ROHDE & SCHWARZ INDIA PVT. LTD. , NEW DELHI V. DCIT, CIRCLE- 21(2), NEW DELHI

ITA 749/DEL/2018

• Counselvise Citation: [2019] 115 COUNSELVISE.COM (IT) 4786 (ITAT-DELHI)
• Duration Of Justice: 1 year(s) 9 month(s) 6 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 07-11-2019
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: F
• Assessment Year: 2012-2013
• Appeal Filed On: 01-02-2018
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Assessee Lawyers: S SRINIVASAN
• Keywords: Transfer pricing

Judgement Text

1 IN THE INCOME TAX APPELLATE TRIBUNAL, DELHI F BEN CH, NEW DELHI BEFORE SHRI N.K. BILLAIYA, ACCOUNTANT MEMBER, AND MS. SUCHITRA KAMBLE, JUDICIAL M EMBER ITA NOS. 2723/DEL/2017 [A.Y 2011-12] ITA NOS. 749/DEL/2018 [A.Y 2012-13] ROHDE & SCHWARZ INDIA PVT LTD VS. THE DY. C.I.T A-27, FIRST FLOOR, MOHAN COOPERATIVE CIRCLE 21 (2) INDUSTRIAL AREA, MATHURA ROAD NEW DELHI NEW DELHI PAN: AAACR 3267 P (APPLICANT) ( RESPONDENT) ASSESSEE BY : SHRI S. SRINI VASAN, CA DEPARTMENT BY : SHRI SURENDRA PAL , SR. DR DATE OF HEARING : 06.11.2019 DATE OF PRONOUNCEMENT : 07.11.2019 ORDER PER N.K. BILLAIYA, ACCOUNTANT MEMBER, THE ABOVE TWO SEPARATE APPEALS BY THE ASSESSEE ARE PREFERRED AGAINST TWO SEPARATE ORDERS OF THE COMMISSIONER OF INCOME TAX [APPEALS] - 7, NEW DELHI DATED 17.02.2017 AND 28.12 .2107 PERTAINING 2 TO ASSESSMENT YEARS 2011-12 AND 2012-13. SINCE BOT H THESE APPEALS WERE HEARD TOGETHER, THESE ARE BEING DISPOSED OF BY THIS COMMON ORDER FOR THE SAKE OF CONVENIENCE AND BREVITY. 2. THE COMMON GRIEVANCE IN BOTH THESE APPEALS RELAT ES TO THE DISALLOWANCE MADE FOR THE PROVISION FOR WARRANTY, T HOUGH THE QUANTUM MAY DIFFER. 3. BRIEFLY STATED, THE FACTS OF THE CASE ARE THAT T HE ASSESSEE RECEIVED COMMISSION INCOME AND AS PER THE SALES REP RESENTATION AGREEMENT, THE ASSESSEES ACTIVITY INVOLVES THE SAL E OF EQUIPMENTS AND AT THE SAME TIME, ATTENDS TO THE WARRANTY SERVICES FOR FREE WARRANTY FOR THE WARRANTY PERIOD. THE ASSESSEE GETS INCOME FROM ITS ASSOCIATED ENTERPRISE RHODE & SCHWARZ GMBH, GERMANY AND OTHER FOR SERVICES RENDERED. THE SERVICES INCLUDE ALL ACTIVITIES CULM INATING IN THE SALE OF THEIR EQUIPMENTS AND FREE WARRANTY SERVICES FOR 2-5 YEARS, DEPENDING UPON THE EQUIPMENTS, WHICH START AFTER THE EQUIPMEN T HAS BEEN SOLD TO THE PARTIES IN INDIA. 