M/s. Dell International Services India Private Limited (for the merged entity Dell India Private Limited), Bangalore V. Joint Commissioner Of Income Tax, LTU, Bangalore

ITTPA 269/BANG/2014

• Counselvise Citation: [2022] 104 COUNSELVISE.COM (IT) 4963 (ITAT-BANGALORE)
• Duration Of Justice: 7 year(s) 11 month(s) 15 day(s)
• Appeal Type: Income Tax (Transfer Pricing) Appeal
• Pronouncement Date: 17-03-2022
• Appeal Filed By: Assessee
• Order Result: PartlyAllowed
• Bench Allotted: C
• Assessment Year: 2009-2010
• Appeal Filed On: 02-04-2014
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Keywords: Unexplained expenditure; Business income; Depreciation; Transfer pricing; International transaction; Additional evidence; Bad and doubtful debts; Revenue expenditure; Capital expenditure; TDS; Set aside
• Section: 32; 69C; 143(3); 142(1); 40(a)(ia); 144C; 13; 92CA

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL BANGALORE BENCHES “C”, BANGALORE Before Shri George George K, JM & Ms.Padmavathy S, AM IT(TP)A No.269/Bang/2014 : Asst.Year 2009-2010 M/s.Dell International Services India Private Limited (for the merged entity Dell India Private Limited) No.12/1, 12/2A, 13/1A, Devyashree Greens, Koramangala Inner Ring Road Domlur Post Bangalore – 560 071. PAN : AAACH1925Q. V. The Joint Commissioner of Income-tax, LTU Bangalore. (Appellant) (Respondent) IT(TP)A No.217/Bang/2014 : Asst.Year 2009-2010 The Joint Commissioner of Income-tax, LTU Bangalore. V. M/s.Dell International Services India Private Limited No.12/1, 12/2A, 13/1A, Devyashree Greens, Koramangala Inner Ring Road Domlur Post Bangalore – 560 071. (Appellant) (Respondent) Revenue by : Sri.Pradeep Kumar, CIT-DR Assessee by : Sri. T.Suryanarayana, Advocate Date of Hearing : 24.02.2022 Date of Pronouncement : 18.03.2022 O R D E R Per George George K, JM These cross appeals are directed against final assessment order dated 31.01.2014 passed u/s 143(3) r.w.s. 144C of the I.T.Act. The relevant assessment year is 2009-2010. 2. The brief facts of the case are as follows: IT(TP)A No.269 & 217/Bang/2014 M/s.Dell International Services India Private Limited 2 The Assessee is engaged in the manufacture and trading of IT hardware products and provides technical and marketing support services to its Associate Enterprises (AEs). For the relevant assessment year 2009-10, the assessee had certain international transactions inter alia being purchase of stock in trade (trading segment), provision of technical and marketing support services to its AEs, reimbursement and recovery of expenses to/from its AEs. (We shall discuss the functions performed under each of the segments while discussing the adjustment determined by the TPO). In the TP study maintained for the year under consideration, the Assessee treated all the international transactions as being at arm’s length. During the year, the Assessee also recovered certain advertisement expenses from Intel USA (“Intel”) and Microsoft USA (“Microsoft”). Since the transactions were with unrelated parties, the assessee did not benchmark the same. During the course of assessment proceedings, reference was made to the Transfer Pricing Officer (TPO). The TPO passed an order dated 29.01.2013 under Section 92CA of the Income-tax Act, 1961 (“the Act”) determining a TP adjustment aggregating to Rs. 250,07,40,281/-, comprising of the following: A. Adjustment of Rs. 53,91,00,000/- determined in the trading segment by ignoring the segmental details along with reconciliation with the financials provided by the Assessee and completely ignoring the installation revenue which according to the assessee, was an integral component of the sales effected in the trading segment; B. TP adjustment determined by bifurcating the technical and marketing support services segment into ITES segment and MSS segment, and treating the recovery of expenses from Intel and Microsoft as part of the cost base for MSS segment and applying a mark-up. The adjustment determined in the ITES is of Rs. IT(TP)A No.269 & 217/Bang/2014 M/s.Dell International Services India Private Limited 3 2,56,75,000/- and the MSS segment is of Rs. 6,87,96,000/-, respectively; C. Adjustment of Rs. 16,11,00,000/- determined for the warranty, which according to the assessee was provided by the AEs to its own customers; D. Adjustment of Rs. 170,60,69,281/- towards reimbursements made to Dell International Inc. towards purchase of licenses from Microsoft. 3. Pursuant to TP adjustment, a draft assessment order dated 28.03.2013 was passed by the AO in which the aforesaid TP adjustments were incorporated. Further, the A.O. also made various additions / disallowance on corporate tax issue. 4. Aggrieved, the Assessee filed its objections before the DRP. The DRP vide its directions dated 30.12.2013, granted partial relief. Pursuant to the directions of the DRP, the AO passed the final assessment order dated 31.01.2014 in which the aggregate TP adjustment was reworked to Rs. 79,46,71,000/- (Many of the direction of DRP was not given effect to). Aggrieved by the final assessment order, the Assessee has filed the IT(TP)A No.269/Bang/2014 before Tribunal. To the extent the DRP granted relief to the Assessee, the Revenue too has filed an appeal [IT(TP)A No.217/Bang/2014]. We shall first adjudicate assessee’s appeal. IT(TP)A No.269/Bang/2014 (Assessee’s appeal) 5. The assessee in the memorandum of appeal has raised 23 grounds. However, no arguments were raised for ground 1 to 6 and 21 to 23, hence, the same are dismissed. The surviving grounds, namely, grounds 7 to 20, read as follows:- IT(TP)A No.269 & 217/Bang/2014 M/s.Dell International Services India Private Limited 4 “7. Trading Segment 7.1 The learned AO / learned TPO erred in arbitrarily arriving- at segmental profit/loss with respect to trading segment 8. Technical and Marketing support Services 8.1 The learned AO! learned TPO erred in rejecting the consolidated analysis of marketing and technical support services which was based on the functional, asset and risk profile of the Appellant. 8.1.1 Technical support services a)The learned AO / learned TPO erred in arbitrarily arriving at segmental profit with respect of technical support services segment. b)The learned AO / learned TPO erred in rejection of comparability analysis carried in the TP documentation and in conducting a fresh comparability analysis by introducing various filters in determining the arm's length price. c)The learned AO / learned TPO erred in including the following companies that do not satisfy the test of comparability and should be rejected. • Infosys BPO Ltd Accentia Technologies Ltd Cosmic Global Ltd • Eclerx Services Ltd d)The learned AO / learned TPO erred in the computation of mark-up for Allsec Technologies Limited. The learned TPO has erroneously considered the provision for bad and doubtful debts as non-operating in nature. e)Having accepted that the appellant is a limited risk contract support service provider, the learned AO / learned TPO erred in not providing appropriate adjustment towards the risk differential, when the com parables selected are full - fledged entrepreneurial companies. 8.1.2 Marketing Support Services a)The learned AO / learned TPO erred in arbitrarily arriving at segmental profit with respect of Marketing support services segment. b)The learned AO / learned TPO erred in adding a mark-up on the impugned marketing support services segment without appreciating the fact that the mark-up on cost is within the + /- IT(TP)A No.269 & 217/Bang/2014 M/s.Dell International Services India Private Limited 5 5% of the arithmetic mean of the comparable companies selected by the appellant and as accepted by the learned AO I learned TPO 9. Advertisement Cost a) The learned AO I learned TPO erred in considering recovery of expenses form Intel Corporation and Microsoft Corporation as deemed international transaction. b)The learned AO / learned TPO erred in adding a mark-up on recharge of advertisement cost (Co-Branding cost). c)The learned AO / learned TPO erred in ignoring the fact that the appellant has already received much more than the cost incurred for co-marketing activity. 10. Warranty cost a) The learned AO I learned TPO erred in arbitrarily imposing a mark-up on warranty. II. Corporate Tax 11. Disallowance of expenditure u/s 40(a)(ia) - Rs. 553,036,094 The learned / AO has erred in disregarding the details provided relating to Rs. 198,263,057 debited under various heads of expenses in the profit and loss account which are not subject to the provisions of TDS. The learned AO has erred in not considering the disallowance made by the appellant himself under section 40(a)(ia) of an amount of Rs. 103,882,844 which has resulted in double disallowance or the said amount. The learned AO should have appreciated the submission of humungous data and ought not to have made any disallowance under section 40(a)(ia). 12. Gross amount on which Service tax paid vis service income as per financials A. Service Tax paid on reverse charge mechanism - Rs.548,188,597 The learned AO has erred in considering expenses towards import of Software service as service income. He ought to have appreciated the fact that, appellant is paying service tax on reverse charge basis upon import or the said services. The learned AO further erred in ignoring the details or expenses along with TDS details submitted during the DRP proceedings. IT(TP)A No.269 & 217/Bang/2014 M/s.Dell International Services India Private Limited 6 B.On account of balance difference - Rs.181,612,085 The learned AO and the Hon'ble DRP erred in not taking into consideration the submissions made by the appellant during the course or DRP proceeding. 13. Disallowance of depreciation on assets supplied on lease and taxation of future lease rentals - Rs. 17,783,741 and 29,313,022 The learned AO and the Hon'ble DRP erred in holding the lessee as the owner or the assets for claiming depreciation on the same. The learned AO and the Hon'ble DRP has erred in not placing reliance on the decision of the Hon'ble Supreme Court in the case of ICDS Ltd. vs. Commissioner of Income Tax. Mysore & Anr (2012-ITS -01-SC) 14. Disallowance of Provision for Warranty and Warranty expenses - Rs. 821,556,000 A. Disallowance of Provision for warranty - Rs. 57.40 crores The learned AO has erred in not placing reliance on the decision of the Hon'ble Supreme Court in the case of Rotork Controls India (P) Ltd vs. Commissioner or Income Tax (SC) [2009] 80 Taxmann 422. B. Warranty Expenses - Rs.24.76 crores The learned AO and the Hon'ble DRP erred in disallowing the warranty expenses of Rs.24.76 crores without considering the details submitted during DRP proceedings. 15. Unexplained expenditure A. Freight - Rs. 376,642,988 The learned AO erred in invoking section 69C without appreciating that, provisions of section 69C is applicable only in case if no explanation offered on the source of income for the expenses under consideration. The learned AO and the Hon'ble DRP have erred disallowing the freight expenses under section 69C without considering the detail submitted during DRP proceedings. B.Rent - Rs. 2,371,471 The learned AO erred In invoking section 69C without appreciating that provisions of section 69C is applicable only in case if no explanation offered on the source of income for the expense under consideration. IT(TP)A No.269 & 217/Bang/2014 M/s.Dell International Services India Private Limited 7 16. Addition of VAT refund offered to tax in other A Y s The learned AO and the Hon'ble DRP erred in considering VAT refund amounting to Rs. 4,376,995 offered to tax during A Y 2008-09 to A Y 2010-11 as undisclosed income for the A Y 2009- 10. 17.Disallowance of Capital expenditure by erroneously deeming it to have been claimed as revenue expenses - Rs. 119,180,698 The learned AO erred in concluding certain expenses of capital in nature as being debited to profit and loss account without considering the reversals of such expenses in the profit and loss account. 18.Disallowance of expenditure claimed as deduction u/s 40(a)(ia) of the Act - Rs. 91,402,291 The learned AO and the Hon'ble DRP erred in disallowing claim for deduction during the current year of the prior year disallowance under section 40(a)(ia). The learned AO and the Hon'ble DRP ought to have allowed the deduction based on the reversal of such expenses during the subsequent year. 19. Short credit of TDS –Rs.1,66,98,930 The learned Assessing Officer (AO) has erred in giving credit for TDS of Rs.4,21,32,027 instead of Rs.5,88,30,957. 20. Set-off of loss brought forward from AY 2008-09 The learned Assessing Officer (AO) has erred in considering brought forward loss of Rs.17,14,29,395 from the assessment order for A.Y. 2008-09 instead of Rs.60,97,79,395 claimed as per the income tax return filed for A.Y. 2009-10.” 5.1 The assessee has also raised additional grounds, which we shall refer when adjudicating the respective issues / grounds. We shall first adjudicate the issues raised under TP adjustments. A. TRADING SEGMENT OF THE ASSESSEE (TP ADJUSTMENT) (GROUND 7.1) 6. The Assessee imports and sells to third party customers in India, computers, hardware, peripherals, etc., which are IT(TP)A No.269 & 217/Bang/2014 M/s.Dell International Services India Private Limited 8 manufactured by its AEs. The Assessee also provides local installation, commissioning and post-warranty, and maintenance support services to the customers. The Net mark- up on cost earned by the Assessee (as per the TP study) are as follows:- Total Income Rs. 4,81,69,81,000/- Total Cost Rs. 4,73,22,43,000/- Profit Rs. 8,47,38,000/- Margin over cost 1.79% 6.1 The Assessee had submitted to the TPO by reconciling the segmental details with the financials (refer page 5566 of the paperbook-Vol.12), wherein the net mark up on cost was 2.23%. The details of the same are as follows:- Total Income Rs. 6,22,30,99,230/- Total Cost Rs. 6,08,74,11,808/- Profit Rs. 13,56,87,422/- Margin over cost 2.23% 6.2 The Comparison of the benchmarking approach adopted by the Assessee and TPO are as follows:- Particulars Assessee TPO Methodology adopted Transaction Net Margin Method (‘TNMM’) TPO accepted the method, the PLI and the comparables selected by the Assessee. (refer page 15 of the TP Order) Profit Level Indicator (‘PLI’) OP/OC Database used PROWESS and CAPITALINE Comparables selected 59 6.3 In trading segment, the dispute primarily arises as the TPO rejected the segmental details reconciled with the financials IT(TP)A No.269 & 217/Bang/2014 M/s.Dell International Services India Private Limited 9 furnished by the Assessee and recast the same by ignoring the installation revenue. According to the assessee, installation revenue was integral to the sales effected in the segment, for which a composite price was charged and received from the customers. The TPO arrived at the operating margin in the following manner (refer pages 12-14 of the TP order): Particulars Amount in crores Basis for computation (page 5590) Opening stock Rs. 1.53 crores Schedule 12 of accounts Purchases Rs. 476.58 crores Schedule 12 to accounts and schedule 15 (Notes on accounts 5) Operating expenses Rs 92.67 crores In the ratio of trading sales to total sales Depreciation Rs. 2.69 crores In the ratio of trading sales to total sales Employee cost Rs. 22.72 crores In the ratio of operating cost of the trading segment to total operating cost Total Debit Rs. 596.19 crores Sales Rs. 544.72 crores Schedule 10 and schedule 16 to accounts Closing stock Rs. 7.91 crores Schedule 12 to accounts Profit margin (OP/OC) -7.31% 6.4 The Assessee objected to the TPO’s action before the DRP, primarily contending that in arriving at the segmental profit, the TPO has: - Not considered installation income; - Has considered incorrect opening stock; - Has considered incorrect depreciation cost; and - Has considered incorrect total cost. IT(TP)A No.269 & 217/Bang/2014 M/s.Dell International Services India Private Limited 10 6.5 The DRP vide its directions dated 30.12.2013, disposed of assessee’s objection. Briefly, the directions issued by the DRP are as follows (refer pages 7-8 of the DRP’s directions): - Re-inclusion of installation income: The DRP observed that it is not clear whether the Assessee is charging installation costs from the clients as a part of the sale of traded goods or if such installation is carried out at the request of its AEs. The DRP therefore upheld the TPO’s action. - Re-adoption of proper opening stock: The DRP observed that the TPO has accepted the claim of the Assessee to this extent and directed the TPO to consider the same. - Re-adoption of correct value of cost and revenue: The DRP observed that the Assessee has not reconciled the figures and therefore the action of the TPO was upheld. - Re-exclusion of Rs. 40 crores from the total cost: The Assessee submitted that the TPO has included cost to the extent of Rs. 40 crores which pertains to the technical and marketing support services segment and was recovered with a mark-up from the AEs. While the DRP observed that once the services are segregated, cost related to such other service should not be included in the cost for trading segment, since it was not clear whether the expenses are included, it directed the TPO to examine the same, and exclude it if the expenses are included. - Re-adoption of incorrect depreciation cost: The DRP observed that the cost allocated by the TPO was lesser than the cost allocated by the Assessee and directed the TPO to examine the same and adopt the correct value. 6.6 Pursuant to the DRP’s directions, final assessment order was passed. Despite the directions issued by the DRP to have a relook at some of the items to arrive at the segmental margin, effect to the same was not given in the final assessment order IT(TP)A No.269 & 217/Bang/2014 M/s.Dell International Services India Private Limited 11 and the adjustment originally made in the trading segment was sustained (refer pages 55-56 of the final assessment order). Aggrieved by the Final Assessment Order, the assessee has raised the issue before the Tribunal. The ground in the assesee’s appeal pertaining to the trading segment is as follows:- “TPO erred in arbitrarily arriving at segmental profit/loss in respect to the trading segment (Ground No. 7.1)”. 