M/s GE Intelligent Platforms Private Limited , Bangalore V. Deputy Commissioner of Income Tax Circle-3(1)(2), Bangalore

ITA 82/BANG/2019

• Counselvise Citation: [2019] 112 COUNSELVISE.COM (IT) 1552 (ITAT-BANGALORE)
• Duration Of Justice: 11 month(s) 1 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 13-12-2019
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: B
• Next Hearing Date: 28-11-2019
• Assessment Year: 2009-2010
• Appeal Filed On: 11-01-2019
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: RENUGADEVI J
• Keywords: Set aside
• Section: 195; 13; 37

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL B BENCH : BANGALORE BEFORE SHRI B.R BASKARAN , ACCOUNTANT MEMBER AND SMT. BEENA PILLAI, JUDICIAL MEMBER ITA NO.82/BANG/2019 ASSESSMENT YEAR : 2009-10 M/S EMERSON AUTOMATION SOLUTIONS INTELLIGENT PLATFORMS PVT. LTD., (FORMERLY GE INTELLIGENT PLATFORMS PVT. LTD., AND EARLIER TO THAT GE FANUS SYSTEMS PVT. LTD., NO.8, GROUND FLOOR, VELANKANI TECH PARK, ELECTRONIC CITY, PHASE 1, HOSUR ROAD, BENGALURU-560 100. PAN AAACG 7573 K VS. THE DY. COMMISSIONER OF INCOME-TAX, CIRCLE-3(1)(2), BENGALURU. APPELLANT RESPONDENT ITA NO.195/BANG/2019 ASSESSMENT YEAR : 2009-10 THE DY. COMMISSIONER OF INCOME-TAX, CIRCLE-3(1)(2), BENGALURU. VS. M/S EMERSON AUTOMATION SOLUTIONS INTELLIGENT PLATFORMS PVT. LTD., NO.8, GROUND FLOOR, VELANKANI TECH PARK, ELECTRONIC CITY, PHASE 1, HOSUR ROAD, BENGALURU-560 100. PAN AAACG 7573 K APPELLANT RESPONDENT REVENUE BY : SMT. RENUGA DEVI, J.C.I.T (DR) ASSESSEE BY : SHRI ROHIT GARG, ADVOCATE DATE OF HEARING : 28.11.2019 DATE OF PRONOUNCEMENT : 13.12.2019 ITA NO.82 & 195 /BANG/2019 PAGE 2 OF 12 O R D E R PER B.R BASKARAN, ACCOUNTANT MEMBER : THESE CROSS APPEALS ARE DIRECTED AGAINST THE ORDER PASSED BY LD CIT(A)-3, BENGALURU AND THEY RELATE TO THE ASSES SMENT YEAR 2009-10. 2. THE GROUNDS OF APPEAL URGED BY THE ASSESSEE RELATE TO THE FOLLOWING TWO ISSUES:- (A) DISALLOWANCE OF PROVISION FOR WARRANTY (B) DISALLOWANCE OF PROVISION FOR STOCK OBSOLESCEN CE. 3. AT THE TIME OF HEARING, THE LD A.R SUBMITTED T HAT BOTH THE ISSUES CITED ABOVE ARE COVERED BY THE DECISION REND ERED BY THE CO- ORDINATE BENCH IN THE ASSESSEES OWN CASE RELATING TO AY 2008-09 IN ITA NO.92/BANG/2013 DATED 19-06-2015. ON THE CONTR ARY, THE LD D.R SUBMITTED THAT THE ASSESSEE HAS NOT FURNISHED T HE BASIS FOR WORKING OUT THE PROVISION IN BOTH THE CASES AND HEN CE THE LD CIT(A) HAS CONFIRMED THE DISALLOWANCE. 