3 4. DURING THE COURSE OF ASSESSMENT PROCEEDINGS, THE ASSESSEE WAS ASKED TO FURNISH THE DETAILS OF COMMISSION INCOME A ND CREATION OF PROVISION. IN A.Y 2011-12, THE ASSESSEE FILED THE FOLLOWING DETAILS: COMMISSION AS ACTUAL RECEIVED 27,94,34,315 ADD: COMMISSION OF EARLIER YEAR CONSIDERED AS INCOME 36,06,987 LESS - COMMISSION OF PREVIOUS YEARS OFFERED TO TAX IN EARLIER YEAR 5,12,51,5 99 LESS: PROVISION FOR WARRANTY 74,45,364 COMMISSION FOR THE YEAR 22,44,44,339 5. IN A.Y 2012-13, THE ASSESSEE FILED THE FOLLOWING DETAILS: BALANCE AS AT 31 ST MARCH, 2011 RS, 3,34,39,187/- ADD: ADDITION DURING THE YEAR RS. 2,55,27,748/- LESS: AMOUNT USED DURING THE YEAR RS. 2,00,88,611/- BALANCE AS AT 31 ST MARCH, 2012 RS. 3,88,78,324/ - 6. THE ASSESSEE WAS REQUIRED TO JUSTIFY ITS CLAIM O F CREATION OF PROVISION FOR WARRANTY. ON RECEIVING NO PLAUSIBLE REPLY, THE ASSESSING OFFICER MADE AN ADDITION OF RS. 74,45,364/- IN A.Y 2011-12 AND RS. 2,55,27,748/- IN A.Y 2012-13. 4 7. THE ASSESSEE CARRIED THE MATTER BEFORE THE LD. C IT(A) AND THE LD. CIT(A), AFTER CONSIDERING THE FACTS AND SUBMISSIONS , FOUND THAT A SIMILAR ADDITION WAS CONFIRMED BY HIS PREDECESSOR I N A.Y 2010-11. THE RELEVANT FINDINGS OF THE LD. CIT(A) READ AS UNDER: 5.3. I HAVE CAREFULLY CONSIDERED THE ASSESSMENT OR DER AND THE SUBMISSIONS FILED BY THE AR. THIS ISSUE WAS ADJ UDICATED BY ME IN APPEAL FOR A.Y. 2011-12 IN APPEAL NO: 625/ CIT(A)- 7/DEL/14-15 DATED 22.04.2016 AND THE ADDITION MADE BY THE AO WAS CONFIRMED. OPERATIVE PART OF THE ORDER IS RE PRODUCED AS UNDER: 3.4. I HAVE CAREFULLY CONSIDERED THE ASSESSMENT OR DER AND THE SUBMISSIONS FILED BY THE AFT. THE APPELLANT COM PANY DURING THE YEAR HAS CREATED A PROVISIONS OF WARRANT Y AT RS.36,06,987/- WHICH IS REDUCED FROM THE COMMISSION INCOME INSTEAD OF SEPARATELY DEBITING INTO THE P & L A/C. THE LD. AR HAS RELIED ON THE JUDGEMENT OF THE HON 'BLE APEX CO URT IN THE CASE OF M/S ROTORK CONTROLS INDIA (P) LTD. VS. CIT (2009) 314 ITR 62. THE AO HAS RECORDED THAT THE APPELLANT FAIL ED TO SUBMIT DETAILS OF WARRANTY EXPENSES AND HOW IT WAS LINKED TO THE COMMISSION. FURTHER, DURING APPELLATE PROCEEDIN GS A SIMPLE CHART DISCLOSING INVOICES AGAINST WHICH PROVISIONS OF WARRANTY IS TABULATED WAS FURNISHED. NO BASIS AS TO HOW THE WARRANTY PROVISION WAS WORKED OUT WAS AVAILABLE. THE HON 'BL E SUPREME 5 COURT IN THE CASE OF M/S ROTORK CONTROLS INDIA (P) LTD. VS. CIT (SUPRA) HELD AS UNDER: A PROVISION IS A LIABILITY WHICH CAN BE MEASURED O NLY BY USING A SUBSTANTIAL DEGREE OF ESTIMATION, A PROVISION IS RECOGNIZED WHEN : (A) AN ENTERPRISE HAS A PRESENT OBLIGATION A S A RESULT OF A PAST EVENT; (B) IT IS PROBABLE THAT AN OUTFLOW OF RESOURCES WILL BE REQUIRED TO SETTLE THE OBLIGATION, AND (C) A RELIABLE ESTIMATE CAN BE MADE OF THE AMOUNT OF THE OBLIGATIO N. IF THESE CONDITIONS ARE NOT MET, NO PROVISION CAN BE R ECOGNIZED.' 