TaxTMI 
TaxTMI 
2016 (10) TMI 175
X X X X Extracts X X X X
X X X X Extracts X X X X
....f income declaring income of Rs. 15,28,572/-. The assessment was completed u/s 143(3) at an assessed income of Rs. 75,43,775/-. Thereafter, ld. CIT passed an order dated 17.3.2009 u/s 263 setting aside the assessment on the limited issue for carrying out necessary verification and cross inquiry to determine true nature, correctness and allowability of the following issues: "i) The assessee had made a payment for AMC of Rs. 255.58 lacs on which no tax was deducted at source. Since these payments were made to the non residents, tax was required to be deducted at source on the same. ii) The assessee has claimed and was wrongly allowed expenditure of Rs. 1,54,02,000/- towards provision for warranty. Since this was an unascertained liability it should have been disallowed and added to the income of the assessee. 4.2. The AO, after considering the assesse's submissions, made following disallowances: a. Disallowance on account of non-deduction of TDS on AMC contract Rs. 2,55,57,990/- b. Addition on account of provision for warrantee Rs. 1,54,02,000/-. 4.3. Apropos non-deduction of TDS in respect of AMC payments, ld. CIT(A) held that the same was n....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... letter dated 15.10.2009, submitted that the payment for AMC has been made by HCL to various parties belonging to various countries. The payment for AMC contract comprised payment for warranty charges and extended warranty charges, which are in the nature of repair/ replacement of equipments. Under the contract, equipments are sent outside India for any repair/ replacement and are reimported in India. 5.4. After considering the aforementioned submissions of assessee, the AO observed that in view of specific provisions laid down u/s 40(a)(i) of the I.T. Act, 1961, deduction could not be allowed as the payment had been made without TDS. He, accordingly, made a disallowance of Rs. 2,55,57,990/-. 5.5. Before ld. CIT(A) the assessee, inter alia, submitted as under: (a) AO has not analyzed the taxability of AMC payments under the provisions of the Act and Double Taxation Avoidance Agreements (hereinafter referred to as "DTAA"), entered between India and respective foreign country and summarily disallowed the entire AMC payments by merely stating that since these payments were made to the non-residents, tax was required to be deducted at source on the same. (b) The....
X X X X Extracts X X X X
X X X X Extracts X X X X
....id not fall within the provisions of Explanation to section 9(1)(vii) . 5.8. In this regard reliance was placed on the order of the ITAT in the case of Lufthansa Cargo India (P) Ltd. Vs. DCIT (2004) 91 ITD 133 (Del.), wherein it was, inter alia, held that overall repairs involved routine maintenance repairs and, therefore, it could not be said that foreign company rendered any managerial, technical or consultancy service to the assessee. The assessee also made detailed submissions in regard to taxability under the provisions of relevant tax treaty/ Double Tax Avoidance Act and pointed out that since these services were in the nature of routine repairs and maintenance and did not make available any technical knowledge, skill, experience, know how etc. to the assessee or its employees, therefore, the services did not come within the purview of the technical services envisaged under Article 13 of the DTAA read with protocol thereof, meaning thereby that the payments towards any such services in the form of AMC were not taxable as FTS as defined under paragraph 3 of Article 13 of the DTAA between India and Israel and, therefore, there was no liability to with-hold tax u/s 195 of the....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ctive action taken by Gilat. Gilat shall bear the cost of returning to the Buyer of Mumbai, India the repaired or replacement Hub Station Equipment within thirty (30) days of Buyer delivering such equipment to Gilat (CIF Tel Aviv), provided that if Gilat determines that such equipment is not defective, Buyer shall pay Gilat all costs of handling, transportation and labor at Gilat's then prevailing rates. 6.1. By referring to these covenants ld. CIT(DR) submitted that delivery is at CIF Mumbai. He, therefore, submitted that the amounts were taxable in India. 7. Ld. Sr. counsel for the assessee relied on the decision of CIT(A) and submitted that in view of the decision in the case of Gee Technologies the provisions of section 195 were not attracted. 8. We have considered rival submissions and have perused the record of the case. The extended maintenance agreement has been entered into with Gilat Satellite Networks Ltd., a Israel company, with the assessee for warranty granted to assessee for the equipment supplied by Gilat Satellite Networks Ltd. The second recital of the agreement reads as under: "Whereas, according to the terms and conditions of purchase thereof, ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ised at an income of Rs. 44,18,870/-. The assessment was completed after making following three additions: (i) Disallowance u/s 14A (ii) Addition on account of difference in creditors balance (iii) Wrong claim of depreciation. 