AI Drafter 
TaxTMI 
TaxTMI 
TaxTMI 
2023 (1) TMI 1248
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....ed that the international transactions entered by the assessee with its Associated Enterprises (AEs) had exceeded the prescribed limit, hence, the matter was referred to the Transfer Pricing Officer (TPO) to determine the Arm's Length Price (ALP) of the said transaction. The TPO passed order u/s 92CA of the I.T.Act on 19.10.2016. In the said order, the TPO had proposed following adjustments:- Manufacturing segment Rs.307,69,14,132 Technical service provided to AEs (ITES) Rs.3,08,20,552 Marketing Service Charges receivable from AEs Rs.1,28,28,101 Warranty charges received / receivable from Dell India Rs.141,37,00,000 Total Rs.453,42,62,785 3. Pursuant to the TPO's order, the draft assessment order was passed u/s 143(3) r.w.s. 144C of the I.T.Act on 23.12.2016. In the said draft assessment order, the assessee incorporated the TP adjustment proposed by the TPO and also made certain corporate tax additions / disallowances. 4. Aggrieved by the draft assessment order, the assessee filed objections before the Dispute Resolution Panel on 24.01.2017. The DRP vide its directions dated 20.09.2017 disposed of the objections raised by the assessee. The ....
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....['the Act']. • The directions issued by the Ld. DRP did not take cognizance of the objections raised by the Appellant in relation to the transfer pricing matters with respect to the ad hoc adjustments proposed for the manufacturing segment and warranty charges. • The order passed by the Ld. AO is bad in law in so far as not following the directions issued by the Ld. DRP, which are binding on the Ld. AO, without considering the provisions of section 144C(10) of the Act. 2.Determination of arm's length price by the Ld. TPO in relation to the Manufacturing Segment • The Ld. DRP and Ld. AO/ Ld. TPO erred in rejecting the value of international transaction of manufacturing activity, as recorded in the books of account, at an arm's length price amounting to INR 160,511,692 on net basis. • The Ld. DRP and the Ld. AO/ Ld. TPO erred in determining a* new arm's length price in substitution of the arm's length price determined by the Appellant, thereby undertaking a transfer pricing adjustment of INR 3,076,914,132 on total turnover of this segment. • The Ld. AO / Ld. TPO erred in adjusting the en....
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....nds, Singapore Branch CDGBV'). This is based on mere surmises and conjectures and completely ignoring the facts and the functions assets and risk analysis of the Appellant in connection to the same. The Ld. DRP also erred in confirming the same. • The Ld. TPO and Ld. AO erred on facts and in law in arbitrarily proposing an adjustment on account of warranty cost in relation to the marketing support services, to the tune of INR 121.27 Crores, which is one-third of total warranty expenses, without considering the facts of the Appellant. The Ld. DRP erred in confirming the same. • The Ld. TPO and Ld. AO erred in not following the directions of the Ld. DRP for the previous years and arbitrarily applied a mark-up of INR 12.10 Cr to the adhoc warranty cost allocated. The ld.DRP erred in confirming the same. • Without prejudices to the above grounds, the Ld. TPO and Ld. AO did not take cognizance of the details filed by the Appellant in connection to the direct sales made in India by its associated enterprise viz. Dell Global B.V., The Netherlands, Singapore Branch CDGBV'). • The Ld. TPO and Ld. AO further erred in not restricting....
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.... the Appellant in this regard. 2. Disallowance of Rebate and Volume discount incurred under Stock and Sell (SNS) model of distribution under section 40(a)(ia) of the Act - Rs. 524,223,354 • The Hon'ble DRP and learned AO has erred in disallowing rebate and volume discount given to distributors under SNS model of distribution under section 40(a)(ia) of the Act, without appreciating that the provisions of TDS is not applicable on such expenses. • The Hon'ble DRP and learned AO has erred in upholding that the provisions of section 194H is applicable on such rebate and volume discount. • The Hon'ble DRP and the learned AO ought to have considered the judicial precedents, wherein it has been held that the provisions of TDS are not applicable on rebate and volume discount. • The Hon'ble DRP and learned AO has erred in stating that the transaction is not on principal-to-principal basis merely because the distributor is a reseller. • The Hon'ble DRP and learned AO ought to have appreciated that rebate is offered to distributors who purchase a predetermined quantity and the same is not paid as comm....
