2014 (10) TMI 429 - AT - Income Tax

Tribunal rulings on tax reassessment, mould expenses, transfer pricing, depreciation, and warranty claims for AY 2003-05

The Tribunal invalidated the reassessment proceedings for AY 2003-04, rendering the Revenue's appeal moot. For AY 2004-05, the Tribunal upheld the ... Validity of reopening of assessment u/s 147 – Jurisdiction of the AO – Escapement of income or not – Held that:- Reassessment was initiated on the basis of material already on record and there was no fresh material to initiate such proceedings – it is a settled position that where there is no fresh material in the possession of the AO, reassessment proceedings are not valid – relying upon THE COMMISSIONER OF INCOME TAX-V Versus ORIENT CRAFT LTD. [2013 (1) TMI 177 - DELHI HIGH COURT] - having regard to the Explanation I of section 147 read with section 143(1) the reopening of the assessment in this case was justified - the note forming part of the return clearly mentioned and described the nature of the receipt under a non-compete agreement - The reasons for the notice u/s 147 nowhere mentioned that the revenue came up with any other fresh material warranting reopening of assessment - mere conclusion of the proceedings u/s 143( I) ipso facto does not bring invocation of powers for reopening the assessment – Tribunal was rightly of the view that it was merely a change of opinion on the part of the AO and it could not initiate reassessment proceedings – Decided against revenue. Deletion on account of mould expenses - Expense or rent on moulds relate to M/s Dart India & ITL and not to the assessee company – Held that:- Following the decision in Asstt. Commissioner of Income Tax Versus M/s. Tupperware India Pvt. Ltd. [2014 (3) TMI 725 - ITAT DELHI] - mould rentals was payable by the assessee under a contractual obligation with contract manufacturer - The contract manufacturer have also given a certificate to the extent that mould rentals was to be borne by the assessee pursuant to the agreement - There is no change in the facts, situation or in law – thus, the Revenue cannot be allowed to adopt a different stand - when in earlier asstt. years the revenue accepted the order of the tribunal in favour of the assessee, then Revenue cannot be allowed to flip flop on the issue and it ought let the matter rest rather than spend the tax payers money in pursuing litigation for the sake of it - the expenditure on mould is allowable in the hands of the assessee - The payment of mould rental was done by the assessee under a contractual obligation with the contract manufacturer. The company had to import the molds from overseas group company on hire basis and provide the same to contract manufacturers to enable them to manufacture the products - Once the contract manufacturer completes the order placed by the assessee, the molds are returned back to the company and therefrom to the molds owners in case the particular molds, is not required for use of manufacturer – the contract and molds borrowed by the assessee can by no stretch of imagination be considered as a colorable device. If it was to be presumed that the payment of mould rentals is the liability of the contract manufacturers and so incurred by them in that case the cost of such mould rentals would be part of 'purchases' as it would increase the production cost of the contract manufacturer and accordingly, the purchase price bargained by the appellant would be increased by the same amount of mould rental - the assessee would not incur rental expenses, but will have to pay resultant higher purchase price to the contract manufacturer – Decided against revenue. Issues Involved:1. Validity of reassessment proceedings under Section 147.2. Disallowance of mould expenses.3. Transfer pricing adjustments.4. Disallowance of depreciation on computers.5. Warranty expenses claim.Issue-wise Detailed Analysis:1. Validity of Reassessment Proceedings under Section 147:The assessee contested the reassessment initiated by the Assessing Officer (AO) under Section 147, arguing it was based on existing material rather than new information. The AO had relied on an audit report already part of the original return, which did not constitute new material. The Tribunal referenced several judicial precedents, including CIT Vs Orient Crafts and CIT Vs Smt. Jyoti Devi, which held that reassessment without fresh material is invalid. The Tribunal quashed the reassessment proceedings, deeming them legally unsound.2. Disallowance of Mould Expenses:The Revenue challenged the allowance of mould expenses by the CIT(A), arguing they were unverifiable and not substantiated by the assessee. The Tribunal upheld the CIT(A)'s decision, noting that the assessee had consistently incurred and been allowed these expenses since 1997. The Tribunal cited the principle of consistency from the Supreme Court's decision in Excel India and found no substantial change in facts or law to warrant a different treatment. The Tribunal also noted that the expenses were contractually obligated and necessary for the business, thus allowable as revenue expenses.3. Transfer Pricing Adjustments:The Revenue disputed the CIT(A)'s method of determining the arm's length price (ALP) for international transactions, arguing for the TNMM over the RPM. The Tribunal supported the CIT(A)'s use of RPM, as the assessee functioned as a reseller with minimal value addition. The Tribunal also agreed with the exclusion of non-operating expenses from the PLI calculation and upheld the proportionate adjustment approach. The Tribunal found the CIT(A)'s detailed and reasoned order aligned with judicial precedents and dismissed the Revenue's appeal on this ground.4. Disallowance of Depreciation on Computers:The assessee's claim for depreciation on computers was disallowed due to the failure to produce original invoices and an updated asset register. The Tribunal remitted the issue back to the AO for re-examination, directing the assessee to provide sufficient evidence of the purchase and use of computers in business. The Tribunal emphasized the need for the AO to be satisfied with the authenticity of the claim.5. Warranty Expenses Claim:The Tribunal addressed the assessee's claim for warranty expenses, noting that the claim should be allowed based on actual expenses rather than provisions. The Tribunal referred to its previous decision in the assessee's case for assessment year 1999-2000, which mandated actual expense claims. Since the assessee had not debited any actual warranty expenses in the P&L account, the Tribunal dismissed the ground, upholding the disallowance of provision-based claims.Conclusion:The Tribunal quashed the reassessment proceedings for AY 2003-04, rendering the Revenue's appeal infructuous. For AY 2004-05, the Tribunal dismissed the Revenue's appeal on mould expenses and transfer pricing issues, while remanding the depreciation claim for re-examination and dismissing the warranty expenses claim. The assessee's cross-objections were partly allowed for statistical purposes.