:- DETAILS OF GLOBAL TRANSFER PRICING POLICY FOLLOWED B Y ASSESSEE. ITA NO. 4360/DEL/2010 7 THE EXTRACTS OF GLOBAL TRANSFER PRICING POLICY OF T HE ASSESSEE ON THE BASIS OF WHICH THE COMPUTATION HAD BEEN WORKED O UT IS AS UNDER: 'GLOBAL TIRE TRANSFER PRICING POLICY THE GOODYEAR TI RE & RUBBER COMPANY POLICY MANUAL SYSTEM PURPOSE THE PURPOSE OF THIS POLICY IS TO DESCRIBE THE REQ UIREMENTS, WHICH MUST BE FOLLOWED IN ESTABLISHING TRANSFER PRI CES FOR TIRES SOLD BY ONE GOODYEAR ENTITY (MANUFACTURING ENTITY) TO ANOTHER GOODYEAR (PURCHASING ENTITY) THAT IS LOCATED IN A D IFFERENT COUNTRY. SCOPE THIS POLICY APPLIES TO ALL ENTITIES (EXCEPT AS PRO VIDED IN THE FOLLOWING PARAGRAPHS) THAT CONTROLLED BY THE GOODY EAR TIRE & RUBBER COMPANY. CONTROL IS DEFINED AS OWNING EITH ER DIRECTLY OR THROUGH ANOTHER CONTROLLED ENTITY GREATER THAN 50% OF THE SHARES OF THE ENTITY. THE SCOPE OF THIS POLICY DOES NOT INCLUDE THE TRAN SFER PRICING OF TIRES BETWEEN THE GOODYEAR TIRE AND RUBBER COMPANY AND GOODYEAR CANADA INC., OR THE SALE OF TIRES FORM GOODYEAR BRA ZIL TO ANY OTHER GOODYEAR ENTITY, AS THEY ARE COVERED BY SEPARATE PO LICIES. POLICY THE INTER-COMPANY TRANSFER PRICE SHOULD BE SET TO A LLOW THE MANUFACTURING ENTITY TO EARN A PROFIT EQUAL TO A 5 % MARKUP. THE ITA NO. 4360/DEL/2010 8 MANUFACTURING ENTITY SHOULD RECOVER INVENTORY COST A ND ALL APPLICABLE OTHER COSTS PLUS THE 5% PROFIT MARK-UP. ACCORDINGLY, THE INTER COMPANY SELLING PRICE MAY INCL UDE OTHER MARKUP TO COVER OTHER DIRECTLY RELATED EXPENSE SUCH AS GENERAL AND ADMINISTRATIVE EXPENSE AND RESEARCH AND DEVELOPMENT COSTS. THE MARK UP FOR RESEARCH AND DEVELOPMENT COSTS SHOULD BE 5% FOR ALL MANUFACTURING ENTITIES. THE MARK UP FOR GENERAL AND ADMINISTRATIVE EXPENSE IS TO BE LIMITED TO RECOVERY EXPENSES REQUIR ED TO CONDUCT INTER COMPANY BUSINESS. GENERALLY THIS WILL INCLUDE ANY S AG REQUIRED TO SUPPORT THE MANUFACTURING FACILITY, AS WELL AS EXPEN SES RELATED TO TRANSPORTING AND WAREHOUSING THE PRODUCT, IF APPLIC ABLE, AND EXPENSE NECESSARY WITH REGARD TO OTHER INTER-COMPANY TRANSA CTIONS SUCH AS ORDER PROCESSING AND ARRANGING FOR SHIPMENT. EXP ENSES (FOR EXAMPLE; SALES, COLLECTION OR ADVERTISING EXPENSES) NOT REQU IRED TO CONDUCT INTER-COMPANY BUSINESS SHOULD NOT BE INCLUDE. THE 5 % MARK UP IS TO BE APPLIED TO THE SUM OF ALL COSTS AND EXPENSES DISC USSED ABOVE. THE FOLLOWING ARE SPECIFIC DIRECTIVES THAT ARE TO BE US ED WITH TRANSACTIONS THAT ARE UNDER THE SCOPE OF THIS POLICY. (I) THE INTENT OF THIS POLICY IS THAT THE MANUFACTURING ENTITY RECOVER ACTUAL COSTS, PLUS A 5% MARK UP. THEREFORE, IT IS IMPERATIVE THAT THE BILLING BE BAS ED AS CLOSELY AS POSSIBLE ON ACTUAL MANUFACTURING COST. IT IS PERMISSIBLE FOR EFFICIENCYS SAKE TO BI LL BASED UPON A STANDARD OR BUDGETED COSTS AND ACTUAL COSTS ARE SIGNIFICANT ARE TO BE MADE BY THE MANUFACTURING ENTITY BASED UPON BUSINESS BUDGETED COSTS (AT THE END OF THE CALENDAR YEAR) ITA NO. 4360/DEL/2010 9 WOULD BE CONSIDERED SIGNIFICANT. EACH MANUFACTURING ENTITY IS RESPONSIBLE FOR MANAGING ITS PRICING THROUGHOUT THE YEAR IN ORDER TO INSURE THAT THE GOAL STATED IN THE FIRST SENTENCE IS ACHIEVED. (II) AS A STANDARD PRACTICE ANY EXPENSE RELATED TO PROVIDING A REPLACEMENT TIRE TO A CUSTOMER, OR THE COST OF A TIRE THAT IS DETERMINED TO BE UNSALEABLE, WILL BE BORNE BY THE PURCHASER. THERE MAY BE CASES WHERE THE PURCHASER FEELS THAT THIS IS NOT TH E APPROPRIATE RESULT BASED UPON THE PARTICULAR FACTS AND CIRCUMSTANCES. IN THOSE CASES, THE PURCHASER MUST FOLLOW THE PROCEDURES CONTAINED IN THE PRODUCT WARRANTY OBLIGATIONS POLICY (POLICY NO. 000 - 11-16-007) CONTAINED IN THE GOODYEAR WORLDWIDE ACCOUNTING POLICIES DATABASE. IN PARTICULAR, POLIC Y SECTION INDIA 3.3 CONTAINS THE PROCEDURES FOR REQUESTING AN ADJUSTMENT FROM THE MANUFACTURING ENTITY AND POLICY SECTION 2.3.8 DETAILS THE DOCUMENTATION REQUIREMENTS THAT MUST BE ADHERED TO. (III) THE TERMS OF SALES WILL BE SUCH THAT TITLE DOES NOT PASS TO THE PURCHASER UNTIL THE PRODUCT IS THAT THE POINT OF EXIT FORM THE MANUFACTURING COUNTRY. THE MANUFACTURING ENTITY WILL INCLUDE THE COST OF THE TRANSPORTATION TO THE POINT OF EXIT IN THE TRANSFER PRICE MARKUP. EXAMPLES OF ACCEPTABLE TERMS WOULD INCLUDE; FREE ON BOARD (NAMED PORT OF ITA NO. 4360/DEL/2010 10 SHIPMENT), COST AND FREIGHT (NAMED PART OF DELIVERED EXSHIP) (NAMED PORT OF DESTINATION) THE INTER COMPANY PRICING IS NOT TO BE INCREASED TO COMPENSATE FOR CARRYING COSTS RELATED TO WORKING CAP ITA, WHETHER IN THE FORM OF RAW MATERIALS, WORK IN PROCESS , FINISHED GOODS OR INTER COMPANY RECEIVABLES. THE IN TER COMPANY PAYMENT TERMS ESTABLISHED AND MAINTAINED BY THE CORPORATE TREASURY DEPARTMENT ARE ESTABLISHED BA SED UPON ARMS LENGTH PRINCIPLES AND THEREFORE NO ADDITI ONAL COMPENSATION WOULD BE APPROPRIATE. 5. TPO OBSERVED THAT GOVT. OF INDIA HAS INITIATED TH E CONCEPT OF EXPORT BENEFITS TO THE TAXPAYERS TO PROMOTE AND STIM ULATE THE GROWTH OF EXPORTS OF GOODS AND SERVICES FROM INDIA TO VARIO US OTHER COUNTRIES. THAT THE OTHER PURPOSE OF EXPORT INCENTIVE IS TO EA RN THE VALUABLE FOREIGN EXCHANGE FOR THE COUNTRY. THAT EXPORT INCE NTIVES WAS AVAILABLE TO THE ASSESSEE ONLY AFTER TRADING EXPORTS MADE BY THE ASSESSEE. THAT THE GLOBAL TRANSFER PRICING POLICY OF THE GROUP COMP ANY TALKS ABOUT COST IN INTER COMPANY TRANSFER BEFORE THE GOODS AND SERVICES ARE DISPATCHED FROM THE PREMISES OF A COMPANY TO THE OTHE R COMPANY. THAT IN NONE OF THE GLOBAL TRANSFER PRICING POLICY, THE FUTURE VALUE OF BENEFITS WHICH MAY BE AVAILABLE IN A FEW COUNTRIES CAN BE INCLUDED AS THIS WILL DISTURB THE VERY BASIS/PURPOSE OF PROVIDI NG UNIFORM RETURN TO EACH AND EVERY ENTERPRISE WHICH IS A MEMBER OF GLOB AL TRANSFER PRICING POLICY. TPO FURTHER OBSERVED THE BASIC PURPOSE OF GLOBAL TRANSFER PRICING IS TO PROVIDE A MINIMUM AMOUNT OF RETURN TO THE MEMBERS OF GLOBAL TRANSFER PRICING POLICY. THAT IF A COUNTRY PROVIDES TAX INCENTIVES OR OTHER INCENTIVES TO COMPENSATE ITS TAXPAYERS ON T HE BASIS OF ITA NO. 4360/DEL/2010 11 ECONOMIC SITUATION IN THAT COUNTRY, THEN THIS BENEFI T IS AVAILABLE ONLY TO THE INDIAN TAXPAYERS AND THE SAME CANNOT BE TRANSFE RRED OR TRADED TO THE OTHER ENTITY WHICH IS NOT LOCATED IN INDIA. T HESE KINDS OF SHIFTING OF ECONOMIC AND TAX INCENTIVES OFFERED TO LOCAL COMPANY WILL DISTURB THE FISCAL STRUCTURE OF A COUNTRY AND WILL RESULT IN SH IFTING OF PROFITS FROM ONE TAX JURISDICTION TO THE OTHER TAX JURISDICTION. 