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....r the head "Profits and Gains of Business or profession" is 'profits and gains' and not 'gross receipts'. • The Hon'ble DRP and learned AO has failed to appreciate the accounting policy adopted by the Appellant to defer the proportionate cost of purchase of Software License over the period of Software License contract. Notwithstanding the above, having brought to tax, the entire consideration from trading in Software Licenses, the portion of cost of purchase deferred for recognition over the period contract ought to have been allowed as deduction. • Notwithstanding and without prejudice to the above contention, we submit that should the said deferred revenue be taxed in the current year, corresponding relief ought to be provided in the future years, wherein the same is offered to tax. 4. Disallowance of claim under section 40(a)(i)/40(a)(ia) of the Act - Rs. 215,109,398 • The Hon'ble DRP and learned AO has erred in disallowing Rs. 51,830,340 under section 40(a)(ia) of the Act on the contention that the Appellant Company has not provided details in respect of deduction of tax at source. • Without pr....
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....tending that the same has no connection with the business carried on by the Appellant. • The Hon'ble DRP and learned AO ought to have appreciated that such interest under section 201(lA) of the Act is compensatory in nature and has arisen in * .1 the course of carrying on business and therefore should be allowable under section 37 of the Act. • The Hon'ble DRP and the learned AO erred in not relying on the judicial precedents put forth by the Appellant in this regard. 7. Disallowance of unpaid Central Sales tax ("CST") - Rs.2,006 • The Hon'ble DRP and learned AO has erred in disallowing CST not appreciating the fact that CST amount was not routed through the profit and loss account and hence, the same should not be added back in the computation of income. • Notwithstanding the above, if the above-mentioned expense is held to be disallowed in the current year, the learned AO should be directed to allow the same on payment basis. • The Hon'ble DRP and the learned AO erred in not relying on the judicial precedents put forth by the Appellant in this regard. 8. Short credit of TDS - Rs. 43....
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....earned by the assessee as computed by the TPO Operating Income Rs.5434,19,06,540 Operating Cost Rs.5841,58,43,349 Operating Profit (Op. Income -Op.cost) (Rs.47,39,36,809) Operating / Net mark-up (OP/TC) -0.87%* Note : The assessee in the TP study had made an adjustment towards underutilized capacity, which the TPO rejected and arrived at a margin of (-)0.87%. Companies selected by TPO and the arithmetic mean of their PLIs : Sl. No. Company Name Average (in %) 1. BLG Electronics Limited 2.52 2. Circuit Systems (India) Ltd. 2.90 3. Fine-Line Circuits Limited 0.93 4. VXL Instruments Limited 1.68 5. TVS Electronics Limited 1.30 6. Electronics Corporation of India Ltd. 6.04 7. Smart Card IT Solutions Limited 12.01 8. Epitome Components Pvt. Ltd. 5.19 9. Sulakshana Circuits Limited 3.23 10 Micropack Private Limited 9.58 11 Sark Synertek Limited 7.36 Arithmetic Mean 4.79 Computation of arm's length price by the TPO and the adjustment made: Taxpayers operating revenue Rs.5434,19,06,540 Taxpayers operati....
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....IKA India (P.) Ltd. v. ACIT reported in (2019) 101 taxmann.com 276 (Bangalore-Trib.) and Continental Automotive Components India (P.) Ltd. v. DCIT reported in (2022) 137 taxmann.co 246 (Bangalore-Trib.). 9.2 The learned DR took us through the reasoning of the TPO for rejecting the assessee's claim. The learned DR submitted that the downslide in the business is industry specific and therefore, no adjustment can be granted on account of under-utilized capacity. 9.3 We have heard rival submissions and perused the material on record. The TPO has rejected the adjustment sought by the assessee for the reason stated at pages 7 to 11 of the TP order. The TPO has stated that adjustment, if any, can be made to the operating cost of the comparable companies. The TPO has stated that under-utilization of capacity is due to general trend in the industry, which is also affecting the comparable. The TPO has stated that the assessee was incorporated in the year 2003 and it is not the initial stage of operations. The adjustment is also rejected on the ground that the assessee has assumed 100% capacity utilization of the comparables. Further the TPO has stated that while calculating the adjustm....