6.7 The learned AR has filed a brief written submission. The learned AR elaborately explained the each of issue raised vis-a- vis the financial of the assessee. The brief point raised by the learned AR are as follows:- “The TPO had proposed to recast the segmental details of the trading segment vide notice dated 11.01.2013. Since there were certain errors as regards the computation of the segmental margin in the TP study as well as what was proposed by the TPO, the Assessee filed its reply dated 25.01.2013 vide which it had furnished the segmental details reconciled with the financials (refer page 5566 of the paperbook-Vol.12). The segmental margin arrived at by the Assessee is reconciled with its audited financial statement and the same ought to have been considered. The segmental details furnished by the Assessee were merely brushed aside by the TPO without providing any basis to reject the same. On an erroneous basis, the TPO proceeded to recast the segmental in an arbitrary manner. Both the direct costs including depreciation, and indirect costs were allocated by the TPO on the basis of revenue in the segment and installation revenue, which was integral to the trading sales and collected as a composite price on the sales effected to the customers, was completely ignored. The errors made by the TPO in recasting the segmental are as under: a. The TPO did not consider the installation revenues while computing the margin; b. The TPO considered wrong value of opening stock of cost of goods sold although she acknowledged the correct value of opening stock; c. TPO allocated both direct costs including depreciation, and indirect costs on the basis of revenue, although the Assessee had taken direct costs on actuals; IT(TP)A No.269 & 217/Bang/2014 M/s.Dell International Services India Private Limited 12 d. The TPO erroneously took into consideration the cost of Rs. 40.31 crores pertaining to the technical and marketing support services segment.” 6.8 The learned DR has filed a brief written submission reiterating the reasoning of TPO and DRP. (The Revenue in its appeal vide ground 2 challenges the DRP’s directions to adopt the figure of Rs.2.99 crore as depreciation cost in trading. This ground of the Revenue, we shall deal in Revenue’s appeal). 6.9 We have heard rival submissions and perused the material on record. Since the assessee’s transfer pricing study was inconsistent with its financials, the TPO had proposed to recast segmental details of trading segment vide notice dated 11.01.2013. The assessee filed its reply admitting mistakes (reply dated 25.01.2013) and furnished the segmental details reconciling the financials. The reconciled segmental details with financials are placed at page 556 of the paper book Vol.2. For ready reference, the reconciled segmental details with the financials of the assessee is reproduced below:- Particulars Trading Segment Manufacturing Segment Marketing and Technical Support Segment Total Revenue Sale of traded items 5,44,72,87,852 24,51,54,28,430 29,96,27,16,282 Less: Duty (6,05,29,065) (1,98,09,13,045) (2,04,14,42,110) Net Sales 5,38,67,58,787 22,53,45,15,385 27,92,12,74,172 Installation and others - allocated 83,63,40,443 30,95,39,557 1,14,58,80,000 Income from support services 46,53,65,615 46,53,65,615 Income from lease financing 33,61,000 Total Revenue 6,22,30,99,230 22,84,40,54,942 46,53,65,615 29,53,58,80,787 Expenditure Cost of goods sold 4,70,06,96,259 18,81,52,22,000 - 23,51,59,18,259 Salaries bonus 18,61,70,520 84,18,47,475 17,57,39,795 1,20,37,57,790 Contribution to provident and other funds 1,44,61,522 6,13,30,594 1,29,56,671 8,87,48,787 Staff Welfare 20,16,540 1,03,98,228 21,22,306 1,45,37,074 IT(TP)A No.269 & 217/Bang/2014 M/s.Dell International Services India Private Limited 13 Particulars Trading Segment Manufacturing Segment Marketing and Technical Support Segment Total Rent 1,20,50,950 4,82,69,679 1,03,11,818 7,06,32,447 Rates and taxes 16,63,237 34,87,669 8,80,548 60,31,454 Insurance 17,97,888 70,64,915 15,15,097 1,03,77,900 Power and fuel 1,85,01,686 3,14,93,056 85,46,607 5,85,41,349 Repairs – Others - 23,83,02,394 4,18,63,394 28,01,65,788 Legal and professional 17,60,48,489 - 3,00,95,510 20,61,43,999 Communication 1,75,83,169 8,28,62,193 1,71,71,146 11,76,16,508 Commission and rebate 4,60,09,868 18,11,60,213 - 22,71,70,081 Travelling and conveyance 2,13,21,122 10,00,34,107 2,07,45,690 14,21,00,919 Advertisement 7,28,57,118 28,68,66,157 6,37,29,582 42,34,52,857 Warranty 55,57,72,122 1,55,83,95,685 - 2,11,41,67,807 Freight outwards 19,56,49,631 22,42,77,284 15,55,279 42,14,82,194 Bad debts 1,56,12,784 8,15,429 - 1,64,28,213 Depreciation 4,91,98,903 18,51,96,109 4,00,69,438 27,44,64,450 Miscellaneous expenses - 9,64,10,122 1,59,02,467 11,23,12,589 Total Expenses 6,08,74,11,808 22,77,34,33,309 44,32,05,348 29,30,40,50,465 Profit Margin 13,56,87,422 7,06,21,633 2,21,60,267 23,18,30,322 Percentage of Net Margin over cost 2.23% 0.31% 5.00% 0.79% Percentage of Net Margin over sales 2.18% 0.31% 4.76% 0.78% Reconciliation Operating Profit as computed 23,18,30,322 Other Income 1,05,87,05,000 Less: Provision for Doubtful Advances 5,22,13,000 Provision for Doubtful Debts 60,79,04,000 Balance with customs written off 9,19,34,000 Loss on sale of fixed assets 1,19,000 Exchange Loss 1,11,09,53,000 Loss on cancellation of forward contracts 1,10,73,000 Interest 7,99,91,000 Depreciation related to MSS not considered in above computation - Profit before tax (66,36,51,678) 6.9.1 The above reconciled segmental details is seen not considered by the TPO and she proceeded to recast the segmental details without assigning any reasons for rejecting the assessee’s reconciled segmental details. The assessee in the IT(TP)A No.269 & 217/Bang/2014 M/s.Dell International Services India Private Limited 14 trading segment provides installation services to the customers for the goods purchased by them. This is evident from the TP study at para 3.2.5 at page 5647 of the paperbook-Vol.12 where it is categorically stated that the Assessee also inter alia provides installation services to the customers in India, and in appendix 13 to the TP study at page 6049 of the paperbook- Vol.12 installation income has been included in the operating revenue base of the trading segment. Therefore, the TPO’s observation at para 1.2.(b) at page 34 of the TP order that the Assessee has not shown that installation is part of the trading sales from its TP study is incorrect. The revenue from installation services reflected in the financials of Rs. 114.58 crores includes installation revenue pertaining to the trading segment of Rs. 83 crores and installation revenue pertaining to the manufacturing segment of Rs. 30.95 crores. This bifurcation was given in the segmental details furnished to the TPO vide submission dated 25.01.2013 (refer page 5566 of the paperbook-Vol.12) The TPO ignored the installation income as provided in the segmental details furnished to her, without assigning any reasons for doing so and more importantly when she had not disputed the functions of the Assessee in this segment or the methodology adopted for benchmarking the segment. Prima facie installation revenues are integral to the trading and manufacturing segments, and the price for the goods from customers is inclusive of the installation costs. It is only for the purposes of drawing the financial statements that the aggregate revenues from installation services is separately reflected under the head “services”- “installation and others”. In IT(TP)A No.269 & 217/Bang/2014 M/s.Dell International Services India Private Limited 15 support of the aforesaid contentions, the Assessee placed reliance on the additional evidence submitted before the Tribunal vide its applications dated 17.03.2020 and 24.02.2021. By application dated 17.03.2020, the additional evidence sought to be admitted are the general ledger extract of trading segment and manufacturing segment providing the break-up of the installation revenues and the trial balance for installation services are provided. The additional evidence dated 24.02.2021 is to demonstrate that the price charged from customers in the trading segment include the price for installation charges (please see Sl. No. 18 of the invoice dated 24.07.2008, Sl. Nos. 20 and 33 of the invoice dated 17.12.2008, Sl. Nos. 26 and 41 of invoice dated 17.12.2008). It is to be mentioned that the assessee in its applications for admission of additional evidence has given the reasons why the same could not be produced before the A.O. during the course of assessment. The additional evidences now produced before the ITAT are necessary document / evidence to prove that installation revenue is integral part of the trading segment. Therefore, for substantial cause and justice, the additional evidence produced vide assessee’s applications dated 17.03.2020 and 24.02.2021 are admitted on record. In the TPO’s order, the installation revenues are not allocated to any of the segments and thus has been completely ignored which is incorrect. According to the assessee, the installation revenues are attributable only to the manufacturing and trading segments of the Assessee as there can be no installation services in the other segment, viz., technical and marketing IT(TP)A No.269 & 217/Bang/2014 M/s.Dell International Services India Private Limited 16 support services rendered to the AEs. Moreover, while the TPO took into account the costs incurred in this regard, she failed to allocate the installation revenues to the trading segment. This has resulted in a skewed operating margin. In the subsequent years too, the Assessee has treated the installation revenue as a part of the operating income for the trading segment. This treatment came to be accepted in the subsequent years. 6.9.2 Further, the TPO in the show cause notice dated 11.01.2013, proposed to consider the value of opening stock at Rs. 1.53 crores (refer page 5589 of the paperbook-Vol.12). On the Assessee’s objections, the TPO agreed with the Assessee’s contention and agreed to consider the value at Rs. 1.39 crores (refer page 34 of the TPO’s order). While so, effect to the same was not given while computing the adjustment. The correct value of opening stock is Rs. 1.39 crores as recorded in the financial statement at Note 12 on page 6281 of the paperbook- Vol.13. While the DRP observed that the TPO had agreed to correct this error, and directed the TPO to do so, effect to the direction was not given in the final assessment order. 6.9.3 The other anomaly of the TPO’s order is that while computing the margin of the trading segment, the TPO has not excluded from the operating expenses an amount of Rs. 40.31 crores, which according to the assessee pertains to the MSS segment. This cost pertains to the MSS segment, is evident from the financial statements read with the notes thereto at pages 6281 and 6309 of the paperbook-Vol.13. The TPO’s observation that total expenses are to be taken into consideration for IT(TP)A No.269 & 217/Bang/2014 M/s.Dell International Services India Private Limited 17 computing the operating margin is incorrect as costs pertaining to a totally unrelated segment cannot be taken into consideration while computing the margin of the trading segment. In fact, on the cost of Rs. 40.31 crores incurred while rendering the technical and marketing support services, the Assessee has charged a mark-up of 5%. More importantly, the TPO has taken the very same costs of Rs. 40.31 crores while arriving at the margin of the MSS segment after bifurcating the same into ITES segment and MSS segments. While the DRP directed the TPO to verify and reduce the costs if they were included by the TPO in the operating expenses while arriving at the margin of the trading segment, the TPO did not give effect to the same. If the segmental margin as furnished by the Assessee is taken into consideration, in terms of which the margin of the Assessee stands at 2.18%, the Assessee’s international transaction in this segment would be at arm’s length. 6.9.4 In view of the aforesaid anomalies. The transfer pricing adjustment in trading segment is set aside. The matter is restored to the files of A.O. / T.P.O. for fresh TP analysis taking into account the above mentioned mistake pointed out. In other words, the TPO is directed to consider the assessee’s reply dated 25.01.2013 vide which it had furnished the segmental details reconciled with the financials. It is ordered accordingly. 6.9.5 In the result, ground 7.1 is allowed for statistical purposes. IT(TP)A No.269 & 217/Bang/2014 M/s.Dell International Services India Private Limited 18 B. TECHNICAL AND MARKETING SUPPORT SERVICES SEGMENT (T.P.ADJUSTMENT) [GROUND 8, 8.1, 8.1.2, 9(a), and 9(b)] 7. The Assessee renders technical and marketing support services to the AEs in respect of their direct sales made by the AEs to customers in India. Under this segment, following services are performed:- (i) Interacting with the existing and prospective clients of the AEs in India, understanding their needs for IT hardware and communicating the same to the AEs. (ii) Communicating the price to the customer based on the price band provided by its AEs. (iii) The AEs has contractual obligation to provide warranty services to its customers in India. The Assessee supports the provision of this service by providing telephonic technical and customer care support for standard problems which do not require on-site services. The Assessee merely co-ordinates for the warranty services for the customers of the AEs. The AEs bears all risks and costs related to replacement of parts and services and provide all such on-site services through third parties/the Assessee. (iv) All expenses incurred in this segment, including the value of spare parts are borne by the AEs. The cost of services rendered by the Assessee to the AEs for discharge of the AEs warranty obligation are reimbursed at cost plus 5% mark-up (refer page 5659 of the paperbook-Vol.12). (A summary of functions performed by the Assessee are available at page 5661 of the paper book- Vol.12). 7.1 The Net mark-up on cost earned by the Assessee (as per the TP study) are as follows:- Services revenue Rs. 24,84,09,000/- Allocable Cost Rs. 23,66,57,000/- Profit on allocable costs Rs. 1,17,52,000/- Margin over cost 4.97% 7.2 The Comparison of the benchmarking approach adopted by the Assessee and TPO are as follows:- IT(TP)A No.269 & 217/Bang/2014 M/s.Dell International Services India Private Limited 19 Particulars Assessee TPO (ITES) TPO (MSS) Methodology adopted Transaction Net Margin Method (‘TNMM’) TNMM TNMM Profit Level Indicator (‘PLI’) OP/OC OP/OC OP/OC Database used PROWESS and CAPITALINE PROWESS & CAPITALINE PROWESS & CAPITALINE Comparables selected 5 8 7 7.3 The Comparables selected by the Assessee and their arithmetic mean are as follows:- Sl. No. Name of the Company NPI Concept Communication Ltd. 5.55% Needwise Advertising Pvt. Ltd. 2.33% New Age Entertainment Pvt. Ltd. 4.83% Rockman Advertising and Mktg. (India) Ltd. 35.45% Times Innovative Media Ltd. 1.97% Mean 9.24% 7.4 The TPO rejected the TP study of the assessee. The dispute arises in this segment as the TPO (i) bifurcated the segment into ITES segment and MSS segment; (ii) arrived at the segmental of the two so called segments, by allocating cost adhoc at 50% to each of the segments and allocating 100% of the profits to the ITES segment; (iii) determined the adjustments in each of the segments on selection of certain companies which according to the assessee is functionally incompatible; and (iv) considering recovery of expenses from Intel and Microsoft towards advertisement as part of the cost base of the MSS segment, and adding a mark-up thereon. 7.5 Aggrieved by the TPO’s order, assessee filed objection before the DRP. The Assessee’s objections on the aforesaid IT(TP)A No.269 & 217/Bang/2014 M/s.Dell International Services India Private Limited 20 adjustments made by the TPO were rejected by the DRP in toto and the TPO’s action was upheld. Pursuant to the DRP’s directions, TP adjustment made by the TPO was incorporated in the final assessment order. 7.6 Aggrieved, assessee is in appeal before the ITAT. The issue / grounds raised in Technical and marketing support services segment are as follows:- (a) Bifurcation of this segment into ITES and MSS segment ( assessee’s ground 8, 8.1) (b) Allocation cost at 50% to each of the segments and allocating 100% of the profits to ITES segment [assessee’s ground 8.1.1 (a) and 8.1.2(a)] (c) Selection of comparable companies in ITES and MSS segment by TPO [assessee’s ground 8.1.1(e) and assessee’s additional ground 1] (d) Reconsidering recovery of expenses from Intel and Microsoft towards advertisement as part of the cost base of the MSS segment and adding a mark up [ground 9(a) and 9(b) of assessee’s appeal]. (a) Bifurcation of the segment into ITES and MSS segments: The submission of the learned AR as regards the bifurcation of segment into ITES and MSS segments are as follows:- (i) It is submitted that under the technical and marketing support services segment, the Assessee does not render any services in the nature of ITES. The services rendered are in the nature in the nature of marketing support services and incidental technical services. On the erroneous basis that what the Assessee does is merely dissemination of information using IT media, the TPO held that the services are in the nature of ITES. IT(TP)A No.269 & 217/Bang/2014 M/s.Dell International Services India Private Limited 21 (ii) It is submitted that services cannot be termed as ITES merely because they are rendered using information technology. If that interpretation is accepted, then virtually every service rendered using a computer device or other technology would become an ITES, which is grossly erroneous. (iii) It is submitted that under the technical and marketing support services segment, the Assessee does not render any services in the nature of ITES. The services rendered are in the nature in the nature of marketing support services and incidental technical services. On the erroneous basis that what the Assessee does is merely dissemination of information using IT media, the TPO held that the services are in the nature of ITES. (iv) It is submitted that services cannot be termed as ITES merely because they are rendered using information technology. If that interpretation is accepted, then virtually every service rendered using a computer device or other technology would become an ITES, which is grossly erroneous. (v) In this regard, support may be drawn from the definition of ITES as defined in Rule 10TA(e) of the Income-tax Rules, 1962, which reads as under: “information technology enabled services” means the following business process outsourcing services provided mainly with the assistance or use of information technology, namely:— (i) back office operations; (ii) call centres or contact centre services; (iii) data processing and data mining; (iv) insurance claim processing; (v) legal databases; (vi) creation and maintenance of medical transcription excluding medical advice; (vii) translation services; (viii) payroll; (ix) remote maintenance; (x) revenue accounting; (xi) support centres; (xii) website services; (xiii) data search integration and analysis; (xiv) remote education excluding education content development; or IT(TP)A No.269 & 217/Bang/2014 M/s.Dell International Services India Private Limited 22 (xv) clinical database management services excluding clinical trials, but does not include any research and development services whether or not in the nature of contract research and development services;” (vi) Evidently, merely because services are rendered using IT medium, they cannot be termed as ITES. Therefore, the arbitrary bifurcation of the services into ITES and MSS ought to be set aside. The functions performed in the technical and marketing services segment as set out in TP study at pages 5642-5644 of the paperbook- Vol.12 does not indicate that any ITES are provided. Reliance is also placed on the additional evidence filed on 24.02.2021 whereunder the agreements entered into by the Assessee with its AEs for rendering the marketing support services are produced, a reading of which shows that there is no ITES being provided to the AE. (vii) Even if the services rendered are considered to be ITES, the services that are being classified as ITES are rendered by the Assessee to third party customers of the AE on behalf of the AE. Since the so called ITES are being rendered to third parties, it cannot be subject matter of TP assessment. (viii) Further, it is submitted that the major post-sales support in relation to the warranty support and co-ordination, i.e., call centre support is not being provided by the Assessee directly to its AEs. The Assessee has outsourced these services to another Group Entity in India which is compensated at an arm’s length mark-up of cost plus 15%. (ix) Pertinently, for the assessment year 2013-14, the DRP granted relief to the Assessee by holding that the services rendered are in the nature of marketing support services (refer page 10 of the directions). (x) It is submitted that if the above submissions are accepted, even taking into consideration the arm’s length mean margin of the comparables arrived at by the TPO, the margin of the Assessee’s technical and marketing support services segment will be at arm’s length. 