6. ASSESSEE SUBMITTED THAT THE EXPORT INCENTIVES ARE VALID SOURCE OF PROFIT FOR ANY EXPORTER. HOWEVER, THE TPO WAS NOT C ONVINCED. THE TPO NOTED IN THE CASE OF THE ASSESSEE WHO IS INVOLVED I N CONTROLLED TRANSACTIONS THIS APPROACH ACTUALLY RESULTS IN TRAN SFERRING, BENEFITS FROM GOVERNMENT GRANTED INCENTIVE TO THE AE. THAT THE UNJUST CLAIM OF THE ASSESSEE TO JUSTIFY ITS TRANSFER PRICE WAS N EVER THE INTENTION OF GRANTING EXPORT INCENTIVES. THAT THIS APPROACH O F THE ASSESSEE WAS IN VIOLATION OF ITS GLOBAL TRANSFER PRICING POLICY. 7. TPO FURTHER NOTED THAT ASSESSEE HAS ATTEMPTED TO SUPPORT IT STAND FROM THE DECISION OF ITAT, NEW DELHI IN SONY I NDIA (P) LTD. VS. DCIT. HOWEVER, TPO WAS NOT CONVINCED IN THIS REGARD . HE OBSERVED THAT IF THE ASSESSEES METHOD OF CALCULATION OF COS T AND GOODS SOLD IS FOLLOWED, IT WOULD TANTAMOUNT TO A CLAIM OF BENEFIT, WHICH HAS NOT YET ACCRUED AT THE TIME OF SALE OF GOODS, BEING TREATED AS A COMPONENT OF COST OF GOODS SOLD. THE TPO FURTHER REFERRED TO THE OECD GUIDELINES, WHERE GROSS PROFITS ARE DEFINED AS THE GROSS PROFI TS FROM A BUSINESS TRANSACTIONS ARE THE AMOUNT COMPUTED BY DEDUCTING FROM THE GROSS RECEIPTS OF THE TRANSACTION THE ALLOCABLE PURCHASED OR PRODUCTION COSTS OF SALES, WITH DUE ADJUSTMENT FOR INCREASES OR DECRE ASES IN INVENTORY OR STOCK IN TRADED, BUT WITHOUT TAKING ACCOUNT OF OTH ER EXPENSES. FROM THE ABOVE TPO INFERRED THAT THE GUIDELINES SUGGESTS THAT WHILE ITA NO. 4360/DEL/2010 12 DETERMINING GROSS PROFIT RECEIVED FROM SALE OF GO ODS SUCH INCENTIVES CAN NEVER BE ADJUSTED TO DETERMINE THE COST OF GO ODS SOLD. TPO FURTHER OBSERVED THAT ASSESSEES MANNER OF CALCULAT ING ITS GROSS MARGINS RUNS COUNTER TO THESE GUIDELINES. ASSESSIN G OFFICER FURTHER OBSERVED THAT EXPORT INCENTIVE DOES NOT FORM PART OF THE INVOICE PRICE OF THE GOODS SOLD. IN THAT CASE, TPO WONDERED AS TO HOW CAN THE ASSESSEE REDUCE IT FROM THE COST OF GOODS SOLD. HE OBSERVED THAT IT IS A WELL SETTLED PRINCIPLE THAT AN EXPENDITURE THAT DOE S NOT FORM PART OF THE BOOKS OF ACCOUNTS CANNOT BE TREATED AS AN EXPENSE F OR THE PURPOSE OF TRANSFER PRICING ACCOUNTING. TPO OBSERVED THAT THE ASSESSEES METHOD OF ACCOUNTING JUGGLERY WAS EMPLOYED TO SELL GOODS TO AE WITHOUT THE MARKUP AS PRESCRIBED BY THE ASSESSEES GLOBAL TRANS FER PRICING POLICY. 8. TPO ASKED THE ASSESSEE TO PROVIDE INFORMATION REGA RDING GROSS MARGIN EARNED ON EXPORT OF TRADED GOODS DURING THE RELEVANT FINANCIAL YEAR. THE ASSESSEE PROVIDED THE FOLLOWING DETAILS: - NET SALES (`) 110,757,058 PURCHASE PRICE (RS.) 110,719,519 EXPORT INCENTIVE BENEFIT (RS.) (7,872,603) TOTAL EFFECTIVE COST (RS.) 102,846,916 GROSS MARGIN (RS.) 7,910,143 GROSS MARGIN % 7.14% ON THE BASIS OF ABOVE CALCULATION, ASSESSEE SUBMIT TED THAT EVEN IF EXPORT WERE NOT ALLOWED, THE TRANSACTION WOULD B E AT ARMS LENGTH. THE TPO ASKED THE ASSESSEE TO PROVIDE THE DETAILS OF COST BASE THAT HAD BEEN EMPLOYED TO CALCULATE THE GROSS MARGIN. A SSESSEE SUBMITTED THE FOLLOWING CALCULATION:- PARTICULARS PARTICULARS PARTICULARS PARTICULARS AMOUNT IN RS. AMOUNT IN RS. AMOUNT IN RS. AMOUNT IN RS. ITA NO. 4360/DEL/2010 13 PURCHASE PRICE OF GOODS 11,07,19,519 LESS: EXPORT INCENTIVES (78,72,603) ADD: FREIGHT COST 55,37,853 LESS: REBATE / DISCOUNT RECEIVED (33,21,586) TOTAL EFFECTIVE COGS 10,50,63,183 ADD: 5% MARK-UP 52,53,159 ARM'S LENGTH PRICE OF EXPORT SALE OF TRADED GOODS TO GROUP COMPANIES 11,03,16,342 TRANSFER PRICE OF EXPORT SALES OF TRADED GOODS TO GROUP COMPANIES 11,07,57,058 FROM THE ABOVE, ASSESSING OFFICER OBSERVED THAT FRE IGHT COST WHICH HAD BEEN OMITTED EARLIER HAD BEEN INCLUDED IN THE COST BASE. TPO NOTED THAT ASSESSEE HAS MADE A CLAIM OF REBATE FO R THE FIRST TIME. ON THIS MATTER, THE ASSESSING OFFICER OBSERVED THE FOLLOWING POINTS. (I) THIS ITEM OF REBATE DOES NOT FIND A PLACE IN THE FINANCIALS ACCOMPANYING THE TP REPORT. (II) IN THE DETAILS FORWARDED BY THE ADDL. C.I.T. (TRANS FER PRICING) PUNE THERE IS NO REFERENCE TO ANY REBATE BEING ALLOWED BY M/S GSATL. (III) THE REBATE CLAIMED DOES NOT SEEM TO APPEAR ANYWHERE IN THE AUDITED FINANCIALS OF THE ASSESSEE. (IV) THE ONLY CONCLUSION THAT CAN BE ARRIVED AT IS THAT THE ISSUE / CLAIM OF REBATE HAS BEEN RAISED TO OFFSET THE FREIGHT COST WHICH HAS ENTERED THE COST BASE AT THIS STAGE. FOR THESE REASONS THE CLAIM OF REBATE SHALL NOT BE ALLOWED. ITA NO. 4360/DEL/2010 14 ON THE BASIS OF THE ABOVE, ASSESSING OFFICER COMP UTED THE ARMS LENGTH PRICE AS BELOW:- PARTICULARS PARTICULARS PARTICULARS PARTICULARS AMOUNT IN RS. AMOUNT IN RS. AMOUNT IN RS. AMOUNT IN RS. PURCHASE PRICE OF GOODS 11,07,19,519 ADD: FREIGHT COST 55,37,853 TOTAL EFFECTIVE COGS 116,157,372 ADD: 5% MARK-UP 5,812,868 ARM'S LENGTH PRICE OF EXPORT SALE OF TRADED GOODS TO GROUP COMPANIES 122,070,240 REVENUE SHOWN 11,07,57,058 DIFFERENCE 11,313,182 THUS, TPO OBSERVED THE VALUE OF INTERNATIONAL TRANSA CTION OF THE ASSESSEE RELATING TO EXPORT OF TRADED GOODS SHALL B E ADJUSTED UPWARD BY ` 11,313,182/- TO BRING IT TO ARMS LENGTH. 9. THE ASSESSEE IN THIS CASE HAS SUBMITTED THE OBJE CTIONS TO THE DISPUTES RESOLUTION PANEL (DRP). HOWEVER, THE DRP RE JECTED THE ASSESSEES SUBMISSIONS. THE DRP NOTED THAT ASSESSEE HAS NOT SHOWN ANY PROFIT ON THE TRANSACTIONS OF THE MATERIAL COSTI NG ` 11,07,19,519/-. THE DRP NOTED THAT TPO HAS COMPUTED THE OPERATING PROF IT ON THE SAME BY TAKING SUITABLE MARK UP OF 5%. THAT THE A SSESSEE HAS SIMPLY JUSTIFIED ITS TRANSACTIONS WHICH HAVE BEEN ENT ERED INTO, WITHOUT PROFIT WHICH IS HIGHLY UNLIKELY AS PER THE PREVALEN T GLOBAL TRANSFER PRICING POLICY. ACCORDINGLY, DRP HELD THAT IT FOUND THAT NO COMPELLING REASONS TO INTERFERE WITH THE ORDER OF TPO IN THIS REGARD. 