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....n of Continental Automotive Components India Pvt. Ltd. v. DCIT reported in (2022) 137 taxman.com 246 followed the decision in the case of IKA India Private Limited v. ACIT (supra) and remanded the case back to AO / TPO. In the instant case, the assessee is not in the initial year of operation and therefore, adjustment cannot be granted without analyzing additional factors. In the case of IKA India Private Limited v. ACIT (supra), the Tribunal observed as follows:- "33. The assessee has under-utilized capacity during the subject assessment year and is accordingly factually and legally eligible to an adjustment for the same. Therefore, such a benefit cannot be denied to the assessee only for the reason that the data about comparable companies is not available. Requiring the assessee to produce such a data which is not available in public domain would tantamount to requiring the Appellant to perform an impossible task. The only way to get the data in the current case, would be where the TPO collates the same from the comparable companies by exercising his powers under section 133(6) of the Act." 9.3.4 We agree with the above observations that if the assessee has under-util....
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....margin 4.45% 1.93% (OP/OC) 10.3 In terms of section 92CA of the I.T.Act, the A.O. can refer the matter to the TPO for computation of ALP in relation to the international transaction and the TPO had empowered compute the ALP only in respect of the international transaction. No adjustment can be made in respect of transaction entered into with non-AEs. Therefore, the action of the TPO to make TP adjustment at entity level instead of restricting it to international transaction is not legally correct. The Hon'ble Bombay High Court in the case of CIT v. Phoenix Mecano (India) Pvt. Ltd. (supra) had held that the determination of ALP ought to be restricted to the transaction with the AEs. The Special Leave Petition preferred by the Revenue against Hon'ble Mumbai High Court judgment was dismissed by the Hon'ble Supreme Court (supra). The Bangalore Bench of the Tribunal in IKA India (P.) Ltd. v. DCIT( (supra) has also held that the transfer pricing adjustment should be only restricted to the AE related transaction of the assessee. The Tribunal in the said case, followed its earlier order in assessee's own case for assessment year 2012-2013 in ITA No.2129/Bang/2017 (order ....
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.... apply the test of functionality consistently. (ii) Sark Synertek Limited 12. It is submitted that this company is engaged in manufacturing of printed circuit boards, trading of switch gear and rendering of services. It is stated that the segmental details as regards these diverse services are unavailable, and therefore, the company cannot be selected as a comparable. 12.1 The learned DR supported the order of the TPO and the DRP. 12.2 We have heard rival submissions and perused the material on record. The annual report of the above company is placed on record from pages 186 to 223 of the index of Annual Report. On perusal of the financials of the said company, we find Sark Synertek Limited is engaged in the manufacture of printed circuit boards, trading of switchgear and rendering of services. Prima facie, the functions cannot be compared with that of the assessee. However, we find that the assessee had considered comparables like BLG Electronics, Circuit Systems and Fine Line Circuits Limited, which are also primarily engaged in the business of manufacture of printed circuit boards and the assessee has not objected to these companies to be taken as comparables, as the....
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....n (2010) 4 ITR (Trib.) 606 (ITAT-Chd.). Adjustment determined in respect of warranty cost [Ground I(3)] 14. It is claimed that the assessee provides telephonic support services for standard problems to the customers who purchase the products sold by Dell Global B.V. (DGBV) in India. It is submitted that the technical support services include services in relation to products sold by DGBV which are under warranty period. It is stated that in relation to warranty services, the cost of third party service provider and spares are borne by the assessee, and recovered from DGBV. It is submitted that the warranty obligation as regards the sales made by the AEs directly in India is wholly on the AEs and the assessee only provides co-ordination and support services as regards the same, for which it is compensated on cost plus 5%. It is stated that the co-ordination and support services includes call centre support, cost for third party services for assistance to customers of the AEs, etc. The cost of spares and parts to be replaced under the warranty are borne by the AEs. 14.1 The TPO made an adjustment on the basis that the assessee had not made any recovery towards warranty servic....
