2020 (10) TMI 1093 - AT - Income Tax

Tribunal Upholds Assessee Victory: Deletes Disallowances, Restores Full Deduction for 2004-05 & 2005-06 Tax Years.

The Tribunal ruled in favor of the assessee for AY 2004-05 and 2005-06, ordering the deletion of disallowances concerning the provision for warranty, ... Provision for warranty - allowable revenue expenditure - HELD THAT:- In case of doubt and debate, Income Tax Authorities should have asked for the basis and the formula/criteria applied by the respondent/assessee to compute provision for warranty. On the other hand without disputing the computation, disallowance was made by holding that actual expenditure on warranty claims and not provision for warranty was allowable as expenditure. This proposition is wrong and incorrect. Improvement in technology would not justify disallowance of claim/expenditure on account of provision for warranty, though in a given case on basis of data it could be relevant factor in making the calculations. In view of the decision of the Supreme Court in Rotork Controls India (P.) Ltd.'s case [2009 (5) TMI 16 - SUPREME COURT] and decision in respondent-assessee's case we do not find any good ground or reason to accept the aforesaid contention of the Revenue. Marketing expenditure - whether above expenditure is allowable as a revenue expenditure incurred wholly and exclusively for the purposes of the business u/s 37 (1) - HELD THAT:- On examination of the issue before the lower authorities it is apparent that identical issue has been entered by the coordinate bench in assessee’s own case for assessment year 2003 –04 , wherein claim of the assessee was allowed and the issue reached to the doorstep of the honourable High Court [ 2018 (9) TMI 877 - DELHI HIGH COURT ] and order of the coordinate bench was confirmed. DR could not show us any reason or change in the facts and circumstances of the case. Therefore, respectfully following the decision of the coordinate bench which is been upheld by the honourable High Court on the identical circumstances and facts of the case, we allow ground wherein the marketing expenses on free of cost phones issued to the employees as well as the service centre dealers claimed by the assessee as revenue expenditure, disallowed by the AO holding it to be capital expenditure, direct the learned assessing officer to delete the disallowance of the whole expenditure and also Simultaneously to withdraw grant of 25% depreciation thereof. Addition on account of closing stock of free of cost phones - closing stock of the assessee has been computed after excluding free issue of phones of 15,554 numbers - HELD THAT:- Respectfully following the decision of the coordinate bench in assessee’s own case for earlier years, where revenue could not show any change in the facts and circumstances of the case of the minuscule amount in comparison to the total turnover of disputed stock, we allow ground number 4 of the appeal of the assessee and direct the learned assessing officer to delete the addition on account of inclusion of closing stock of free of cost phones issued. Addition on account of provision for obsolescence of inventory - HELD THAT:- Assessing officer has not done any exercise on his part, the disallowance proposed by the AO constantly being deleted by the learned dispute resolution panel in subsequent years also, we allow ground number 5 of the appeal for assessment year 2004 – 05 and ground number 4 for assessment year 2005 – 06 direct the learned assessing officer to delete the disallowance of 25% of the provision for obsolescence of inventory for both the years. Non consideration of the foreign exchange gain while computing the deduction u/s 80 HHE - HELD THAT:- The issue squarely covered in favour of the assessee by the decision of Novell Software Development (I) (P.) Ltd. [2013 (7) TMI 120 - KARNATAKA HIGH COURT] 90% of the foreign-exchange gain cannot be reduced from the profits and gains of the business of the export of software while calculating deduction u/s 80 HHE of the income tax act. Accordingly ground number 8 of the appeal for assessment year 2004 – 05 filed by the assessee is allowed. Issues Involved:1. Disallowance of provision for warranty.2. Disallowance of marketing expenditure.3. Addition on account of valuation of closing stock.4. Disallowance of provision for stock obsolescence.5. Assessment of arm’s length price in relation to international transactions.6. Reduction of claim under section 80HHE of the Income Tax Act.Detailed Analysis:1. Disallowance of Provision for Warranty:The assessee contested the disallowance of INR 18,47,08,697 for AY 2004-05 and INR 32,02,85,550 for AY 2005-06, arguing that the provision was made on a scientific basis. The CIT(A) had upheld the AO’s view that the provision was contingent. However, the Tribunal noted that the High Court had previously ruled in favor of the assessee on this issue for AY 2003-04, confirming that the provision for warranty was based on a scientific method and was an ascertained liability. Consequently, the Tribunal allowed the appeal for both assessment years, directing the deletion of the disallowance.2. Disallowance of Marketing Expenditure:The assessee challenged the disallowance of INR 65,17,570 for AY 2004-05 and INR 35,649,818 for AY 2005-06, which were treated as capital expenditure by the AO. The Tribunal referred to the High Court’s decision in the assessee’s favor for AY 2003-04, where it was held that mobile handsets provided to employees, dealers, and service centers were revenue expenditures as the ownership was transferred to the recipients. Following this precedent, the Tribunal directed the deletion of the disallowance and the withdrawal of the depreciation granted on these amounts.3. Addition on Account of Valuation of Closing Stock:The AO had added INR 7,69,56,677 to the closing stock for AY 2004-05, arguing that the method adopted by the assessee was incorrect. The Tribunal noted that in earlier years, similar issues had been resolved in favor of the assessee by the High Court and the Tribunal itself. It was established that the adjustment was revenue-neutral and the loss was not unusual given the minuscule amount relative to total turnover. Thus, the Tribunal directed the deletion of the addition.4. Disallowance of Provision for Stock Obsolescence:The AO had disallowed 25% of the provision for stock obsolescence, amounting to INR 42,80,732 for AY 2004-05 and INR 6,934,200 for AY 2005-06, treating it as an unascertained liability. The Tribunal observed that in subsequent years, the Dispute Resolution Panel (DRP) had deleted similar disallowances, recognizing the provision as based on a scientific method in accordance with the Global Company Policy. Hence, the Tribunal directed the deletion of the disallowance for both years.5. Assessment of Arm’s Length Price in Relation to International Transactions:The grounds related to the transfer pricing adjustments were not pressed by the assessee during the hearing. Consequently, these grounds were dismissed as not pressed.6. Reduction of Claim under Section 80HHE:The AO had reduced the claim under section 80HHE by INR 16,84,340 for AY 2004-05, arguing that foreign exchange gains should not be included in the computation of export profits. The Tribunal referred to the Karnataka High Court’s decisions in CIT vs. Infosys Technologies Ltd. and CIT vs. Novel Software Development Private Limited, which held that foreign exchange gains should be included in the export turnover. Following these precedents, the Tribunal directed the AO to allow the full deduction claimed by the assessee.Conclusion:The Tribunal allowed the appeals of the assessee for both assessment years 2004-05 and 2005-06, directing the deletion of disallowances related to the provision for warranty, marketing expenditure, valuation of closing stock, and provision for stock obsolescence. The grounds related to transfer pricing adjustments were dismissed as not pressed, and the reduction in the claim under section 80HHE was reversed in favor of the assessee.