TaxTMI 
TaxTMI 
2014 (12) TMI 805
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....ed to Dywidag International Gmbh) 29.0% b. Larsen & Toubro Ltd., India 26.0% c. Samsung Corporation, Korea 26.0% d. Ircon International Ltd. India 9.5% e. Shimizu Corpon, Japan 9.5% 100.0% 3. The Joint venture is engaged in execution of a project for construction of the Rail Corridor from ISBT upto Central Secretariat packaged as MCIB for the Delhi Metro Rail Corporation. The return for the year was filed on 30.10.2004 declaring a loss of Rs. 6,59,74,376/-. The return was selected for scrutiny assessment and statutory notices were issued and served upon the assessee. 3.1. During the course of the assessment proceedings, a proposal u/s. 142(2A) for audit of the books of account was forwarded to the Commissioner of Income Tax-18, Mumbai. The CIT granted approval which was challenged by the assessee vide a Writ petition. The Hon'ble Bombay High Court set aside the order. Again a proposal was sent for Special Audit u/s. 142(2A) which was approved by the Commissioner. Against this order, the assessee approached the Hon'ble Bombay High Court in a Writ Petition and the Hon'ble Bombay High Court dismissed the petition. The assessee filed a Special ....
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....urns of work contract was at Rs. 5,30,46,88,602/-. The turnover as per running account (RA) was at Rs. 5,00,68,52,523/-. The AO was of the strong belief that the turnover as per running account should be considered as the actual turnover for the year. 3.3. The assessee was asked to justify its claim of turnover of Rs. 4,94,78,18,674/-. The assessee filed a detailed reply stating that it has been consistently following AS-7 and it is incorrect to hold that it is not mandatory under the Income tax Act. The assessee claimed that this method was accepted in the earlier years also. This explanation of the assessee did not find favour from the AO. The AO was of the belief that income assessable under the Income Tax Act has to be computed in accordance with the Act and since the accounts have been drawn by the assessee on the basis of AS-7 which is neither recognized nor mandatory under the Act. The AO proceeded by taking the turnover as per the Running Account statement as the actual turnover for the year under consideration and added the difference of Rs. 5,90,33,849/- to the income of the assessee. 3.4. Proceeding further, it was noticed that the assessee has debited depreciation of ....
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....onsidering the facts and the submission, the Ld. CIT(A) was of the opinion that depreciation is a charge on current year's income by prescribed rate mandated by the statute. Therefore, there is no option available either for the assessee or for the AO to deviate from the prescribed rate mandated by the statute. The Ld. CIT(A) further observed that the difference amount between the statutory depreciation and excess as per amortization also cannot be allowed u/s. 37 of the Act as Sec. 37 is not applicable to depreciation. The Ld. CIT(A) concluded that there is no evidence to show that expenses on machineries were revenue in nature and accordingly upheld the findings of the AO in relation to the claim of depreciation. 3.7. Before the Ld. CIT(A), the assessee raised an additional ground which related to the claim of foreseeable losses of Rs. 4,42,31,018/-. The Ld. CIT(A) observed that the assessee itself has disallowed the claim in the return of income. Since he has rejected the method adopted by the assessee and further relying upon the decision of the Hon'ble Supreme Court in the case of Goetze (India) Ltd 157 Taxman 01, the Ld. CIT(A) was of the firm belief that no such claim can b....
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....Standard AS-7 on account for construction contracts. Construction contracts are formulated in a variety of ways in general fall into two basic types (1) fixed price contracts and (2) cost plus contract. Two methods of accounting for contracts commonly followed by the contractors are the percentage of completion method and the completed contract method. 4.5. Under the percentage of completion method, Revenue is recognized as the contract activity progresses based on the stage of completion reached. The cost incurred in reaching the costs of completion are matched with revenue resulting in the reporting of results which can be attributed to the proportion of the work completed. Although as per the principle of prudence, Revenue is recognized only when realized under this method, the revenue is recognized as the activity progresses even though in certain circumstances it may not be realized. Under the percentage of completion method, the amount of revenue recognized is determined by reference to the stage of completion of the work activity at the end of each accounting period. The addition of this method of accounting for contract, revenue is that it reflects revenue in the accountin....