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....he above to be a part of the warranty costs debited to the P&L account and effect suitable adjustment. Since the services related to warranty are being handled by a third party and the assessee is being used only as a medium, the TPO is not correct in charging a markup on this amount. Hence, the objection relating to markup on the warranty cost is upheld. The TPO cannot charge a markup on warranty amount as such services are not rendered by the assessee to its AE." 8.7.1 In the light of the above directions of the DRP, which we are in consonance with the TPO, is directed to reexamine the issue raised in ground 10 afresh. It is ordered accordingly. 8.7.2 Hence, ground 10 is allowed for statistical purposes." 14.5 In the light of the above said order of the Tribunal, in assessee's own case, which is identical to the facts of the year under consideration, we restore ground 3 (TP segment) to the files of the AO / TPO. It is ordered accordingly. CORPORATE TAX ISSUE Disallowance u/s 40(a)(ia) of the I.T.Act for short deduction of tax [Ground II(1)] 15. The brief facts in relation to the above ground are as follows: For the assessment year under considerat....
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....n the nature of rebate given to the distributors on which tax were not liable to be deducted at source. The A.O., however, rejected the contention of the assessee and held the transaction was between principal and agent and not principal to principal basis. Therefore, the A.O. concluded that the assessee was obliged to deduct tax at source u/s 194H of the I.T.Act and since no tax was deducted at source, the said amount was disallowed u/s 40(a)(ia) of the I.T.Act. The DRP rejected the objections of the assessee and upheld the view taken by the A.O. 16.1 The learned AR reiterated the submissions that a sum of Rs.52.42 crore represents rebate payment to distributors on which the provisions of TDS are not applicable. The learned AR took us through the agreement to drive home the point that the transaction of the assessee with its distributors is in relation to rebate / discount on principalto- principal basis and hence the provisions of section 194H of the I.T.Act is not applicable. It was submitted that on identical facts, the Tribunal in assessee's own case for assessment year 2010-2011 (supra) had allowed the issue in favour of the assessee. It was further submitted that the issu....
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....ty of the distributor thereafter to sell such goods to the consumers and any unsold goods would not be returned back to the Assessee. Further, the distributor shall make the payments in relation to such purchases, within the time prescribed in the agreement irrespective of whether the same is sold by him or not. Further, upon achieving certain predetermined targets as set out by the Assessee, the distributors are eligible for rebate / volume discount at a predetermined rate. Therefore the nature of relationship between the Assessee and the distributors is that of a principal-to-principal and therefore there is no tax is liable to be deducted at source. This is evident from a reading of the agreement at page 2063 of Volume 5. 55. The ld AR drew our attention to the various clauses of the agreement to substantiate that the transaction of the Assessee with its distributors in relation to rebate / discount is on principal-to-principal basis and hence the provisions of 194H are not applicable. Further the ld. AR relied on the following case laws in this regard - - Harihar Cotton Pressing Factory v. CIT (Reported in [1960] 39 ITR 594 (Bombay) - Ahmedabad Stamp ....
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....essee that the clauses of the agreement with its distributors demonstrate that the transactions in relation to rebate/discount are on a principal-to-principal basis not attracting the provisions of section 194H. We are of the view that the agreements with distributors require examination to verify the claim of the assessee. We therefore remit this issue to the AO for verification of the agreements which the assessee has entered into with the distributors in relation to discount/rebate transactions and decide the allowability based on the ratio laid down by the Hon'ble High Court after giving reasonable opportunity of being heard to the assessee. This ground is allowed for statistical purposes." 16.4 In view of the above order of the Tribunal in assessee's own case for assessment year 2010-2011 (supra), we restore the issue raised in ground II(2) to the files of the A.O. The A.O. shall follow the directions of the Tribunal given for the assessment year 2010-2011. It is ordered accordingly. Addition of deferred revenue [Ground II(3)] 17. The brief facts in relation to the above ground are as follows: The assessee is engaged in the business of sale of computer hardware. It....
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....ccrues or arises or is deemed to accrue or arise to him in India during such year. It is submitted that during the year under consideration, to the extent of Rs. 100,30,45,893/-, no income "accrued" to the Assessee. • In the Assessee's case, as the obligation to provide the warranty services which could involve outflow of resources like goods(spares) and services are yet to occur and hence, in line with the generally accepted accounting principles, revenue is recognized on a straight-line basis over the period of contract. Any portion of consideration for which invoices have been raised but, some portion of the contract period pertains to subsequent year would be classified under "other liabilities" and the same would be recognized as revenue in the year in which obligation to provide the services arise. • To illustrate, say the Company sells a laptop in December 2011 along with warranty for two years. In such a case, proportionate revenue towards warranty services for four months would be accounted in FY 2011-12 and the balance would be carried forward to the next two years and offered to tax based on time proportion. Thus, though the full con....