10. AGAINST THE ABOVE ORDER THE ASSESSEE IS IN APPE AL BEFORE US. ITA NO. 4360/DEL/2010 15 11. WE HAVE HEARD THE RIVAL CONTENTIONS IN LIGHT O F THE MATERIAL PRODUCED AND PRECEDENT RELIED UPON. LD. COUNSEL OF THE ASSESSEE SUBMITTED THAT EXPORT INCENTIVES RECEIVED FOR SALES AMOUNTING TO ` 7,872,603/- IN RESPECT OF EXPORT OF FINISHED GOODS IS REQUIRED TO BE TAKEN INTO ACCOUNT FOR DETERMINING THE COST OF SUCH EXPORT FOR THE FOLLOWING REASONS:- I) EXPORT INCENTIVES ARE GRANTED UNDER THE IMPORT & EXPORT POLICY ISSUED IN TERMS OF POWERS CONFERRED UNDER SECTION 5 OF THE SA ID FOREIGN TRADE (DEVELOPMENT & REGULATION) ACT, 1992. CHAPTER 7 OF THE EXPORT IMPORT POLICY LAYS DOWN VARIOUS DUTY EXEMPTION AND DUTY REMI SSION SCHEMES. DEPB SCHEME IS ONE OF THE DUTY REMISSION SCHEME GIVEN UNDER THE SAID CHAPTER 7 OF THE EXPORT IMPORT POLICY. IN ORDER TO PROMOTE EXPORTS FROM INDIA, THE GOVERNME NT HAS FRAMED SPECIAL SCHEMES UNDER WHICH IMPORTS ARE PERMITTED FREE OF DUTY OR AT CONCESSIONAL RATE OF CUSTOMS DUTY. THE EXPORT INCENTIVE IN THE FORM OF DUTY DRAW BACK SCHEME OR DEPB CREDIT ENTITLES THE EXPORTER REFUND OR CREDIT AGAINST DUTY SUFFERED BY HIM IN THE COST OF PURCHASE EITHER DIRECTLY OR INDIRE CTLY, IN RESPECT OF EXPORT TURNOVER. THEREFORE, FOR THE PURPOSE OF COMPUTING THE CORRECT PROFITABILITY OF EXPORT TRANSACTIONS, THE EXPORT INCENTIVES RECEIVED A RE REQUIRED TO BE NETTED OFF FROM THE COST OF PURCHASE. THE PROFITABILITY FROM THE TRANSACTION OF EXPORT MAY BE PRESENTED IN TWO ALTERNATIVE WAYS BY NETTING OR REDUCING THE EXPO RT INCENTIVE FROM THE COST OF PURCHASE OR CAN BE SHOWN SEPARATELY A S RECEIPT / INCOME RELATED TO EXPORT AS FOLLOWS: ITA NO. 4360/DEL/2010 16 ILLUSTRATION 1 ILLUSTRATION 1 ILLUSTRATION 1 ILLUSTRATION 1 AMOUNTS IN AMOUNTS IN AMOUNTS IN AMOUNTS IN ILLUSTRATION 2 ILLUSTRATION 2 ILLUSTRATION 2 ILLUSTRATION 2 AMOUNTS IN AMOUNTS IN AMOUNTS IN AMOUNTS IN RS. RS. RS. RS. RS. RS. RS. RS. EXPORT SALES OF TRADED 110,757,058 EXPORT SALES OF TRADED 110,757,058 GOODS ADD: EXPORT INCENTIVES 7,872,603 TOTAL INCOME 118,629,661 COST OF PURCHASE 110,719,519 COST OF P URCHASE 110,719,519 LESS: EXPORT INCENTIVES 7,872,603 NET COST OF PURCHASE 102,846,916 GROSS PROFIT 7,910,143 GROSS PROFIT 7,910,1 43 GROSS PROFIT / SALES GROSS PROFIT / SALES GROSS PROFIT / SALES GROSS PROFIT / SALES 7.14% 7.14% 7.14% 7.14% GROSS PROFIT / SALES GROSS PROFIT / SALES GROSS PROFIT / SALES GROSS PROFIT / SALES 6.67% 6.67% 6.67% 6.67% IN EITHER SITUATION, THE PROFIT MARGIN FROM SUCH EXPO RT FOR TRADED PRODUCTS WOULD REMAIN THE SAME AS COMPUTED HEREINABOVE. (II) AS PER THE GTPP, THE EXPORTING GROUP ENTITY CAN RECOVER THE INVENTORY COST AND ALL APPLICABLE OTHER COSTS, PLUS THE 5% PROFIT MARK-UP. ACCORDINGLY, THE INTER-COMPANY SELLING PRICE MAY INCLUDE OTHER MA RK-UPS TO COVER OTHER DIRECTLY RELATED EXPENSES SUCH AS GENERAL AND ADMINISTRA TIVE EXPENSES AND RESEARCH AND DEVELOPMENT EXPENSES. AN ILLUSTRATION FROM THE GTPP WHICH EVIDENCES THE FACT THAT EXPORT INCENTIVES ARE TO BE D EDUCTED FOR COMPUTATION OF THE INTER-COMPANY TRANSFER PRICE IS REPRODUCED BEL OW: NORMAL SPECIAL V - PRICE SPECIAL V - PRICE TRANSFER PRICE $ COST (NFLC) $ COST (FLC) $ MATERIALS 25.70 25.70 25.70 LABOR 0.92 0.92 0.92 VARIABLE OH 13.58 13.58 13.58 FIXED OH 7.80 N/A 7.80 EXPORT INCENTIVES EXPORT INCENTIVES EXPORT INCENTIVES EXPORT INCENTIVES (0.34) (0.34) (0.34) (0.34) (0.34) (0.34) (0.34) (0.34) (0.34) (0.34) (0.34) (0.34) TOTAL PRODUCTION COST (A) 47.66 39.86 47.66 ITA NO. 4360/DEL/2010 17 FREIGHT/ HANDLING TO PORT OF EXIT 0.90 0.90 0.90 SAG 1.20 0.60 1.20 TOTAL COSTS 49.76 41.36 49.76 5% PROFIT MARKUP 2.49 N/A N/A 50/50 PROFIT SPLIT N/A 4.73 0.31 SERVICE CHARGE/ RD&E (5%) 2.69 2.69 2.69 NORMAL V -PRICE 54.94 48.78 52.76 EXPORTER COST TOTAL PRODUCTION (A) - SEE ABOVE 39.86 47.66 CALCULATION FACTORY COST 39.86 47.66 FREIGHT TO PORT OF EXIT 0.90 0.90 AKRON SERVICE CHARGE/ RD&E (5%) 2.69 2.69 SAG - EXPORTER 0.60 1.20 TOTAL EXPORTER COST 44.05 52.45 IMPORTER COST OCEAN FREIGHT 0.65 0.65 INSURANCE DUTIES 0.48 0.48 HANDLING/ PORT CHARGES 0.31 0.31 INLAND FREIGHT, BROKERAGE, & MIC. 0.49 0.49 ITA NO. 4360/DEL/2010 18 OTHER 0.01 0.01 INCREMENTAL SAD - IMPORTER 0.56 1 TOTAL IMPORTER COST 2.50 2.94 NET SELLING PRICE TO ULTIMATE 56.00 56.00 CUSTOMER LESS: TOTAL COST 46.55 55.39 TOTAL PROFIT 9.45 0.61 TOTAL EXPORTER COST 44.05 52.45 50% PROFIT TO EXPORTER 4.73 0.31 50/50 SPECIAL V -PRICE 48.78 52.76 THE TPO, CLEARLY IGNORED THE FACT THAT THE GLOBAL T RANSFER PRICING POLICY OF THE GROUP, PG. 11 PB-1 PROVIDE FOR REDUCING THE COST OF MERCHANDIZE EXPORTED BY THE EXPORT INCENTIVE AVAILABLE TO TPO ORDER THE EXP ORT ENTITY, I.E. THE APPELLANT. (III) IT IS A STANDARD PRACTICE FOR EXPORTERS OF GOODS TO COMPUTE THEIR PROFITABILITY, BY FACTORING IN THE EXPORT INCENTIVE S RECEIVED FROM THE GOVERNMENT. IT IS ALSO THE INDUSTRYWISE PRACTICE TO D ETERMINE COST OF GOODS NET OF EXPORT INCENTIVE FOR THE PURPOSE OF PRICING/ PROFITABILITY OF SUCH EXPORT. THESE EXPORT INCENTIVES COULD EITHER BE NETTED OFF FR OM THE COSTS (AS IN THE CASE OF THE APPELLANT), OR ALTERNATIVELY, ADDED TO T HE INCOME FOR COMPUTING THE PROFITABILITY OF THE EXPORT TRANSACTIONS. FURTHER, IT WOULD BE APPRECIATED THAT IN MANY CASES, TO GAIN ENTRY INTO LARGER OVERSEAS MARKETS AND TO BE COMPETITIVE THEREIN, EXPORT ERS HAVE TO OPERATE ON THIN MARGINS, IN WHICH CASE THEIR SELLING PRICE MAY NOT BE VERY DIFFERENT FROM THEIR COST OF PRODUCTION/ PURCHASE. THE EARNINGS OF THE EXPORTERS IN SUCH CASES ACTUALLY ARISE FROM THE EXPORT BENEFITS RECEI VED, WHICH ENABLE THEM TO CARRYON WITH THEIR EXPORT BUSINESSES, AND ESTABL ISH A PRESENCE! REACH IN OVERSEAS MARKETS. ITA NO. 4360/DEL/2010 19 IN THE INSTANT CASE, TOO, THE APPELLANT FOLLOWS A SIMIL AR ECONOMIC MODEL FOR PRICING ITS EXPORTS, BE IT EXPORTS OF MANUFACTURED GOO DS OR TRADED GOODS, AND WHETHER THE EXPORTS ARE TO ASSOCIATED ENTERPRISES OR THI RD PARTIES, WHICH STRONGLY POINTS TOWARD THE FACT THAT THE STRATEGY FOLL OWED BY THE ASSESSEE FOR PRICING ITS EXPORT TRANSACTIONS IS UNIFORM AND AT ARM'S LENGTH. RELIANCE IS ALSO PLACED ON THE DECISION OF THE HON'BLE INCOME TAX APPELLATE TRIBUNAL (IT AT) IN THE CASE OF SONY INDIA : 114 ITD 448 (DEL), WHEREIN THE HON'BLE TRIBUNAL ALLOWED THE EXPORT BENEFITS RECEIVE D BY THE ASSESSEE TO BE ADJUSTED, FOR CALCULATING THE EFFECTIVE SELLING PRICE OF GOODS EXPORTED TO ASSOCIATED ENTERPRISES, FOR SUBSEQUENT