7.7 The learned Departmental Representative supported the orders of the TPO and the DRP. 7.8 We have heard rival submissions and perused the material on record. The TPO held that services under the technical and marketing services segment is essentially IT(TP)A No.269 & 217/Bang/2014 M/s.Dell International Services India Private Limited 23 dissemination of information and the assessee is acting as communication channel between the customers and the AEs using IT medium. According to the TPO, those services rendered by the assessee are to be considered as ITES. After holding so, the TPO bifurcated segment into IT segment and MSS segment and bench marked them separately. 7.8.1 In this context, it is pertinent to note that for assessment year 2013-2014, the DRP granted relief to the assessee by holding that services rendered are in the nature of marketing support services. Copy of the DRP’s order for assessment year 2013-2014 is placed on record at page 770 Vol.4 of the case law compilation. The DRP has given the above directions at page 10. The relevant finding of the DRP in assessment year 2013-2014 reads as follows:- “Having considered the submissions, and on perusal of the details filed, we note that as per the Services Agreement entered between the assessee and Dell Global BV (Singapore branch) dated 01.01.2009, the assessee is required to prove certain technical support to the customers who purchase products from the assessee, to provide logistics support to ensure delivery of products and services to the customers and also provide marketing support and Sales promotion services. The technical services are provided to the customers of products, and as such cannot be compared to the function of provision of ITES service. Therefore. we are no in agreement with the TPO's view in comparing such services to call entre activity, and there is no information for the TPO to take such a view. Besides, we note that all these functions is provision of logistics support, marketing support and technical support have interrelation in the facts & circumstances of the case. Therefore, it would not be appropriate to segregate them into Technical Services & Marketing Supports services. Accordingly, the TPO’s action in such segregated analysis is disapproved. The TPO is directed to consider the Marketing support and Technical Support as an integrated function and such integrated revenue of these two activities may be IT(TP)A No.269 & 217/Bang/2014 M/s.Dell International Services India Private Limited 24 benchmarked as Marketing Support Service. Accordingly, the TPO's benchmarking analysis with regard to Marketing Support Service would be considered applicable for this integrated Market Support & Business Support Services. The TP analysis made by the TPO by taking comparables relating to IES segment are here by rejected. The TPO is accordingly directed to recompute the-adjustment in line with the above direction. We also note here, that in view of the above, the objections raised in 22-26, against comparability analysis of comparables relating to ITES functions are rejected as infructuous.” 7.8.2 The functions performed by the assessee under this segment are prima facie identical for the concerned assessment year and for the assessment year 2013-2014. For assessment year 2013-2014, when the DRP had held that services rendered by the assessee are in the nature of marketing and support services and since no appeal preferred by the Revenue to the ITAT, the matter had attained finality. Therefore, we are of the view that the entire TP issue raised under marketing support services segment needs to be examined afresh by the AO / TPO in the light of the DRP’s directions for assessment year 2013- 2014. It is ordered accordingly. 7.8.3 Since assessee’s main issue relating technical and marketing support segments raised in grounds 8 and 8.1 are restored to the AO / TPO for fresh consideration, the other subsidiary grounds in this segment also needs to be restored to the TPO for fresh adjudication (As the same would be relevant if TPO rejects the assessee’s contentions in ground 8 and 8.1). Therefore, ground 8.1.1(a), 8.1.2(b) and 8.1.1(c), additional grounds 1, 9(a) and 9(b) are restored to the files of TPO for fresh adjudication. IT(TP)A No.269 & 217/Bang/2014 M/s.Dell International Services India Private Limited 25 C. WARRANTY CHARGES RECEIVABLE determined by the TPO (TP ISSUE) 8. The brief facts in respect of the above issue are as follows:- It was stated that in respect of the goods manufactured and traded by the Assessee, the Assessee provides warranty services, for which it imports spares from its AEs and incurs other expenses. The cost incurred for discharging such warranty obligations was Rs. 211.41 crores (including provision for warranty of Rs. 57.39 crores), which is reflected at Schedule 13 to the accounts at page 6281 of the paperbook-Vol.13. In respect of the products sold by the AE directly to its customers in India, it was submitted that the assessee provides support services to its AEs separately to enable them to fulfill their warranty obligations in respect of the sales made by them. For the support services, the Assessee was compensated at a mark- up of 5% on costs (as part of the technical and marketing support services segment). It was stated that the cost of the spares utilized for discharging the warranty obligations including the freight charges in connection therewith are borne by the AE. 8.1 The TPO was of the view that the Assessee had not taken note of warranty expenses while arriving at the margin of the technical and marketing support services and was of the view that no mark-up was received on expenses incurred in relation to support provided for the AE’s warranty obligation. Proceeding on this basis that some portion of the warranty expenses of Rs. 211.41 crores (wrongly considered as Rs. 268.81 crores in the IT(TP)A No.269 & 217/Bang/2014 M/s.Dell International Services India Private Limited 26 TP Order, after adding the amount of provision of Rs. 57.39 crore again) pertained to the MSS segment, the TPO computed an adjustment of Rs. 16.11 crores as the price of warranty services provided to the AEs. The TPO held that the expenses incurred towards technical and marketing services of Rs. 40.03 crores as a percentage of total cost base of Rs. 738.78 crores comes to 5.42%. Of the total warranty expenses incurred by the Assessee of Rs. 268.81 crores (wrongly considered), the TPO attributed 5.42% of the expenses amounting to Rs. 14.57 crores as being attributable towards the MSS segment. On adopting the same margin as adopted for the MSS segment, the TPO determined the adjustment as under (pages 42-47 of the TPO’s order): Particulars Amount (Rs.) Cost incurred by the assessee 14.57 crore ALP at 10% on cost 1.58 crore Profit already shown Nil Adjustment 16.11 crore 8.2 Aggrieved by the above TP adjustment, the assessee filed objections before the DRP. The DRP directed the TPO to verify whether warranty expenses incurred on behalf of AE’s is separately accounted and reduced from cost and if so, no adjustment is warranted. The directions of the DRP in brief are as follows (refer pages 21-22 of the DRP’s directions): (i) Since the services were rendered by third parties to the AE and the Assessee was merely used as a medium, the DRP held that a mark-up cannot be charged on the warranty amount; (ii) Since it was not clear whether the Assessee had reduced the reimbursements from the costs or accounted for it separately, the DRP directed the TPO to verify the treatment and if accounted for separately or reduced from costs, that no adjustment is warranted. IT(TP)A No.269 & 217/Bang/2014 M/s.Dell International Services India Private Limited 27 8.3 The directions of the DRP was not given effect final assessment order and the adjustment originally made segment was sustained (refer pages 55-56 of the final assessment order). 8.4 Aggrieved by the TP adjustment of Rs.16.11 crore in the final assessment order, the assessee has raised this issue in ground 10, which reads as follows :- “The AO / TPO erred in arbitrarily imposing a mark-up on warrant.” (ground No.10) 8.5 The submission of the learned AR in brief are as follows:- (i) The warranty obligation as regards the sales made by the AEs directly in India is wholly on the AEs and the Assessee only provides co- ordination and support services as regards the same, for which it is compensated on cost plus 5%. The co-ordination and support services includes call centre support, cost for third party services for assistance to customers of the AEs, etc. The cost of spares and parts to be replaced under the warranty are borne by the AEs. (ii) During the proceedings before the TPO, the Assessee had submitted that the amount of Rs. 211.42 crores does not pertain to the sales made by AEs in India and that it pertains solely to the sales made by the Assessee. This fact is not disputed. The DRP’s directions was for the Assessee to show that the expenses in relation to providing support services for the AE’s warranty obligations are either reduced from the costs or accounted for separately. It is evident from Schedule 13 to the accounts that the entire expenses incurred in rendering the technical and marketing support services (including costs in relation to the support services) of Rs. 40.31 crores are reduced from the total operating expenses incurred by the Assessee (please see page 6281 read with page 6309 of the paperbook-Vol.13) and a mark-up of 5% is charged on Rs. 40.31 crores. Since the TPO has not disputed that the warranty expenses of Rs. 211.42 crores pertains only to the sales made by the Assessee, the TPO ought to have deleted the adjustment. (iii) The DRP in fact directed that since the services in relation to the warranty obligations are provided by third party services providers, and the Assessee is only coordinating for the same, no mark-up is warranted. However, as stated above, the Assessee has charged a mark-up of 5% and therefore no adjustment is required. 8.6 The learned DR supported the finding of the TPO. IT(TP)A No.269 & 217/Bang/2014 M/s.Dell International Services India Private Limited 28 8.7 We have heard rival submissions and perused the material on record. The assessee had submitted that the amount of Rs.211.42 crore does not pertains to the sales made by the AEs in India and it pertains solely to the sales made by the assessee. The DRP in its directions held that the assessee was to show that expenses in relation to providing support services for AEs warranty obligation are either reduced from the cost or accounted for separately. The DRP in fact directed that since the services in relation to the warranty obligations are provided by third party service providers and the assessee is only coordinated for the same, no mark up is warranted. The relevant finding of the DRP in this regard reads as follows:- “6.6.6 The assessee is directed to demonstrate to the TPO that the above reimbursement has either been reduced from the costs or accounted for separately. In absence of such demonstration, the TPO can take the above to be a part of the warranty costs debited to the P&L account and effect suitable adjustment. Since the services related to warranty are being handled by a third party and the assessee is being used only as a medium, the TPO is not correct in charging a markup on this amount. Hence, the objection relating to markup on the warranty cost is upheld. The TPO cannot charge a markup on warranty amount as such services are not rendered by the assessee to its AE.” 8.7.1 In the light of the above directions of the DRP, which we are in consonance with the TPO, is directed to reexamine the issue raised in ground 10 afresh. It is ordered accordingly. 8.7.2 Hence, ground 10 is allowed for statistical purposes. IT(TP)A No.269 & 217/Bang/2014 M/s.Dell International Services India Private Limited 29 CORPORATE TAX ISSUES Disallowance of expenditure under section 40(a)(ia) (Ground No. 11) 9. The brief facts in relation to the above issue are as follows:- The Assessing Officer during the relevant assessment year had called for details of taxes deducted on source on various payments in the nature of repairs and maintenance, legal and professional charges, communication, commission and rebate, advertisements, and travelling and conveyance. The assessee submitted details for a substantial amount (upto 80 percent). The AO brought to tax the difference between the amount debited to P&L Account and the amount for which details of tax deducted at source was furnished. The A.O. held that taxes have not been deducted on the difference and thus made a disallowance of Rs. 55,30,36,094 by section 40(a)(ia) of the I.T.Act. 9.1 Aggrieved, the assessee filed objection before the DRP. The DRP directed the AO to verify the details submitted by the assessee and that wherever tax has been deducted, the claim of the assessee was to be allowed. The DRP also directed the AO to verify as to whether to the extent of Rs. 10,38,82,844/- there had been a double disallowance. In the final assessment order, the AO did not consider the details submitted by the assessee (at page 57) holding that sufficient opportunity had been given. IT(TP)A No.269 & 217/Bang/2014 M/s.Dell International Services India Private Limited 30 9.2 Aggrieved, the assessee has raised this issue before the ITAT. The submission of the learned AR are as follows:- (i) Firstly, it is submitted that to the extent of Rs. 10,38,82,844/- the assessee had already disallowed the same in its computation of income and therefore, there is a double disallowance to that extent, which although the DRP had directed the AO to verify, no verification was done.- please see page no. 6365 of Volume 13 of the Paperbook containing the tax audit report. (ii) The Assessee submits that it had provided details regarding a substantial portion of the amounts debited to the P&L Account during the assessment proceedings, in the light of which the disallowance was unwarranted. i. Submission dated 07.11.2012 (Pages 1023 and 1523- 1681, Volume 4 of the paperbook) ii. Submission dated 26.11.2012 (Pages 5141, 5197, Volume 11 of the paperbook) iii. Submission dated 18.12.2012 (Pages 1721 at Volume 5 and 3453 at Volume 8 of the paperbook) iv. Submission dated 22.01.2013 (Pages 4753, 4759,4859, 5075, Volume 10 of the paperbook) v. Submission dated 20.02.2013 (Pages 4271 and 4305, Volume 9 of the paperbook) (iii) Before the DRP, the Assessee had submitted additional details vide its submissions dated 08.10.2013 (Page 557, Volume 2 of the paperbook) giving details of the taxes deducted at source as also details of expenses which did not require tax deduction at source, along with ledger extracts. (iv) Before this Hon’ble Tribunal, the Assessee has filed an application for production of additional evidence on 05.11.2018 vide which additional details for an amount of approximately Rs. 24.10 crores has been submitted along with ledger extracts along with details of TDS wherever applicable. It was submitted that on consideration of the additional evidence together with the details submitted to the AO, it is clear that on all the amounts debited to the P&L Account, either tax has been deducted at source or the amounts are of a nature which do not require tax deduction at source. 9.3 The learned Departmental Representative supported the order of the A.O. IT(TP)A No.269 & 217/Bang/2014 M/s.Dell International Services India Private Limited 31 9.4 We have heard rival submissions and perused the material on record. The A.O. brought to tax the difference between the amount debited to the profit and loss account and the amount for which the details of tax deducted at source was furnished, holding that taxes has not been deducted on the difference and thus made a disallowance of Rs.55,30,36,094 invoking section 40(a)(ia) of the I.T.Act. It was submitted that to the extent of Rs.10,38,82,844, the assessee had already disallowed the same in its computation of income, and therefore, there is double disallowance to that extent. This fact has been noticed by the DRP and the DRP in its order had specifically directed the A.O. to verify the same. The assesee had produced additional evidence vide its petition dated 05.11.2018. The additional details for an amount of approximately Rs.23.10 crore has been submitted along with the ledger extracts and details of the TDS wherever it is applicable. The additional evidence now produced before the Tribunal are necessary material for proper adjudication of the issue. Therefore, for substantial cause and justice, we take on record the additional evidence now produced before the Tribunal. 