10.1. Ld. CIT examined the assessment records of assessee from which it transpired that the assessee had written off Rs. 458.13 lacs on account of cost of goods of more than 365 days on notional basis as a policy on the ground of their having nil market value at the end of that period. 10.2. Ld. CIT observed that since the loss claimed was only notional loss, not based on any actual valuation, therefore, should have been disallowed and added back to the income of the assessee. This mistake resulted in under-assessment of Rs. 458.13 lacs involving tax effect of Rs. 205.09 lacs including interest. Ld. CIT observed that these aspects were never considered by the AO while framing the assessment order. He further observed that no inquiry/ investigation appeared to have been carried out with regard to this aspect. Thus, he observed that it was a case of lack of inquiry/ investigation, apart from the under assessment of income. Thus,....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ently followed by the assessee company and the choice of the method of valuation of inventories rested with the assessee. Further, it was submitted that even if two views were possible about the tax deductibility of the written down of the value of the spares and accessories @ 25% only reduced from carrying value to the realizable value, the view taken by the AO was possible view. The assessee had placed reliance, inter alia, o the decision of Hon'ble Supreme Court in the case of Malabar Industries Vs. CIT 243 ITR 83. Ld. CIT after considering the assessee's submission did not accept the same for the following reasons: (a) Although AO collected the details from the assessee during the course of assessment proceedings but did not record that he examined the matter on the issue of allowability of the amount as claimed. He pointed out that AO did not critically examined the same with reference to the appropriate legal provision and, therefore, the assessment order was erroneous in the eyes of law. (b) As regards the assessee's claim that AO had taken one possible view, ld. CIT pointed out that since the issues were never considered by the AO during the course of asse....
X X X X Extracts X X X X
X X X X Extracts X X X X
....res had already been depreciated by 75% as on lst April-05, the remaining 25% of depreciation on these spares had been charged to COGS and it is the value has been included in the 4.85 crores . Note 2: It is a well known fact that IT equipment are subject to obsolescence on account of rapid change in technology and methods. On account of the above, the hardware ,software and other components unsold for more than 365 days are subject to write off's on account of their being rendered obsolete due to technology and market change and on account of their having nil market value at the end of that period. This policy of write off's has been followed year after year by the company and has been accepted by the A.O in the assessment of the earlier years. The breakup of the region wise write off's is as per Annexure No 8 to this note". 11.2. Ld. counsel further referred to the copy of audited accounts, contained at pages 68 to 91 of the PB and referred to Schedule 16 to P&L A/c of the cost of goods and services wherein note in regard to loss on writing of inventories to net realizable value was given. Ld. counsel further submitted t....
X X X X Extracts X X X X
X X X X Extracts X X X X
....lia, observed that on a question of valuation of the closing stock any alleged difference or discrepancy tends to balance itself out over a period of years if the same method is consistently followed. This is because the closing stock of one year becomes the opening stock of the succeeding year and any addition made to the valuation of the closing stock to increase the profits for that year automatically gets neutralized when the same figure of closing stock is taken as the opening stock of the succeeding year. What is, therefore, more important to be seen is whether the same method of valuation of stock is followed consistently by the assessee so that there is no distortion of profit. 11.4. With reference to these decisions, ld. counsel submitted that the assessment order cannot be said to be erroneous since the same is in consonance with the judicial precedents. In this regard ld. counsel relied on the decision in the case of K.N. Agrawal Vs. CIT 189 ITR 769, wherein it was, inter alia, held that ITO is bound to follow the order of appellate authority and, therefore, the said order cannot be held to be erroneous empowering Commissioner to revise the same. He also relied on the....
