Humboldt Wedag India Pvt. Ltd., Delhi V. DCIT, New Delhi

ITA 475/DEL/2021

• Counselvise Citation: [2021] 107 COUNSELVISE.COM (IT) 7337 (ITAT-DELHI)
• Duration Of Justice: 3 month(s) 20 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 18-08-2021
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: I1
• Assessment Year: 2016-2017
• Appeal Filed On: 28-04-2021
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: SURENDER PAL
• Keywords: Transfer pricing; International transaction; Wholly owned subsidiary
• Section: 143(3); 144C; 48; 13; 20

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL DELHI BENCH I-1, NEW DELHI BEFORE MS. SUCHITRA KAMBLE, JUDICIAL MEMBER DR. B. R. R. KUMAR, ACCOUNTANT MEMBER ITA NO. 8119/DEL/2018 : ASSTT. YEAR: 2014-15 HUMBOLDT WEDAG INDIA PVT. LTD., A-36, MEHTAB HOUSE, MOHAN CO- OP ESTATE, MATHURA ROAD, NEW DELHI-110044 VS ACIT, CIRCLE-11(2), NEW DELHI-110002 (APPELLANTT (RESPONDENT) PAN NO. AAACH7474G ITA NO. 475/DEL/2021 : ASSTT. YEAR: 2016-17 HUMBOLDT WEDAG INDIA PVT. LTD., A-36, MEHTAB HOUSE, MOHAN CO- OP ESTATE, MATHURA ROAD, NEW DELHI-110044 VS DCIT, CIRCLE-10(1), NEW DELHI-110002 (APPELLANT T (RESPONDENT) PAN NO. AA ACH7474G ASSESSEE BY : SH. AJIT KUMAR JAIN, CA REVENUE BY : SH. SURENDERPAL, CIT DR DATE OF HEAR ING: 13 . 08 .20 21 DATE OF PRONOUNCEMENT: 18 .0 8 .20 2 1 ORDER PER DR. B. R. R. KUMAR, ACCOUNTANT MEMBER: THE PRESENT APPEALS HAVE BEEN FILED BY THE ASSESSE E AGAINST THE FINAL ASSESSMENT ORDERS DATED 31.10.201 8 AND 31.03.2021 FOR THE AYS. 2014-15 AND 2016-17 PASSED BY THE AO U/S 143(3) R.W.S. 144C OF THE INCOME TAX ACT, 1961. ITA NO. 475/DEL/2021 ITA NO. 8119/DEL/2016 HUMBOLDT WEDAG INDIA PVT.LTD. 2 MARKUP ON SERVICES AVAILED: (A.Y. 2014-15 & 2016-17 ) 2. HUMBOLDT WEDAG INDIA PRIVATE LIMITED (APPELLANT OR THE COMPANY OR HW INDIA), INCORPORATED IN 1976, IS A WHOLLY OWNED SUBSIDIARY OF KHD HUMBOLDT WEDAG INTERNATIONA L AG COLOGNE (KHD AG). KHD AG, THROUGH ITS SUBSIDIARIE S IS ENGAGED IN THE BUSINESS OF PROCESS TECHNOLOGY DESIG N, ENGINEERING, PROJECT MANAGEMENT, THE SUPPLY OF TECH NOLOGY AND EQUIPMENT, AS WELL AS SUPERVISING THE ERECTION AND COMMISSIONING OF CEMENT PLANTS AND RELATED EQUIPMEN T. IT ALSO PROVIDES CUSTOMER SERVICES SUCH AS, SUPPLYING SPARE PARTS, OPTIMIZATION OF CEMENT PLANTS, AND TRAINING PLANT P ERSONNEL ROUND OUT KHDS SERVICE PORTFOLIO. HW INDIA IS ENGA GED IN PROVIDING SERVICES SUCH AS DESIGNING AND ENGINEERIN G, PROJECT MANAGEMENT, SUPPLY OF TECHNOLOGY AND EQUIPMENT, AND SUPERVISION OF ERECTION AND COMMISSIONING OF CEMENT PLANTS AND RELATED EQUIPMENT. 3. DURING AY 2014-15, THE APPELLANT HAS UNDERTAKEN VARIOUS INTERNATIONAL TRANSACTIONS WITH ITS ASSOCIATED ENTE RPRISES (AES). FOR THE PURPOSE OF BENCHMARKING THE PRICES OF THE INTERNATIONAL TRANSACTIONS, THE APPELLANT IN ITS TR ANSFER PRICING DOCUMENTATION, HAS FOLLOWED THE TRANSACTION-BY-TRAN SACTION APPROACH. 