4. WE HEARD THE PARTIES ON THESE TWO ISSUES AND PERUSED THE RECORD. AS SUBMITTED BY LD D.R, THE LD CIT(A) HAD CONFIRMED BOTH THE DISALLOWANCEA FOR WANT OF DETAILS. IN FACT, TH E LD CIT(A) HAD DELETED THE DISALLOWANCES OF IDENTICAL NATURE IN AY 2008-09 AND HENCE THE REVENUE WAS IN APPEAL BEFORE THE TRIBUNAL IN THAT YEAR. HOWEVER, IN THE YEAR UNDER CONSIDERATION, THE ASSES SEE IS IN APPEAL SINCE THE LD CIT(A) HAS CONFIRMED THE DISALLOWANCES . ITA NO.82 & 195 /BANG/2019 PAGE 3 OF 12 5. FOR THE SAKE OF CONVENIENCE, WE EXTRACT BELOW THE OPERATIVE PORTION OF THE ORDER PASSED BY THE TRIBUNAL IN RESP ECT OF ABOVE SAID TWO ISSUES:- (A) PROVISION FOR WARRANTY:- 8. WE HAVE CONSIDERED THE RIVAL SUBMISSION AND ALSO PERUSED THE RELEVANT MATERIAL PLACED ON RECORD. AS FAR AS THE PROVISION OF WARRANTY IS CONCERNED, WE FIND THAT THE PROVISION IS MADE BY THE ASSESSEE ON THE BASIS OF PAST/HISTORICAL DATA AND TAKING THE AVERAG E OF THE PAST THREE YEARS. THE ASSESSEE HAS FURNISHED THE DETAILS OF PAST SEVEN YEARS AND CALCULATED THE PROVISION FOR WARRANTY AT 0.5% OF THE TOTAL TURNOVE R. THUS THE PROVISION IS BASED ON THE AVERAGE OF THE ACTUAL EXPENDITURE ON THIS ACCOUNT DURING THE PAST SEVERAL YEARS. WE FIND THAT THE PROVISION BAISED ON THE PREVIOUS DATA CANNOT BE SAID THAT IT IS WITHOUT ANY SCIENTIFIC BASIS. AS IT IS EVIDENT FROM THE REC ORDS THAT THE ASSESSEE IS MAINTAINING PROVISION FOR WARRANTY WHICH IS BASED ON THE TECHNICAL EVALUATION AND PAST EXPERIENCE, THEREFORE, IT HAS A SOUND BASI S OF ESTIMATION. THE HON'BLE SUPREME COURT IN THE CAS E OF ROTORK CONTROLS JNDIA{PJ LTD. (SUPRA) HAS OBSERV ED AS UNDER:- '17. AT THIS STAGE, WE ONCE AGAIN REITERATE THAT A LIABILITY IS A PRESENT OBLIGATION ARISING FROM PAST EVENTS, THE SETTLEMENT OF WHICH IS EXPECTED TO ITA NO.82 & 195 /BANG/2019 PAGE 4 OF 12 RESULT IN AN OUTFLOW OF RESOURCES AND IN RESPECT OF WHICH A RELIABLE ESTIMATE IS POSSIBLE OF THE AMOUNT OF OBLIGATION. AS STATED ABOVE, THE CASE OF INDIAN. MOLASSES CO. PVT. LTD., (SUPRA) IS DIFFERENT FROM T HE PRESENT CASE. AS STATED ABOVE, IN THE PRESENT. CASE WE ARE CONCERNED WITH AN ARMY OF ITEMS, OF SOPHISTICATED (SPECIALIZED) GOODS MANUFACTURED AND SOLD BY THE ASSESSEE WHEREAS THE CASE OF INDIAN MOLASSES CO. LTD. (SUPRA) WAS RESTRICTED TO AN INDIVIDUAL