9.4.1 The gist of the learned AR’s submission is that on considering the additional evidence together with the details submitted to the A.O., it is clear that all amounts debited to the profit and loss account, has been either subjected to TDS or amounts are in such a nature which does not require tax deduction at source. The learned AR has filed a reconciliation, which is as under:- IT(TP)A No.269 & 217/Bang/2014 M/s.Dell International Services India Private Limited 32 Particulars Amount disallowed by AO u/s 40(a)(ia) Amount voluntarily disallowed u/s 40(a)(ia) not considered by AO Amount for which details were filed before the AO but not considered in order Amount for which TDS is not applicable were filed before the DRP but not considered in order. Additional evidence filed on 05 Nov 2018 before ITAT Balance for which details are not filed. Amount of which TDS is applicable Amount on which TDS is not applicable (a) (b) (c) (d) (e) (f) (g) = (a-b- c-d-e-f) Legal and profession 15,86,70,886 41,91,067 -- 10505148 101641479 42333116 76 Communi- cation 7,15,52,531 -- -- 70122720 -- -- 14,29,81 1 Commission and Rebate 7,04,40,179 -- 28627543 2009695 -- 39634319 1,68,622 Travelling and Conveyance 11,14,39,964 -- -- 86297287 4084057 20703428 3,55,192 Advertise- ment 12,15,75,766 7,26,35,204 -- 23116555 4663326 21096308 64,373 Repairs and maintenance 1,93,56,768 Total 55,30,36,094 7,68,26,271 28627543 192051405 110388862 123767171 20,18,07 4 The details of repairs and maintenances are as under:- Repairs and Maintenance Particulars Amount Amount debited to profit and loss account 28,01,66,000 Less : Amount voluntarily disallowed u/s 40(a)(ia) 2,70,56,573 (I) 25,31,09,427 Amount for which details of TDS details have been submitted 36,96,39,920 Less : Capital expenditure not debited to profit and loss account. 12,95,80,993 (II) 24,00,58,927 Balance (III=I-II) 1,30,50,500 Less : Amount on which TDS is not applicable, details of which was filed before DRP but not considered in order (IV) 62,11,652 Less : Additional evidence filed before this Hon’ble Tribunal on 05.11.2018 on which TDS is not applicable (V) 68,06,111 Balance for which details not filed (VI) = III-IV-V 32,737 9.4.2 The above reconciliation submitted needs to be verified by the TPO. The DRP in its order directed the A.O. to verify the details submitted by the assessee and wherever the tax has been deducted, the claim of the assessee was to be IT(TP)A No.269 & 217/Bang/2014 M/s.Dell International Services India Private Limited 33 allowed. The DRP also directed the A.O. to verify as to whether the extent of Rs.10,38,82,844 has been subjected to double disallowance. The relevant directions of the DRP reads as follows:- “11.2 The panel is of the opinion that this aspect has not been verified by the assessing officer in the draft order. Since the AO has not verified the same, AO is directed to verify the above factual contentions of the assessee and if TDS has been deducted then the claim of the assessee is to be allowed to that extent. The AO is also directed to verify the claim that the assessee had already disallowed an amount of Rs.103,882,844 under section 40(a)(ia) for non-deduction of TDS in relations to the expenses disallowed by the AO. 11.3 However the claim of the assessee that since the assessee has provided substantial amount of information and therefore the disallowance cannot be made is not acceptable. It is the onus heavily cast on the assesee to prove by demonstrative evidence that the statutory obligation of tax deduction on eligible expenses has been discharged by the assessee. Therefore the assessee will produce all the necessary documents to show that tax has been deducted on all the expenses on which deduction of tax is required as per the Income Tax Act, 1961. If the assessee fails to do so, the addition will survive to the extent of non-furnishing of evidence.” 9.4.3 The above directions of the DRP, we are in consonance with and the entire issue raised in ground 11 needs to be reexamined by the Assessing Officer taking into consideration the additional evidences now filed before the Tribunal. It is ordered accordingly. 9.4.4 In the result, ground 11 is allowed for statistical purposes. IT(TP)A No.269 & 217/Bang/2014 M/s.Dell International Services India Private Limited 34 Difference between service income disclosed in the P&L Account and amount disclosed in the service tax returns brought to tax as undisclosed income (Ground No. 12) 10. The brief facts of this issue are as follows:- The Assessing Officer during the course of assessment proceedings called for the service tax return filed by the Assessee and compared the same to the service income reflected in the audited financials. The financial statements for the FY 2008-09 disclosed a service income under the head “Installation and others” of Rs. 116,80,40,000, whereas the service tax returns disclosed Rs. 189,78,40,682 as the amount on which service tax liability was discharged. Thus, prima facie there was a difference in service revenue of Rs. 72,98,00,682. During the assessment proceedings assessee submitted that, the above said difference was due to the following reasons: (i) Rs. 54,81,88,597/- represents service tax paid as a service recipient (not as a service provider) with respect to Information Technology Software Service (ITSS) availed by the Company from outside India. This being an expenditure for the Company, this cannot be considered as service income (ii) Balance amount of Rs. 18,16,12,085/- pertains to revenue, the recognition of which is deferred to future years. 10.1 In the draft assessment order (refer page 41 to 44) the AO disregarded the explanation furnished by the Assessee as regards the difference and brought to tax the difference between the income reflected in the P&L Account of Rs. 116,80,40,000/- IT(TP)A No.269 & 217/Bang/2014 M/s.Dell International Services India Private Limited 35 and the amount reflected in the service tax return of Rs. 189,78,40,682/- i.e., an amount of Rs.72,98,00,682/- to tax as undisclosed income. 10.2 Aggrieved, the assessee filed objection before the DRP (refer page 35 to 40). Before the DRP the assessee submitted a detailed reconciliation. It was explained that out of Rs. 72.98 crores, Rs. 54.82 crores represented an amount on which the assessee had paid tax on reverse charge mechanism and thus, the same could not be construed as its income. As regards the balance, although initially it was submitted that the same was on account of deferment of revenue, vide an additional submission, a reconciliation was given. The DRP while directing the AO to verify the contention as regards payment on account of reverse charge mechanism, failed to appreciate the additional submission filed by the assessee. In the final assessment order, the AO did not consider any of the details submitted by the assessee (at page 56) holding that the ledger account extracts had not been submitted. 10.3 Aggrieved, the assessee has raised this issue before the ITAT. The contention of the learned AR are summarized as follows:- * The AO grossly erred in relying on service tax returns for the purposes of assessing the income of the assessee as the point of taxation under service tax and income tax are entirely different. * The assessee had provided a detailed reconciliation between the service tax return and the income as per the P&L Account in its additional submission dated 08.10.2013 at page 263 of Volume 2 of the paperbook, which ought to have been considered. IT(TP)A No.269 & 217/Bang/2014 M/s.Dell International Services India Private Limited 36 * It is clear that out of Rs. 72,92,00,682/-, a sum of Rs. 54,81,88,597/- was paid on reverse charge basis, which cannot be construed to be the income of the assessee. During the previous year relevant to the AY in question, it had imported software amounting to Rs. 54,81,88,597/- and the same was considered in the service tax return under information technology software services for discharging service tax on reverse charge basis. * This is in fact an expenditure debited to Cost of Goods Sold (as part of the trading segment) and the assessee has even deducted taxes at source on net payments. * A brief write up on the accounting entries is available at pages 317, 318 of Volume 2 of paperbook. The evidence produced in this regard are as follows: * The service tax return demonstrating the above are available at pages 277 and 297 of Volume 2 of the paperbook (relevant pages 285 and 305). * Invoice listing of microsoft licenses – page 321 to 329 of Volume 2 of the paperbook Sample invoices – page 319 read with pages 331 to 361 of Volume 2 of the paperbook * Journal entries along with back-up details – pages 363 to 389 of Volume 2 of paperbook * General Ledger extracts/screenshots providing details of the accounting entries passed in the books of account (Page 317 of Volume 2 of the paperbook) * Sample copies of Form 15CB certificates covering an amount of approximately Rs. 43.68 crores – pages 391 to 431. * As regards the balance Rs.18,16,12,085 though it was submitted initially that the same was on account of deferment of income, on further analysis, reconciliation was given and the reconciliation clearly indicate that the amount reflected in profit and loss account is more than the amounts as per service tax return. IT(TP)A No.269 & 217/Bang/2014 M/s.Dell International Services India Private Limited 37 10.4 The learned DR supported the findings of the A.O. and the DRP. 10.5 We have heard rival submissions and perused the material on record. The Assessing Officer in the draft assessment order brought to tax as undisclosed income, the difference reflected in the profit and loss account of Rs.116,80,40,000 and the amount reflected in the service tax return of Rs.189,78,40,682, i.e, the amount of Rs.72,98,00,682. The DRP in its order though directed the A.O. to verify the contentions as regards the payment on account of reverse charge mechanism did not consider the additional submission and the reconciliation. In the final assessment order, the A.O. sustained the addition made in the draft assessment order stating that ledger account extracts has not been submitted. The assessee had provided detailed reconciliation between service tax return and income in the profit and loss account in its additional submission dated 08.10.2013 before the DRP (refer page 263 Vol.2 of the paper book). Out of the total addition of Rs.72,92,00,682, it was submitted that a sum of Rs.54,81,88,597 was paid on reverse charge basis, which cannot be construed to be income of the assessee. During the relevant assessment year, it was claimed that the assessee had imported software amounting to Rs.54,81,88,597 and the same was considered in the service tax return under information technology software services for discharging service tax on reverse charges basis. This was claimed as an expenditure debited to the cost of goods sold (as part of trading segment) and the assessee has even deducted tax at source on the net IT(TP)A No.269 & 217/Bang/2014 M/s.Dell International Services India Private Limited 38 payments. The brief write up of the accounting entry is available at page 317 and 318 of Vol.2 of the paper book. Evidences produced in this regard are enclosed in Vol.2 of the paper book. As regards the balance of Rs.18,16,12,085 though it was submitted initially that the same was on account of deferment of income, on further analysis reconciliation was given, which are as under:- Description Amount (in Rs.) Service revenue as per financials Revenue from Installation and Others (excluding Net Income from support services for parity purpose)-(A) 114,58,80,000 Service revenue as per Service Tax (ST) return Total service revenue as per ST return (including amount on which ST is paid on reverse charge basis) 189,78,40,682 Less: Expenses on which service tax is paid on reverse charge basis not to be considered as revenue (considered as undisclosed income by AO) 54,81,88,597 Actual revenue as per ST return 134,96,52,085 Less: Gross Income from support services included in ST return on gross basis whereas reflected in the financials on net basis. Hence excluded for parity 35,01,23,435 Revised service revenue in ST return to be compared with service revenue as per financials (B) 99,95,28,650 Higher income as per financials (A-B) 14,63,51,350 Add: Income from product sale of peripherals and accessories grouped under service income in the financials on which no service tax applicable -Identified to the extent of Rs.14,24,71,202 -(C) 14,63,51,350 Revenue as per service tax return matching with financials-(B)+(C) 114,58,80,000 IT(TP)A No.269 & 217/Bang/2014 M/s.Dell International Services India Private Limited 39 10.5.1 The above reconciliation clearly indicate that the amount reflected in the profit and loss account is more than the amounts as per the service tax return. The break-up of the services income as per the profit and loss account are detailed as under:- 10.5.2 The break-up on which the service tax is paid is as under:- 10.5.3 Therefore, prima facie, the different of two, i.e., Rs.72,98,00,682, which is brought to tax by the Assessing Officer. Rs.54.81 crore represents payment subjected to reverse charges as stated above. 10.5.4 As regards the technical and marketing support services are concerned, the assessee is remunerated at cost plus Description Amount (in Rs.) Installation and Others 114,58,80,000 Income for Support Services – Technical and Marketing services 2,21,60,000 Total 116,80,40,000 Description Amount (in Rs.) Management, Maintenance or Repair Services 13,15,38,280 Erection, Commissioning or Installation Services 41,94,88,681 Information Technology Software Service 44,85,01,689 Information Technology Software Service (ITSS) – Reverse Charge 54,81,88,597 Technical Support Service 11,59,80,626 Marketing Support Service 23,41,42,809 Total 189,78,40,682 IT(TP)A No.269 & 217/Bang/2014 M/s.Dell International Services India Private Limited 40 5%. While in the service tax return, the entire amount of Rs.35,01,23,435 is reflected in the financial statement. Whereas under Income tax the cost is netted off with the expenses and only, the mark up portion of Rs.2,21,60,000 is reflected. This is evidenced by the profit and loss account and the disclosure in the notes of the account (refer page 433 and 434 of Vol.2 of the paper book). If the revenue from technical and market services is removed, the following scenario emanates:- 10.5.5 Out of the above, the difference of Rs.14,24,71,202, according to the assessee, represents sale of certain expendable equipment / peripherals and accessories. It is stated by the assessee that since the said income is not the main income of the assessee, i.e., trading and manufacturing, the same is grouped under “service and others” in the financials. The list of items grouped under “installation and other services”, ledger extracts and sample invoices is available at page 441 to 545 of Vol.2 of the paper book. 10.5.6 The assessee had filed detailed submission before the A.O. and the DRP. The submissions made by the assessee before the AO and the DRP are as follows:- Description Amount (in Rs.) Management, Maintenance or Repair Services 13,15,38,280 Erection, Commissioning or Installation Services 41,94,88,681 Information Technology Software Service 44,85,01,689 Revenue as per service tax return 99,95,28,650 Revenue from Installation and Others 114,58,80,000 Difference 14,63,51,350 IT(TP)A No.269 & 217/Bang/2014 M/s.Dell International Services India Private Limited 41 a. Submission dated 08.10.2013 filed before the DRP – Pages 263 – 535 of Volume 2 of the paperbook b. Submission dated 20.02.2013 filed before the AO – Page 4275 read with 4307 of Volume 9 of paperbook. c. Submission dated 22.03.2013 filed before the AO – Page 4761 of Volume 10 of the paperbook 10.5.7 The detailed submission of the assessee and the above reconciliations are not seen considered by the A.O. nor the DRP. Therefore, for fresh adjudication of the issue raised in ground 12, the matter is restored to the A.O. The A.O. is directed to afford a reasonable opportunity of hearing before a decision is taken on the issue. It is ordered accordingly. Disallowance of depreciation claimed on assets given on lease and taxation of future lease rentals (Ground No. 13) 11. The brief facts of the issue raised in ground 13 are as follows:- The assessee is engaged in the business of manufacture and trading in computers and the said computer equipment are also given on lease. It is stated that in terms of Accounting Standard -19, the assessee had in its books of account, recorded the principal amount of the lease installments to be received over the entire lease period as revenues and the cost relating to the computers was debited to the P&L Account. It was stated that for the purposes of income-tax, the assessee being the owner of the asset, the principal amount of lease rental which had accrued during the year was offered to tax and thus, Rs. 2,93,13,022/- pertaining to future years was reduced IT(TP)A No.269 & 217/Bang/2014 M/s.Dell International Services India Private Limited 42 from the income. Depreciation allowance was claimed under section 32 on the cost of the leased assets. 