TaxTMI 
TaxTMI 
2020 (12) TMI 556
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....x at source. The A.O. treated the purchases of computer software as payment in the nature of royalty. Since the assessee did not deduct tax at source from the payments so made, the A.O. disallowed the same u/s 40(a)(i) of the Act. The Ld. CIT(A) held that the payment made by the assessee for purchase of software was in respect of copy righted article and accordingly held that disallowance u/s 40(a)(i) of the Act is not called for. Accordingly, he deleted the disallowance. 4. We heard the parties on this issue and perused the record. The Ld. D.R. submitted that the jurisdictional High Court has held in the case of Samsung Electronics Company Ltd. (345 ITR 494) that the payment made for software purchase is in the nature of payment of royalty. Accordingly, the Ld. D.R. submitted that the assessee should have deducted tax at source from the payment made for purchase of software. Accordingly, he submitted that the A.O. was justified in making disallowance u/s 40(a)(i) of the Act. 5. On the contrary, the Ld. A.R. submitted that the decision in the case of Samsung Electronics Company Ltd. was rendered by Hon'ble jurisdictional High Court on 15.10.2011. Prior to the said decision....
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....losure of the FY 2010-11. Subsequently, the Finance Act 2012 also introduced, retrospectively, Explanation 4 to section 9(1 (vi) of the Act to clarify that payments for, inter alia. License to use computer software would qualify as royalty. During the FY 10-11, the assessee did not have the benefit of clarification brought by the respective amendment. As such, for the FY 2010-11, in light of the provisions of section 9(1)(vi) of the Act read with judicial guidance on the taxation of computer software payments, tax was not required to be deducted at source. Given the practice in prior assessment years, the assessee was of the bona fide view that the payment of software license fee was not subject to tax deduction at source under section1941/195 of the Act. Liability to deduct tax at source cannot be fastened on the assessee on the basis of retrospective amendment to the Act (Finance Act 2012 amendment the definition of royalty with retrospective effect from 01.04.1976) or a subsequent ruling of a court (the Karnataka HC IT(TP)A Nos.405 & 474/Bang/2015 in CIT v Samsung Electronics Co. Ltd. (16 taxmann.com 141) was passed on October 15,2011). Courts have consistently upheld this princ....
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....not be made in the facts of the present case. Accordingly, we confirm the decision rendered by Ld. CIT(A) on this issue on the above said reasoning. 8. The next issue relates to disallowance of provision for warranty. The A.O. noticed that the assessee has debited a sum of Rs. 29.17 crores towards Provision for warranty in respect of goods sold by it. The A.O. noticed that the deductibility of provision for warranty has been examined by the Hon'ble Supreme Court in the case of Rotork Controls India P. Ltd. (Civil Appeal No.3506 - 3510 of 2009) and certain guidelines have been laid down. The A.O. noticed that the assessee is making provision for warranty of huge amount every year and also reversing the warranty provision in subsequent years, which was also of significant amount. Hence, the A.O. took the view that the assessee is not following scientific method for creating provision for warranty and accordingly, he disallowed the same. 9. The Ld. CIT(A) noticed that the A.O. had made identical disallowance in assessment years 2004-05 to 2006-07 and the jurisdictional Income Tax Tribunal had deleted the same. Accordingly, the Ld. CIT(A), following the decision rendered by IT....
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....tual expenses and provisions made for warranty, the details of which are given in the Assessment Order itself, we do not find any abnormal fluctuation or excess provision made by the Assessee-Company on this account. 10. We express our concern and dissatisfaction at the manner in which the Assessing Authority in the present case has very casually disallowed the said claim in the hands of the Respondent-Assessee. Moreover, when the Higher Appellate Authorities have corrected the said approach of the Assessing Authority by the First Appellate Authority allowing the appeal of the Assessee and the Tribunal dismissing the appeal of the Revenue, we are all the more pained to see that the Revenue still felt dissatisfied and has brought up the matter before this Court under Section 260-A of the Act without actually any substantial question of law arising in the matter. This reflects the irresponsible manner in which the Revenue Department becomes a frivolous litigant in constitutional courts, by dragging such case, wasting public time and money. 11. As is well settled, the appeal under Section 260-A of the Act lies before this Court only on substantial questions of law. T....
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.... could constitute a contingent liability not entitled to deduction under Section 37 of the said Act. However, when there is manufacture and sale of an army of items running into thousands of units of sophisticated goods, the past event of defects being detected in some of such items leads to a present obligation which results in an enterprise having no alternative to settling that obligation. In the present case, the appellant has been manufacturing and selling Valve Actuators. They are in the business from assessment years 1983-84 onwards. Valve Actuators are sophisticated goods. Over the years appellant has been manufacturing Valve Actuators in large numbers. The statistical data indicates that every year some of these manufactured Actuators are found to be defective. The statistical data over the years also indicates that being sophisticated item no customer is prepared to buy Valve Actuator without a warranty. Therefore, warranty became integral part of the sale price of the Valve Actuator(s). In other words, warranty stood attached to the sale price of the product. These aspects are important. As stated above, obligations arising from past events have to be recognized....