RETIREE. ON THE OTHER HAND, THE CASE OF METAL BOX CO. OF INDIA LTD, (SUPRA) PERTAINED TO AN ARMY OF EMPLOYEES WHO WERE DUE TO RETIRE IN FUTURE. IN THAT CASE THE COMPANY HAD ESTIMATED ITS LIABILITY UNDER TWO GRATUITY SCHEMES AND THE AMOUNT OF LIABILITY WAS DEDUCTED FROM THE GRASS RECEIPTS IN THE PROFIT AND LOSS ACCOUNT. THE COMPANY HAD WORKED OUT ITS ESTIMATED LIABILITY ON ACTUARIAL. VALUATION. IT HAD MADE PROVISION FOR SUCH LIABILITY SPREAD OVER TO A NUMBER OF YEARS. IN SUCH A CASE IT WAS HELD BY THIS COURT THAT THE PROVISION MADE BY THE ASSESSEE COMPANY FOR MEETING THE LIABILITY INCURRED BY IT UNDER THE GRATUITY SCHEME WOULD BE ENTITLED TO DEDUCTION OUT OF THE GROSS RECEIPTS FOR THE ACCOUNTING YEAR DURIN G WHICH THE PROVISION IS MADE FOR THE LIABILITY. THE SAME PRINCIPLE IS LAID DOWN IN THE JUDGMENT OF THIS COURT IN THE CASE OF BHARAT EARTH MOVERS (SUPRA). IN THAT CASE THE ASSESSEE-COMPANY HAD ITA NO.82 & 195 /BANG/2019 PAGE 5 OF 12 FORMULATED, LEAVE ENCASHMENT SCHEME. IT WAS HELD, FOLLOWING THE JUDGMENT IN METAL BOX CO. OF INDIA LTD. 'S CASE (SUPRA), THAT THE PROVISION MADE BY THE ASSESSEE FOR MEETING THE LIABILITY INCURRED UNDER LEAVE ENCASHMENT SCHEME PROPORTIONATE WITH THE ENTITLEMENT EARNED BY THE EMPLOYEES, WAS ENTITLED TO DEDUCTION OUT OF GROSS RECEIPTS FOR THE ACCOUNTING YEAR DURING WHICH THE PROVISION IS MADE FOR THAT LIABILITY HE PRINCIPLE WHICH EMERGES FROM THESE DECISIONS IS THAT IF THE HISTORICAL TREN D INDICATES THAT LARGE NUMBER OF SOPHISTICATED GOODS WERE BEING MANUFACTURED IN THE POST: AND IN THE PAST IF THE FACTS ESTABLISHED SHOW THAT DEFECTS EXISTED III SOME OF THE ITEMS MANUFACTURED AND SOLD THEN THE PROVISION MADE FOR WARRANTY IN RESPECT OF THE ARMY OF SUCH SOPHISTICATED GOODS WOULD BE ENTITLED TO DEDUCTION FROM THE GROSS RECEIPTS UNDER SECTION 37 OF THE 1961 ACT. IT WOULD ALL DEPEND ON THE DATA SYSTEMATICALLY MAINTAINED BY THE ASSESSEE. IT MAY BE NOTED THAT IN ALL THE IMPUGNED JUDGMENTS BEFORE US THE ASSESSEE(S) HAS SUCCEEDED EXCEPT IN THE CASE OF CIVIL APPEAL NOS. 3506-3524 OF 2009 - ARISING OUT OF S.L.P.(G) NOS. 14178-14182 OF 2007 - ROTORK CONTROLS INDIA 'P.) LTD. V. CIT, IN WHICH THE MADRAS HIGH COURT HAS OVERRULED THE DECISION OF THE TRIBUNAL ALLOWING DEDUCTION UNDER SECTION 37 OF THE 1961 ACT. HOWEVER, THE HIGH COURT HAS FAILED TO NOTICE THE ITA NO.82 & 195 /BANG/2019 PAGE 6 OF 12 'REVERSAL'' WHICH CONSTITUTED PART OF THE DATA SYSTEMATICALLY MAINTAINED BY THE ASSESSEE OVER LAST DECADE. 