COMPARISON WITH LOC AL SELLING PRICE. THE RELEVANT EXTRACT OF THE SAID DECISION READS AS UNDE R: 'THE TAXPAYER CLAIMED THAT 8,680 COLOUR T.VS WERE ASSE MBLED AND EXPORTED TO SONY JAPAN TO UTILIZE IDLE CAPACITY OF ASSEMBLING FACILITIES TO ENABLE THE COMPANY TO IMPROVE RECOVERY OF ITS FIXED ASSEMBLY COST. ACCORDINGLY GOODS WERE PRICED TAKING INT O CONSIDERATION MARGINAL COST. THE TAXPAYER FURTHER CLA IMED THAT COLOUR T.VS WERE EXPORTED AT ALP AND THIS SUBMISSION WAS SUPPORTED WITH REFERENCE TO THE FOLLOWING CHART: PARTICULARS LOCAL SALES EXPORT KV - XAI12P80 KV - XA21P80 PER UNIT PER UNIT SALES VALUE 16,138 10,676 LESS: EXCISE DUTY @ 16% 1,929 LESS : SALES TAX @ 14% 2,010 LESS: OTHER TAXES @ 1% 144 ADD: EXPORT BENEFIT @ 18% 1921 COMPARATIVE PRICES 12056 12595 ITA NO. 4360/DEL/2010 20 THE PRICE WORKS OUT TO RS.12,056 AGAINST RS. 12, 595 CHARGED FROM SONY JAPAN AFTER TAKING BENEFIT PERMISSIBLE IN EXPORT SCHEM E @18% . ....... IN THE LIGHT OF ABOVE EVIDENCE, WE ARE OF T HE VIEW THAT TRANSACTION OF SALE OF CTV TO SONY JAPAN WAS CARRIED BY TAXPAYER AT ARM'S LENGTH AND. THEREFORE, ADJUSTMENT MADE BY THE TPO AND UPHELD IN APPEAL BY THE LD. COMMISSIONER OF INCOME TAX (A) IS NOT CALLED FOR. IT I S DIRECTED TO BE DELETED. '[EMPHASIS SUPPLIED} IN THAT CASE THE HON'BLE TRIBUNAL ALSO HELD THAT SALES / SERVICE TAX REFUNDS CAN REASONABLY BE TREATED AS OPERATIONAL INCOME OF TH E TAXPAYER AND CAN BE INCLUDED IN WORKING OUT ITS OPERATING PROFIT. THE ASSE SSING OFFICER WOULD APPRECIATE THAT THE NATURE OF EXPORT INCENTIVES IS AK IN TO THAT OF SALES / SERVICE TAX REFUNDS, SINCE THEY ARE ALSO TAX BENEFITS GI VEN TO COMPANIES BY THE GOVERNMENT OF INDIA. THE RELEVANT EXTRACT OF TH E SAID DECISION IN THIS REGARD READS AS UNDER: 'OBSERVING IN PARA 21.3 OF THE IMPUGNED ORDER THAT T HE FOLLOWING ITEMS WHILE CALCULATING THE OPERATING MARGINS FOR COMPARISO N AND DETERMINATION OF ALP BE EXCLUDED: PARTICULARS AMOUNT IN RS. ('000) PROVISIONS WRITTEN BACK 7,916 SALES TAX/SERVICE TAX REFUND 431 NOTICE PAY RECD! FINES & PENALTIES FROM STAFF 437 MEMBERSHIP & SUBSCRIPTION RECEIVED 35 OTHER MISC. INCOME 12162 ITA NO. 4360/DEL/2010 21 ..................... THE TAXPAYER HAS SUBMITTED CERT AIN ARGUMENTS WHILE MAKING SIMILAR CLAIM IN THE GENERAL GROUNDS RELATING TO DED UCTION U/S 8OHHC, RELIANCE IN SUPPORT OF SUCH CLAIM HAS BEEN PLACED ON T HE DECISION OF HON'BLE BOMBAY HIGH COURT IN THE CASE OF BANGALORE CLOTHING COMPANY (SUPRA) WHEREIN CERTAIN GUIDELINES HAVE BEEN LAID DOWN TO ASC ERTAIN AS TO WHETHER ANY ITEM OF OTHER INCOME REPRESENTS OPERATIONAL INCOM E OF THE TAXPAYER. APPLYING THE SAID GUIDELINES, WE HAVE HELD THAT SCRAP SALES, SPARE SALES AND PROVISIONS WRITTEN BACK REPRESENT OPERATIONAL INCOME O F THE TAXPAYER. SIMILARLY, WE ARE OF THE VIEW THAT THE RECEIPTS FROM DAMAGES FOR DEFECTIVE ITEMS, INSURANCE CLAIM AND SALES TAXI SERVICE TAX REFUND S CAN REASONABLY BE TREATED AS OPERATIONAL INCOME OF THE TAXPAYER APPLYI NG THE SAID GUIDELINES AND ACCORDINGLY, THE SAME CAN BE INCLUDED IN WORKING OUT ITS OPERATING PROFIT.' [EMPHASIS SUPPLIED} IN VIEW OF THE ABOVE, IT IS RESPECTFULLY SUBMITTED TH AT THE EXPORT INCENTIVES RECEIVED BY THE ASSESSEE ON EXPORT OF TRADING GOODS TO A SSOCIATED ENTERPRISES ARE AN INTEGRAL PART OF ITS OPERATING 1 BU SINESS ACTIVITIES. ACCORDINGLY, IT IS ONLY RATIONAL AND LOGICAL FOR THE INCENTIVES AVAILABLE ON EXPORTS TO BE TAKEN INTO ACCOUNT FOR COMPUTING PROFI TABILITY OF THE EXPORT TRANSACTION. RE: REBATE / DISCOUNT RECEIVED FROM GSATL: IN RESPECT OF THE OFF TAKE AGREEMENT DATED 1.9.2001 ENTERED INTO BY THE ASSESSEE WITH GSATL, A REBATE OF 3% ON COST OF GOODS PU RCHASED IS RECEIVED BY THE ASSESSEE FOR EXPORTS TO AE AS WELL AS TO UNRELATED PARTIES. THE AMOUNT OF ` 33,21,586/- BEING INEXTRICABLY LINKED TO THE COST OF PURCHASES, WAS NETTED OFF AND NET AMOUNT OF COST OF PURCHASES OF FINISHED GOODS WAS SHOWN IN THE PROFIT AND LOSS ACCOUNT. THE TPO, CLEARL Y ERRED IN HOLDING THAT THE SAID AMOUNT WAS NOT REFLECTED ANYWHERE IN THE BOO KS OF ACCOUNTS OF THE ASSESSEE. ITA NO. 4360/DEL/2010 22 FURTHER, IT WOULD ALSO BE NOTED THAT THE TPO HAS HIM SELF IN THE ORDER PASSED FOR THE ASSESSMENT YEAR 2007-08 AND 2008-09, ACCEPTED T HE CONTENTION OF THE ASSESSEE THAT REBATE RECEIVED UPON PURCHASE OF GOO DS IS DEDUCTIBLE FROM THE VALUE OF COST OF GOODS SOLD. IT WOULD BE AP PRECIATED THAT CONSIDERING THE ORDERS PASSED BY THE TPO FOR SUBSEQUENT A SSESSMENT YEARS AND THE COMMONALITY OF FACTS, THERE WOULD BE NO RE ASON NOT TO DEDUCT THE AMOUNT OF REBATE RECEIVED FROM THE VALUE OF COST OF GOODS SOLD, WHILE DETERMINING THE ARMS LENGTH PRICE OF EXPORT OF GOODS FOR ASSESSMENT YEAR 2006-07. ALTHOUGH THERE IS NO RES JUDICATA IN INCOME-TAX PROCE EDINGS, THE SUPREME COURT IN THE CASE OF RADHASOAMI SATSANG V. CIT: 193 IT R 321 AT PAGE 329 HELD THAT WHERE A FUNDAMENTAL ASPECT PERMEATING THRO UGH DIFFERENT YEARS IS FOUND AS A FACT ONE WAY OR THE OTHER AND PARTIES HAVE ALLOWED THAT POSITION TO REMAIN, IT IS NOT POSSIBLE TO COME TO A DIFFERENT C ONCLUSION IN THE SUBSEQUENT YEAR. THERE HAS BEEN NO CHANGE IN FACT AND IN LAW IN THE A PPELLANT'S CASE AND FOLLOWING THE PRINCIPLE OF CONSISTENCY, AS LAID IN THE FOLLOWING DECISIONS, THE REBATE RECEIVED BY THE APPELLANT SHALL BE REDUCED FR OM THE COST OF GOODS SOLD IN THE RELEVANT PREVIOUS YEAR: RADHASOAMI SATSANG VS. CIT: 193 ITR 321 (SC) CITVS. NEO POLYPACK (P) LID. : 245 ITR 492 (DEL. CITVS. A.K.J. SECURITY PRINTERS: 264 ITR 276 (DEL.) DIT(E) VS. APPAREL EXPORT PROMOTION COUNCIL: 244LTR 734 (DEL.) VESTA INVESTMENT AND TRADING CO. (P) LTD. VS. CIT: 70 ITD 200 (CHD.) NGC NETWORK (INDIA) P LTD. ITA NO. 5307/M/2008 ITA NO. 4360/DEL/2010 23 RELIANCE IN THIS REGARD IS ALSO PLACED ON THE RECENT D ECISION OF PUNE BENCH OF HON'BLE TRIBUNAL IN THE CASE OF BRINTONS CARPETS ASIA P. LTD. VS. DCIT [ITA NO. 1296/PUNE/10, WHEREIN THE HON'BLE TRIBUNAL HELD, TH AT, THE RULE OF CONSISTENCY IS RELEVANT TO INCOME TAX MATTERS AND THE A SSESSING OFFICER CANNOT IGNORE THE SAME. THERE OUGHT TO BE UNIFORMITY IN TREATMENT AND CONSISTENCY WHEN THE FACTS AND CIRCUMSTANCES ARE IDENTIC AL. RELIANCE IS ALSO PLACED ON THE RECENT DECISION OF THE HON'BLE DELHI BENCH OF TRIBUNAL IN THE CASE OF MCCANN ERICKSON INDIA PVT. LT D. VS. ADDL. CIT (ITA NO. 5871/DEV2011), WHEREIN, THE HON'BLE TRIBUNAL HELD T HAT 'ALTHOUGH THE PRINCIPLE OF RES JUDICATA IS NOT APPLICABLE TO THE IN COME-TAX PROCEEDINGS, HOWEVER, SOMETHING MATERIAL OR ADVERSE IN NATURE, WHI CH IS HAVING DIRECT BEARING ON THE PECULIAR FACTS AND CIRCUMSTANCES OF THE CASE, HAS TO BE BROUGHT ON RECORD TO DRAW THE ADVERSE INFERENCE'. IN VIEW OF THE AFORESAID CUMULATIVE REASONS, THE ADJUST MENT MADE BY THE TPO, WHILE DETERMINING THE ARM'S LENGTH PRICE OF INT ERNATIONAL TRANSACTION OF EXPORT OF GOODS IS NOT SUSTAINABLE AND IS LIABLE TO BE D ELETE. 