4. THE ASSESSEE PAID RS.8.28 LACS FOR SUPERVISING C HARGES, AND RS.14.25 CRORES FOR CENTRAL SERVICES. ON SUPERV ISION SERVICES, THE AE CHARGED A NET PROFIT MARKUP OF 4% ON THE INTERNAL COST INCURRED ON THE BASIS OF NUMBER OF HO URS SPENT BY ITS PERSONAL IN PROVIDING SUCH SERVICES. ON THE CEN TRAL SERVICES, ITA NO. 475/DEL/2021 ITA NO. 8119/DEL/2016 HUMBOLDT WEDAG INDIA PVT.LTD. 3 THE AE CHARGED 5% PROFIT MARKUP ON INTERNAL COST WH ILE THIRD PARTY COSTS ARE CHARGED ON COST TO COST BASIS. 5. THE MARKUP OF 4% AND 5% HAS BEEN DISALLOWED BY T HE TPO AND ACCORDINGLY ENHANCED THE INCOME OF THE ASSESSEE BASED ON THE LD. DRP OBSERVATIONS FOR THE YEAR 2010-11. FOR THE SAKE OF READY REFERENCE, THE SAME IS REPRODUCED AS UNDER: 3.3.2. IN THE ASSESSEES CASE, THE INTRA- GROUP S ERVICES RELATE TO GENERAL ADMINISTRATION, FINANCE AND ACCOUNTING, COORDINATION, GENERAL MANAGEMENT, CORPORATE AND PROJECT FINANCING , RECRUITMENT AND EDUCATION. IT IS NOTED THAT THE ASS ESSEE IS AN ENTREPRENEUR IN ITS OWN RIGHT AND IS ENGAGED IN ENG INEERING, PROCUREMENT AND COMMISSIONING PROJECTS FOR THE THIR D PARTY CLIENTS. IT PROCURED ORDERS ON INDEPENDENT BASIS AN D ALSO CARRIED OUT THE PROJECT ON ITS OWN. IT IS HARDLY OP ERATING AS AN EXTENSION OF AE OR CATERING EXCLUSIVELY TO THE AE. IT VIRTUALLY UNDERTAKES ALL THE RISKS ASSOCIATED WITH RENDERING SERVICES, MARKETING AND PERFORMS VARIOUS COMPLEX ROLES. THERE FORE, THE RATIO OF SUPREME COURT DECISION IN THE CASE OF MORG AN AND STANLEY & CO. HARDLY APPLIES ON THE FACTS OF THE AS SESSEES CASE. THE ASSESSEE HAS ALSO PROVIDED SUBSTANTIAL EVIDENCE IN FORM OF E-MAILS AND CORRESPONDENCE WITH THE AE IN RESPECT O F THE SERVICES RENDERED BY THE AE. ON GOING THROUGH THE S AME, IT CLEARLY COMES OUT THAT THE AE WAS RENDERING SERVICE S WHICH WERE BENEFICIAL FOR THE ASSESSEE IN CONDUCTING ITS BUSINESS. NO DOUBT, SOME BENEFIT OF THE SERVICES MAY HAVE ACCRUE D TO OVERALL GROUP ALSO. BUT THE PRIMARY BENEFICIARY WAS DEFINIT ELY THE ASSESSEE. UNDER THESE CIRCUMSTANCES, IT WOULD NOT B E PROPER TO TERM THE SERVICES RENDERED BY THE AE AS STEWARDSHIP ACTIVITY. ITA NO. 475/DEL/2021 ITA NO. 8119/DEL/2016 HUMBOLDT WEDAG INDIA PVT.LTD. 4 3.3.3. CORNING TO THE QUANTUM OF PAYMENT FOR THE SE RVICES, IT IS SEEN THAT FROM THE TOTAL COST OF SERVICES, COST OF STEWARDSHIP ACTIVITY SERVICES/DUPLICATE SERVICES IS FIRST REMOV ED. THE REMAINING COST IS ALLOCATED TO DIFFERENT ORGANIZATI ONS OF THE GROUP. THE ASSESSEE PAYS THE COST OF SERVICES ALLOC ATED TO IT PLUS ORE-AGREED MARK UP. IN THE COURSE OF HEARING, THE ASSESSEE WAS ASKED TO JUSTIFY THE MARK UP. HOWEVER, NO DETAI LED JUSTIFICATION WAS PROVIDED IN THIS REGARD. IT WAS O NLY STATED THAT SINCE THE AE WAS PROVIDING THE SERVICES, IT WAS ENT ITLED TO EARN SOME MARGIN ON THE SAME. HOWEVER, AS DISCUSSED EARL IER, WHILE THE PRIMARY BENEFICIARY OF THE SERVICES IS THE ASSE SSED, THERE ARE ALSO SOME INCIDENTAL BENEFITS ACCRUING TO THE G ROUP. THE PARENT COMPANY GETS BENEFITED BY BETTER SYNERGIES, SCALE OF ECONOMY, BETTER COORDINATION AND REPORTING. CONSIDE RING THIS, THE AE, IN OUR OPINION, WAS NOT JUSTIFIED IN CHARGI NG ANY MARK UP ON THE COST OF SERVICES. THE ARMS LENGTH PRICE OF THE SERVICES IS THEREFORE DECIDED AT THE ACTUAL COST. T HE ADJUSTMENT IS THEREFORE SUSTAINED TO THE EXTENT OF MARK UP ONL Y. THE TPO IS DIRECTED TO REDUCE THE ADJUSTMENT ACCORDINGLY. 