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....-13 [order dated 11.11.2022 passed by this Hon'ble Tribunal in IT(TP)A No. 2834/Bang/2017] at paras 28-35 where the assessee's ground of appeal was allowed, accepting the above contentions and the addition deleted. 17.4 The learned DR supported the order of the AO / TPO. 17.5 We have heard rival submissions and perused the material on record. We find an identical issue was considered by the Tribunal in assessee's own case for assessment year 2010-2011. The Tribunal on perusal of the sample warranty agreements and following the Co-ordinate Bench order in the case of Schneider Electric IT Business India Pvt. Ltd. v. JCIT, LTU in ITA Nos.299/Bang/2014 and 218/Bang/2014 (order dated 30.04.2019), deleted the addition on account of deferred revenue expenses. The relevant finding of the Tribunal in this regard reads as follows:- 31. We heard the rival submissions and perused the materials on record. The main ground on which the DRP confirmed the order of AO is that the amount received towards warranty is not refundable even when the customer cancels the warranty agreement. The relevant extract from the DRP order reads as under - "Having heard the assessee we find t....
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....ician; or Customer fails to abide by all of the terms and conditions set forth in this Service Description. If Dell cancels this Service, Dell will send Customer written notice of cancellation at the address indicated on Customer's invoice. The notice will include the reason for cancellation and the effective date of cancellation, which will be not less than me 0-01 days from the date Dell sends notice of cancellation to Customer, unless state law requires other cancellation provisions that may not by varied by agreement. IF DELL CANCELS THIS SERVICE PURSUANT TO THIS PARAGRAPH, CUSTOMER SHALL NOT BE ENTITLED TO ANY REFUND OF FEES PAID OR DUE TO DELL." 33. The assessee recognizes that portion of consideration for which invoices have been raised pertaining to the year under consideration and the balance portion of the contract period that pertains to subsequent year is classified under "other liabilities". The revenue thus deferred is recognized in the year in which obligation to provide the services arise. In Assessee's case, as the obligation to provide the warranty services which could involve outflow of resources like goods(spares) and services are ....
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....question therefore that needs to be addressed is regarding whether deferring revenue is permissible under the mercantile system of accounting followed by the Assessee where income that accrues or arises to an Assessee has to be regarded as income. 92. The learned counsel for the Assessee in his rejoinder submitted that the decision of the Tribunal rendered in the case of Optum Health & Technology (India) (P.) Ltd. (supra) is clearly distinguishable because in that case not only was the revenue received but also services were rendered and still the Assessee chose to defer revenue recognition and it was in those circumstances, the Tribunal held that deferring revenue was not proper and had to be regarded as income of the relevant year. 93. We have given a very careful consideration to the rival submissions. Similar issue had arisen for consideration in the case of Punjab Tractors Co-op. Multipurpose Society Ltd. (supra) before the Hon'ble Punjab & Haryana High Court. In that case the facts were that the assessee was engaged in the purchase and sale of tractors, motor cycles, etc., and doing their repairing. It had received advances from the buyers of tractors to....
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....ceived is income or simply an advance, is the initial character of the receipt and not the head under which the amount is credited in the books of account. If no income has resulted, it cannot be said that income accrued merely on the ground that the assessee has been following the mercantile system of accounting." The Hon'ble Court accordingly upheld the stand of the Assessee. Holding that the Assessee did not become owner of the money received unless the services are rendered and was not entitled to appropriate the same till service was rendered in lieu of which the same was received in advance. 94. The Hon'ble Madras High Court in the case of Coral Electronics (P.) Ltd. (supra) also dealt with similar case. The assessee is a private limited company carrying on business in television sets. In the previous year ending 31st March, 1983, and 31st March, 1988 corresponding to the assessment years 1983-84 and 1988-89, respectively, the assessee had collected service charges, which were bifurcated into two items, one as pertaining to year and another pertaining to the subsequent assessment year and, therefore, excluded from consideration in determining the tot....
