Tribunal rulings on cross appeals: non-resident commissions, warranty provision, ESI contributions upheld.

The Tribunal partly allowed both cross appeals, upholding the CIT(A)'s decisions on commission paid to non-residents, provision for warranty, and employees' ESI contributions. It allowed the marked to market loss claim, remitted the foreign tax credit issue for fresh adjudication, and clarified that no deduction under section 37(1) is permissible for foreign income tax withheld.

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Issues Involved:
1. Deleting the disallowance of Rs. 65,96,434 on account of commission paid to non-residents.
2. Deleting the disallowance of Rs. 60,48,228 on account of provision for warranty.
3. Restricting the disallowance of foreign tax credit to Rs. 3,10,799 and directing the balance unallowed foreign tax credit of Rs. 52,50,507 to be allowed as deduction under section 37(1).
4. Disallowing the employees' contribution to ESI of Rs. 43,908 under section 2(24)(x) r.w.s. 36(1)(va).
5. Disallowing marked to market loss of Rs. 71,29,913 on account of forward contracts entered into for hedging export sales.
6. Not allowing the entire foreign tax credit amounting to Rs. 55,61,306.

Issue-Wise Detailed Analysis:

1. Deleting the disallowance of Rs. 65,96,434 on account of commission paid to non-residents:

The issue revolves around the payment of commission to non-resident agents for procuring business without withholding tax. The Assessing Officer (AO) disallowed the commission payment citing the lack of evidence to justify the reasonableness and genuineness of the payment, and the non-compliance with Section 195. The CIT(A) deleted the disallowance, stating that the services provided by non-resident agents were genuine, substantiated by invoices and purchase orders, and that no tax was required to be withheld as the income was not taxable in India. The Tribunal upheld the CIT(A)'s decision, emphasizing that the agreements and related invoices were furnished, and no specific defects were pointed out by the revenue. The Tribunal also referenced the Supreme Court's ruling in GE India Technology Centre Private Ltd., which held that Section 195 is not applicable if the payments are not taxable in India.

2. Deleting the disallowance of Rs. 60,48,228 on account of provision for warranty:

The AO disallowed the provision for warranty, considering it a contingent liability and not based on a consistent and scientific method. The CIT(A) reversed this decision, citing the Supreme Court's judgment in Rotork Controls India Pvt Ltd, which allows such provisions if based on a scientific method and historical data. The Tribunal upheld the CIT(A)'s decision, noting that the provision was computed on a scientific basis, supported by historical data, and met the tests laid down by the Supreme Court in Rotork Controls' case.

3. Restricting the disallowance of foreign tax credit to Rs. 3,10,799 and directing the balance unallowed foreign tax credit of Rs. 52,50,507 to be allowed as deduction under section 37(1):

The AO granted a foreign tax credit of only Rs. 3,10,799 out of the claimed Rs. 55,61,306. The CIT(A) upheld this quantification but allowed the balance amount as a deduction under section 37(1). The Tribunal remitted the matter back to the CIT(A) for fresh adjudication on the quantification aspect, in light of its order for the assessment year 2009-10. The Tribunal also held that no deduction under section 37(1) can be allowed in respect of any income tax withheld abroad, as it is hit by the disabling provisions under section 40(a)(ii).

4. Disallowing the employees' contribution to ESI of Rs. 43,908 under section 2(24)(x) r.w.s. 36(1)(va):

The Tribunal noted that this issue is covered against the assessee by the Gujarat High Court's judgment in CIT Vs Gujarat State Road Transport Corporation, which disallows such contributions if not paid within the due date. The Tribunal upheld the CIT(A)'s decision, confirming the disallowance.

5. Disallowing marked to market loss of Rs. 71,29,913 on account of forward contracts entered into for hedging export sales:

The AO disallowed the marked to market loss, considering it notional and contingent. The CIT(A) upheld this disallowance, relying on CBDT instruction no. 3 of 2010. The Tribunal, however, referred to the Supreme Court's judgment in CIT Vs Woodward Governor India Pvt Ltd, which allows such losses if they are in accordance with the accounting standards. The Tribunal allowed the assessee's claim, emphasizing that the accounting treatment was consistent with AS-11 and that the loss was not notional.

6. Not allowing the entire foreign tax credit amounting to Rs. 55,61,306:

The Tribunal remitted the matter back to the CIT(A) for fresh adjudication on the quantification aspect, in light of its order for the assessment year 2009-10. The Tribunal also held that no deduction under section 37(1) can be allowed in respect of any income tax withheld abroad, as it is hit by the disabling provisions under section 40(a)(ii).

Conclusion:

The Tribunal partly allowed both the cross appeals. It upheld the CIT(A)'s decisions on issues related to the commission paid to non-residents, provision for warranty, and employees' contribution to ESI. It allowed the assessee's claim on marked to market loss and remitted the matter regarding foreign tax credit back to the CIT(A) for fresh adjudication. The Tribunal also held that no deduction under section 37(1) can be allowed for income tax withheld abroad.

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