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....rranty provision should be based on past experience of the company. A detailed assessment of the warranty provisioning policy is required particularly if the experience suggests that warranty provisions are generally reversed if they remained unutilized at the end of the period prescribed in the warranty. Therefore, the company should scrutinize the historical trend of warranty provisions made and the actual expenses incurred against it. On this basis a sensible estimate should be made. The warranty provision for the products should be based on the estimate at year end of future warranty expenses. Such estimates need reassessment every year. As one reaches close to the end of the warranty period, the probability that the warranty expenses will be incurred is considerably reduced and that should be reflected in the estimation amount. Whether this should be done through a pro rata reversal or otherwise would require assessment of historical trend. If warranty provisions are based on experience and historical trend(s) and if the working is robust then the question of reversal in the subsequent two years, in the above example, may not arise in a significant way. In our view, on the fac....
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....s contingent in nature. The Ld. CIT(A) noticed that the Bengaluru bench of ITAT has allowed foreign exchange losses as deduction in the case of Quality Engineering and Software Technologies Pvt. Ltd. 52 Taxmann.com 515 and also in the case of ACIT Vs. Hanuman Weaving Factory (ITA No.1112/2012). Accordingly, the Ld. CIT(A) deleted disallowance made by the A.O. 15. We heard the parties on this issue and perused the record. The Ld. A.R. submitted that the A.O. has assessed the foreign exchange gains arising on account of revaluation of creditors and other trading items. He submitted that the forward contracts have been entered by the assessee in respect of revenue items only. He further submitted that the assessee has not imported any fixed assets during the year under consideration and hence, there did not exist any forward contract on capital account. He submitted that revaluation of forward contract relating to revenue item is allowable as deduction as held by the Bengaluru bench of ITAT in the caseof Quality Engineering & Software Technologies Pvt. Ltd. 16. The Ld. D.R. submitted that marked to market losses have been held as notional loss by the CBDT instruction No.3/201....
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....to an assessee on account of trading in forex-derivatives. A large number of assesses are said to be reporting such losses on 'marked to market' basis either suo motu or in compliance of the Accounting Standard or advisory circular issued by the Institute of Chartered Accountants. The issue whether such losses on account of forex-derivatives can be allowed against the taxable income of an assessee has been considered by the Board. In this connection, I am directed to say that the Assessing Officers may follow the guidelines given below: 2....... 3. Treatment of loss from actual transactions in forex-derivatives. In a case where a loss on a forex-derivative transaction arises on actual settlement / conclusion of contract and is not a notional or marked to market book entry, a further question will arise as to whether such a loss is on account of a speculative transaction as contemplated in Section 43(5) of the Income tax Act. For determining whether loss from a transaction in respect of a forex-derivative is a speculation loss or not, the Assessing Officers may refer to Proviso (d) below sub-section (5) of Section 43 inserted by the Finance Act, 20....
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....may fall within the scope of the expression 'speculative transaction', it must be a transaction in which a contract for purchase or sale of any commodity, including stocks and shares, is periodically or ultimately settled otherwise than by the actual delivery or transfer of the commodity or scrips. 5.2.2. Here, it would be useful to appreciate in proper perspective how hedge transactions are commercially understood before determining the true scope, width and nature of proviso (a) to section43(5). Hedge contracts are those contracts which hedge against prejudicial price fluctuations. In speculative transactions the modus operandi of persons indulging in them is that when one enters into a contract of purchase, he also simultaneously enters into one or more contracts of sale against the same quantity deliverable at the same time either to the original vendor or to someone else, so as either to secure profit or to minimize loss, before the Vaida day ; and similarly when he enters into a contract of sale, he simultaneously enters into one or more contracts to purchase the same quantity before the Vaida day. The result of such dealings, when the sale and purchase are t....
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....loss arising from adverse fluctuations in prices, it also prevents him from making windfall profit owing to favourable fluctuations in prices as well. The forgoing of such a possible windfall profit is the price which he pays for the insurance against loss. This well-known technique, of hedge trading clearly implies forward contracts both ways, namely, for sale and purchase with a view to guarding against adverse price fluctuations. These forward contracts by way of hedge transactions usually afford a cover to a trader inasmuch as his loss in the ready market is offset by a profit in the forward market and vice versa. It, therefore, follows that in order to effectively hedge against adverse price fluctuations of the manufactured goods or merchandise, a manufacturer or merchant has necessarily to enter into forward transactions of sale and purchase both, and without these contracts of sale and purchase constituting hedge transactions, there would be no effective insurance against the risk of loss in the price fluctuations of the commodity, manufactured or the merchandise sold. 5.3. Hedging contracts are dealt in Clause (a) of the proviso to section 43(5) of the Act. From th....