3.5. AS THE APPELLANT COMPANY DID NOT FURNISH ANY JUSTIFICATION OR ANY SCIENTIFIC BASIS TO SUPPORT TH E PROVISION OF WARRANTY BY REDUCING THE SAME FROM THE COMMISSION I NCOME, THE AO CANNOT BE FAULTED IN EFFECTING THE DISALLOWA NCE OF RS.36,06,987/-. MOREOVER, THE HON'BLE ITA T WHILE ADJUDICATING THE ISSUE IN THE CASE OF THE APPELLANT FOR A.Y 2008-09 HAS HELD THAT ESTIMATION OF THE AMOUNT OF W ARRANTY OBLIGATION HAS TO BE MADE ON THE BASIS OF SCIENTIFI C METHOD AND NOT ON THE BASIS OF ANY ARITHMETICAL CALCULATIO N. THE HON'BLE ITA T RESTORED THE MATTER TO THE AO TO RE- COMPUTE- THE INCOME RECEIVED BY THE APPELLANT ON AC COUNT OF COMMISSION AND SERVICE INCLUDING WARRANTY OBLIGATIO N. THIS ALSO REINFORCES THE VIEW THAT THE WARRANTING PROVISION M ADE BY THE APPELLANT WAS NOT BASED ON ANY REALISTIC ESTIMATION OR SCIENTIFIC BASIS. IN VIEW OF THE FACTS OF THE CASE, THE ADDITION 6 OF RS.36,06,987/- FOR ASSESSMENT YEAR 2011-12 AND 2,55,27,748/- IN A.Y 2012-13 MADE BY THE AO ON ACCOUNT OF PROVISION OF WARRANTY IS HELD TO BE IN ORDER AND IS SUSTAINED. THIS GROUND OF APPEAL IS RULED AGAINST THE APPELLAN T.' 8. BEFORE US, THE LD. COUNSEL FOR THE ASSESSEE OUT RIGHTLY STATED THAT THE ISSUE HAS BEEN DECIDED BY THE TRIBUNAL IN A.YS 2007-08, 2008-09, 2009-10 AND 200-11. 9. PER CONTRA, THE LD. DR COULD NOT BRING ANY DISTI NGUISHING DECISION IN FAVOUR OF THE REVENUE. 10. WE HAVE GIVEN THOUGHTFUL CONSIDERATION TO THE O RDERS OF THE AUTHORITIES BELOW AND HAVE ALSO CONSIDERED THE ORDE RS OF THE COORDINATE BENCH IN ITA NO. 894/DEL/2012 AND 520/DE L/2013 IN A.YS 2007-08 AND 2008-09. THE RELEVANT FINDINGS OF THE COORDINATE BENCH READ AS UNDER: GROUND NO.2 OF ITA NO.894/DEL/2012 QUA AY 2007-08 A ND GROUND NO.2 OF ITA NO. 520/DEL/2013 QUA FOR A Y: 20 08-09. 16. UNDISPUTEDLY THE ASSESSEE COMPANY RECEIVED COMMISSION TO THE TUNE OF RS. 17,46,97,141/- QUA FOR ASSESSMENT YEAR 2007-08 7 AND RS.60,46,937/- QUA FOR ASSESSMENT YEAR 2008-09. THE AO NOTICED FROM THE DETAILS FILED BY THE ASSESSEE T HAT OUT OF AFORESAID COMMISSION THE ASSESSEE HAS TAKEN RS. 1,3 0,76,118/- AS INCOME ACCRUED BUT NOT DUE FOR ASSESSMENT YEAR 2 007- 08 AND RS. 1,27,85,642/- FOR ASSESSMENT YEAR 2008-09. 