18. FOR THE ABOVE REASONS, WE SET ASIDE THE IMPUGNED JUDGMENT OF THE MADRAS HIGH COURT DATED 5-22007 - ROTORK CONTROLS INDIA (P.) LTD.'S CASE (SUPRA) AND ACCORDINGLY THE CIVIL APPEALS STAND ALLOWED IN FAVOUR OF THE ASSESSEE WITH NO ORDER AS TO COSTS. 9. RAVING REGARD TO THE FACTS AND CIRCUMSTANCES OF THE CASE, WHEN THE PROVISION FOR WARRANTY IS BASED ON THE PAST EXPERIENCE AS WELL AS THE ACTUAL DATA THEN , THE JUDGMENT, OF HON'BLE SUPREME .COURT IN THE CASE OF ROTORK CONTROLS INDIA (P.) LTD. (SUPRA) IS FULLY APPLICABLE ON THE FACTS OF THE PRESENT CASE. FURTHE R, THE A.O. HAS ACCEPTED THE CLAIM OF PROVISION FOR WARRANTY BASED ON THREE YEARS. AVERAGE SALE WHILE COMPLETING. THE ASSESSMENT FOR A.Y. 2010- 11, ACCORDINGLY WE DO NOT FIND ANY ERROR IN THE IMPUGNE D ORDER OF THE LD. CIT(A). (B) PROVISION FOR STOCK OBSOLESCENCE:- 10. THE NEAT POINT OF DISPUTE IS THE PROVISION FOR STOCK OBSOLESCENCE. WE HAVE HEARD THE ID. D.R. AND ID. COUNSEL FOR THE ASSESSEE AND CONSIDERED THE RELEVAN T ITA NO.82 & 195 /BANG/2019 PAGE 7 OF 12 MATERIAL PLACED ON RECORD. THERE IS NO 4UARREL ON T HIS POINT THAT AS PER THE PRUDENT ACCOUNTING POLICY, INVENTORY SHALL BE VALUED AT COST OR NET REALIZABLE VALUE WHICHEVER IS LESS. THIS PRINCIPLE IS BASED ON THE P REMISE THAT THE VALUE OF THE CLOSING STOCK WILL BE THE VAL UE OF THE OPENING STOCK OF THE SUBSEQUENT YEAR AND THEREF ORE IT WOULD MITIGATE THE SCOPE OF ANY DISTORTION OF IN COME DUE TO ADOPTING THE CONSERVATIVE POLICY OF ACCOUNTI NG FOR VALUATION OF INVENTORY. THIS POLICY OF ACCOUNTING H AS BEEN ACCEPTED AND RECOGNIZED UNDER THE ACCOUNTING STANDARDS. IN THIS CASE, THE ASSESEE INSTEAD OF TAK ING STOCK AT THE REALIZATION, VALUE TO THE P&L ACCOUNT HAS MADE PROVISION TO DEBIT PROFIT & LOSS ACCOUNT WHICH MEANS THE CLOSING STOCK IS TAKEN TO THE P&L ACCOUNT WITHOUT REDUCING THE VALUE DUE TO OBSOLESCENCE/ DIMINUTION IN THE VALUE OF THE INVENTORY. THE ONLY POINT IS TO BE TAKEN CARE OF IS TO ENSURE THAT THE OPENIN G STOCK OF SUBSEQUENT YEAR SHALL BE TAKEN AT THE VALUE AFTE R REDUCING THE PROVISION MADE FOR THIS YEAR. ACCORDIN GLY, EXCEPT THE ABOVE OBSERVATION AND FACT TO BE VERIFIE D THAT THE VALUE OF OPENING STOCK OF THE SUBSEQUENT YEAR I S TO BE CORRECTLY TAKEN AFTER REDUCING THE PROVISION MAD E FOR THIS YEAR FROM THE C1OSIN STOCK, WE DO NOT FIND ANY REASON TO INTERFERE WITH THE ORDER OF THE LD. CIT(A ) QUA THE ASSESSEE. 