11.1 LD. DEPARTMENTAL REPRESENTATIVE RELIED UPON THE ORDER OF THE TPO AND DRP AND REITERATED THAT THE ASSESSEE IS SELLING TO THE AE WITHOUT MARKUP. HE CLAIMED THAT THE ASSESSEE HAS SUBSIDIZI NG SALES TO THE AE BY INCENTIVE RECEIVED. HE FURTHER SUBMITTED THAT TH E EXPORT INCENTIVE IS RECEIVED AFTER THE SALE. IN THESE CIRCUMSTANCES , HE CLAIMED THAT THE SAME CANNOT BE ACCOUNTED FOR IN TRANSFER PRICIN G. 11.2 WE HAVE CAREFULLY CONSIDERED THE SUBMISSIONS AND PERUSED THE RECORDS. ITA NO. 4360/DEL/2010 24 11.3 THE ASSESSEE HAS EXPORTED FINISHED GOODS, VIZ. , TYRES PURCHASED FROM GSA TL AMOUNTING TO RS. 11,07,57,058 TO THE AES AT A MARK-UP OF 5% OVER THE COST OF GOODS SOLD AS FOLLOWS: PART PART PART PARTICULARS ICULARS ICULARS ICULARS AMOUNT IN RS. AMOUNT IN RS. AMOUNT IN RS. AMOUNT IN RS. PURCHASE PRICE OF GOODS 11,07,19,519 LESS: EXPORT INCENTIVES (78,72,603) ADD: FREIGHT COST 55,37,853 LESS: REBATE / DISCOUNT RECEIVED (33,21,586) TOTAL COGS 10,50,63,183 ADD: 5% MARK-UP 52,53,159 ARM'S LENGTH PRICE OF EXPORT SALE OF TRADED GOODS TO GROUP COMPANIES 11,03,16,342 TRANSFER PRICE OF EXPORT SALES OF TRADED GOODS TO GROUP COMPANIES 11,07,57,058 11.4 IT WAS SUBMITTED BEFORE THE TPO THAT FOR COMPUTI NG THE GROSS PROFIT MARGIN OR THE MARK-UP FROM SUCH INTERNATIONAL TRANSACTIONS OF EXPORT OF TRADED GOODS TO THE AES, THE EXPORT INCEN TIVE AMOUNTING TO RS.78,72,603 AND REBATE/DISCOUNT AMOUNTING TO RS.33, 21,586 RECEIVED IN RESPECT OF SUCH PURCHASES FROM GSATL IN TERMS OF THE OFF-TAKE AGREEMENT DATED 01-09-2001 IS TO BE DEDUCTED FROM THE COST OF GOODS SOLD. 11.5 AS REGARDS ISSUE OF REDUCTION OF EXPORT INCENT IVE FROM GOODS SOLD IS CONCERNED, WE FIND THAT THE REASONING ADOPTED B Y THE TPO HAS CONSIDERABLE COGENCY. THE EXPORT BENEFITS ARE GIV EN TO THE TAXPAYERS TO PROMOTE AND STIMULATE THE GROWTH OF EXPORTS OF GO ODS AND SERVICES IN INDIA. THEY ARE ALSO MEANT TO EARN VALUABLE FOR EIGN EXCHANGE FOR ITA NO. 4360/DEL/2010 25 THE COUNTRY. THE EXPORT INCENTIVE WAS AVAILABLE T O THE ASSESSEE ONLY AFTER TRADING EXPORTS MADE BY THE ASSESSEE. GLOBA L TRANSFER PRICING POLICY OF THE GROUP COMPANY MENTIONS COST IN INTER COMPANY TRANSFER BEFORE THE GOODS AND SERVICES ARE DISPATCH ED FROM THE PREMISES OF A COMPANY TO THE OTHER COMPANY. IN THE G LOBAL TRANSFER PRICING POLICY THE FUTURE VALUE OF BENEFITS WHICH MA Y BE AVAILABLE IN A FEW COUNTRIES CANNOT BE INCLUDED AS THIS WILL DISTU RB THE VERY BASIS/PURPOSE OR PROVIDING UNIFORM RETURN TO TEACH AND EVERY ENTERPRISE WHICH IS A MEMBER OF GLOBAL TRANSFER PRIC ING POLICY. THE VERY PURPOSE OF GLOBAL TRANSFER PRICING IS TO PROVI DE A MINIMUM AMOUNT OF RETURN TO THE MEMBERS OF GLOBAL TRANSFER PR ICING POLICY. IF INDIA PROVIDE TAX INCENTIVE OR OTHER INCENTIVE TO COMPENSATE ITS TAXPAYERS ON THE BASIS OF THE ECONOMIC SITUATION, TH EN THIS BENEFIT IS AVAILABLE TO INDIAN TAXPAYERS AND THE SAME CANNOT BE TRANSFERRED OR TRADED TO OTHER ENTITY WHICH IS NOT LOCATED IN IND IA. THIS KIND OF SHIFTING OF ECONOMIC AND TAX INCENTIVES OFFERED TO LOCAL COMPANY WILL DISTURB THE FISCAL STRUCTURE OF A COUNTRY AND WILL RESULT IN SHIFTING OF PROFITS FROM ONE TAX JURISDICTION TO OTHER TAX JURISD ICTION. THE ECONOMIC AND TAX INCENTIVES OFFERED TO INDIAN ENTITI ES ARE NOT MEANT TO SUBSIDIZE THE ENTITY IN FOREIGN JURISDICTION. THE ASSESSEE WHO IS INVOLVED IN CONTROLLED TRANSACTION THIS APPROACH AC TUALLY RESULTS IN TRANSFERRING, BENEFIT FROM GOVERNMENT GRANTED INCENT IVES TO AE. MOREOVER, THE ENTITIES TRANSFER PRICING POLICY CANN OT OVERRIDE THE BASIC FUNDAMENTAL OF TRANSFER PRICING ANALYSIS. IF ASSE SSEES METHOD OF CALCULATION OF COST OF GOODS SOLD IS FOLLOWED, IT W OULD TANTAMOUNT TO A CLAIM OF BENEFIT, WHICH HAS NOT YET ACCRUED AT THE TIME OF SALE OF GOODS, BEING TREATED AS A COMPONENT OF COST OF GOOD S SOLD. ITA NO. 4360/DEL/2010 26 11.6 THE TPOS REFERENCE TO THE OECD GUIDELINES IS A LSO GERMANE. IN THIS REGARD, WE FIND THAT IN THE SAID GUIDELINES GR OSS PROFIT ARE DEFINED AS THE GROSS PROFITS FROM A BUSINESS TRANSACTIONS ARE THE AMOUNT COMPUTED BY DEDUCTING FROM THE GROSS RECEIPTS OF THE TRANSACTIONS THE ALLOCABLE PURCHASED OR PRODUCTION COSTS OF SALES, W ITH DUE ADJUSTMENT FOR INCREASES OR DECREASES IN INVENTORY OR STOCK IN TRADED, BUT WITHOUT TAKING ACCOUNT OF OTHER EXPENSES. 11.7 FROM THE ABOVE IT FOLLOWS THAT WHILE DETERMINING THE GROSS PROFITS FROM SALE OF GOODS SUCH INCENTIVES CANNOT BE ADJUSTE D TO DETERMINE THE COST OF GOODS SOLD. TPO HAS RIGHTLY OBSERVED T HAT EXPORT INCENTIVES DOES NOT FORM PART OF THE INVOICE PRICE O F GOODS SOLD. IN SUCH A CASE, IT CANNOT BE REDUCED FROM THE COST OF GOODS SOLD. WE AGREE WITH THE TPO THAT AN EXPENDITURE THAT DOES N OT FORM PART OF THE BOOKS OF ACCOUNTS CANNOT BE TREATED AS AN EXPENSE F OR THE PURPOSE OF TRANSFER PRICING ACCOUNTING. 11.8 ASSESSEES RELIANCE OF ACCOUNTING STANDARD (A S)-II- VERIFICATION OF INVENTORIES ISSUED BY INSTITUTE OF CHARTERED ACCOUN TANT OF INDIA (ICAI), FOR THE PURPOSE OF DETERMINING THE COST OF PURCHASE IS NOT COGENT AS THE REFERENCE TO COST OF PURCHASE IN THIS IS NOT I N THE CONTEXT OF ARMS LENGTH PRICE IN TRANSFER PRICING. 