11.1 In the draft assessment order, it was held as follows (refer page 50 to 53) (a) As per certain clauses of the lease agreement, the lessee is the owner of the asset. The lessee has chosen the equipment to be leased. (b) The Supreme Court in the case of ABB v. IFCI([2006] 154 Taxman 512 (SC)), the Special Bench of the ITAT in Indus Ind Bank v. Additional CIT, and the Bangalore Bench of the ITAT in Hewlett Packard India Sales Pvt. Ltd. held that in the case of finance lease, the lessee is the owner of the asset and is entitled to depreciation. (c) The decision of the Supreme Court in ICDS Ltd. v. CIT [2013] 350 ITR 527 (SC) (“ICDS”) is contradictory to the decision in ABB. Since ICDS was in the context of motor vehicles the same is inapplicable to the assessee. (d) The assessee should not have reduced the sale value of Rs. 5,89,52,591/- by adding the cost of Rs. 2,96,39,569/- 11.2 Aggrieved by the draft assessment order, the assessee preferred objection before the DRP. The DRP confirmed the findings in the draft assessment order relying on the judgment of the Supreme Court in ABB (supra). The DRP held that all risks and liabilities in respect of the asset stand transferred to the lessee whereas in the case of ICDS, ICDS was to remain the exclusive owner of the leased vehicles and therefore the decision in the case of ICDS is inapplicable to the assessee. The DRP further held that Circular No.2 dated 09.02.2001 is not applicable. Pursuant to the DRP’s direction, final assessment order was passed. The assessee being aggrieved, has raised this issue before the ITAT. As regards the claim for depreciation on IT(TP)A No.269 & 217/Bang/2014 M/s.Dell International Services India Private Limited 43 leased assets, the submission of learned AR are summarized as follows:- * There is no distinction between an operating lease and finance lease for the purposes of the Act. As per Section 32 of the Act, an assessee must be the owner of the asset and must use the asset for the purpose of business in order to be eligible to claim depreciation. Hence, for tax purposes, depreciation continues to be allowed to the legal owner and in accordance with the provisions of Section 32 of the Act. * The assessee satisfies the twin conditions provided under Section 32 of the Act. * The CBDT Circular No. 2 dated 9.02.2001 provides that “AS 19 requiring capitalization of the asset by the lessees in a finance lease transaction will have no implication on the allowance of depreciation on assets under the Income Tax Act.” * Clause 10, 13, 17, 21, 25 , etc. of the agreement between assessee/lessor and lessee establish assessee / lessor is the owner of asset. The right to inspect, right to return of equipment were the salient terms noticed by the Hon’ble Supreme Court in the case of ICDS (supra) as well and it was held that the mere fact that the equipment could be transferred to the lessee at the end of the lease period for a nominal value, would not take away the lessor’s right to claim depreciation. * The clauses relied on by the A.O. does not indicate that the lessee is the legal owner of the asset. On the contrary, the clause provides that the Lessor shall make payment of the taxes and will be entitled for a reimbursement from the Lessee. Insurance albeit maintained by the lessee shall be to the satisfaction of the lessor. Also, the costs incurred which are recurring in nature and incidental to operating the asset, it is the responsibility of the lessee to bear (cost incurred in normal course of usage). * The detailed submissions in this regard made before the AO in the submissions dated 18.12.2012 (At page 1693 of Volume 5) and 20.02.2013 (at page 4277 of Volume 9) and also before the DRP vide submission dated 08.10.2013 (Pages 243-259 of Volume 2 of the paperbook) IT(TP)A No.269 & 217/Bang/2014 M/s.Dell International Services India Private Limited 44 11.3 As regards fixation of future lease rentals are concerned, the submission of the learned AR are as follows:- * The AO has brought to tax the entire principal portion of lease rentals amounting to Rs. 5,89,52,591 in the current year although the entire lease rental income does not accrue in the first year and the same ought to be taxed as and when they accrue over the lease period. * The lease is a cancellable lease at the option of the lessee (see clause 21). Hence, considering the entire lease rental as income accrued for the year and taxing the same in the current year is incorrect. * The AO has accepted that the interest component of the lease would accrue as and when the same is due, the same ought to apply for the principal component as well. Thus, the entire principal portion of the lease rentals does not accrue in the current year but accrues over the period of the lease. In this context, the learned AR relied on the following case laws:- (i) CIT v. Punjab Tractors Co-op Multipurpose Society Ltd. (1997) 95 taxman 579 (P&H) (ii) CIT v. Coral Electronics (P) Ltd. (2005) 142 Taxman 481 (Mad.) [para 2, 3 and 8). 11.4 The learned DR strongly supported the orders of the A.O. and the DRP. 11.5 We have heard rival submissions and perused the material on record. The assessee is primarily engaged in the manufacture and trading of computers. The assessee also gives on lease computer equipment. The assessee-company entered into lease agreement dated 14.11.2006 with General Motors India Private Limited (the lessee). The assessee for the relevant assessment year had claimed depreciation on assets leased stating that it was the owner of the assets. The A.O. by relying on certain clauses in the lease agreement, held that the assessee is in the business of financial lease and is not the IT(TP)A No.269 & 217/Bang/2014 M/s.Dell International Services India Private Limited 45 owner of the assets leased. By relying on the judgment of the Hon’ble Apex Court in the case of ABB v. IFCI reported in 154 Taxman 512 (SC), the Special Bench of the ITAT in IndusInd Bank v. Additional CIT and the Bangalore Bench of the Tribunal in Hewlett Packard India Sales Pvt. Ltd. held that in case of finance lease, the lessee is the owner of the asset and is entitled to depreciation. The A.O. distinguished the judgment of the Hon’ble Apex Court in the case of ICDS Ltd. v. CIT (2013) 350 ITR 527 (SC) by stating that the judgment in the case of ICDI (supra) was rendered in the context of motor vehicles and is inapplicable to the assessee. The DRP confirmed the finding of the A.O. by relying on the judgment of the Hon’ble Apex Court in the case of ABB (supra). The DRP held that all the risk and liabilities in respect of the assets leased transferred to the lessee, whereas in the case of ICDS (supra), the same remained in the exclusive ownership of the lessor, and therefore, the assessee cannot take the support of the judgment of the Hon’ble Apex Court in the case of ICDC (supra). The DRP further held that Circular No.2 dated 09.02.2001 is not applicable to the facts of the assessee since the ownership of the assets does not belong to the assessee-lessor. 11.5.1 As per section 32 of the I.T.Act, for claiming depreciation, the assessee should be the owner of the asset and must have used the said asset for the purpose of its business. We find that the there is no distinction between an operating lease and finance lease for the purpose of the Act. The CBDT Circular No.2 dated 09.02.2001 provides that “AS 19 requiring IT(TP)A No.269 & 217/Bang/2014 M/s.Dell International Services India Private Limited 46 capitalization of the asset by the lessees in a finance lease transaction will have no implication on the allowance of depreciation on assets under the Income-tax Act. 11.5.2 As mentioned earlier, the assessee-company had entered into a master lease agreement dated 14.11.2006 with General Motors India Private Limited (the lessee). Copy of the same is placed at page 1727 of Vol.5 of the paper book submitted by the assessee. On perusal of the same, prima facie, the following clauses demonstrate that the assessee is the owner of the asset, namely, i. Clause 10 – Right to inspect ii. Clause 13 – Right of assignment by lessor iii. Clause 17 – Damaged units to be replaced by lessee which shall be the property of the lessor iv. Clause 20 – Right to return of equipment v. Clause 21 – Cancellable at the option of lessee - early termination vi. Clause 25- right to repossess the equipment upon default. 11.5.3 The right to inspect, right to return of equipment were the salient terms noticed by the Hon’ble Supreme Court in the case of ICDS (supra) and it was held that the mere fact that the equipment could be transferred to the lessee at the end of the lease period for a nominal value would not take away the lessor’s right to claim depreciation. The A.O. had relied on clause 5, clause 6 and clause 8 and 9 of said lease agreement to hold that the assessee is not the owner of the leased asset. The relevant clauses relied on by the A.O. are as follows:- IT(TP)A No.269 & 217/Bang/2014 M/s.Dell International Services India Private Limited 47 (i) Clause 6 - Lessee is to incur the repair cost for the equipment’s maintenance. (ii) Clause 8 and 9 – Lessee is to incur taxes and insurance cost of the equipment. (iii) Clause 5 – Assignment of warranty rights that the assessee has against the manufacturer to the lessee. 11.5.4 None of the above clauses, prima facie, indicate that the lessee is the legal owner of the assets that are leased. On the contrary, the clause provides that the lessor shall make payment of the taxes and will be entitled for a reimbursement from the lessee. Insurance although maintained by the lessee shall be to the satisfaction of the lessor and also the cost incurred which are recurring in nature and are incidental to operating the asset, it is the lessee’s responsibility to bear the same. After perusal of the lease agreement, prima facie, we are of the view that the assessee-lessor is the owner of the assets. The further question is whether the said asset has been used for the purpose of business of the assessee. The Hon’ble Apex Court in the case of CIT v. Shaan Finance (P.) Ltd. (1998) 97 Taxman 435 (SC) and also in the case of ICDS (supra) had held that when the assessee is in the business of leasing and in the course of the business of leasing had leased out the equipment, the assessee / lessor has used the said assets for the purpose of its business and was entitled to the benefit of depreciation. Since there is no proper examination by the A.O., we restore the issue to the files of the A.O. for de novo consideration. The A.O. is directed to examine afresh who is the owner of the asset during the relevant assessment year. The assessee shall also IT(TP)A No.269 & 217/Bang/2014 M/s.Dell International Services India Private Limited 48 produce necessary proof that General Motors India Private Limited (the lessee of the assets) has not claimed depreciation on the assets leased (a similar finding was rendered in the case of ICDS (supra) – refer para 26 of the judgment). Further, the A.O. shall render a finding whether the assessee, apart from the business of manufacture of computers, is also in the business of leasing of computer equipments. With the above said directions, we restore to the files of the A.O. the question as to whether the assessee / lessor is entitled to depreciation on the leased assets. Before concluding, it is to be mentioned that the judgment of the Hon’ble Apex Court relied on by the A.O. and the DRP in the case of ABB (supra) does not have application to the instant case. In the case of ABB, the issue involved was relating to “offences relating to transactions in securities” and not connected to Income-tax Act and the claim of depreciation, whereas, the facts in the case of ICDS (supra) is more similar to the facts of the instant case. Moreover, CBDT Circular No.2 dated 09.02.2001 has clearly mentioned that the claim of depreciation is dependant on the test of ownership. The test of ownership is discernible only on interpretation of various clauses in the lease agreement. 11.5.5 As regards the taxation of future lease rentals are concerned, we notice from clause 21 of the lease agreement states that the lease is a cancellable lease. According to the assessee, the A.O. has brought to tax the entire principal portion of the lease rentals amounting to Rs.5,89,52,591 in the current assessment year. We are of the view that the entire lease rental income (subsisting during the lease period) does not IT(TP)A No.269 & 217/Bang/2014 M/s.Dell International Services India Private Limited 49 accrue in the first year as the same ought to be taxed as and when they accrue over the lease period. When the A.O. has accepted that the interest component of lease would accrue as and when the same is due, the same principle would apply to the principle components as well. The stand of the assessee is supported by the judgment of the Hon’ble Punjab & Haryana High Court in the case of CIT v. Punjab Tractors Co-operative Multipurpose Society Ltd. (1997) 95 taxman 579 (P&H) and the judgment of the Hon’ble Madras High Court in the case of Coral Electronics (P) Ltd. (2005) 142 taxman 481 (Mad.). The learned AR, on directions from the Bench, had furnished primary entries for leasing. However, there is no clarity on the same. It is not clear how the A.O. has arrived at the figure of Rs.5,89,52,591 to be disallowed in the current year and how it pertains to the future lease rentals. Therefore, in the interest of justice and equity, we restore the issue of taxation of future lease rentals (also raised in the ground 13), to the files of the A.O. 11.5.6 In the result, ground 13 is allowed for statistical purposes. Disallowance of provision for warranty and expenses incurred towards warranty obligation(Ground No. 14) 12. The brief facts of the issue raised in ground No.14 are as under:- During the assessment 2008-2009, an amount of Rs. 211,41,68,000/- was debited to the Profit and Loss account IT(TP)A No.269 & 217/Bang/2014 M/s.Dell International Services India Private Limited 50 towards Warranty expenses. It was stated that out of the same, Rs. 57,39,66,000/- represents provision for warranty expenses and the balance Rs. 154,02,02,000/- represents actual warranty expenses incurred during the year for servicing products under warranty. According to the learned AR, the Assessee had submitted a detailed write-up on the methodology for estimating warranty cost on a scientific basis before the AO and had provided evidence for an amount of Rs. 129.26 crores out of the actual expenses of Rs. 154.02 crores. The AO disallowed the provision for warranty of Rs. 57,39,66,000/- on the ground that it is not scientific and also disallowed expenses towards utilization of warranty amounting to Rs. 24,76,00,000/- crores on the ground that no evidence was submitted in support of such warranty expenses. 12.1 Aggrieved by the Draft assessment order, the assessee preferred objections before the DRP. The DRP confirmed the disallowance of actual expenses incurred towards warranty to the extent of Rs. 24,76,00,000/- on the basis that no evidence was submitted. Further, the DRP confirmed the disallowance of provision for warranty of Rs. 57,39,66,000/- on the ground that the scientific nature of the creation of the provision was not established. Pursuant to the DRP’s directions, final assessment order was passed. 12.2 Aggrieved by the final assessment order, the assessee has raised this ground before the ITAT. The submission of the learned AR as regards provisions for warranty are as follows:- IT(TP)A No.269 & 217/Bang/2014 M/s.Dell International Services India Private Limited 51 a. The methodology followed by the assessee in estimating the warranty cost and tracking the relating expenses is briefly explained as under: (i) The assessee has a specialized warranty accounting team which tracks the incidents reported and associated cost of providing warranty services for each of the product; (ii) The total sales are divided into various categories of IT hardware products based on the warranty period attached to each such product. The faults are tracked on the basis of a unique identification number attached to each IT hardware so as to identify cases of faults; (iii) Thus, the warranty cost is nothing but the product of number of incidents reported and cost involved in servicing each unit under various categories of products; (iv) The system of tracking the faults and related warranty costs is extremely scientific with minimal margin of error as it is based on actual faults reported and costs incurred in servicing them. (v) The assessee neither creates the provision customer wise nor the utilization of such provision for warranty would be tracked customer wise. The tracking is based on the products and not customers. The warranty service for products sold is carried out based on the service tag number ascribed to each such product. Hence, non-submission of the list of customers for whom the warranty expense has been incurred cannot be the basis to conclude that the assessee does not create provision for warranty on a scientific basis, as has been done by the AO. (vi) Further, there are automatic reversals of the provision when products go out of warranty period. For the purpose of estimating the warranty provision, the assessee takes into account only those units in respect of which the warranty period has not expired as on the date of estimating the provision. (vii) Thus, the closing provision as on 31st March 2009 represents the cost involved for servicing the units for which the warranty period has not expired as on that day. (viii) Accordingly, the system would automatically exclude those products for which the warranty period has expired and include only those products (i.e. products sold in past for which warranty period has not expired and products sold IT(TP)A No.269 & 217/Bang/2014 M/s.Dell International Services India Private Limited 52 during the year with a warranty commitment) for which warranty period has not expired. (ix) Thus, based on the above accounting methodology, as the reversals get adjusted with the provision required to be created in the subsequent years, it, in effect, leads to the same being credited to the Profit and Loss account in the subsequent year. (x) Detailed submissions as regards the methodology of creating the provision is made before the AO in the submissions dated 07.11.2012 (at pages 1001 to 1011 of Volume 4 of the paperbook) and the submission dated 18.12.2012 (At page 1715 of Volume 5) and also before the DRP vide submission dated 08.10.2013 (Pages 537-551 of Volume 2 of the paperbook) 12.3 The submission of the learned AR as regards disallowance of Rs.24.76 crore (expenditure on warranty) are as follows:- (a) Out of the total warranty expenses of Rs. 154.02 crores, the assessee had provided evidences for purchase of spare parts, technical support, labor and logistics support amounting to Rs. 129.26 crores. (b) Thus, details regarding approximately 85 % of the total expenses was furnished. Ignoring the fact that the data is voluminous and furnishing of 100 percent evidences was not possible, the AO has disallowed the difference amount of Rs. 24.76 crores. (c) In any event, details to the extent of Rs. 24,41,26,267/- was filed before the DRP vide submission dated 08.10.2013. The said expense pertains to freight payments incurred towards transportation of spare parts for warranty replacements. Details of the partywise payments made along with details of tax deducted at source is available at pages 541, 547 to 551 of Volume 2 of the paperbook. (d) Thus, the assessee has submitted evidences of approximately 99%. 