6. THE MAIN ARGUMENT OF THE LD. AR WAS THAT THESE TRANSACTIONS ARE BENCHMARKED BY USING TNMM AND FURN ISHED THAT TP DOCUMENTATION WHEREAS THE TPO DID NOT FOLLO W ANY PRESCRIBED METHOD AND THE ENTIRE MARKUP IS DISALLOW ED WITHOUT GIVING ANY REASONS. THE OBSERVATION OF THE REVENUE THAT THE PARENT COMPANY GETS BENEFITED BY BETTER SYNERGIES, SCALE OF ECONOMY, BETTER COORDINATION AND REPORTING CANNOT B E ACCEPTED. ITA NO. 475/DEL/2021 ITA NO. 8119/DEL/2016 HUMBOLDT WEDAG INDIA PVT.LTD. 5 7. WHILE THE ASSESSEE AVAILS SUPERVISION SERVICES F ROM ITS AES AND PAYS MARKUP CHARGES, IT ALSO PROVIDES SUCH SERV ICES TO THE AES FOR THEIR THIRD PARTY CONTRACTS AND RECEIVES MA RKUP CHARGES. THE PRICING BASIS AND THE RESULTS ARISING FROM THE SAME HAVE BEEN ACCEPTED BY THE TPO. DISALLOWING THE MARK-UP O N RECEIPT OF SERVICES WHILE IN-PRINCIPLE ACCEPTING THE PROVIS ION OF SIMILAR SERVICES RENDERED HAVING SIMILAR INTENT AND BASIS O F PRICING CANNOT BE VALID GROUND TO DISALLOW THE MARKUP. IT I S NOT OUT OF CONTEST TO NOTE THAT NO SUCH DISALLOWANCE HAS BEEN MADE ON THE MARKUP IN THE CASE OF THE ASSESSEE AY 2007-08 TO 20 12-13 AND AY 2015-16. 8. HENCE, KEEPING IN VIEW, THE ENTIRE FACTS AND CIRCUMSTANCES, THE CONTENTION OF THE REVENUE THAT T HE AE INVARIABLY DERIVES SOME BENEFIT AND HENCE NO MARKUP SHOULD BE CHARGED, CANNOT BE ACCEPTED. PROVISION FOR WARRANTY:(A.Y. 2014-15 & 2016-17) 9. THE ASSESSEE CONTENDED THAT THE ISSUE OF WARRANT Y IS A RECURRING PROVISION MADE IN THE PAST SEVERAL YEARS AND THAT IN ALL THE YEAR FROM 2009-10 ONWARDS BY THE VARIOUS JU DICIAL AUTHORITIES. 10. THE LD. DRP FOR BOTH THE YEARS IN QUESTION DIRE CTED THE AO TO MODIFY THE DISALLOWANCE AFTER VERIFYING THE PROV ISIONS MADE IN THE EARLIER YEARS, ITS ACTUAL UTILIZATION AND WR ITING BACK OF UNUTILIZED PROVISION FOR TAXATION. THE AO WAS FURTH ER DIRECTED TO EXAMINE AND VERIFY COMPLETE DETAILS OF THE DATA OF THE PROVISIONS CREATED, AND ACTUAL EXPENSES ON THE WARR ANTY INCURRED IN THE SUBSEQUENT YEARS. ITA NO. 475/DEL/2021 ITA NO. 8119/DEL/2016 HUMBOLDT WEDAG INDIA PVT.LTD. 6 11. HEARD THE ARGUMENTS OF BOTH THE PARTIES AND PER USED THE MATERIAL AVAILABLE ON RECORD. 12. THE DETAILS SUBMITTED BY THE ASSESSEE ARE PERUS ED. 13. THE AGREEMENTS PERTAINING TO THE WARRANTY CLAUS E ON COMPLETION OF THE PROJECTS HAVE BEEN EXAMINED. THE ARTICLE 9 PERTAINING TO THE WARRANTIES SPECIFY THAT THE EQUIP MENT CARRY A WARRANTY FOR A PERIOD OF 12 MONTHS FROM COMPLETION OF PERFORMANCE TEST OR 18 MONTHS FROM THE DATE OF COMM ISSIONING OR 24 MONTHS FROM THE DATE OF LAST MAJOR DELIVERY, WHICHEVER IS EARLIER, AGAINST ANY MATERIAL DEFECT, DESIGN DEFECT , MANUFACTURING DEFECT AND/OR FAILURE OF EQUIPMENT TO PERFORM AS STIPULATED. THE SPARES SHALL CARRY A WARRANTY PERIO D OF 12 MONTHS FROM THE DATE OF THEIR BEING PUT TO USE OR M AXIMUM 24 MONTHS FROM THE DATE OF DELIVERY WHICHEVER IS EARLI ER. THE PERFORMANCE BANK GUARANTEE SUBMITTED BY THE SUPPLIE R WILL REMAIN VALID TILL THE AFORESAID WARRANTEE PERIOD. F URTHER, SPECIFIC ITEMS AS GEAR BOX FOR KITH, GIRTH GEAR, TH RUST ROLLERS, WILL HAVE LATEST DEFECT LIABILITY PERIOD OF 60 MONT HS FROM THE DATE OF DELIVERY. 