11.9 ASSESSEES RELIANCE ON THE DECISION OF THE ITA T IN SONY INDIA (P) LTD., VS. DCIT (SUPRA) IS NOT APPLICABLE ON THE FAC TS OF THE PRESENT CASE. THE PORTION OF THIS DECISION REFERRED BY THE ASSESS EES COUNSEL WAS IN THE CONTEXT OF MANUFACTURING OF EXPORT TO UTILIZE I DLE FACILITIES TO ENABLE THE COMPANY TO IMPROVE RECOVERY OF ITS FIXED ASSEMBLY COST. MOREOVER, IN THE PRESENT CASE, WE ARE CONCERNED WITH COMPUTATION OF COST PLUS MARKUP WHICH WAS NOT THE CASE IN THE SON Y INDIA DECISION. ITA NO. 4360/DEL/2010 27 11.10 IN THE BACKGROUND OF THE AFORESAID DISCUSSION , WE ARE OF THE OPINION THAT TPO HAS RIGHTLY HELD THAT EXPORT INCENT IVE AMOUNTING TO ` 7,872,603/- CANNOT BE DEDUCTED FROM COST OF GOODS SO LD. 12. AS REGARDS ISSUE OF DEDUCTION OF REBATE /DISC OUNT RECEIVED AMOUNTING TO ` 33,21,586/-, THE TPO OBSERVED THAT THE ASSESSEE IN THIS REGARD HAS MADE THE CLAIM FOR THE FIRST TIME. ASSE SSING OFFICER FURTHER OBSERVED AS UNDER:- (I) THIS ITEM OF REBATE DOES NOT FIND A PLACE IN THE FINANCIALS ACCOMPANYING THE TP REPORT. (II) IN THE DETAILS FORWARDED BY THE ADDL. C.I.T. (TRANS FER PRICING) PUNE THERE IS NO REFERENCE TO ANY REBATE BEING ALLOWED BY M/S GSATL. (III) THE REBATE CLAIMED DOES NOT SEEM TO APPEAR ANYWHERE IN THE AUDITED FINANCIALS OF THE ASSESSEE. (IV) THE ONLY CONCLUSION THAT CAN BE ARRIVED AT IS THAT THE ISSUE / CLAIM OF REBATE HAS BEEN RAISED TO OFFSET THE FREIGHT COST WHICH HAS ENTERED THE COST BASE AT THIS STAGE. FOR THESE REASONS THE CLAIM OF REBATE SHALL NOT BE ALLOWED. 12.1 IN THIS REGARD, WE FIND THAT AS PER THE AGREE MENT ASSESSEE IS ENTITLED FOR REBATE OF 3% ON COST OF GOODS PURCHAS ED FOR EXPORTS TO AE AS WELL AS TO UNRELATED PARTIES. WE FIND THAT THE ABOVE REASONING ADOPTED BY THE ASSESSING OFFICER IN DISALLOWING T HE DEDUCTION IS NOT COGENT. THAT THE ASSESSEE HAS NOT MADE ANY SUCH C LAIM INITIALLY CANNOT ACT AS ESTOPPEL AGAINST THE PROPER AND VALI D CLAIM. WE AGREE WITH THE LD. COUNSEL OF THE ASSESSEE COMPANY THAT T HE REBATE RECEIVED IS INEXTRICABLY LINKED WITH THE COST OF PURCHASE. WE FURTHER NOTE THAT ITA NO. 4360/DEL/2010 28 IN SUBSEQUENT ASSESSMENT YEARS FOR ASSESSMENT YEAR 2 007-08 AND 2008-09 THE TPO HAS ACCEPTED THE CONTENTION OF THE A SSESSEE THAT THE REBATE RECEIVED UPON PURCHASE OF GOODS IS DEDUCTIBL E FROM THE VALUE OF COST OF GOODS SOLD. HENCE, IN OUR CONSIDERED OPI NION, ASSESSEE IS ENTITLED FOR DEDUCTION OF REBATE RECEIVED UPON PURC HASE OF GOODS FROM THE VALUE OF GOODS SOLD. 12.2 WE FURTHER FIND THAT THE REBATE AMOUNT WAS NETT ED OFF AND NET AMOUNT OF PURCHASE COST SHOWN IN THE PROFIT AND LOSS ACCOUNT. IN THIS REGARD, TPO HAS CONTENDED THAT THE SAID AMOUNT WAS N OT REFLECTED IN THE BOOKS AND ACCOUNTS OF THE ASSESSEE. IN OUR CON SIDERED OPINION, THIS FACTUAL ASPECT NEEDS VERIFICATION. HENCE, WE REMIT THIS ISSUE REGARDING VERIFICATION OF NETTING OFF OF REBATE FRO M COST OF PURCHASE TO THE FILE OF ASSESSING OFFICER. NEEDLESS TO ADD THAT THE ASSESSEE SHOULD BE GIVEN ADEQUATE OPPORTUNITY OF BEING HEARD. 13. GROUND NOS. 3 TO 3.4 ON THIS ISSUE, THE ASSESSING OFFICER PROPOSED THA T WHY NOT 20% DISALLOWANCE BE MADE OUT OF MACHINERY REPAIR AND MAIN TENANCE DUE TO HIGH MACHINERY REPAIR EXPENSE OF ` 4.985 CRORES. ASSESSEE SUBMITTED THAT THE PLANT AND MACHINERY WAS VERY OLD AND REQUIRES REGULAR REPAIR AND MAINTENANCE. THEREFORE, THE REPA IR AND MAINTENANCE EXPENSES ARE HIGHER THIS YEAR. ASSESSIN G OFFICER FOUND THAT THIS REPLY OF THE ASSESSEE WAS VERY GENERAL. HE OBSERVED THAT ASSESSEE HAS NOT MADE ANY SPECIFIC REASONS FOR STEEP INCREASE IN THE REPAIR AND MAINTENANCE OF THE EXPENSES WHILE THE SALES REMAINED ALMOST SAME. HE FURTHER OBSERVED THAT IT WAS FOUN D IN EARLIER ASSESSMENT YEARS 2003-04 & 2004-05, THAT MANY ITEMS S HOWN AS ISSUES FROM COMPANIES OWNED STORES UNDER THE HEAD R EPAIR INCLUDED ITA NO. 4360/DEL/2010 29 VARIOUS ITEMS OF CAPITAL NATURE AND THEREFORE, PART OF THE REPAIR AND MAINTENANCE EXPENSES WERE DISALLOWED. ASSESSING O FFICER FURTHER OBSERVED THAT IT WAS SEEN FROM THE DETAIL OF REPAI R TO MACHINERY ACCOUNT THAT IT INCLUDES VARIOUS ITEMS OF CAPITAL N ATURE IN THIS YEAR TOO. ASSESSING OFFICER ESTIMATED THE ITEMS IN CAPITAL NA TURE AT 20% OF THE MACHINERY REPAIR AND MAINTENANCE. THEREFORE, THE T OTAL AMOUNT TO BE CAPITALIZED CAME TO ` 99,69,422/- (20% OF 4,98,4 7,109/-). THEREFORE, THE ASSESSING OFFICER MADE THE ADDITION OF ` 99,69,422/- TO THE INCOME OF THE ASSESSEE. 13.1. ASSESSEE OBJECTIONS IN THIS REGARD WERE REJE CTED BY THE DRP. DRP AFFIRMED THE ORDER OF THE ASSESSING OFFICER AND ALSO HELD THAT THE CLAIM OF DEPRECIATION ON THIS CAPITAL EXPENDITURE W AS TO BE ALLOWED. 14. WE HAVE HEARD THE RIVAL CONTENTIONS IN LIGHT OF THE MATERIAL PRODUCED AND PRECEDENT RELIED UPON. LD. COUNSEL O F THE ASSESSEE SUBMITTED AS UNDER:- THAT THE ASSESSEE HAD INCURRED EXPENDITURE ON ROUT INE REPAIR AND MAINTENANCE OF PLANT AND MACHINERY AGGREGATING TO RS. 4,98,47,109 WHICH INCLUDED EXPENDITURE ON ACCOUNT O F CONSUMABLES, STORES AND SPARES, ETC., AMOUNTING TO RS.2,14,95,075 ISSUED FROM STORES. THE BALANCE EXPEN SES WERE ALSO INCURRED ON ANNUAL MAINTENANCE SERVICES, PURCH ASE OF CONSUMABLES AND SPARES, JOB WORKS, ETC., FOR THE PUR POSE OF REPAIR AND MAINTENANCE OF THE EXISTING PLANT. THE TPO MADE DISALLOWANCE OF RS.99,64,422 BEING 20% OF THE TOTAL EXPENDITURE ON THE REPAIRS HOLDING THE SAME T O BE CAPITAL EXPENDITURE. ITA NO. 4360/DEL/2010 30 THE DETAILS OF THE AFORESAID EXPENDITURE ON REPAIR AND MAINTENANCE OF PLANT AND MACHINERY ARE PLACED AT PAG ES 132 TO 160. THE AFORESAID EXPENDITURE DID NOT RESULT IN AN ENDURING BENEFIT IN THE CAPITAL FIELD NOR WERE SUCH EXPENSES INCURRED FOR ACQUIRING ANY CAPITAL ASSET. SUCH EXPENSES ON REPAI R AND MAINTENANCE OF PLANT AND MACHINERY WERE TO BE ESSENT IALLY REGARDED AS REVENUE EXPENSES IN TERMS OF TEST LAID DOWN BY THE SUPREME COURT IN THE CASE OF EMPIRE JUTE MILLS LTD.: 124ITR 1. THE DELHI BENCH OF THE TRIBUNAL, VIDE ORDER DATED 2 8-08-2006, IN THE ASSESSEE'S OWN CASE FOR THE ASSESSMENT YEAR 1997 -98, DELETED A SIMILAR DISALLOWANCE. FURTHER, THE HON'BLE DELHI BENCH OF THE TRIBUNAL IN THE ASSESSEE'S CASE FOR THE ASSESSMENT YEAR 2003-04 AND 2004-05 UP HELD THE ORDER PASSED BY THE CIT(A) DELETING SIMILAR ADHOC D ISALLOWANCE OF EXPENDITURE OUT OF REPAIR AND MAINTENANCE EXPENSES FOR PLANT AND MACHINERY. IT MAY BE NOTED THAT REVENUE HAS NOT FILED AN APPEAL TO THE HIGH COURT AGAINST ORDER PASSED BY THE TRIBUNAL FOR ASSE SSMENT YEAR 2003-04. WITHOUT PREJUDICE TO THE AFORESAID, THE ASSESSING O FFICER DID NOT ALLOW DEPRECIATION ON THE AFORESAID AMOUNT OFRS.99,6 9,422 HELD TO BE CAPITAL EXPENDITURE. 