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....which is not notified by the Central Government, the method of accounting of the assessee would be out-rightly rejected. As there is no doubt that the assessee has been consistently following accounting standard-7, in our considered opinion, the method followed by the assessee has to be accepted. We, therefore, do not find any justification in not accepting the sales recorded by the assessee in its books of accounts as per Accounting Standard AS-7. We set aside the findings of the Ld. CIT(A) and direct the AO to delete the addition of Rs. 5,90,33,849/-. Ground No. 1 is accordingly allowed. 5. Ground No. 2 relates to the disallowance of Rs. 23,61,29,230/- out of amortization of cost of specific equipment. 5.1. During the course of the assessment proceedings, it was noticed that the assessee has debited depreciation of Rs. 43,42,76,155/- to the profit and loss account. On perusing the schedule, it was found that the assessee has provided depreciation on the useful life of the asset over the contractual period of the project and the value of an asset for this purpose has been arrived at by the cost of acquisition minus its estimated residual value. It was further noticed that the as....
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....ing depreciation/amortization. However, the Income tax Act u/s. 32 specifically provides the method of computing the depreciation and the Income Tax Rules provide the relevant rates. All assessees are bound to follow the rates prescribed under the rules and compute the depreciation as per the procedure laid down u/s. 32 of the Act. The assessee has followed none. The corporate assessees compute depreciation in their books of account as per the Companies Act 1956. The same is recomputed for filing the Income tax returns in line with the provisions of the Income tax Act. By similar analogy, the assessee is free to compute the depreciation in its books in whatever manner/whatever method it wants to adopt but for income-tax purpose, the depreciation shall be computed and allowed as per the provisions of the Income-tax Act. The reliance on the judicial decisions placed by the AR do not support the facts of the case. The decision relied upon by the assessee relate to the fact that whether the expenditure is of revenue or capital in nature. In both the cases relied upon by the assessee the expenditure relates to the purchase of software and the judicial authorities have taken a view that ....
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.... the Ld. Counsel. It is not in dispute that the expenditure of Rs. 1,31,59,717/- has been disallowed as it pertain to A.Y. 2004-05. We, accordingly, restore this issue to the file of the AO. The AO is directed to entertain the claim of the assessee in A.Y. 2004-05. Ground No. 2 is treated as allowed for statistical purpose. 16. Ground No. 3 relates to the disallowance of Rs. 3,84,018/- out of salary. 16.1. It was noticed that the assessee has claimed TDS liability of Rs. 1,15,68,355/- being TDS on salary to expatriate employees by JV. The sum was reduced to Rs. 1,08,84,337/- through a rectification entry by debiting TDS payable by Rs. 3,84,108/- and crediting salary account. Accordingly, Rs. 3,84,10-8/- was treated as excess credit of salary. It was explained by the assessee that this mistake has crept up and has been rectified by the accountant. However, the same was disallowed as excess salary. 16.2. Before us, the Ld. Counsel for the assessee stated that it was a genuine mistake on the part of the accountant and the sum of Rs. 3,84,018/- has been added back in A.Y. 2006-07. 17. We find that there is no dispute that there was an excess credit of salary by Rs. 3,84,018/-. We, ....
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....terprises (AE). 24.1. Facts relating to this issue are that the assessee has entered into the following international transaction with its AE. Sr. No. Name of the Associated Enterprise Nature of International Transaction Method used for determining ALP Amount in INR 1. Gtckerhoff & Widmann AG Purchase of old equipments Comparable uncontrolled price method 2,939,660 2. Samsung Corporation Tunnel ventilation and station Air conditioning & ventilation works Comparable uncontrolled price method 690,805,808 3. Samsung Corporation Head Office Overheads Cost Plus Method 43,893,690 4. Dytwidag International Gmbh Head Office Overheads Cost plus method 53,420,531 5. Shimizu Corpn. Head Office Overheads Cost Plus Method 17,499,829 6. Samsung Corporation Direct expenses Cost 1,114,860 7. Dytwidag International GmbH Direct Expenses Cost 11,543,328 8. Shimizu Corporation Direct Expenses Cost 464.236 Total 821,681,942 24.2. The nature of international transaction is as under: Sr. No. Name, Address and country of tax residence of the Associated Enterprise. Relationship with IMCC Nature of business 1. Dyckerho....
