2018 (7) TMI 224 - AT - Income Tax

Tribunal Decisions: Warranty Expenses Upheld, Liquidated Damages Re-examined

CPS Cash Processing Solutions Private Ltd. [Formerly known as-De La Rue Cash Processing Solutions India Pvt. Ltd. Versus DCIT Circle-1 (1), Gurgaon

CPS Cash Processing Solutions Private Ltd. [Formerly known as-De La Rue Cash Processing Solutions India Pvt. Ltd. Versus DCIT Circle-1 (1), Gurgaon - TMI Issues Involved:1. Disallowance of provision for warranty expenses.2. Disallowance of liquidated damages.3. Adjustment under Section 145A of the Income Tax Act for unutilized countervailing duty.4. Additional ground for deduction of countervailing duty on imported machinery.5. Transfer pricing adjustment for support services of employees.6. Disallowance of provision for liquidated damages for delay in supply.7. Disallowance of custom duty on leased machine.8. Disallowance of countervailing duty paid in earlier years and written off.Detailed Analysis:1. Disallowance of Provision for Warranty Expenses:The CIT(A) upheld the disallowance of Rs. 1,76,90,014/- on account of warranty provision estimated at 10% of sales. The assessee argued that the provision was based on a systematic and scientific manner considering various factors such as the life of machines and expected service costs. The Tribunal referenced the Supreme Court's decision in Bharat Earth Movers vs. CIT and Rotork Controls India (P) Ltd. v. CIT, which established criteria for deductibility of warranty provisions. The Tribunal found that the assessee's provision met these criteria and allowed the appeal, reversing the CIT(A)'s decision.2. Disallowance of Liquidated Damages:The CIT(A) upheld the disallowance of Rs. 1,34,98,850/- for liquidated damages provided for delays in supply. The assessee contended that these damages were contractual obligations and not unilateral deductions. The Tribunal noted that the liquidated damages were incurred per the terms of the purchase orders and agreements with public sector banks. The Tribunal directed the Assessing Officer to verify the documents and the claim of set-off in the subsequent assessment year, restoring the issue for further examination.3. Adjustment under Section 145A for Unutilized Countervailing Duty:The CIT(A) upheld the addition of Rs. 1,99,98,194/- under Section 145A for unutilized countervailing duty, arguing it should be added to the value of closing inventory. The assessee argued that their accounting method was in conformity with ICAI guidelines and had no impact on net profit. The Tribunal directed the Assessing Officer to re-examine the issue, considering the provisions of Section 145A and the actual calculations related to countervailing duty and service tax.4. Additional Ground for Deduction of Countervailing Duty on Imported Machinery:The assessee claimed a deduction for countervailing duty of Rs. 1,84,25,285/- paid on imported machinery. The Tribunal rejected this additional ground, noting it was not raised before the lower authorities and was a factual issue that could not be entertained at this stage.5. Transfer Pricing Adjustment for Support Services of Employees:The Assessing Officer made an addition of Rs. 4,10,274/- for transfer pricing adjustment related to support services of employees deputed to associated enterprises. The Tribunal found that the company had charged more than the proposed 5% mark-up and allowed the appeal, reversing the Assessing Officer's decision.6. Disallowance of Provision for Liquidated Damages for Delay in Supply:The Assessing Officer disallowed Rs. 8,50,077/- for liquidated damages related to delays in supply. The Tribunal directed the Assessing Officer to verify the documents and the claim of set-off in the subsequent assessment year, restoring the issue for further examination.7. Disallowance of Custom Duty on Leased Machine:The Assessing Officer disallowed Rs. 1,08,930/- being the custom duty on a leased machine, arguing it should have been capitalized. The Tribunal found that the company had capitalized the value of the machine inclusive of customs duty and allowed the appeal, reversing the Assessing Officer's decision.8. Disallowance of Countervailing Duty Paid in Earlier Years and Written Off:The Assessing Officer disallowed Rs. 2,07,03,492/- for countervailing duty paid in earlier years and written off in the current year. The Tribunal upheld the Assessing Officer's decision, noting that the expenditures were of prior periods and could not be allowed as deductions in the current year.Conclusion:The Tribunal allowed the appeals partly for statistical purposes, directing further verification and examination by the Assessing Officer on several issues while allowing some claims and rejecting others based on the evidence and legal precedents. The judgments emphasized the necessity of adhering to contractual obligations, proper accounting methods, and the principles of natural justice in tax assessments.