14.1 LD. DEPARTMENTAL REPRESENTATIVE RELIED UPON TH E ORDER OF THE TPO AND DRP. 14.2 WE FIND THAT ON THIS ISSUE ASSESSING OFFICER HAS MADE AN ADHOC DISALLOWANCE OF 20% OF THE EXPENDITURE INCURRED ON MACHINERY ITA NO. 4360/DEL/2010 31 REPAIR AND MAINTENANCE ON THE PREMISE THAT THE SAME I S CAPITAL EXPENDITURE. ASSESSING OFFICER HAS NOT IDENTIFI ED AS TO WHICH ITEMS IN HIS OPINION ARE IN CAPITAL EXPENDITURE. IN THIS REG ARD, WE ALSO NOTE THAT SUCH ADHOC DISALLOWANCE WERE ALSO MADE BY THE ASSESS ING OFFICER IN THE PRECEDING YEARS IN THE CASE OF THE ASSESSEE. BUT THE DELHI TRIBUNAL IN ASSESSEES OWN CASE FOR ASSESSMENT YEAR 2003-04 AND 2004-05 UPHELD THE ORDER OF THE LD. COMMISSIONER OF INCOME TAX (A) DELETING THE SIMILAR DISALLOWANCE OF EXPENDITURE OUT OF REPAIR AND MAINTENANCE EXPENSES FOR PLANT AND MACHINERY. WE AL SO NOTE THAT REVENUE HAS NOT FILED ANY APPEAL BEFORE THE HIGH CO URT OF DELHI AGAINST THE AFORESAID ORDER PASSED BY THE TRIBUNAL. HENCE, IN THE BACKGROUND OF THE AFORESAID DISCUSSIONS AND PRECEDE NTS, WE SET ASIDE THE ORDER OF THE ASSESSING OFFICER AND DECIDE TH E ISSUE IN FAVOUR OF THE ASSESSEE. 15. GROUND NOS. 4 TO 4.1 ON THIS ISSUE ASSESSING OFFICER OBSERVED THAT DUR ING THE YEAR ENDED 31.3.2006, THE ASSESSEE HAS CLAIMED AN AMOUNT O F ` 1,38,70,000/- TOWARDS PROVISION FOR WARRANTY. THE ASSESSEE WAS ASKED TO EXPLAIN AS TO WHY THE SAID PROVISION BE A LLOWED. ASSESSEE IN RESPONSE RELIED UPON CERTAIN CASE LAWS AND CONTEND ED THAT BASED ON PRINCIPLES OF ACCOUNTING IT SHOULD BE ALLOWED. H OWEVER, ASSESSING OFFICER DID NOT FIND THIS RESPONSE ACCEPTABLE. HE HELD THAT ASSESSEE HAS NOT BEEN ABLE TO PROVE THE COMPUTATION MECHANISM FOLLOWED BY THE COMPANY FOR CREATING SUCH PROVISIONS THAT BEIN G CONTINGENT IN NATURE THE PROVISION FOR WARRANTY WAS DISALLOWED AND ADDED TO THE INCOME OF THE ASSESSEE. ITA NO. 4360/DEL/2010 32 16. ASSESSEE SUBMITTED ITS CROSS OBJECTION BEFORE TH E DRP. THE DRP AFFIRMED THE ACTION OF THE ASSESSING OFFICER IN TH IS REGARD. HOWEVER, THE DRP OBSERVED THAT THE CLAIM OF THE ASSESSEE THAT ONLY ` 1870000/- HAS BEEN CHARGED TO PROFIT AND LOSS ACCO UNT. HENCE, THE DISALLOWANCE SHOULD BE RESTRICTED TO THIS AMOUNT, NE EDS TO BE VERIFIED BY THE ASSESSING OFFICER. ASSESSING OFFICER WAS THUS, DIRECTED TO VERIFY THE CONTENTION OF THE ASSESSEE AND RESTRICT THE DISALLOWANCE TO THE AMOUNT AS HAS BEEN CHARGED IN PROFIT AND LOSS AC COUNT IN THIS REGARD. 17. WE HAVE HEARD THE RIVAL CONTENTIONS IN LIGHT OF THE MATERIAL PRODUCED AND PRECEDENT RELIED UPON. LD. COUNSEL O F THE ASSESSEE SUBMITTED AS UNDER:- DURING THE RELEVANT ASSESSMENT YEAR, THE APPELLANT MADE PROVISION FOR LIABILITY ON ACCOUNT OF CLAIMS FOR RE PLACEMENT- WARRANTIES ASSOCIATED WITH SALE OF FINISHED GOODS, VIZ., TYRES PRODUCED BY THE APPELLANT. THE PROVISION FOR WARRANTY WAS MADE FOR THE FIRST T IME BY THE APPELLANT DURING THE PREVIOUS YEAR RELEVANT TO ASSESSMENT YEAR 2005-06. THE APPELLANT IN THAT YEAR CREATED A PROVISION FOR RS. 1,20,00,000 ON THE BASI S OF RATIONAL ESTIMATE OF SUCH LIABILITY. SIMILARLY THE LI ABILITY TOWARDS PROVISION FOR WARRANTY AS ON 31-03-2006 WAS ESTIMATED AT RS. 1,38,70,000. ACCORDINGLY, THE APPE LLANT HAS DEBITED TO PROFIT AND LOSS ACCOUNT SUM OF RS.18, 70,000 TOWARDS PROVISION FOR WARRANTY IN THE RELEVANT PREV IOUS YEAR. ITA NO. 4360/DEL/2010 33 THE AO, HOWEVER, DISALLOWED THE PROVISION FOR WARRA NTY OF RS.18,70,000 HOLDING THAT THE SAID LIABILITY AS AN UNASCERTAINED, CONTINGENT LIABILITY. PROVISION FOR ESTIMATED EXPENDITURE TO BE INCURRED ON ACCOUNT OF WARRANTY OBLIGATION IN RESPECT OF SALES MADE IN THE RELEVANT PREVIOUS YEAR IS TO BE ACCOUNTED AS EXPENDITURE IN THE YEAR OF SALE, IN ORDER TO MATCH C OST WITH REVENUE. THE PROVISION FOR WARRANTY IS NECESSARILY REQUIRED TO BE MADE BY COMPANIES WHICH ARE REQUIRED TO FOLLOW MERCANTILE SYSTEM OF ACCOUNTING. THE COURTS HAVE CONSISTENTLY HELD THE VIEW THAT LIABILITY FOR PROVI SION FOR WARRANTY FOR REPLACEMENT ON ACCOUNT OF MANUFACTURING DEFECTS ARISES AT THE TIME OF SALE AND IS TO BE ALL OWED AS DEDUCTION IN THAT YEAR ON THE BASIS OF RATIONAL/ SC IENTIFIC ESTIMATE, NOTWITHSTANDING THAT THE EXACT AMOUNT OF LIABILITY IS ASCERTAINED AT A LATER DATE. RELIANCE IS PLACED IN THIS REGARD ON THE RECENT DEC ISION OF SUPREME COURT IN THE CASE OF ROTORK CONTROLS INDIA LTD. VS. CIT : 314 ITR 62, WHEREIN, THE SUPREME COURT LAID DO WN THREE CONDITIONS FOR ALLOWABILITY OF PROVISION FOR WARRANTY (A) AN ENTERPRISE HAS A PRESENT OBLIGATION AS A RESULT OF A PAST EVENT; (B) IT IS PROBABLE THAT AN OUTFLOW OF RESOUR CES WILL BE REQUIRED TO SETTLE THE OBLIGATION; AND (C) A RELIAB LE ESTIMATE CAN BE MADE OF THE AMOUNT OF THE OBLIGATION. RELYING ON THE ABOVE DECISION IN THE CASE OF ROTORK CONTROLS (SUPRA), THE HON'BLE DELHI HIGH COURT IN THE CASE O F CIT VS. WHIRLPOOL OF INDIA [242 CTR 245], TOO, DISMISSED TH E ITA NO. 4360/DEL/2010 34 GROUNDS OF THE REVENUE FOR DISALLOWING PROVISION FO R WARRANTY . RELIANCE IS ALSO PLACED ON THE FOLLOWING DECISIONS, WHEREIN, PROVISION FOR WARRANTY ON THE BASIS OF AN ESTIMATE H AS BEEN HELD TO BE ALLOWABLE DEDUCTION: CIT VS. VINITEC CORPN. (P.) LTD.: 278 ITR 337 (DEL) CIT VS. BEEMA MFRS (P) LTD: 130 TAXMAN 400 (MADRAS) CIT V. INDIAN TRANSFORMERS LTD.: 270 ITR 259 (KER.) COMMISSIONER OF INLAND REVENUE V. MITSUBISHI MOTORS N EW ZEALAND LTD.: 222 ITR 697 HONDA SIEL CARS INDIA LTD. FOR THE ASSESSMENT YEARS 2001-02 AND 2002-03 (ITA NOS. 3688,3689/DEI/2005) (DELHI) WIPRO GE MEDICAL SYSTEMS LTD. V. DCIT: 81 ITJ 455 (BA NG.) MODI OLIVETTI LTD. V. DCIT: (ITA NO. 2245/D/99)(DEL.) JCIT V. WHIRLPOOL INDIA LTD. : (ITA NO. 1904/D/1999) (DEL.) JAYBEE IND V. DCIT: 66 ITD 530 (ASR.) MAJESTIC AUTO LTD. V. LAC: ITA NO.7/CHANDI/88 (CHD.) ITO V. WANSON (INDIA) LTD.: 5 ITD 102 (PUNE) VOLTAS INDIA LTD. : 64 ITD 232 (BORN) DCIT V SAMTEL COLOR LTD IN ITA NO 3966/D/96 (DEL) IN THE CASE OF THE APPELLANT, PROVISION FOR WARRANT Y / OBLIGATION INCURRED PURSUANT TO SALE OF FINISHED PR ODUCTS, ITA NO. 4360/DEL/2010 35 VIZ., TYRES TO CUSTOMERS, HAS BEEN MADE ON RATIONAL AND SCIENTIFIC ESTIMATE AND THE SAME BEING THE LIABILITY