6. THUS, WE NOTICE THAT, IN PRINCIPLE, THE CLAIM OF THE ASSESSEE IS ALLOWABLE AS PER THE DECISION RENDERED BY THE CO-OR DINATE BENCH. ITA NO.82 & 195 /BANG/2019 PAGE 8 OF 12 THE LD CIT(A) WAS CONSTRAINED TO CONFIRM THE DISALL OWANCES FOR WANT OF DETAILS ONLY. HENCE, IN THE INTEREST OF NA TURAL JUSTICE, WE ARE OF THE VIEW THAT THE ASSESSEE SHOULD BE PROVIDE D WITH ONE MORE OPPORTUNITY TO FURNISH THE RELEVANT DETAILS. ACCOR DINGLY, WE SET ASIDE THE ORDER PASSED BY LD CIT(A) IN RESPECT OF B OTH THE ABOVE SAID ISSUES AND RESTORE THEM TO THE FILE OF THE AO FOR EXAMINING THEM AFRESH BY CONSIDERING THE DETAILS FURNISHED BY THE ASSESSEE AND FOR DECIDING BOTH THE ISSUES IN THE LIGHT OF DE CISION RENDERED BY THE TRIBUNAL IN THE ASSESSEES OWN CASE IN AY 2008- 09. THE ASSESSEE IS ALSO DIRECTED TO FURNISH THE DETAILS IN SUPPORT OF THE CLAIMS MADE TO THE SATISFACTION OF THE ASSESSING OF FICER. 7. WE SHALL NOW TAKE UP THE APPEAL OF THE REVENU E. THE ONLY ISSUE URGED BY REVENUE IS WHETHER THE RECOVERY OF A DMINISTRATIVE EXPENSES WOULD FORM PART OF OPERATING INCOME FOR TH E PURPOSE OF COMPUTING OPERATING PROFIT MARGIN. 8. THE LD A.R SUBMITTED THAT THIS ISSUE IS COVER ED BY THE DECISION RENDERED BY THE CO-ORDINATE BENCH IN THE ASSESSEES OWN CASE RELATING TO AY 2010-11 IN IT(TP)A NO. 148/BANG/2015 DATED 04-04- 2017. THE LD D.R DID NOT CONTROVERT THE SAME. 9. FOR THE SAKE OF CONVENIENCE, WE EXTRACT BELO W THE OPERATIVE PORTION OF THE ORDER PASSED BY THE CO-ORDINATE BENC H IN RESPECT OF ABOVE SAID ISSUE:- 12. THE REVENUE IS IN APPEAL CHALLENGING THE DIRECT ION OF THE DRP DIRECTING INCOME FROM ADMINISTRATIVE ITA NO.82 & 195 /BANG/2019 PAGE 9 OF 12 SERVICES AS PART OF OPERATING REVENUE. THE REVENUE RAISED THE FOLLOWING GROUNDS OF APPEAL: 1. THE DIRECTIONS OF THE DISPUTE RESOLUTION PANEL A RE OPPOSED TO LAW AND FACTS OF THE CASE. 2. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CAS E, THE DISPUTE RESOLUTION PANEL ERRED IN DIRECTING THE TPO/AO TO EXCLUDE THE INCOME OF RS 2,33,97,997 RECEIVED AS ADMINISTRATIVE SERVICES, EVEN WHEN THIS IS ATTRIBUTABLE TO INCOME FROM OTHER SOURCES WHICH IS NOT ATTRIBUTABLE TO THE BUSINESS AND CANNOT BE CONSIDER ED AS OPERATING REVENUE. 