X X X X Extracts X X X X
X X X X Extracts X X X X
....lication of mind and whether proper application of mind is there or not, is to be decided keeping in view the level of enquiry expected from an authority, conversant with nuances of law. 13. Ld. Sr. counsel, in the rejoinder referred to page 80 of the PB, wherein significant accounting policies are contained in which, as regards inventory, it is stated as under: "Inventories are valued at lower of cost and net realizable value. The cost is calculated on the basis of weighted average price method and includes share of allocable overheads. The net realizable value is determined with reference to selling prices of goods. The comparison of cost and net realizable value is made on an item by item basis." 13.1. He further referred to the tax audit report contained at page 36 of the PB, wherein at serial no. 11, it is stated as under: 11. a) Method of accounting employed in previous year. Mercantile basis of Accounting. b) Whether there has been any change in the method of accounting employed vis-à-vis the method employed in the immediately preceding previous year. There has been no change in the method of accounting as compared to the method....
X X X X Extracts X X X X
X X X X Extracts X X X X
....educed valuation of slow moving raw material on the basis of estimated realizable value was held allowable. 13.4. Ld. counsel further referred to page 77 of PB, to point out that out of the total revenue of Rs. 2538368049, the revenue from service was Rs. 754735740/- which was 1/3rd of the total value. The assessee had to keep spares for service to cater its requirement of rendering services. 13.5. Ld. counsel submitted that ld. CIT lost of consistent method being followed by assessee. 14. We have considered the rival submissions and have perused the record of the case. It is well settled law that if there is no application of mind by AO in respect of an issue, then non-application of mind makes the order erroneous. There is no gain saying that mere erroneous order does not empower ld. CIT to exercise his powers u/s 263 unless the order is also prejudicial to the interests of revenue. 14.1. In the present case the assessee's reply dated 3.12.2008 is contained at pages 28 to 30, the contents from which, in regard to justification for writing off of stock as per the books of a/c, have been reproduced earlier. From the said reply it is evident that assessee in its note had....
X X X X Extracts X X X X
X X X X Extracts X X X X
....t realizable value of inventory was made available by assessee. Therefore, this decision is not applicable to the facts of the case because in the present case the assessee has simply reduced 25% valuation considering the same as to reduce the value of inventory to net realizable value. No proper estimate was produced before AO so that he could arrive at proper conclusion regarding net realizable value of spare. Further, in the case of Hughes Communication India Ltd., Hon'ble Delhi High Court in para 4 has, inter alia, noted that the claim was made on the footing that the net realizable value of the stock had fallen below even the cost price and in respect of the valuation the assessee submitted the basis of the estimate which was prepared by its technical department. Certain details were also submitted regarding certain items of stock together with their realizable rate as on 31.3.2003 and 31.3.2004. Therefore, this decision is also not applicable to the present set of facts. Accordingly, the assessment order was erroneous on account of nonapplication of mind to relevant aspect of arriving at net realizable value. 14.3. Now coming to the issue regarding assessment order being prej....
X X X X Extracts X X X X
X X X X Extracts X X X X
....der dated 24.08.2012 in appeal no. 233/11-12 relating to AY 2006-07. 17. The AO passed the assessment order u/s 143(3) read with section 263 of the I.T. Act, on 9.12.2011, determining total income at Rs. 29,36,07,013/- as against the returned income of Rs. 22,83,76,292/-. 17.1. The assessment order has been passed in pursuance to the order of ld. CIT u/s 263 dated 30.9.2010, setting aside the assessment. 17.2. The main issue for which the assessment was set aside, was regarding writing down of inventories of Rs. 458.14 lakhs by assessee, which was on the basis of impairment in the value of inventory by 25% of the cost of spares and accessories. The AO, after detailed discussion, disallowed the assessee's entire claim of Rs. 458.13 lakhs. In brief the reasons recorded by AO were as under: i. The assessee was not contesting the issue that the writting off had not been done on the basis of estimation and actually the goods were functional and operating. The assessee was also not disputing the fact that all the goods were in use during the year and as a matter of fact these goods had not been deleted from the actual stock. ii. The assessee was following regul....