17. ON THE QUERY RAISED BY THE AO THAT AS TO WHY THE AFORESAID AMOUNT RECEIVED BUT DEFERRED FOR WARRANTY SERVICES BE NOT TAKEN AS INCOME IN THE RELEVANT ASS ESSMENT YEAR, THE ASSESSEE FILED THE RESPONSE AS UNDER: AS REGARDS THE COMMISSION IS CONCERNED YOUR HONOUR MAY NOTE THE FOLLOWING: A) THE COMMISSION IS RECEIVED ON THE SALE OF EQUIPMEN TS MANUFACTURED BY THE PARENT COMPANY. B) FOR OTHER SERVICES INCLUDING WARRANTY WHICH IS PRO VIDED BY THE ASSESSEE COMPANY FOR THE NEXT 2 YEARS THOUGH FOR THE PURPOSE OF TRANSFER PRICING CERTIFIC ATE THE ENTIRE AMOUNT HAS BEEN REPORTED, YOUR HONOUR WOULD RIGHTLY APPRECIATE THAT FOR THE SERVICES NOT RENDERED I.E. THE WARRANTY SERVICES WHICH ARE TO BE RENDERED IN THE N EXT 2 YEARS, THE INCOME HAS NOT ACCRUED TO THE ASSESSEE A ND SO THIS HAS NOT BEEN TAKEN IN THE P & L A/C WE WOULD LIKE T O CONFIRM THAT THIS HAS BEEN CONSIDERED AS INCOME IN THE NEXT YEARS AND OFFERED TO TAX (I.E. THE YEAR IN WHICH WARRANTY SER VICES ARE 8 RENDERED.} IT IS WORTHWHILE TO NOTE THAT THE ASSESSEE HAS NOT MADE ANY PROVISION FOR WARRANTY SEPARATELY AND HAS NOT DEBIT ED ANY EXPENSES PERTAINING TO WARRANTY TO THE P & L THE AS SESSEE INSTEAD OF DEBITING P & L A/C HAS REDUCED FROM THE INCOME THE PROVISION FOR WARRANTY AND HAS BEEN FOLLOWING T HE SAME ACCOUNTING PRINCIPLE. YOUR HONOUR WOULD APPRECIATE THAT IF THIS AMOUNT IS ADDED, THIS AMOUNTS TO DOUBLE TAXATI ON AS THESE HAVE BEEN OFFERED TO INCOME TAX BY THE ASSESS EE IN THE NEXT 2 ASSESSMENT YEARS. THEREAFTER, THE ASSESSEE WAS ASKED TO FILE DETAILS OF EXPENSES INCURRED FOR THE LAST FOUR YEARS PRIOR TO THE RELEVANT ASSESSMEN T YEAR WHICH THE ASSESSEE FILED. THE AO BY CONSIDERING THE PAST DATA ARRIVED AT THE CONCLUSION THAT THE ASSESSEE HAS BEEN INCURR ING EXPENSES ON ACCOUNT OF WARRANTY SERVICES TO THE TUN E OF 6.4% ON THE COMMISSION EARNED BY HIM BEING THE AVERAGE A S AGAINST 8% CLAIMED BY THE ASSESSEE AND THEREBY MADE AN ADDI TION OF RS. 10,58,630/- QUA FOR THE ASSESSMENT YEAR 2007-08 AND RS. 14,17,054/- QUA THE ASSESSMENT YEARS 2008-09 TO THE INCOME OF THE ASSESSEE. THE LEARNED COMMISSIONER OF INCOME -TAX (APPEALS) AFFIRMED THE FINDING RETURNED BY THE AO O N THE GROUND THAT THE COMMISSION INCOME IS NOT CONTINGENT ON SERVICING OF WARRANTY CLAIM AND SINCE THE COMMISSIO N HAS ACCRUED DURING THE YEAR UNDER ASSESSMENT IT IS TAXA BLE IN THE 9 SAID YEAR. 19. UNDISPUTEDLY THE AO ADMITTED THE CLAIM OF THE ASSES SEE BY ALLOWING OF PROVISION FOR WARRANTY TO THE EXTENT OF 6.4% INSTEAD OF 8% CLAIM BY THE ASSESSEE BY RESORTING TO ARITHMETIC CALCULATION BY TAKING AVERAGE OF THE LAST FOUR YEARS PRIOR TO THE ASSESSMENT YEAR UNDER CONSIDERATION. THE LEARNED COMMISSIONER OF IN COME-TAX (APPEALS) WITHOUT BIFURCATING THE COMMISSION INCOME AND PROVISION FOR WARRANTY INCOME AFFIRMED THE