12.4 The learned DR supported the order of the A.O. and the DRP. IT(TP)A No.269 & 217/Bang/2014 M/s.Dell International Services India Private Limited 53 12.5 We have heard rival submissions and perused the material on record. As regards the provision for warranty, the learned AR explained that the methodology followed by the assessee for estimating warranty cost is on a scientific basis and it is based on past years experience. The detailed explanation of the learned AR is recorded in para 12.2 (supra), hence, the same is not reiterated. The Tribunal in assessee’s own case for assessment year 2002-2003, 2003-2004 and 2005-2006 had dismissed the appeal of the Revenue and held that the provision of warranty claimed is based on scientific basis and held that it is entitled for deduction. The relevant finding of the Tribunal in assessee’s own case for assessment year 2005-2006 in IT(TP)A No.1838/Bang/2013 (order dated 13.10.2017), reads as follows:- 21. We have given a very careful consideration to the rival submissions. The basis on which provision for warranty was made by the assessee was that the Assessee has arrived at a model for ascertaining the warranty cost, based on the type of equipment, periodicity of warranty and nature of commitment. The Assessee has a specialized warranty accounting team which tracks the incidents reported for each product country-wise and associated cost of providing warranty services. The total sales are divided into various categories of IT hardware products based on the warranty periods attached to each such product. The faults are tracked on the basis of a unique identification number attached to each IT hardware so as to identify cases of faults. The warrant cost is a product of the Field Incident Rate i.e., the number of repairs and the Cost per Incident. Field Incident Rate is determined based on the actual faults reported over the earlier years, the Cost per Incident is determined a scientific basis based on the past experience, which is the sum of the following: - Cost of Spare Parts; - Cost of logistics; and - Labour cost The Assessee writes back the difference between the warrant provision made for a particular year and actual expenditure incurred in the subsequent year, in the subsequent year. IT(TP)A No.269 & 217/Bang/2014 M/s.Dell International Services India Private Limited 54 22. It is not in dispute before us that the basis on which the provision for warranty was made was identical in AYs 2002-03 & 2003-04 as well as in AY 2005-06. The Tribunal has in the appeal for the AYs 2002-03 & 2003- 04 after considering the method of providing for warranty liability by way of a provision, specified that the provision made was based on past history and was on scientific method of estimating liability on account of warranty claims. It is clear from the chart which has been extracted in the order of assessment that as and when the period of warranty expires, the assessee writes back the provision made in the books of account to the extent it relates to the warranty liability which the assessee does not incur and which was already provided by way of a provision and allowed as deduction in the past. It appears to us that the provision made by the assessee is scientific and is based on past history. We are also of the view that in view of the parity of basis of provision of warranty in AYs 2002-03 & 2003-04 and AY 2005-06, the ruling of the Tribunal in AYs 2002-03 & 2003-04 is squarely applicable to AY 2005-06 also. For the reasons stated above, we do not find any merit in ground No.3 raised by the revenue and accordingly the same is dismissed.” 12.5.1 Similar view has been held by the Tribunal in assessee’s own case for assessment year 2002-2003 and 2003- 2004 in ITA Nos.362 & 363/Bang/2007 (order dated 18.03.2016). The relevant finding of the Tribunal reads as follows:- “5. Learned AR of the assessee submitted t hat in the earlier order, though the Hon’ble Tribunal held that provision for warranty was made following scientific method and the past history, still the matter was remanded to the AO for verification. He submitted t hat when the entire material is on record, it is not in the fitness of things, to remand the matter to the file of the AO. Our attention was drawn to the material on record wherein the methodology and basis of estimating warranty provision was made out which reads as under: “5. Warranty provisioning policy – Methodology and basis of estimating warranty cost: The company has submitted a detailed methodology of estimating the warranty provision before the AO vide its submission on 17.03.2006 for AY 2003-04. An extract of the acknowledged copy of the same is attached herewith as Annexure 2. Please find below a summary of the same: IT(TP)A No.269 & 217/Bang/2014 M/s.Dell International Services India Private Limited 55 The company has arrived at a model for ascertaining the warranty cost, based on the type of equipment, periodicity of warranty and nature of commitment. The company has a specialized warranty accounting team which tracks the incidents reported fo reach product country-wise and associated cost of providing warranty services. The total sales are divided into various categories of IT hardware products based on the warranty periods attached to each such product. The fault are tracked on the basis of a unique identification number attached to each IT hardware so as to identify cases of faults.” He also placed a chart in the paper book showing methodology of provision for warranty: From the above details, it is clear that provision for warranty is made following scientific method. From the chart it is also clear that as against provision of Rs.144,114,000/- an amount of Rs.11,97,00,000/- was utilized in the subsequent year which is almost near the provision. Therefore, it could be easily said that the provision was created based on past history. The methodology followed by the assessee-company cannot be faulted with. Therefore, we direct the A.O. to allow the provision for warranty as a deduction.” IT(TP)A No.269 & 217/Bang/2014 M/s.Dell International Services India Private Limited 56 12.5.2 There is no dispute before us that the basis on which the provision of warranty was made in assessment year 2002- 2003, 2003-2004 and 2005-2006 as well as in the relevant assessment year is identical. The Tribunal in the above mentioned orders for assessment year 2002-2003, 2003-2004 and 2005-2006 after considering the method of providing for warranty liability by way of a provision, specified that the provisions made was based on past history and was a scientific method of estimating liabilities on account of warranty claims. For the relevant assessment year also, there are automatic reversals of the provision when products goes out of warranty period. For the purpose of estimating the warranty provision, the assessee takes into account only those units in respect of which the warranty period has not expired as on the date of estimation of provision. Accordingly, the system would automatically exclude those products for which the warranty period has expired and include only those products (i.e. products sold in past for which warranty period has not expired and products sold during the year with a warranty commitment) for which warranty period has not expired. Thus, based on the above accounting methodology, as the reversals get adjusted with the provision required to be created in the subsequent years, it, in effect, leads to the same being credited to the profit and loss account in the subsequent year. In view of the parity of basis of provision for warranty for assessment year 2002-2003, 2003-2004, 2005-2006 and the relevant assessment year, the ruling of the Tribunal in assessment years 2002-2003, 2003- IT(TP)A No.269 & 217/Bang/2014 M/s.Dell International Services India Private Limited 57 2004, 2005-2006 is squarely applicable for this assessment year also. 12.5.3 We noticed in the final assessment order, the A.O. had commented that the ITAT order in assessee’s group case, namely, CIT v. Dell International Services India Private Limited (wrongly mentioned as assessee’s group company) has been set aside by the Hon’ble High Court and restored to the Tribunal with a direction to examine the claim of warranty. In this background, it is necessary to recapitulate the background of the Tribunal order for assessment years 2002-2003 and 2003- 2004. In the first round, the Tribunal vide its order dated 16.12.2017 (in ITA Nos.362/Bang/2007 & 363/Bang/2007) dismissing the appeals filed by the Revenue. The said order was challenged by the Revenue before the Hon’ble High Court of Karnataka in ITA Nos.448/2008 and 449/2008. The Hon’ble High Court of Karnataka vide judgment dated 26.09.2012, remanded the matter to the Tribunal to decide the issue in the light of Hon’ble Supreme Court’s judgment in Rotork Controls India P. Ltd. (This is what is referred to by the AO in page 25, para 3 in the assessment order for assessment year 2009-2010). After remand, this Tribunal further remanded the matter to the Assessing Officer vide order dated 13.02.2015. The same was challenged by the assessee before the Hon’ble High Court of Karnataka in ITA No.295/2015. The Hon’ble High Court vide judgment dated 03.02.2016, set aside the remand order passed by the Tribunal and directed the Tribunal to decided the matter on merits. Pursuant to the judgment of the Hon’ble High Court IT(TP)A No.269 & 217/Bang/2014 M/s.Dell International Services India Private Limited 58 of Karnataka dated 03.02.2016, the order dated 18.03.2016 was passed by this Tribunal in ITA No.362 & 363/Bang/2007, dismissing the appeal filed by the Revenue (finding reproduced supra at para 12.5.1). 12.5.4 As regards ITAT’s order for assessment year 2005- 2006, the issue of provision warrant arose in the Revenue’s appeal before this Tribunal in IT(TP)A No.1838/Bang/2013. Vide order dated 13.10.2017, the Tribunal dismissed the Revenue’s appeal (finding reproduced supra at para 12.5). In the appeal filed by the Revenue before the Hon’ble High Court of Karnataka against the said order, the Revenue did not raise any ground on provision for warranty (copy of Hon’ble High Court judgment dated 09.11.2018 in ITA No.236/2018 is placed on record). In view of the aforesaid reasoning and following the orders of the Tribunal in assessee’s own case for assessment years 2002-2003, 2003-2004 and 2005-2006, we direct the A.O. to allow provision for warranty as a deduction. It is ordered accordingly. 12.5.5 As regards the disallowance of Rs.24.76 crore (expenditure on warranty) is concerned, we noticed that out of the total warranty expenditure of Rs.154.02 crore, the assessee had provided evidence only for a sum of Rs.129.26 crore before the A.O. Accordingly, the balance sum of Rs.24.76 crore has been disallowed for want of evidence. It is stated by the learned AR that the assessee had filed the details along with the submissions dated 08.10.2013 for a further sum of Rs.24.41 crore before the DRP. However, the same was not taken note by IT(TP)A No.269 & 217/Bang/2014 M/s.Dell International Services India Private Limited 59 the DRP. Accordingly, the issue of actual expenditure on warranty for the disallowance of Rs.24.76 crore is restored to the files of the A.O. The assessee shall cooperate with the A.O. and shall furnish necessary evidence for having incurred the warranty expenditure to the tune of Rs.24.76 crore, failing which the A.O. shall make necessary additions. It is ordered accordingly. 12.5.4 Therefore, the issue raised in ground 14 as regards the provision for warranty is allowed and the issue in respect of disallowance of warranty expenditure of Rs.24.76 crore, is allowed for statistical purposes. Addition made under section 69C of the Act (Ground No.15) 13. The brief facts of the issue raised in ground 15 are as follows:- The AO during the course of assessment proceedings had called for details of TDS made on freight expenses. It is stated that the assessee had submitted the details of all freight expenses irrespective of whether the same was incurred towards freight inwards, outwards or towards other logistic services obtained. The details so submitted amounted to Rs. 79,81,25,181 (details of amount of Rs.79,72,64,081 submitted vide submission dated 07.11.2012 and details of amount of Rs.8,61,100 submitted vide submission dated 26.11.2012) .In the schedule to the P&L Account, an amount of Rs.42,14,82,193 was debited as freight outwards. The AO disallowed the difference between the two (i.e. Rs.79,81,25,181 IT(TP)A No.269 & 217/Bang/2014 M/s.Dell International Services India Private Limited 60 Rs.42,14,82,193) and brought to tax Rs.37,66,42,988/- as unexplained expenditure under Section 69C of the Act. The DRP directed the AO to verify the details and explanations submitted by the assessee. The addition was sustained by observing that the final order is to be passed without further opportunity. 13.1 Aggrieved, the assessee has raised this issue before the ITAT. The relevant submission of the learned AR are as follows:- (a) The provisions of section 69C are applicable only in a case where the assessee offers no explanation on the source of income to incur the expenses under consideration. (b) The expenses are recorded in the books of account and the same is out of the funds generated from the routine business carried out by the assessee. Thus, in respect of expenses which are recorded in the books of account adjustment under section 69C as unexplained expenses cannot be accepted. (c) In any case, the assessee had provided detailed explanation as under: (i) The assessee incurs freight charges for: Purchase of materials i.e. Freight inwards – classified under cost of goods sold; Sale of goods i.e. freight outwards – grouped under “Operating and other expenses” in the Profit and Loss account; and Warranty services – classified under warranty expenses (ii) Certain expenses were debited under other heads like cost of goods sold, warranty etc. For instance, freight expenses incurred for purchase of goods forms part of cost of purchases and hence the same would be debited under cost of goods sold. Please see submission dated 22.01.2013 point 14 (page 4745 of Volume 10 of paperbook). Similarly, logistics/freight expenses incurred towards warranty spares would be part of expenses towards warranty utilization. IT(TP)A No.269 & 217/Bang/2014 M/s.Dell International Services India Private Limited 61 (iii) It is submitted that out of Rs. 37,66,42,988/-, Rs. 9,95,36,401/- pertains to payments made towards freight inwards and accounted under “Cost of materials”. The party-wise details of the said Freight inwards along with the details of TDS deducted on them were produced before the DRP which is available at page 641 of Volume 2 of paperbook. (iv) Further, the freight and other logistics costs of Rs. 24,41,26,267/- incurred for transportation of spare parts procured for servicing products under the warranty period, is part of warranty utilization expenses. The party-wise details submitted and have identified entries for an amount of Rs. 24,41,26,267 which pertain to freight incurred towards transportation of spare parts for warranty. The party-wise details of the said freight amount pertaining to warranty along with the details of TDS deducted on them are available at pages 633-639 and 663-667 of Volume 2 of paperbook. (v) On similar lines, the AO also added an amount of Rs. 23,71,471/- being rent. This difference between the amount debited as Rent (amounting to Rs. 7,06,32,000) and the amount as per the party-wise break up submitted (amounting to Rs. 7,30,03,471) amounting to Rs. 23,71,471 represents the amount debited under other heads of the Profit and Loss account. (vi) Out of the above, Rs.5,04,900/- was inadvertently debited to the rates and taxes ledger, which was explained to the AO vide submission dated 20.02.2013 (Please see page 4285 read with 4599 of Volume 9 of the paperbook). (vii) TDS certificates were provided vide submission dated 07.11.2012 (relevant pages – page 1015, 1333-35 at volume 4 of the paperbook) 13.2 In support of above contention, the learned AR relied on the judgment of the Hon’ble Delhi High Court in the case of CIT v. Radhika Creation reported in (2011) 10 taxman.com 138 (Delhi). It was contended that since the expenses are duly accounted in the books of account and adequate explanation as IT(TP)A No.269 & 217/Bang/2014 M/s.Dell International Services India Private Limited 62 regards the same have been provided by the assessee, no addition u/s 69C of the I.T.Act is warranted. 13.3 The learned Departmental Representative supported the findings of the TPO. 13.4 We have heard rival submissions and perused the material on record. The DRP in its order directed the A.O. to verify the details of explanation submitted by the assessee. The relevant finding of the DRP reads as follows:- “12.1 The Panel has carefully perused the draft assessment order, facts of the case, legal position on the issue as delineated by the Assessing Officer as well as put forth by the assessee. On the issue of disallowance of Rs.376,642,988 incurred towards freight as unexplained expenditure under section 69C, the assessee has claimed that the party-wise list of TDS details was provided to the AO for Rs.797,264,081, out of which Rs.376,642,988 represents amount subsequently reimbursed and credited to freight account and also amount debited under other heads of profit and loss account. 12.2 The panel is of the option that this aspect has not been verified by the assessing officer in the draft order. Since the AO has not verified the same, AO is directed to verify the same and if the contention of the assessee is found correct, then the claim of the assessee is to be allowed. The assessee will produce all the necessary documents to show that tax has been deducted on all the expenses on which deduction of tax is required as per the Income Tax Act, 1961 and Rs.376,642,988 represents amount subsequently reimbursed and credited to freight account and also amount debited under other heads of profit and loss account. If the assessee fails to do so, the addition will survive to the extent of non-furnishing of evidence.” 13.4.1 The A.O. in the final assessment order confirmed the draft assessment order by observing as under:- 14.7 Unexplained expenditure u/s 69C – Freight : At paragraph 7 of the draft assessment order a sum of IT(TP)A No.269 & 217/Bang/2014 M/s.Dell International Services India Private Limited 63 Rs.37,66,42,988/· was added as unexplained expenditure u/s 69C of the IT Act. The assessee company has raised a grounds of objection that party wise list of TDS details was provided for Rs.79,72,64,081/- out of which Rs.37,66,42,988/- represents the amount subsequently reimbursed and credited to freight account. The DRP has issued its direction at paragraph 12.2 to verify the claim. It has directed the AO to produce necessary documents. As per the DRP, if the assessee fails to furnish the evidences the addition will survive to the extent of non furnishing of evidences. 'Prima facie the final order has to be passed without providing any opportunity. The assessee company has never made any such claim in response to noticed issued u/s 142(1) of the IT Act. It was discussed in the draft assessment order. Prima facie the expenditure incurred towards freight was much more than the amounts debited into pal account. Hence no further opportunity could be given to the assessee company and the entire amount of Rs.37,66,42,988/- is retained in the final order. 