14. THE PROVISION FOR WARRANTY HAS BEEN MADE ON A S CIENTIFIC AND REASONABLE BASIS THAT THE ASSESSEE MAKES A PROV ISION FOR WARRANTY @3% OF THE CONTRACT VALUE UPON THE COMPLET ION OF THE DELIVERIES BASED UPON THE HISTORICAL TREND. THE FOL LOWING TABLE PROVIDES A RECONCILIATION OF PROVISIONS FOR WARRANT Y FOR VARIOUS YEARS I.E. PROVISION CREATED IN PRECEDING YEARS, AC TUAL EXPENDITURE DURING THE YEAR, EARLIER PROVISION UTIL IZED, THE BALANCE PROVISION CARRIED FORWARD. ITA NO. 475/DEL/2021 ITA NO. 8119/DEL/2016 HUMBOLDT WEDAG INDIA PVT.LTD. 7 AY OPENING BALANCE ADDITIONS REVERSAL UTILIZATION CLOSING BALANCE CONTRACT REVENUE 2009 - 10 35,58,78,785 10,22,90,817 5,13,94,994 25,54,00,584 15,13,74,024 3,92,60,86,075 2010 - 11 15,13,74,024 28,81,12,854 4,50,43,319 9,11,22,433 30,33,21,126 3,55,32,53,339 2011 - 12 30,33,21,126 18,76,87,197 3,24,89,702 9,49,25,941 36,35,92,680 4,60,22,79,741 2012 - 13 36,35,92,680 23,89,75,515 6,28,00,944 24,32,96,504 29,64,70,747 3,39,46,41,837 2013 - 14 29,64,70,747 41,88,64,157 2,02,09,842 20,55,67,885 48,95,57,177 2,57,40,20,904 2014 - 15 48,95,57,177 5,02,88,810 2,68,65,259 5,68,84,319 45,60,96,407 3,99,17,38,396 2015 - 16 45,60,96,407 13,99,70,672 15,15,91,912 18,70,47,392 25,74,27,775 2,37,98,26,136 15. FURTHER, WE ALSO FIND THAT THE CO-ORDINATE BENC H OF ITAT VIDE ORDER DATED OCTOBER 31, 2017 FOR AY 2008-09, H AS DISMISSED THE REVENUES APPEAL FILED AGAINST THE OR DER OF LD. CIT(A) ALLOWING THE DEDUCTION FOR PROVISION FOR WAR RANTY. THE RELEVANT EXTRACT FROM THE ORDER IS AS FOLLOWS: 14. SO FAR AS THE ISSUE RELATING TO DISALLOWANCE OF PROVISION FOR WARRANTY, IT IS AN ADMITTED FACT THAT UNDER THE TE RMS OF AGREEMENT, ASSESSEE HAS PROVIDED WARRANTY FOR THE P ERIOD RANGING FROM 12 TO 36 MONTHS TO WHICH ASSESSEE IS C ONTRACTUALLY OBLIGED TO PAY WARRANTY ON ITS OWN CASE IN CASE OF ANY BREACH IN SUPPLY AND SERVICES, IN CASE IF THERE IS ANY DEMAND FROM THE PURCHASER. THE TERMS OF AGREEMENT CLEARLY PROVIDES THAT ASSESSEE HAS TO TAKE EFFECTIVE STEPS; FOR REJECTION OR MODIFY OR REPLACE OR REMOVE THE DEFECT OR DEFICIENCY OR IN CA SE OF DAMAGE OF EQUIPMENT; ASSESSEE SHALL DO THE NEEDFUL AND FOR THIS PURPOSE IT HAS BEEN MAKING PROVISION FOR MAKING SUC H GUARANTEE. THE ID. CIT(A) HAS ALSO TAKEN NOTE OF TH E ACTUAL EXPENSES INCURRED ON WARRANTY BY THE ASSESSEE IN EA RLIER YEARS AND ALSO CALCULATED THE PERCENTAGE OF SUCH EXPENDIT URE (AS NOTED BY US HEREIN ABOVE). IF BASED ON SUCH ACTUAL EXPENDITURE INCURRED ON WARRANTY, ASSESSEE HAS MADE THE PROVISI ON FOR WARRANTY, THEN OSTENSIBLY IT CAN BE HELD THAT, NOT ONLY ASSESSEE ITA NO. 475/DEL/2021 ITA NO. 8119/DEL/2016 HUMBOLDT WEDAG INDIA PVT.LTD. 8 HAS MADE THE PROVISION AS PER PAST EXPERIENCE BUT T HERE WAS A CERTAIN DEGREE OF CERTAINTY WHILE MAKING SUCH ESTIMATE . THE RATIO LAID DOWN BY THE HON BLE APEX COURT IN T HE CASE OF ROTORK CONTROLS INDIA (P) LTD VS. CIT (SUPRA) IS SQ UARELY APPLICABLE ... 