ADDITION ONLY ON A CCRUAL BASIS. THE ID AR FOR THE ASSESSEE CONTENDED THAT THE IDENT ICAL ISSUE HAS ALREADY BEEN SETTLED BY THE HONBLE JURISDICTIONAL HIGH COURT IN THE JUDGMENT CITED AS CIT VS. SMT. PARAMJEET LUTHRA (20 14) 51 TAXMANN. COM 571 (DEL) IN FAVOUR OF THE ASSESSEE. WE HAVE GONE THROUGH THE JUDGMENT CIT VS. PARAMJEET LUTHRA (SUPR A) RELIED BY THE ID COUNSEL FOR THE ASSESSEE THE RATIO OF WHICH IS THAT IN CASE OF PROVISION FOR WARRANTY SERVICES THE ENTIRE INCOME C OULD NOT BE OFFERED FOR TAXATION FOR THE YEAR UNDER ASSESSMENT WHEN THE ASSESSEE HAD FEW OBLIGATIONS FOR PROVIDING AFTER SA LES MAINTENANCE SERVICES AND THE NECESSARY' EXPENSES IS REQUIRED TO BE KEPT FOR THE SAME. 20. HON'BLE APEX COURT IN JUDGMENT CITED AS ROTORK CONTROLS INDIA P. LTD. VS. CIT (2009) 314 ITR 62 SETTLED THE IDENTICAL ISSUE ONCE FOR ALL BY HOLDING AS UNDER:- THE PRESENT VALUE OF A CONTINGENT LIABILITY, LIKE THE WARRANTY 10 EXPENSE, IF PROPERLY ASCERTAINED AND DISCOUNTED ON ACCRUAL BASIS CAN HE AN ITEM OF DEDUCTION UNDER SECTION 37. THE PRINCIPLE OJ ESTIMATION OF THE CONTINGENT LIABILITY IS NOT NORMAL RULE. IT WOULD DEPEND ON THE NATURE OF THE BUSINESS , THE NATURE OF SALES, THE NATURE OF THE PRODUCT MANUFACT URED AND SOLD AND 1 THE SCIENTIFIC METHOD OF ACCOUNTING ADOPTED BY THE ASSESSEE. IT WOULD ALSO DEPEND UPON THE HISTORICAL TREND AND UPON THE NUMBER OF ARTICLES PRODUCED. A PROVISION IS A LIABILITY WHICH CAN BE MEASURED ON LY BY USING A SUBSTANTIAL DEGREE OF ESTIMATION. A PROVISION IS RE COGNIZED WHEN : (A) AN ENTERPRISE HAS A PRESENT OBLIGATION A S A RESULT OF A PAST EVENT; (B) IT IS PROBABLE THAT AN OUTFLOW OF RESOURCES WILL BE REQUIRED TO SETTLE THE OBLIGATION, AND (C) A RELIABLE ESTIMATE CAN BE MADE OF THE AMOUNT OF THE OBLIGATIO N. IF THESE CONDITIONS ARE NOT MET, NO PROVISION CAN BE R ECOGNIZED. THE PRINCIPLE IS THAT IF THE HISTORICAL TREND INDICATES THAT A LARGE NUMBER OF SOPHISTICATED GOODS WERE BEING MANU FACTURED IN THE PAST AND THE FACTS SHOW THAT DEFECTS EXISTED IN SOME OF THE ITEMS MANUFACTURED AND SOLD, THEN PROVISION MADE FOR WARRANTY IN RESPECT OF SUCH SOPHISTICATED GOODS WOU LD BE ENTITLED TO DEDUCTION FROM THE GROSS RECEIPTS UNDER SECTION 37. BY APPLYING THE LAW LAID BY HONBLE APEX COURT AND JURISDICTIONAL HIGH COURT IN JUDGMENT CITED IN PREC EDING PARAS WE ARE OF THE CONSIDERED VIEW THAT AO AS WELL AS TH E LEARNED 11 COMMISSIONER OF INCOME-TAX (APPEALS) HAVE PROCEEDED TO MAKE THE ADDITION PURELY BY RESORTING TO THE ARITHE MATIC CALCULATIONS BY COMPLETELY IGNORING THE FACT