3. FOR THESE AND OTHER GROUNDS THAT MAY BE URGED AT THE TIME OF HEARING, IT IS PRAYED THAT THE DIRECTIO NS OF THE DISPUTE RESOLUTION PANEL IN SO FAR AS IT RELATE S TO THE ABOVE GROUNDS MAY BE REVERSED. 4. THE APPELLANT CRAVES LEAVE TO ADD, ALTER, AMEND AND / OR DELETE ANY OF THE GROUNDS MENTIONED ABOVE. THE FINDING OF THE DPO IS AS FOLLOWS: HAVING HEARD THE OBJECTION, WE PERUSED THE ORDER OF THE TPO AND IT IS NOTICED BY US FROM PARAGRAPH 9.1. 4 OF THE TPO'S ORDER THAT THE TPO HAS NOT ADDRESSED THE ISSUE RAISED BY THE ASSESSEE, BUT SIMPLY OBSERVED T HAT THE NATURE OF INCOME IS FROM OTHER SOURCES WHICH IS ITA NO.82 & 195 /BANG/2019 PAGE 10 OF 12 ATTRIBUTABLE TO BUSINESS BUT NOT DERIVED FROM OPERA TING ACTIVITY. TO EXAMINE THE CORRECTNESS OF THE FINDING S OF THE TPO, WE EXAMINED THE ANNUAL REPORT AND IT IS NOTICED BY US FROM SCHEDULE 13 TO THE P&L ACCOUNT THAT THE ABOVE AMOUNT HAS BEEN SHOWN AS 'ADMINISTRATIVE EXPENSES RECOVERED' WHICH CLEARLY INDICATES THAT THE ADMINISTRATIVE EXPENSES RECOVERE D ARE NOTHING BUT THE REIMBURSEMENT OF THE EXPENSES INCURRED BY THE ASSESSEE FOR THE ABOVE COMPANY AND THEREFORE, IF SUCH INCOME IS EXCLUDED FROM THE OPER ATING REVENUE, CORRESPONDING EXPENSES HAVE TO BE EXCLUDED FROM THE OPERATING COST. HENCE, WE ARE IN AGREEMENT WITH THE SUBMISSION OF THE ASSESSEE THAT THE ADMINISTRATIVE EXPENSES RECOVERED TO BE CONSIDERED AS OPERATING REVENUE, CONSIDERING THE FACT THAT THE TP O HAS NOT REDUCED CORRESPONDING EXPENSES FROM THE OPERATING COST. THE ASSESSING OFFICER IS DIRECTED ACCORDINGLY. THE FINDING OF THE DRP IS BASED ON SETTLED POSITION OF LAW AND DO NOT REQUIRE ANY INTERFERENCE. 10. WE NOTICE THAT THE LD CIT(A) HAS FOLLOWED TH E DECISION RENDERED BY THE CO-ORDINATE BENCH FOR AY 2010-11 (R EFERRED SUPRA) IN DECIDING THIS ISSUE IN FAVOUR OF THE ASSESSEE. ACCORDINGLY, WE DO NOT FIND ANY INFIRMITY IN THE ORDER PASSED BY LD CI T(A) ON THIS ISSUE. ITA NO.82 & 195 /BANG/2019 PAGE 11 OF 12 11. IN THE RESULT, THE APPEAL OF THE ASSESSEE IS TREATED AS ALLOWED AND THE APPEAL OF THE REVENUE IS DISMISSED. ORDER PRONOUNCED IN THE OPEN COURT ON 1 3 TH DECEMBER, 2019. SD/ - (BEENA PILLAI) JUDICIAL MEMBER SD/ - (B.R BASKARAN) ACCOUNTANT MEMBER BANGALORE, DATED, 13 TH DECEMBER, 2019. / VMS / COPY TO: 1. THE APPLICANT 2. THE RESPONDENT 3. THE CIT 4. THE CIT(A) 5. THE DR, ITAT, BANGALORE. 6. GUARD FILE BY ORDER ASST. REGISTRAR, ITAT, BANGALORE.