14.8 Unexplained expenditure - Rent: In paragraph 3 of the draft assessment order a sum of Rs.23,71,471/- was added as unexplained expenditure on payment of rent. In this connection a detailed analysis has been made in the assessment order. Without providing any specific evidence the assessee company has filed the grounds of objection before DRP stating that the said amount has been grouped under other heads of expense in the pal account. In this connection the DRP has issued its direction to verify such claim and if the assessee fails to furnish evidences the addition will survive. It is pertinent mention here that number of opportunities were given to the company to verify their contention. During the course of draft assessment proceedings as well as before DRP no evidence was submitted by the company except grounds of objection. Hence this addition is also retained in the final order.” 13.4.2 The A.O. is not justified in stating that the assessee has not produced necessary evidence in support of its objections. The assessee had given objections and necessary evidence before the AO and the DRP. The details of the same are as follows:- IT(TP)A No.269 & 217/Bang/2014 M/s.Dell International Services India Private Limited 64 (a) Submission before the DRP dated 08.10.2013 – pages 212, 633 – 639 of Volume 2 of the paperbook. (b) Submission before the AO dated 07.11.2012 – pages 1011-1015, 1023 and 1333-1335 of Volume 4 of the paperbook. (c) Submission before the AO dated 20.02.2013 – pages 4273, 4285, 4599 of Vol. 9 of the paper book. (d) Submission before the AO – dated 26.11.2012 – pages 5141, 5211 of volume 11 of the paperbook. 13.4.3 Therefore, in view of the directions of the DRP, which we are in consonance with, we direct the A.O. to re-examine the issue raised in ground 15 afresh. It is ordered accordingly. 13.4.4 In the result, ground 15 is allowed for statistical purposes. Addition of VAT refund offered to tax in other assessment years (Ground No. 16) 14. The brief facts in relation to the issue raised in ground 16 are as follows:- The assessee had set up a manufacturing unit at Sriperumbudur Hi-Tech Special Economic Zone on a land allotted by State Industries Promotion Corporation of Tamil Nadu Limited (SIPCOT). Pursuant to a Memorandum of Understanding (MOU) entered with State Government of Tamil Nadu, the assessee was entitled to receive refund of VAT on manufactured items sold from the facility at SIPCOT. During the relevant assessment year, the assessee had recognized an amount of Rs.93,70,89,776/- as income from VAT refund. The AO called for details of disbursements from the Joint IT(TP)A No.269 & 217/Bang/2014 M/s.Dell International Services India Private Limited 65 Commissioner of Commercial Taxes, Chennai, according to whom an amount of Rs.94,14,66,995/- had been disbursed. The AO brought to tax the difference between Rs.94,14,66,995/- and Rs.93,70,89,776/- of Rs. 43,77,219/- as undisclosed income in the draft assessment order. 14.1 Aggrieved by the draft assessment order, the assessee filed objections before the DRP. The DRP rejected the contention of the assessee that the said amount was offered to tax in the previous and subsequent assessment years. The DRP held that income requires to be taxed at the earliest point of time. As regards the alternate contention that if the said amount is taxed in the current AY, the same ought not to be taxed in the other years, the DRP did not issue any directions to that effect holding that the issue did not pertain to the current assessment year. 14.2 Aggrieved, the assessee has raised this issue before the ITAT. The submission of the assessee is summarized as follows:- (a) Before the AO, a detailed reconciliation between the two amounts explaining the difference of Rs. 43,76,995 was submitted to the AO. As per the reconciliation statement, the differential amount was offered to tax as under: (i) Rs.7,24,111/- in the form of excess Vat refund (in excess of the amount as per Joint Commissioner CT, Chennai) recognized and offered to tax for the FY 2007-08; and (ii) Rs.36,52,884/- by debiting the VAT refund receivable account and crediting sales in the FY 2009-10. Journal entry for the same showing the said debit to VAT refund receivable account and credit to sales account for an amount of Rs.30,50,789/- was also provided. IT(TP)A No.269 & 217/Bang/2014 M/s.Dell International Services India Private Limited 66 (b) A detailed reconciliation was provided to the AO vide submission dated 18.12.2012 at page 1693 - 1695 of Volume 5 of the paperbook. Journal entries for an amount of Rs. 30,50,789 was also provided. (c) Thus, the entire amount was offered as income over a period of three years. (d) A summary of the above details for addition of VAT refund are as under Particulars Amount (in Rs.) VAT refund credited to Profit and Loss account 93,70,89,776 Less: VAT refund claimed with Joint Commissioner - CT 94,14,66,995 Excess VAT refund claimed as per AO 43,77,219 Less: Excess VAT refund credited to P&L account in AY 2008-09 and offered to tax 7,24,111 Less: Excess VAT refund credited to P&L in AY 2010-11 and offered to tax 36,53,108 Balance Difference Nil (e) Since the VAT refund has been offered to tax over a period of three years, there is no loss of revenue and thus the same should not be considered as undisclosed income for the current year. (f) Even if the assessee were to revise its return of income and offer the same to tax for AY 2009-10, it had sufficient losses to set- off such income. Hence, there is no loss to revenue on account of the same not being offered to tax during AY 2009-10. (g) Without prejudice, if the aforesaid VAT refund of Rs. 43,77,219/- is being brought to tax in the current year, then the learned AO should give consequential benefit for the same in AYs 2008-09 and 2010-11 where the same has been offered to tax. 14.3 The learned Departmental Representative supported the orders of the Income Tax Authorities. 14.4 We have heard rival submissions and perused the material on record. During the relevant assessment year, the IT(TP)A No.269 & 217/Bang/2014 M/s.Dell International Services India Private Limited 67 assessee had recognized an amount of Rs.93,70,89,776 as income from VAT refund. The assessee called for details of disbursement from the Joint Commissioner of Commercial Taxes, Chennai, according to whom the amount of Rs.94,14,66,995 had been disbursed. The A.O. brought to tax the difference between Rs.94,14,66,995 and Rs.93,70,89,776 of Rs.43,77,219 as undisclosed income in the draft assessment order. The DRP rejected the contention of the assessee that the said amount was offered to tax in the previous and subsequent assessment years. The DRP held that income requires to be taxed at the earliest point of time. As regards the alternate contention that if the said amount is taxed in the current assessment year, the same ought not to be taxed in the other years, the DRP did not issue any directions to that effect holding that the issue did not pertain to the current assessment year. 14.4.1 It is the claim of the assessee that the entire amount has been offered to tax over a period of three years. The learned AR in his submission had stated that out of difference of Rs.43,77,219 brought to tax by the A.O., a sum of Rs.7,24,111 was offered to tax in the assessment year 2008-2009 and Rs.36,53,108 in the assessment year 2010-2011. It is the claim that the assessee had suffered losses to set off above income, hence, there is no loss to the Revenue on account of the same not been offered to tax during the relevant assessment year 2009-2010. IT(TP)A No.269 & 217/Bang/2014 M/s.Dell International Services India Private Limited 68 14.4.2 The A.O. is directed to examine whether the assessee had offered to tax Rs.43,77,219 in the assessment year 2008- 2009 and 2010-2011. If it is found that the assessee had offered to tax the said income, we direct the A.O. to grant corresponding deduction in the relevant assessment year (otherwise the addition of Rs.43,77,219 would lead to taxation of income twice). The assessee shall cooperate with the A.O. and shall provide the necessary details for the expeditious disposal of the issue. It is ordered accordingly. 14.5 In the result, ground 16 is allowed for statistical purposes. Disallowance of capital expenditure on the erroneous basis that the same was claimed as a revenue expenditure (Ground No. 17) 15. The brief facts in relation to the issue raised in ground 17 are as follows:- The AO during the course of assessment proceedings, had sought details of tax deducted at source on various expenses. It is stated that while providing the details for repairs and maintenance expenses, certain amounts paid to Sobha Developers, Firepro and Deva Interiors were reflected under the party-wise list of Repairs and Maintenance expenses provided. It is stated that the said details were furnished to substantiate that the Company has been compliant in deducting taxes. However, according to the assessee, it had not claimed deduction of the same on the basis that it was capital IT(TP)A No.269 & 217/Bang/2014 M/s.Dell International Services India Private Limited 69 expenditure. The nature of the payments was explained as under: (i) Sobha Developers - Rs. 11,58,28,028/- The amount pertains to payment made to Sobha Developers towards Civil construction undertaken at the assessee’s Chennai factory. Though the amount was initially debited to the repairs and maintenance account, the same has been subsequently reversed and capitalized and thus no deduction has been claimed for the same. (ii) Firepro – Rs. 52,69,401/- The said payment pertains to payment towards installation of firefighting system in the factory at Chennai. Though the entries were initially debited to repairs and maintenance account, subsequently these were reversed and capitalised under buildings. The vendor subsequently, based on the negotiations, provided a discount of Rs.30,47,655/- to the assessee, which also the assessee recognized by reducing the capitalised value of buildings and recognizing a net fixed asset of Rs. 22,21,746/- only as buildings. (iii) Deva Interiors – Rs. 63,71,722/- The said amount pertains to payments made towards interior decoration for the factory at Chennai. The same was capitalized as building. 15.1 In the draft assessment order, the AO brought to tax an amount of Rs. 13,13,46,253 and allowed depreciation of Rs. 1,21,65,545/- on the basis that the same was claimed as revenue expenditure by the assessee. The DRP directed the AO to verify the claim of the assessee that the said expenses were IT(TP)A No.269 & 217/Bang/2014 M/s.Dell International Services India Private Limited 70 not claimed as revenue expenditure at all. In the final assessment order, the addition as per draft assessment order was sustained stating that the verification was already done at the stage of draft assessment order. 15.2 Aggrieved, the assessee has raised this issue before the ITAT. The submission of the learned AR are as follows:- a. It is submitted that the AO has erred in placing reliance on the party-wise break-up of repairs and maintenance expenses to make an addition without appreciating that the assessee had not claimed the same as revenue expenditure at all in the first place. b. The payments made to Sobha Developers, Firepro and Deva Interiors were included in the party-wise list of payments on which tax was deducted at source, which was provided only to substantiate the assessee’s compliance with TDS provisions. c. The assessee had submitted party-wise listing of TDS deducted on Repairs and Maintenance for Rs. 36,96,39,920. However, the net amount claimed as Repairs and Maintenance expenditure was only Rs. 28,01,65,787. d. Detailed explanation with respect to payments made to each of the parties were provided to the AO: (i) Sobha Developers – Rs. 115,828,028  The entire project was completed during the financial year 2007-08 relevant to the assessment year 2008-09 and thus the expenses were capitalised as buildings during financial year 2007-08. This is evidenced by the Letter of Intent signed with Sobha Developers and the addition to buildings made during that year which is available at pages 4869-4877 of Volume 10 of the paperbook.  The entry reflected in the repairs and maintenance account during financial year 2008-09 was subsequently reversed and thus, no deduction for the same is claimed during financial year 2008-09.  Ledger extract of repairs and maintenance showing the debit as well as the subsequent credit entries are available at page 4909 of Volume 10 (reversal of Rs. 11,45,17,397/-). If at all, the addition should be limited to Rs. 12,15,631/- to the IT(TP)A No.269 & 217/Bang/2014 M/s.Dell International Services India Private Limited 71 extent not reversed in the ledger, and consequential depreciation should be given thereon. (ii) Firepro – Rs. 52,69,401/-  Though the expenses were initially debited to repairs and maintenance account, subsequently these were reversed and capitalized under buildings.  Ledger extract of repairs and maintenance showing the debit as well as the subsequent credit entries for Rs.52,69,401/- and Rs.5,49,672/- respectively are available at page 4881 and 4882 of Volume 10.  The vendor subsequently provided a discount of Rs.30,47,655/- to the assessee and accordingly the assessee reduced the capitalized value of building by recognizing the net fixed asset of Rs. 2,21,746/- as buildings. (Additions made during the year to Buildings available at page 5001 of Volume 10 of the paperbook)  The AO has erred in stating that the discount entry passed in the repairs and maintenance has been immediately reversed and thus the net effect is nil. The AO has failed to appreciate that since the original amount has been reversed and capitalized, the discount amount also ought to be reversed and reduced from the capitalized amount and thus the net amount of Rs.22,21,746 has been capitalized as buildings in the fixed asset schedule. The AO proceeded on the basis that if any discount was received, the same ought to have been offered to tax without appreciating that the assessee had capitalized the net amount and was thereby claiming depreciation on the reduced amount. (iii) Deva Interiors – Rs. 6,371,722  The payment made towards interior decoration for the factory at Chennai was capitalized as building.  The details of capitalization were submitted to the AO and are available at page 5001 of Volume 10 of the paperbook. 15.3 The learned Departmental Representative was duly heard. 15.4 We have heard rival submissions and perused the material on record. The DRP in its order, directed the A.O. to verify the claim of the assessee that the expenditure is IT(TP)A No.269 & 217/Bang/2014 M/s.Dell International Services India Private Limited 72 capitalized and not claimed as a revenue expenditure. The directions of the DRP read as follows:- “13.2 The assessee has itself stated that the expenditure is in the nature of capital expenditure but it claims that the same has been capitalized and not claimed as revenue expenditure in the year under consideration on the other hand it claims that if disallowance is to be made the amount to be disallowed should be restricted to the difference between the amount debited to the profit and loss account and the amount reversed i.e. Rs.1,215,631. Thus there is an apparent contradiction in the stand of the assessee. This contradiction needs verification. However in principle the stand of the AO is justified in treating the expenses as capital expenditure. However, the panel is of the opinion that the claim of the assessee that the expenditure has already been capitalized and not claimed as revenue expenditure in the year under consideration has not been verified by the assessing officer in the draft order. Since the AO has not verified the same, AO is directed to verify the claim of the assessee and if the contention of the assesee is found correct then the claim of the assessee to the extent expenditure not claimed in the current year is to be allowed. Any expenditure claimed in the year under consideration will be capitalized and depreciation provided at appropriate rates. The assessee will produce all the necessary documents in support of its claim. If the assessee fails to do so, the addition will survive to the extent of non-furnishing of evidence.” 15.4.1 The A.O. in the final assessment order has retained the addition by observing as under:- “ 14.9 Disallowance of capital expenditure: In the draft assessment order a sum of Rs.11,91,80,698/- was disallowed as capital expenditure in paragraph 2. In this connection a detailed discussion has been made in the draft assessment order. The enquiries conducted, evidences gathered, show cause noticed given, reply of the assessee company and analysis of the assessee company were discussed elaborately in the draft assessment order. The DRP has considered the grounds of appeal of the assessee company at paragraph 13 of its direction. The assessee company has once again contended before DRP that such expenditure was already capitalized and not claimed as revenue expenditure. IT(TP)A No.269 & 217/Bang/2014 M/s.Dell International Services India Private Limited 73 The DRP has considered their objection and directed to verify the claim. It is pertinent to mention here that all the ledger accounts and other evidences collected during the course of assessment proceedings was thoroughly examined during the course of assessment proceedings and drawn specific inference that the assessee company has debited the capital expenditure into P&L account. Hence, it cannot said that it was not verified. Accordingly, the addition of Rs.11,91,80,698/- made in the draft assessment order is retained.” 15.4.2 It is to be noted that in the final assessment order the A.O. observed that the ledger and other evidences collected during the course of assessment proceedings was thoroughly examined and specific inference was drawn that the assessee- company had debited capital expenditure into profit and loss account. The Assessing Officer, pursuant to the DRP’s directions, has not verified again in view of the above said observations. The directions of the DRP we are in approval. In the interest of justice and equity, we direct the A.O. to verify once again the claim of the assessee. The AO shall afford a reasonable opportunity of hearing to the assessee before a decision is taken on the issue raised in ground 17. It is ordered accordingly. 