THAT T HE ASSESSEE COMPANY IS REQUIRED TO OUTSOURCE THE SERVICE TO SET OFF TO SETTLED ITS WARRANTY OBLIGATION WHICH CAN ONLY BE M EASURED BY USING SUBSTANTIAL DEGREE OF ESTIMATION. MORE PARTIC ULARLY THE RELIABLE ESTIMATION OF THE AMOUNT OF OBLIGATION HAS TO BE MADE ON THE BASIS OF SCIENTIFIC METHOD AND NOT ON THE BA SIS OF ARITHMETIC CALCULATION AS HAS BEEN DONE BY AO AND A FFIRMED BY LEARNED COMMISSIONER OF INCOME-TAX (APPEALS). UNDISPUTEDLY THE ASSESSEE COMPANY IS TO PROVIDE SER VICES INCLUDING WARRANTY FOR NEXT TWO YEARS AFTER SALES. THE INCOME ACCRUED AT THE TIME OF RECEIVING COMMISSION HAS TO BE ACCOUNTED FOR IN THE YEAR OF ACCRUAL AND NOT IN THE YEAR OF RECEIPT. SO WE ARE OF THE CONSIDERED VIEW THAT THE MATTER IS REQUIRED TO BE RESTORED TO THE AO TO RECOMPUTE THE INCOME RECEIVED BY THE ASSESSEE ON ACCOUNT COMMISSION AND SERVICE INCLUDING WARRANTY OBLIGATION IN PURSUANCE OF THE F INDINGS RETURNED HEREIN AFTER. CONSEQUENTLY GROUND NO.2 OF ITA NO.894/DEL/22 QUA AY 2007-08 AND GROUND NO.2 OF IT A NO.520/DEL/2013JQFTA FOR AY: 2008-09 ARE DETERMINE D IN FAVOUR OF THE ASSESSEE. 11. A SIMILAR VIEW WAS TAKEN BY THE COORDINATE BENC H IN ITA NOS. 793/DEL/2015 AND 3692/DEL/2016 FOR A.YS 2009-10 AND 2010-11. 12 RESPECTFULLY FOLLOWING THE FINDINGS OF THE COORDINA TE BENCH [SUPRA] WE RESTORE THE QUARREL TO THE FILE OF THE ASSESSING OF FICER. THE ASSESSING OFFICER IS DIRECTED TO DECIDE THE ISSUE AFRESH IN L IGHT OF THE DIRECTIONS BY THE COORDINATE BENCH GIVEN IN EARLIER A.YS. 13. IN THE RESULT, BOTH THE APPEALS OF THE ASSESSEE IN ITA NOS. 2723/DEL/2017 AND 749/DEL/2018 ARE ALLOWED FOR STAT ISTICAL PURPOSES. THE ORDER IS PRONOUNCED IN THE OPEN COURT ON 07.11. 2019. SD/- SD/- [ SUCHITRA KAMBLE ] [N.K. BILLAIYA] JUDICIAL MEMBER ACCOUNTANT MEMBER DATED: 07 TH NOVEMBER, 2019 VL/ COPY FORWARDED TO: 1. APPELLANT 2. RESPONDENT 3. CIT 4. CIT(A) 5. DR ASST. REGISTRAR, ITAT, NEW DELHI 13 DATE OF DICTATION DATE ON WHICH THE TYPED DRAFT IS PLACED BEFORE THE DICTATING MEMBER DATE ON WHICH THE TYPED DRAFT IS PLACED BEFORE THE OTHER MEMBER DATE ON WHICH THE APPROVED DRAFT COMES TO THE SR.PS /PS DATE ON WHICH THE FAIR ORDER IS PLACED BEFORE THE DICTATING MEMBER FOR PRONOUNCEMENT DATE ON WHICH THE FAIR ORDER COMES BACK TO THE SR.P S/PS DATE ON WHICH THE FINAL ORDER IS UPLOADED ON THE WE BSITE OF ITAT DATE ON WHICH THE FILE GOES TO THE BENCH CLERK DATE ON WHICH THE FILE GOES TO THE HEAD CLERK THE DATE ON WHICH THE FILE GOES TO THE ASSISTANT RE GISTRAR FOR SIGNATURE ON THE ORDER DATE OF DISPATCH OF THE ORDER