15. THE OBSERVATIONS AND FINDING OF THE ID. CIT(A) IS NOT ONLY IN ACCORDANCE WITH THE FACTS AND MATERIAL ON RECORD, B UT ALSO IN CONFORMITY WITH THE PRINCIPLE LAID DOWN BY THE HON BLE SUPREME COURT, HENCE THERE IS NO REASON TO DEVIATE FROM SUC H A FINDING AND ACCORDINGLY SAME IS CONFIRMED. 16. THE CO-ORDINATE BENCH OF ITAT VIDE COMBINED ORD ER DATED JUNE 11, 2018 FOR AY 2010-11 & AY 2011-12, HAS DISM ISSED THE REVENUES APPEAL FILED AGAINST THE DIRECTIONS OF LD . DRP ALLOWING THE DEDUCTION OF PROVISION FOR WARRANTY, FOLLOWING THEIR ORDER FOR AY 2008-09. THE RELEVANT EXTRACT FROM THE ORDER IS AS FOLLOWS: FOR AY 2010-11 12.2 GROUND NO. 3 CHALLENGES THE DIRECTION OF THE LD. DRP IN ALLOWING THE PROVISION FOR WARRANTY AMOUNTING TO RS . 288,112,854/-. WE FIND THAT THE LD. DRP HAD HELD TH E ISSUE IN A SIMILAR ISSUE HAD ARISEN IN AY 2008-09 WHEREIN THE LD. CIT (A) HAD DELETED THE DISALLOWANCE. THE LD. DRP HAS NOTED THAT THE FACTS WERE IDENTICAL IN AY 2008-09 AND THE YEAR UND ER CONSIDERATION AND, THEREFORE, THE DISALLOWANCE WAS TO BE DELETED. ... THE DEPARTMENT HAS NOT BEEN ABLE TO BR ING OUT ANY DISTINGUISHING FACTOR WITH RESPECT TO THE FACTS IN THE PROCEEDINGS ITA NO. 475/DEL/2021 ITA NO. 8119/DEL/2016 HUMBOLDT WEDAG INDIA PVT.LTD. 9 BEFORE US. IN THE CIRCUMSTANCES, WE FIND NO REASON TO INTERFERE AND DISMISS GROUND NO. 3. FOR AY 2011-12 13.3 GROUND NO. 4 CHALLENGES THE DIRECTION OF THE LD. DRP IN DELETING THE DISALLOWANCE PERTAINING TO PROVISION O F WARRANTY AMOUNTING TO RS. 187,687,197/-. WE FIND THAT A SIMI LAR ISSUE HAD COME UP IN ASSESSMENT YEARS 2008-09 AND 2010-11 AND THE DEPARTMENTS GROUND CHALLENGING THE DELETION HAD BE EN DISMISSED BY THE ITAT IN ITA NOS. 2295/DEL/2013 AND 567/KOL/2015 RESPECTIVELY. THE DEPARTMENT HAS NOT B EEN ABLE TO BRING OUT ANY DISTINGUISHING FACTOR WITH RESPECT TO THE FACTS IN THE PROCEEDINGS BEFORE US. IN THE CIRCUMSTANCES, WE FIND NO REASON TO INTERFERE AND DISMISS GROUND NO. 4. 17. THE CO-ORDINATE BENCH OF ITAT VIDE COMBINED ORD ER DATED APRIL 7, 2021 FOR AY2012-13 AND AY 2013-14, HAS DIS MISSED THE REVENUES APPEAL FILED AGAINST THE ORDER OF LD. CIT (A) ALLOWING THE DEDUCTION OF PROVISION FOR WARRANTY, FOLLOWING THEIR ORDER FOR AY 2008-09. THE RELEVANT EXTRACT FROM THE ORDER IS AS FOLLOWS: 13. SINCE, THE MATTER STANDS ADJUDICATED AND ALLOWE D FOR SEVERAL YEARS PRIOR, IN THE ABSENCE OF ANY MATERIAL CHANGE, WE HEREBY HOLD THAT THE ADDITION MADE BY THE AO CANNOT BE SUSTAINED. 