15.4.3 In the result, ground 17 is allowed for statistical purposes. Disallowance of expenditure disallowed under section 40(a) in the previous years and reversed in the current assessment year (Ground 18 & Additional ground 24) 16. The brief facts of the issue raised in ground 18 and additional ground 24 are as follows:- IT(TP)A No.269 & 217/Bang/2014 M/s.Dell International Services India Private Limited 74 In the previous assessment year, i.e., AY 2008-09, the assessee had disallowed a sum of Rs. 9,14,02,291/- representing provision made at the end of the year towards accrued advertisement, freight outwards, legal and professional expenses, repairs and maintenance and other expenses under section 40(a)(ia) of the Act. The said accrual entries were reversed in the books upon receipt of invoices from vendors and corresponding entries was passed to account for the actual expenses along with the TDS liability. It was stated that the provision for year-end accrued expenses was reversed in the books of account of the assessee during the year and corresponding expenses were separately recorded after deduction of taxes wherever required. The AO brought to tax the said amount of Rs. 9,14,02,219/- on the ground that reversal entries ought to have been offered to tax under section 41 of the Act and also for the reason that the evidence of tax deduction at source was not provided. The DRP confirmed the draft assessment order holding that an amount disallowed under section 40(a) in an earlier year could be allowed in the current year only upon demonstrating that tax was deducted at source. Thus, the addition as per draft assessment order was sustained in the final assessment order. 16.1 Aggrieved, the assessee has raised this issue before the ITAT. The submission of the learned AR are as follows:- (a) The break-up of Rs. 9,14,02,219/- which was disallowed under section 40(a)(ia) in AY 2008-09 is as under: IT(TP)A No.269 & 217/Bang/2014 M/s.Dell International Services India Private Limited 75 Sl No Particulars Amount disallowed under section 40(a) 1 Advertising 4,31,43,941/- 2 Contractor 1,77,46,263/- 3 Legal and professional 1,69,70,280/- 4 Freight Outwards 1,14,20,521/- 5 Repairs and maintenance – others 21,21,214/- (b) The assessee, based on mercantile system of accounting, makes a provision for various expenses which have accrued at the end of the year but where invoices are not received at the end of the year. Such provision for expenses is reversed upon receipt of invoices. Reversal entries are passed by crediting the respective expenditure accounts which is in effect crediting the Profit and Loss account, thereby resulting in higher income for the year. (c) The AO having agreed that the reversal entries were submitted to him, erred in concluding that such reversal entries should have been credited to the P&L account instead of the respective expenses accounts. (d) Section 41(1) has no application as there is no cessation of any liability for which the assessee had claimed any deduction in any previous year. The basis of the assessee’s claim is that since the provision was disallowed in the computation of a previous year, on reversal of the same, there should be no addition to the income to that extent. (e) The AO failed to appreciate that upon receipt of invoices and the actual expenses being booked, the assessee deducted tax at source on payments made to the parties. However, one to one correlation of the provision of expenses and with the actual invoices and TDS thereon is not the prerequisite for allowing the deduction on reversal of provision. (f) Ledger extracts for advertisements and repairs and maintenance to demonstrate the reversals were submitted before the AO vide submission dated 20.02.2013 – relevant pages 4283 and 4311-4593 of Volume 9 of the paperbook. Ledger extracts for freight and legal and professional expenses were provided to the AO vide submission dated 18.12.2012 at pages 1779-1883 of Volume 5 of the paperbook. IT(TP)A No.269 & 217/Bang/2014 M/s.Dell International Services India Private Limited 76 (g) The assessee has also filed an application for additional evidence on 21.03.2019 whereunder it has submitted the details of tax deducted at source to the extent of Rs. 9,01,59,242/- along with sample invoice copies. 16.2 The learned DR relied on the orders of the Assessing Officer and the DRP. 16.3 We have heard rival submissions and perused the material on record. The assessee has raised an additional ground, vide petition dated 21.03.2019, namely, ground 24. The additional ground raised reads as follows:- “Without prejudice to the ground No.18, the deduction ought to have been allowed in the year in which the taxes has been deducted and remitted to the credit of Central Government on subsequent payments made to the vendors as well as on the purchase orders written off, against the said provision for expenses.” 16.3.1 The above additional ground is an integral part of the main issue raised in ground 18, hence, the same is admitted and taken for adjudication. 16.3.2 The assessee has also raised additional evidence. The document sought to be admitted as additional evidence are as follows:- “(a) Details of subsequent payments made to vendors and purchase orders written off in relation to Advertisement expenses amounting to INR 43,139,040, along with details of TDS, wherever applicable. Also enclosing sample copies of invoices in relation to the same. (b) Details of subsequent payments made to vendors and Purchase Orders Written-off in relation to Contractor payments amounting to INR 17,337,851 along with details of TDS, wherever applicable. Also, enclosing sample copies of invoices in relation to the same. (c) Details of subsequent payments made to vendors and IT(TP)A No.269 & 217/Bang/2014 M/s.Dell International Services India Private Limited 77 Purchase Orders Written-off in relation to legal and professional expense amounting to INR 15,453,163 along with details of TDS, wherever applicable. (d) Details of subsequent payments made to vendors in relation to Freight Outwards expense amounting to INR 12,139,326 along with details of TDS, wherever applicable. Also, enclosing sample copies of invoices in relation to the same. (e) Details of subsequent payments made to vendors in relation to Repair and maintenance - Others expense amounting to INR 2,089,863, along with details of TDS, wherever applicable.” 16.3.3 It was submitted that the additional evidence now produced goes to the root of the issue and for collecting details of the same from the vendors etc. it required time and same could not be produced before the A.O. nor the DRP. The additional evidence now submitted gives the details of the tax deducted at source along with sample invoice copies. For proper adjudication of the issue raised in grounds 18 and additional ground 24, the additional evidences are taken on record. Since the additional evidence had been admitted, necessarily, the same has to be examined by the A.O. For the above said purpose, ground 18 and additional ground 24 are restored to the files of the A.O. The A.O. after considering the submissions made before him, the DRP and the additional evidence filed before the Tribunal, shall take a decision in accordance with law after affording a reasonable opportunity of hearing to the assessee. It is ordered accordingly. 16.4 In the result, ground 18 and 24 are allowed for statistical purposes. IT(TP)A No.269 & 217/Bang/2014 M/s.Dell International Services India Private Limited 78 Short credit of TDS – Rs.1,66,98,930 (Ground 19) 17. In ground 19, the assessee submits that the A.O. has erred in giving credit for TDS for only Rs.4,21,32,027 instead of Rs.5,88,30,957. 17.1 After hearing both the parties, we direct the A.O. to give correct credit for TDS in accordance with law. It is ordered accordingly. 17.2 In the result, ground 19 is allowed for statistical purposes. Set-off of loss brought forward from Assessment Year 2008- 2009 (Ground 20) 18. In ground 20, it is submitted that the A.O. has erred in considering the brought forward loss of only Rs.17,14,29,395 from the assessment order for 2008-2009 instead of Rs.60,97,79,395 claimed as per the return of income filed for the relevant assessment year. 18.1 After hearing both the parties, we direct the A.O. to examine the issue whether the carry forward losses is to be set off to the tune of Rs.60,97,79,395 or not. It is ordered accordingly. 18.2 In the result, ground 20 is allowed for statistical purposes. IT(TP)A No.217/Bang/2014 (Revenue’s appeal) 19. Six grounds are raised in the memorandum of appeal. Ground 1 and 6 are general in nature and no adjudication is IT(TP)A No.269 & 217/Bang/2014 M/s.Dell International Services India Private Limited 79 called for, hence, the same are dismissed. The surviving grounds, namely, ground 2 to 5, read as follows:- “2. Whether the Hon’ble DRP is correct in sending back the issue of allocation of depreciated cost to the file of TPO with a direction to adopt the figure of Rs.2.99 as depreciation cost in trading segment. 3. Whether the Hon’ble DRP is correct and reasonable in not disallowing in payment for Microsoft Licenses ignoring the findings of TPO> 4. Whether the Hon’ble DRP is correct in upholding the objections of the tax payer relating to mark up on the warranty cost. 5. Whether the Hon’ble DRP is correct in deleting the disallowance of Forex loss of Rs.111,09,53,000/-.” We shall adjudicate the above grounds as under. Ground 2 20. In ground 2, the Revenue challenges the DRP’s direction to adopt the figure of R.2.99 crore as depreciation cost in trading segment. It is to be mentioned that in the final assessment order, the A.O. did not give effect to the above directions of the DRP. Therefore, ground 2 raised in the Revenue’s appeal is misconceived. However, ground 2 is connected with the assessee’s ground 7.1 and since ground 7.1 of the assessee’s appeal is restored to the files of the AO/TPO (vide our findings in para 6.9 to 6.9.5), we restore ground 2 also to the files of the AO/TPO. 20.1 Hence, ground 2 is allowed for statistical purposes. IT(TP)A No.269 & 217/Bang/2014 M/s.Dell International Services India Private Limited 80 Ground 3 21. Brief facts in relation to the issue raised in ground 3 are as follows: It was submitted that assessee’s AE centrally procures licenses from independent unrelated third party vendors, on behalf of the Dell Group, for their usage and for usage in the products sold. It was stated that the cost incurred by the AE in this regard are allocated to each of the Dell group entities on the basis of usage of licenses by them and are recovered from them at cost. During the year under consideration, the Assessee reimbursed an amount of Rs. 170,60,69,281/- (refer pages 5584, 5625 to 5627 of the paperbook- Vol.12). On this payment, the Assessee deducted tax at source (refer pages 5558-5560 of the paperbook-Vol.12). Customs duty was also paid on import of the licenses. The TPO held that the Assessee has not demonstrated receipt of services, the cost base of the AE, the allocation key of cost allocation, determined the ALP as Nil, and determine the entire value of reimbursement as TP adjustment (pages 38-42 of the TPO’s order). 21.1 Aggrieved, the assessee filed objection before the DRP. The DRP accepted the objections of the Assessee and set aside the adjustment. The DRP held that the Assessee having submitted that the licenses are utilized in its products and the cost is allocated on the basis of usage, the TPO could not have determine the ALP at Nil in the absence of any data to the contrary (pages 19-20 of the DRP’s directions). IT(TP)A No.269 & 217/Bang/2014 M/s.Dell International Services India Private Limited 81 21.2 The learned DR filed a brief written submission reiterating the findings of the TPO. 21.3 The learned AR reiterated the submission made before the TPO and the DRP. 21.4 We have heard rival submissions and perused the material on record. The assessee’s AE centrally procure licences from independent unrelated third party vendors on behalf of the Dell Group for their usage and for usage in the products sold. The cost incurred by the AE in this regard are allocated to each of the Dell group entities on the basis of usage of licences by them and are recovered from them at cost. During the relevant assessment year, the assessee reimbursed an amount of Rs.170,60,69,281. The details of which is provided at pages 5584, 5625 to 5627 of the paper book Vol.2. On the payments made as reimbursement, the assessee had deducted tax at source (refer pages 5558 to 5560 of the paper book Vol.2. The assessee had also paid Customs Duty on import of licences. The licences so procured by the assessee are used in the products sold by it. In absence of installing such licences, the product sold by the assessee cannot be utilized by the cutomers. Therefore, the usage of licences cannot be doubted. Allocation of cost is as per the usage and on the payment made, tax is deducted at source. In absence of any material, the TPO cannot determine an adjustment on the basis of mere conjecture and surmises. In any event, in an adhoc manner ALP cannot be determined at Nil. Moreover, the above transactions are undertaken by the assessee on a year to year basis and have IT(TP)A No.269 & 217/Bang/2014 M/s.Dell International Services India Private Limited 82 not been questioned in any of the subsequent years by the TPO. For the aforesaid reasons, we reject ground 3. It is ordered accordingly. 21.5 In the result, ground 3 is dismissed. Ground 4 22. In ground 4, Revenue questions the DRP’s action in upholding the objections of the assessee relating to mark up of warranty cost. It is to be noted that the DRP’s direction was not given effect to and therefore, ground 4 is misconceived. However, this issue is connected with ground 10 raised in assessee’s appeal. Since we have directed the AO / TPO to re- examine ground 10 of the assessee’s appeal (see para 8.7 to 8.7.2), ground 4 raised in Revenue’s appeal is also restored to the files of the AO / TPO. 22.1 In the result, ground 4 is allowed for statistical purposes. Ground 5 23. The brief facts in relation to the above ground are as follows: Assessee’s business includes trading and manufacturing of computer hardware and peripheral products. These products are mainly sourced from outside India from Dell group entities and mainly sold in India’s domestic markets with small portion of exports. The assessee being an import driven entity, during the year has made a total import of Rs. 2,277 crores and a total IT(TP)A No.269 & 217/Bang/2014 M/s.Dell International Services India Private Limited 83 export of Rs. 465 crores. During the said financial year, the rupee value has depreciated considerably from Rs. 40/USD at the beginning of the year to Rs. 50/USD at the end of the year. Owing to huge imports during the year and the fact that rupee value depreciated considerably, the assesee had incurred a foreign exchange loss of Rs. 111,09,53,000 which represents realized and unrealized exchange loss (net) arising on account of transactions in foreign currency. The above loss is a net result of all kinds of foreign exchange loss/gain during the year i.e. loss/gain on realization of foreign currency amounts on account of transactions in foreign currency as well as re- statement of foreign currency balances as on the period closure as per the prescribed accounting policy being consistently followed by the assessee company. Thus, it was claimed that the entire exchange loss has arisen on settlement/re-statement of foreign currency receivable and payable balances. Further, it was stated that there were some forward contracts entered by the assessee to hedge the risk against the volatility of foreign currency. Such hedge has resulted in a gain of Rs. 5,26,74,967 which has been offered to tax. 23.1 The AO in the draft assessment order held that loss on account of foreign exchange fluctuation as regards forward contracts is a contingent liability and that no evidence in support thereof was produced by the assessee. 23.2 Aggrieved, the assessee filed objection before the DRP. The DRP allowed the assessee’s claim, relying on the judgment of the Hon’ble Supreme Court in the case of Woodward Governor IT(TP)A No.269 & 217/Bang/2014 M/s.Dell International Services India Private Limited 84 India (P) Ltd. reported in 312 ITR 254 (SC), holding that the same was not a contingent liability and that the accounting treatment adopted by the assessee was only a timing issue. 23.3 The learned DR supported the order of the TPO. 23.4 The learned AR reiterated the submissions made before the TPO and the DRP. 23.5 We have heard rival submissions and perused the material on record. The net forex loss arising after set-off of the said gain on forward contract is as under: Nature of forex loss Amount (in Rs.) Gain on forward exchange contracts (5,26,74,967) Realised and unrealized forex loss (Net) – on settlement/re-statement of forex transaction 116,36,27,892 Amount claimed as deduction 111,09,52,925 23.5.1 The AO’s observation that the assessee had not offered any gain to tax is ex facie incorrect. AS-11 requires a foreign currency transaction to be initially recognized using the exchange rate as on the date of the transaction. However, at each balance sheet date, the foreign currency monetary items would be required to be reported using the closing rate. Such exchange loss accrued as at the year-end is in accordance with the method of accounting regularly adopted by the assessee and is not notional or contingent in nature. Before the AO, the assessee had submitted the following: IT(TP)A No.269 & 217/Bang/2014 M/s.Dell International Services India Private Limited 85  ledger extracts showing the accounting entries for forex gain/loss for the financial year 2008-09;  Sample invoices  the process adopted in accounting the forex gain/loss for each of the foreign currency transaction;  voluminous back-up workings including monthly Foreign Currency Trial Balance substantiating the net forex gain or loss booked in the forex ledger extracts;  Sample copies of intercompany summary extracts showing the invoice value in foreign currency for various transactions etc. 23.5.2 The AO completely ignored the detailed workings on forex loss. Having mentioned in the order that sample invoice copies were submitted, the AO erred in contending that no evidences were provided by the assessee. The DRP rightly appreciated that evidences demonstrating foreign exchange loss had been submitted and that the same cannot be said to be contingent liability. 23.5.3 Therefore, ground 5 is dismissed. 24. In the result, the appeal filed by the assessee is partly allowed and the appeal filed by the Revenue is partly allowed for statistical purposes. Order pronounced on this 18 th day of March, 2022. Sd/- (Padmavathy S) Sd/- (George George K) ACCOUNTANT MEMBER JUDICIAL MEMBER Bangalore; Dated : 18 th March, 2022. Devadas G* IT(TP)A No.269 & 217/Bang/2014 M/s.Dell International Services India Private Limited 86 Copy to : 1. The Appellant. 2. The Respondent. 3. The DRP, Bangalore. 4. The CIT (LTU) Bangalore. 5. The DR, ITAT, Bangalore. 6. Guard File. Asst.Registrar/ITAT, Bangalore