INCURRED IN RESPECT OF SALES MADE DURING THE RELEVANT PREVIO US YEAR WHICH MAY INVOLVE OUTFLOW OF RESOURCES, CALLS FOR B EING ALLOWED AS DEDUCTION IN THE RELEVANT PREVIOUS YEAR. 17.1 LD. DEPARTMENTAL REPRESENTATIVE RELIED UPON THE ORDER OF THE TPO AND DRP. 17.2 ON THIS ISSUE WE NOTE THAT ASSESSEE FOR THE P RECEDING ASSESSMENT YEAR CREATED A PROVISION OF ` 12,00,000/ - BEING PROVISION FOR WARRANTY. SIMILARLY, THE LIABILITY TOWARDS PROV ISION OF WARRANTY AS ON 31.3.2006 WAS ESTIMATED AT ` 1,38,70,000/-. ACCOR DINGLY, THE ASSESSEE HAS DEBITED TO PROFIT AND LOSS ACCOUNT A S UM OF ` 18,70,000/- TOWARDS PROVISION FOR WARRANTY IN THE RELEVANT PREV IOUS YEAR. HOWEVER, THE ASSESSING OFFICER HAS DISALLOWED THIS PROVISION FOR WARRANTY BY HOLDING THAT THE SAID LIABILITY WAS AN UNCERTAIN CONTINGENT LIABILITY. WE AGREE WITH THE ASSESSEES CONTENT ION THAT PROVISION FOR ESTIMATED EXPENDITURE TO BE INCURRED FOR WARRANTY O BLIGATION IN RESPECT OF SALES MADE IN THE RELEVANT PREVIOUS YEARS IS TO BE ACCOUNTED AS EXPENDITURE IN THE YEAR OF SALE, IN ORDER TO MATCH THE COST WITH REVENUE. THE PROVISION FOR WARRANTY IS NECESSARIL Y REQUIRED TO BE MADE BY THE COMPANIES WHICH ARE REQUIRED TO FOLLOW ME RCANTILE SYSTEM OF ACCOUNTING. IN THIS REGARD, WE FURTHER F IND THAT COURTS HAVE CONSISTENTLY HELD THE VIEW THAT LIABILITY FOR PROV ISION FOR WARRANTY FOR REPLACEMENT ON ACCOUNT OF MANUFACTURING DEFECTS ARI SES AT THE TIME OF SALE AND IS TO BE ALLOWED AS DEDUCTION IN THAT YEAR ON THE BASIS OF RATIONAL /SCIENTIFIC ESTIMATE, NOTWITHSTANDING THAT THE EXACT AMOUNT OF LIABILITY IS ASCERTAINED AT A LATER DATE. WE FURT HER FIND THAT ACTION OF ITA NO. 4360/DEL/2010 36 THE ASSESSEE IN CREATING PROVISION FOR WARRANTY IS ALSO IN CONSONANCE WITH THE DECISION OF THE HONBLE APEX COURT IN THE CASE OF ROTORK CONTROLS INDIA LTD. VS. C.I.T. 314 ITR 62. SIMILARL Y, WE FIND THAT RELYING ON THE ABOVE DECISION IN THE CASE OF ROTORK CONTROL S THE HONBLE HIGH COURT IN THE CASE OF C.I.T. VS. WHIRLPOOL OF INDIA 242 CTR 245 TOO, DISMISSED THE GROUNDS OF THE REVENUE FOR DISALLOWING PROVISION FOR WARRANTY. RELIANCE BY THE ASSESSEES COUNSEL IN OTHER CASE LAWS IN THIS REGARD AS MENTIONED ABOVE ARE ALSO GERMANE AND SUPPORT THE CASE OF THE ASSESSEE. IN THE BACKGROUND OF THE AF ORESAID DISCUSSIONS AND PRECEDENTS, WE HOLD THAT PROVISION FOR WARRANTY MADE BY THE ASSESSEE IS ALLOWABLE. HENCE, WE SET ASIDE THE OR DER ASSESSING OFFICER ON THIS ISSUE. 18. GROUND NO. 5 ON THIS ISSUE, IT WAS THE CLAIM OF THE ASSESSEE THA T EXCISE DUTY OF ` 1,05,415/- HAS BEEN PAID THIS YEAR WHICH WAS A P ART OF TOTAL AMOUNT OF EXCISE DUTY OF ` 2,06,646/- DISALLOWED IN A.Y. 2 005-06, IN ACCORDANCE OF THE PROVISION OF SECTION 43B OF THE I .T. ACT. THEREFORE, THE SAME SHOULD BE ALLOWED IN THIS YEAR. ASSESS ING OFFICER OBSERVED THAT ASSESSEE HAS MADE SIMILAR REQUEST BEFORE THE THE N ASSESSING OFFICER FOR GIVING RELIEF U/S. 43B AGAINST THE PAY MENT OF EXCISE DUTY OF ` 105415/- IN THIS YEAR WHICH WAS A PART OF THE TOT AL AMOUNT OF EXCISE DUTY OF ` 206646/- DISALLOWED IN A.Y. 2005-06. T HE ASSESSING OFFICER OBSERVED THAT THE THEN ASSESSING OFFICER AFTER PR OPER VERIFICATION OF THE ASSESSEES CLAIM HAS PROPOSED DISALLOWANCE OF A SUM OF ` 38,369/- AS THE AMOUNT PAID AFTER THE DUE DATE, AS PER THE P ROVISION OF SECTION 43B OF THE I.T. ACT. ASSESSING OFFICER HELD THAT FOR WANT OF PROPER BREAK-UP AND OTHER DETAILS A SUM OF ` 38,369/- WAS P AID AS EXCISE DUTY, ITA NO. 4360/DEL/2010 37 AFTER THE DUE DATE, IS AGAIN DISALLOWED, AS PER TH E PROVISIONS OF SECTION 43B OF THE I.T. ACT. 19. WE HAVE HEARD THE RIVAL CONTENTIONS IN LIGHT OF THE MATERIAL PRODUCED AND PRECEDENT RELIED UPON. LD. COUNSEL OF THE ASSESSEE SUBMITTED AS UNDER:- THE ASSESSING OFFICER IN THE ASSESSMENT ORDER PASS ED FOR ASSESSMENT YEAR 2005-06 DISALLOWED A SUM OF RS. 2,06,646/- BEING AMOUNT OF EXCISE DUTY ON CLOSING ST OCK WHICH REMAINED UNPAID TILL THE DATE OF FILING THE RE TURN OF INCOME I.E., 31ST OCTOBER, 2005. OUT OF THE SAID AM OUNT OF EXCISE DUTY OF RS. 2,06,646/- THE ASSESSEE IN THE R ELEVANT PREVIOUS YEAR DEPOSITED EXCISE DUTY OF RS. 1,05,415 . THE ASSESSING OFFICER DURING THE COURSE OF ASSESSME NT, DID NOT DEAL WITH THE CLAIM OF THE APPELLANT. IN TER MS OF SECTION 43B OF THE ACT, THE EXCISE DUTY ON CLOSING STOCK DISALLOWED IN THE PRECEDING PREVIOUS YEAR AND PAID DURING THE RELEVANT PREVIOUS YEAR SHOULD BE DIRECTED TO BE ALLOWED DEDUCTION. 19.1 LD. DEPARTMENTAL REPRESENTATIVE RELIED UPON THE ORDER OF THE TPO AND DRP. 19.2 ON THIS ISSUE, IT HAS BEEN CLAIMED BY THE ASSE SSEE THAT AN AMOUNT OF ` 2,06,646/- ON ACCOUNT OF EXCISE DUTY WAS DISALLOWED IN ASSESSMENT YEAR 2005-06 IN ACCORDANCE WITH THE PROV ISION OF SECTION 43B OF THE I.T. ACT. DURING THE PRESENT YEAR OUT O F THE ABOVE EXCISE DUTY OF 105415/- HAS BEEN PAID DURING THIS YEAR. HENCE, IT HAS BEEN CLAIMED THAT THE SAME SHOULD BE ALLOWED IN TERMS OF S ECTION 43B OF THE ITA NO. 4360/DEL/2010 38 I.T. ACT. WE AGREE WITH THE ASSESSEES COUNSEL CO NTENTION THAT ASSESSING OFFICER HAS NOT PROPERLY DEALT WITH THI S CLAIM OF THE ASSESSEE. ASSESSEES CLAIM IS THAT IN TERMS OF SECTION 43B OF THE I.T. ACT THE EXCISE DUTY ON CLOSING STOCK DISALLOWED IN THE PRECEDING PREVIOUS YEAR AND PAID DURING THE RELEVANT PREVIOUS YEAR SHOULD BE ALLOWED AS DEDUCTION. THE CLAIM NEEDS FACTUAL VERI FICATION, HENCE, WE REMIT THIS ISSUE TO THE FILE OF THE ASSESSING OFFICE R. ASSESSING OFFICER IS DIRECTED TO VERIFY THE VERACITY OF THE ASSESSEE S CONTENTION AND DECIDE ACCORDINGLY. 20. IN THE RESULT, THE APPEAL FILED BY THE ASSESSEE IS PARTLY ALLOWED. ORDER PRONOUNCED IN THE OPEN COURT ON 14/12/2012. SD/- SD/- [ [[ [I.C. SUDHIR I.C. SUDHIR I.C. SUDHIR I.C. SUDHIR] ]] ] [SHAMIM YAHYA] [SHAMIM YAHYA] [SHAMIM YAHYA] [SHAMIM YAHYA] JUDICIAL MEMBER JUDICIAL MEMBER JUDICIAL MEMBER JUDICIAL MEMBER ACCOUNTANT MEMBER ACCOUNTANT MEMBER ACCOUNTANT MEMBER ACCOUNTANT MEMBER DATE 14/12/2012 SRBHATNAGAR SRBHATNAGAR SRBHATNAGAR SRBHATNAGAR COPY FORWARDED TO: COPY FORWARDED TO: COPY FORWARDED TO: COPY FORWARDED TO: - -- - 1. APPELLANT 2. RESPONDENT 3. CIT 4. CIT (A) 5. DR, ITAT TRUE COPY BY ORDER, ASSISTANT REGISTRAR, ITAT, DELHI BENCHES