18. SINCE, THE PROVISION FOR WARRANTIES HAS BEEN MA DE @ 3% AND THE UNUTILIZED PORTION HAS BEEN REVERSED AT A R EGULAR INTERVALS FROM YEAR TO YEAR, THE APPELLANT HAS BEEN CONSISTENTLY FOLLOWING THE POLICY OF MAKING PROVISION FOR WARRAN TY AS PER THE ITA NO. 475/DEL/2021 ITA NO. 8119/DEL/2016 HUMBOLDT WEDAG INDIA PVT.LTD. 10 TERMS OF THE CONTRACT, THE ITAT FOR AY 2008-09, AY 2010-11, AY 2011-12, AY 2012-13 & AY 2013-14 HAS ALLOWED PROVIS ION FOR WARRANTY, THE PROVISION MADE DURING AY 2014-15 IS O N SAME BASIS AS IN EARLIER YEARS IS HEREBY ALLOWED. PROVISION FOR ANTICIPATED LOSSES: :(A.Y. 2016-17) 19. THE ANTICIPATED LOSS CLAIMED BY THE ASSESSEE WI TH REGARD TO SHRI CEMENTS LTD. HAS BEEN DISALLOWED BY THE AO. THE LD. DRP HELD THAT THE DETAILS FURNISHED BY THE ASSESSEE IN THIS REGARD DO NOT CONTRADICT THE VIEW TAKEN BY THE AO. LIQUIDATED DAMAGES :(A.Y. 2014-15) 20. THE ASSESSEE IS ENGAGED IN THE BUSINESS OF INDU STRIAL PLANT ENGINEERING AND SUPPLY OF EQUIPMENT FOR CEMENT AND MINERAL PLANTS, ENTERED INTO VARIOUS CONTRACTS WITH CUSTOME RS FOR SUPPLIES AND ENGINEERING SERVICES RANGING FROM 2 TO 4 YEARS. THE CONTRACTS CONTAIN CLAUSE FOR PAYMENT OF LIQUIDA TED DAMAGES FOR DEFAULT OF DELIVERY AS PER THE AGREED TERMS ENT ERED IN THE CONTRACT AGREEMENTS. THE LD. DRP DIRECTED THE AO TO VERIFY THE PROVISIONS MADE IN THE EARLIER YEARS, ACTUAL UTILIZ ATION AND WRITING BACK OF UNUTILIZED PROVISION TO TAXATION. 21. THE TABLE BELOW PROVIDES A RECONCILIATION OF PR OVISION FOR LIQUIDATED DAMAGES MADE/ REVERSAL OF PROVISION AND UTILIZATION FOR LIQUIDATED DAMAGES FOR VARIOUS YEARS: ITA NO. 475/DEL/2021 ITA NO. 8119/DEL/2016 HUMBOLDT WEDAG INDIA PVT.LTD. 11 AY OPENING BALANCE ADDITIONS REVERSAL UTILIZATION CLOSING BALANCE 2009-10 20,06,94,749 16,80,30,693 10,25,75,683 10,55,822 26,50,93,937 2010-11 26,50,93,937 3,18,02,972 2,45,24,252 12,63,45,462 14,60,27,195 2011-12 14,60,27,195 10,97,86,518 4,85,62,347 2,31,36,169 18,41,15,197 2012-13 18,41,15,197 17,76,31,240 3,31,22,000 10,31,162 32,75,93,275 2013-14 32,75,93,275 8,83,02,186 29,54,62,259 26,47,557 11,77,86,274 2014-15 11,77,86,274 11,78,25,376 3,04,70,046 - 20,51,41,604 2015-16 20,51,41,604 3,95,29,500 8,51,40,846 2,18,11,696 13,77,18,562 22. WE ALSO FIND THAT THE ISSUE HAS BEEN ADJUDICATE D IN THE CASE OF THE ASSESSEE IN THE APPEALS FILED BY THE RE VENUE FOR THE ASSESSMENT YEARS 2008-09, 2010-11, 2011-12, 2012-13 , 2013- 14. 23. FOR THE SAKE OF READY REFERENCE, THE OPERATIVE PART OF THE EARLIER ORDER IS REPRODUCED BELOW: 13 ... THE ID. CIT(A) HAS CATEGORICALLY NOTED THAT ASSESSEE HAS PROVIDED FOR LIQUIDATED DAMAGES BASED ON THE PERIOD OF DELAY WHICH OCCURRED DURING THE END OF THE YEAR AND ON TH E BASIS OF PERCENTAGE OF THE CONTRACT THE VALUE PAYABLE AS DAM AGES IN TERMS OF THE AGREEMENT. APART FROM THAT, ASSESSEE H AS ALSO REVERSED THE PROVISION FOR LIQUIDATED DAMAGES IN TH E YEAR IN WHICH CLIENTS WAIVED THE SAID LIQUIDATED DAMAGES AN D THE WRITE BACK AMOUNT HAS BEEN OFFERED TO TAX BY THE ASSESSEE . WHENCE A PROVISION IS ARISING OUT OF A CONTRACTUAL OBLIGATIO N AND THE BASIS OF PROVIDING THE PROVISION IS BASED ON PAST EXPERIE NCE AND SUCH A REASONABLE BASIS OF ESTIMATION HAS BEEN REGULARLY FOLLOWED BY THE ASSESSEE IN THE PAST, THEN OSTENSIBLY IT CANNOT BE HELD THAT THE BASIS OF ESTIMATION OR WORKING OF THE PROVISION IS NOT CORRECT. FURTHER, ONCE IT IS BROUGHT ON RECORD