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....led by the assessee from the JV partners which could justify the allocation of overheads to the assessee. The only piece of evidence available is the agreement entered between the assessee and its JV partners. 24.5. The TPO finally concluded by stating that in respect of all the international transactions with the AE, it is the responsibility of the assessee to justify/prove the nature of services availed from the AEs and also to prove as to how the said services have been utilized in the income earning process by the assessee during the financial year before determining the ALP of the transaction and the final allowability of the said expenditure under the provisions of Income tax Act. The TPO proceeded by taking the ALP of the allocation of overhead expenses at Rs. Nil and made an adjustment of Rs. 11,48,14,050/-. 25. The second TP adjustment is in relation to the determination of ALP of Tunnel Ventilation charges paid to AE at Rs. 69.08 crores. The assessee has paid sub-contract expenses to Samsung Corporation, Japan which is a JV partner for which the assessee claimed CUP method for justifying the ALP of transaction. It was explained that the sub-contract was given to the AE ....
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..... Ethos Hvac Systems Ltd 8.12 0.17 2.09% 4. Flakt (India)Ltd. 93.43 10.03 10.74% 5. Voltas Ltd. 1382.35 111.07 8.03% Arithmetic mean of all cases 8.17% 25.2. On receiving no details of segmental analysis of data/profitability of contract works with the AEs and the non-AEs, the TPO computed the ALP of the sub-contract price paid to the AE as under: Total value of contract receipt during the year Rs. 271.44 crores Total Operating expenses as per assessee Rs. 281.30 crores Total Operating Loss as per the assessee Rs. 9.86 crores Determination of ALP by applying arithmetic mean: Total value of contract receipts during the year Rs. 271.44 crores Desired profit margin @ 8.17% of comparables Rs. 22.18 crores Desired total costs based arithmetic mean Rs. 249.26 crores Actual total operating expenses claimed by assessee Rs. 281.30 crores Excess expenses claimed requiring adjustment Rs. 32.04 crores Desired total costs as determined above Rs. 249.26 crores Less: Total costs (other than AE-sub-contract cost) Claimed by assessee (281.30-69.08) Rs. 212.22 crores Desired cost of sub-contract to AE Rs. 37.04 crores....
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....deration. 28. Per contra, the Ld. DR strongly supported the order of the lower authorities. 29. We have carefully perused the orders of the authorities below and the relevant documentary evidences brought on record before us. The TPO has arrived at the ALP of this international transaction at Nil on the basis that the assessee was awarded a single contract work in the earlier years and more than 85% of the said contract had already been assigned to various sub-contractors including AEs on back to back basis. We find that the assessee JV came into existence with 5 independent enterprises coming together for executing the contract for DMRC. As per the agreement between the assessee and its JV partners, overhead office expenses of the respective JV partners were to be allocated to the assessee with a cap of 8.5% of the turnover of the assessee. We find that the TPO has not brought out any fact to indicate that the extents of overhead expenses are in excess of any overhead expenses debited in any of the comparable or the set of comparable. Infact the TPO has not taken any comparable for benchmarking this international transaction. Moreover, the TPO has not mentioned anything against ....
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....erefore, do not find any merit in the findings of the TPO. We, accordingly, set aside the findings of the TPO and direct the TPO to delete the adjustments made on account of arm's length price in relation to these international transactions entered into by the assessee with its AE. Ground No. 3 with its sub-grounds are accordingly allowed. 32.1. In the result, the appeal filed by the assessee is partly allowed. ITA No. 3608/M/2012 - A.Y. 2007-08 - Assessee's appeal 33. The first ground relates to addition of Rs. 29,23,55,121/- on account of alleged difference in sales. 33.1. The issue relates to the applicability of Accounting Standard AS- 7. We have discussed this issue in detail in ITA No. 2368/M/2011 qua ground No. 1 of that appeal. For our detailed reasons given in that appeal ground No. 1 is allowed. 34. Ground No. 2 is not pressed and is accordingly dismissed. 34.1. The assessee has taken an additional ground relating to disallowance of depreciation u/s. 32(1)(iii) of the Act. 34.2. The assessee has claimed a loss of Rs. 20,57,29,970/-. The loss was as a result of the difference between written down value less value realized on disposal of the assets. The assessee clai....