X X X X Extracts X X X X
X X X X Extracts X X X X
....n accordance with the accounting standard II, issued by the Institute of Chartered Accountants of India. (ii) The assessee estimated 4-5 years as usual academic life of these spare parts as per industry norms and, accordingly, every year 25% of the value of these spare parts was written down to the P&L A/c. (iii) As per AS-2, issued by the Institute of Chartered Accountants of India, net realizable value is the estimated selling price in the ordinary course of business less the estimated cost of completion and the estimated cost necessary to make the same. (iv) The assessee had followed this method consistently. The assessee operated in a highly sophisticated and technological place wherein, owing to rapid technical advances, the obsolescence was very high and the value of spares of a few year ago, were rendered worthless because of technological changes. (v) No fault could be found with the method adopted by the assessee which was an accepted practice in the industry to value the inventory of net realizable value. (vi) As per the proviso of section 145(3) as substituted by the Finance Act, 1995 w.e.f. 1.4.1997, there were two options av....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ed to examine the correctness of method employed by assessee in preparation of its accounts. The method employed by assessee should be such from which true profits of an year can be deduced. However, in the present case since the assessee has debited the P&L a/c merely on presumptive basis, therefore, we restore the matter to the file of AO for providing the assessee an opportunity to furnish the details of net realizable value of spares backed with proper evidence in order to substantiate its claim. 21. In the result, appeal is allowed for statistical purposes. ITA no. 5898 (Assessee's appeal for AY 2009-10): 22. This appeal, preferred by the assessee, arises out of CIT(A)-XIII, New Delhi's order dated 17.09.2012 in appeal no. 232/11-12, relating to AY 2009-10. 23. Brief facts of the case are that during the year the assessee company carried on the same business as was in earlier year. Assessee had filed return of income declaring income of Rs. 19,31,49,431/- including short term and long term capital gains of Rs. 3,86,61,878/- and Rs. 1,58,29,030/- respectively. AO noticed that assessee had earned tax free income and for the purpose, the company had made investment of....
X X X X Extracts X X X X
X X X X Extracts X X X X
....w of the matter, the maximum amount of disallowance by considering the average of the value of the relevant investments, should not exceed Rs. 7,50,000/- only. 24. Apropos ground no. 1, as against disallowance of Rs. 1,06,61,713/- made by AO u/s 14A ld. CIT(A) restricted the disallowance to Rs. 27,42,886/- being 0.5% of average investment of Rs. 54,85,77,213/- holding that the disallowance was warranted under Rule 8D(2)(iii). 25. Ld. counsel for the assessee referred to page 34 of CIT(A)'s order that dividend income earned was Rs. 4,10,000/- and, therefore, disallowance should be restricted to Rs. 4,10,000/- only as the same cannot exceed the dividend income, which is exempt u/s 10(34). 26. Having heard both the parties we find that in view of the decision of Hon'ble Delhi High Court in the case of Joint Investments P. Ltd. Vs. CIT, rendered in ITA no. 117/2015 dated 25.2.2015, disallowance is to be restricted to Rs. 4,10,000/-. In the result, assessee's appeal is partly allowed. 6142/Del/2012 (Department's appeal for AY 2009-10): 27. The department has taken following grounds of appeal: 1. On the facts and circumstances of the case and in law, the Ld. CIT(A....
X X X X Extracts X X X X
X X X X Extracts X X X X
....008. These funds were raised from following parties: Category Nature of Loan taken Amount outstanding as on 31.10.2008 (Rs. / Lacs) Amount outstanding as on 31.10.2009 (Rs. / Lacs) Related interest cost incurred during the relevant FY under consideration (Rs./Lacs) Purpose for which loan was taken Supporting Documents 1 Loan taken from CISCO SYSTEMS (INDIA) PRIVATE LIMITED 841.93 4757.38 219.00 Loan was taken in connection with one of the projects of the appellant called "NSE (National Stock Exchange) Project". Since the moneys so borrowed were utilized wholly and exclusively for the business purpose only, interest cost associate with these loans is not warranted to be considered for the purpose of making any disallowance u/s 14A of the Act. Details of the Loans outstanding as on 31.3.2008 and 31.03.2009 along with the sample relevant Loan Agreements are enclosed as "ANNEXURE-2" II Short Term Foreign Currency Loan taken from HSBC and Societe Generale 4,799.29 NIL 52.48 These loans were taken in foreign currency and the same, being in the nature of buyers' credit, were utilized for the business purpose. As a result, no part....