THAT ASSESSEE ON ITA NO. 475/DEL/2021 ITA NO. 8119/DEL/2016 HUMBOLDT WEDAG INDIA PVT.LTD. 12 THE YEAR OF REVERSAL HAS PAID TAXES ON EXCESS PROVI SION AND SIMILAR FEATURE APPEARED IN THE EARLIER YEARS AND A SSESSEE HAD PAYMENTS FOR LIQUIDATED DAMAGES ON DELAY IN DELAY O F DELIVERABLES, THEN NO ADVERSE VIEW CAN BE TAKEN, BE CAUSE IT IS NOT THE CHARGE OF THE ASSESSING OFFICER THAT ASSESS EE HAS MADE SOME KIND OF EXCESSIVE PROVISION IN THIS YEAR IN RE LATION TO PAST. THE FINDING AND OBSERVATIONS OF THE ID. CIT(A), ARE BASED ON CORRECT APPRECIATION OF FACTS AND LAW, HENCE WE CON FIRM THE ORDER OF CIT(A) ON THIS SCORE AND ACCORDINGLY, GROU ND NO. 1 BY THE REVENUE IS DISMISSED. 24. SINCE, THE PROVISION FOR LIQUIDATED DAMAGES HAS BEEN MADE REGULARLY AND ALLOWED IN P&L ACCOUNT AND SINCE THE UNUTILIZED PORTION HAS BEEN REVERSED AT A REGULAR INTERVALS FR OM YEAR TO YEAR, SINCE, THE ITAT FOR AY 2008-09, AY 2010-11, A Y 2011-12, AY 2012-13 & AY 2013-14 HAS ALLOWED PROVISION FOR L IQUIDATED DAMAGES, THE PROVISION MADE DURING AY 2014-15 IS ON SAME BASIS AS IN EARLIER YEARS IS HEREBY ALLOWED. PROVISION FOR ANTICIPATED LOSSES: (AY 2016-17) 25. THE ASSESSEE HAS CLAIMING PROVISION FOR ANTICIP ATED LOSSES ON THE GROUNDS THAT ACCOUNTING STANDARD 7 ON CONSTR UCTION CONTRACTS ALLOWS SUCH PROVISION. HE RELIED ON THE J UDGMENTS IN THE CASE OF MAZAGAON DOCK LTD. VS. JCIT 29 SOT 356, DREDGING INTERNATIONAL VS ACIT 48 SOT 430 WHEREIN THE LOSS O N ESTIMATED BASIS DETERMINED ON TECHNICAL ESTIMATION HAS BEEN A LLOWED. 26. THE LD. DRP HELD THAT THIS LIABILITY HAS NOT BE EN CRYSTALLIZED DURING THE RELEVANT PERIOD AND DISALLOWED THE LOSS OWING TO THE ITA NO. 475/DEL/2021 ITA NO. 8119/DEL/2016 HUMBOLDT WEDAG INDIA PVT.LTD. 13 ABSENCE OF COGENT EVIDENCES TO PROVE THAT THE LIABI LITY HAS BEEN TAKEN SHAPE. 27. BEFORE US, THE ASSESSEE REITERATED THE ARGUMENT S TAKEN UP BEFORE THE AUTHORITIES BELOW WHILE THE LD. AR RELIE D ON THE ORDER OF THE LD. DRP. 28. HEARD AND PERUSED THE MATERIAL AVAILABLE ON REC ORD. 29. WHAT IS THE PROFIT OF A TRADE OR BUSINESS IS A QUESTION OF FACT AND IT MUST BE ASCERTAINED, AS ALL FACTS MUST BE ASCERTAINED, WITH REFERENCE TO THE RELEVANT EVIDENC E, AND NOT ON DOCTRINE OR THEORIES. AT FIRST SIGHT, IT MIGHT BE T HOUGHT THAT THE CALCULATION OF VARIABLES SUCH AS REVENUE, EXPENDITU RE AND PROFITS SHOULD BE THE SAME FOR THE PURPOSES OF BOTH COMMERCIAL ACCOUNTING AND TAXATION BUT NOT SO. THE FUNDAMENTAL POINT, OF COURSE, IS THAT ACCOUNTING AND TAXATION EXIST FOR D IFFERENT REASONS. THE PURPOSES AND REQUIREMENTS OF COMMERCIA L ACCOUNTING PRINCIPLES AND TAXATION ARE NOT ALWAYS T HE SAME. 30. ACCOUNTING INVOLVES THE PREPARATION OF INFORMAT ION FOR THE PURPOSES OF CONTROL AND DECISION-MAKING AND MAY REQ UIRE INTERPRETATION, FORECASTING OR SIMPLY RECORDING FAC TUAL INFORMATION. 31. THE MAIN PURPOSE OF TAXATION IS USUALLY TO RAIS E REVENUE BUT IT IS ALSO USED AS AN INSTRUMENT OF GOVERNMENT ECONOMIC AND SOCIAL POLICY. FOR A TAX SYSTEM TO OPERATE SUCC ESSFULLY WITHIN THE LAW IT REQUIRES A DEGREE OF CERTAINTY TH AT MAY NOT ALWAYS BE APPROPRIATE FOR COMMERCIAL ACCOUNTING. FU RTHERMORE THERE ALTERNATIVE METHODS OF PREPARING ACCOUNTS THA T ARE ITA NO. 475/DEL/2021 ITA NO. 8119/DEL/2016 HUMBOLDT WEDAG INDIA PVT.LTD. 14 EQUALLY ACCEPTABLE IN TERMS OF ACCOUNTING STANDARDS BUT THE CHOICE OF WHICH IS NOT ACCEPTED FOR THE TAXATION PU RPOSE. THERE ARE SEVERAL REASONS WHY FINANCIAL REPORTING RULES A ND PRACTICES MIGHT NOT ALWAYS BE APPROPRIATE FOR DETERMINING FIN AL TAX LIABILITY. THE PRIMARY GOAL OF FINANCIAL ACCOUNTING IS TO PROVIDE USEFUL INFORMATION TO MANAGEMENT, SHAREHOLDERS, CRE DITORS, AND OTHERS PROPERLY INTERESTED; THE MAJOR RESPONSIBILIT Y OF THE ACCOUNTANT IS TO PROTECT THESE PARTIES FROM BEING M ISLED. THE PRIMARY GOAL OF THE INCOME TAX SYSTEM, IN CONTRAST, IS THE EQUITABLE COLLECTION OF REVENUE, THE MAJOR RESPONSI BILITY OF THE STATE IS TO PROTECT THE PUBLIC FINANCE. HENCE, ANY PRESUMPTIVE EQUIVALENCY BETWEEN TAX AND FINANCIAL ACCOUNTING WO ULD BE UNACCEPTABLE. 32. FURTHERMORE, THERE ARE OTHER REASONS WHY TAXATI ON MIGHT DEVIATE FROM ACCOUNTING CONCEPTS OF INCOME. WHILE T HE MOST OBVIOUS PURPOSE OF TAXATION IS TO FINANCE PUBLIC EX PENDITURE, THE EXTENT AND MAGNITUDE OF TAXATION IN MODERN ECONOMIE S ALSO MAKES IT A POWERFUL INSTRUMENT OF GOVERNMENT ECONOM IC AND SOCIAL POLICY IN ITS OWN RIGHT. WHILE IT IS TRUE TH AT SOME TAXATION MEASURES MIGHT BE INTRODUCED TO IMPROVE ECONOMIC DE CISION MAKING, OTHERS ARE IMPLEMENTED FOR VERY DIFFERENT R EASONS. THE CONCEPT OF TAX EXPENDITURES ABLY DESCRIBES THE SITU ATION THAT THOSE PROVISIONS OF THE INCOME TAX CONTAINING SPECI AL EXEMPTIONS, DEDUCTIONS AND OTHER TAX BENEFITS WERE REALLY METHODS OF PROVIDING BENEFITS BY DEVIATING FROM THE SYSTEM OF PROFITS DERIVED FOLLOWING ACCOUNTING STANDARDS. THU S, WE FIND THAT WHEREVER EXEMPTION OR DEDUCTIONS ARE CALLED FO R, THE SAME HAS BEEN PROVIDED EXPLICITLY IN THE PROVISION OF TH E INCOME TAX ACT. EVEN, THE PROVISION FOR WARRANTY, LIQUIDATED DAMAGES HAVE ITA NO. 475/DEL/2021 ITA NO. 8119/DEL/2016 HUMBOLDT WEDAG INDIA PVT.LTD. 15 BEEN ALLOWED TAKING INTO CONSIDERATION THE MATCHING PRINCIPLE OF REVENUE ACCOUNTING. IN THE INSTANT CASE, WE FURTHER FIND THAT NO COGENT EVIDENCES HAVE BEEN FURNISHED BY THE ASSESSE E AS TO HOW THIS LOSS HAS BEEN ARRIVED AT. 33. HENCE, WE DECLINE TO INTERFERE WITH THE DECISIO N OF THE LD. DRP ON THIS ISSUE. CHARGING OF INTEREST U/S 234A: (AY 2014-15) 34. WE HEREBY DIRECT THE AO TO VERIFY THE DATE OF F ILING OF RETURN BY THE ASSESSEE WITH REGARD TO THE TIMELINE EXTENDED FOR THE INSTANT YEAR AND CHARGE INTEREST ACCORDINGLY. 35. IN THE RESULT, THE APPEAL OF THE ASSESSEE IN IT A NO.8119/DEL/2018 IS ALLOWED AND THE APPEAL IN ITA NO.475/DEL/2021 IS PARTLY ALLOWED. ORDER PRONOUNCED IN THE OPEN COURT ON 18/08/2021. SD/- SD/- (SUCHITRA KAMBLE) (DR. B. R. R. KUMAR) JUDICIAL MEMBER ACCOU NTANT MEMBER . DATED: 18/08/2021 *SUBODH KUMAR, SR. PS* COPY FORWARDED TO: 1. APPELLANT 2. RESPONDENT 3. CIT 4. CIT(APPEALS) 5. DR: ITAT ASSISTANT REGISTRAR