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.... were that the sums were received in advance and in respect of the sums received services were also performed but still the Assessee did not recognize revenue but postponed recognition based on the bills raised on the clients for services performed. Though there are observations in the order of the Tribunal that postponement of recognition of income is not possible on the basis of AS- 9 of ICAI when income accrues or arises under the mercantile system of accounting, those observations have to be confined as decision on the facts of that case. In the light of the decision of the Hon'ble High Courts of Punjab & Haryana and the Hon'ble Madras High Court, we are of the view that the claim made by the Assessee deserves to be accepted. Accordingly the addition made by the AO and confirmed by the DRP is directed to be deleted. Gr.No.19 is accordingly allowed." 35. In the light of the decision of the coordinate bench of the Tribunal and considering the facts of the case as discussed above, we are of the view that claim of the assessee deserves to be accepted and the addition made by the AO as confirmed by the DRP is hereby deleted. This ground accordingly is allowed in fav....
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....of the above accounting and tax treatment, it is submitted that a deduction for the entire amount shall be allowed in AY 2013-14. • Out of the total provision of expenses disallowed of Rs. 158,25,21,633/-, the assessee while providing complete break up, has provided evidence of TDS done/ TDS not applicable for substantial sum of Rs. 153,06,91,293/-. However, for certain expenses as listed below, considering the volume of transactions, the assessee had not submitted the details of TDS in respect of some of the following, as indicated: Particulars of Payment Amount disallowed u/s 40(a)(ia) (INR) Evidence for TDS given (INR) Difference (INR) Freight 31,56,15,532/- 39,75,65,546/- (1,63,31,923/-) Contract - Others 9,82,81,937/- Advertisement 16,46,61,955/- 37,06,35,583/- (3,42,48,397/-)* Repairs & Maintenance 2,32,67,228/- Staff Welfare 1,17,75,882/- Travelling and Conveyance 58,30,101/- Legal and Professional 9,57,01,235/- Warranty 10,36,47,579/- Accounting & Audit fee 72,73,030/- 75,97,261/- 3,24,231/- Royalty payment 35,02,23,675/- 34,86,49,424/- There i....
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....had already been offered to tax in the previous AY, the Assessee claimed the deduction of the same in the computation of income for AY 2010-11. During the course of hearing the AO called on the assessee to furnish the details of tax deducted at source on the amount claimed as deduction. Since the assessee was able to furnish evidences of tax deducted at source to the extent of Rs. 16,69,09,884/- out of Rs. 22,05,17,807/-, the AO made a disallowance of Rs.5,09,07,923/- for want of evidence, on the ground that under Section 40(a)(ia) of the Act deduction of the amount was allowable only if tax was deducted at source. 67. Before us, the ld. AR submitted that the impugned deduction is claimed not on the basis of subsequent tax deduction, but on the basis that entries are reversed in the current year and taxing the same would amount to double disallowance. The ld. AR therefore submitted that the amount claimed needs to be allowed as a deduction for tax computation purposes. The ld AR also submitted that the assessee, based on mercantile system of accounting, makes a provision for various expenses that have accrued at the end of the year but for which invoices are not received a....
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....70 -- 22,05,17,807 19,13,17,073 2,92,00,734 9,89,08,582 22,07,456 72. According to the ld AR the accounting practice of the assessee is to make the provision for expenses 31st March of the financial year and reverse the same on the 1st day of April of subsequent financial year. The assessee disallowed the provision made on 31st March of 2009 in the computation of income for the assessment year 2009-10. The same amount is claimed as a deduction in the subsequent in the computation of income as the year end provisions are reversed on 1st April 2009. The contention of the assessee that the deduction claimed if not allowed will result in double disallowance has merits. The expenses disallowed is eligible for deduction u/s.40(a)(ia) of the Act as and when the tax is deducted at source on such expenses. The reversal of provisions done on 1st April 2009, would go to nullify the impact of the expenses claimed by way of debit to the profit and loss account on which tax is deducted at the time of the payment. Therefore the reversal of provisions disallowed in the computation of assessment year 2009-10 is to be claimed as a deduction in the....
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....ch is identical to the issue raised for the relevant assessment year, we restore the matter to the files of the A.O. to re-examine the issue afresh. It is ordered accordingly. Disallowance of fixtures and stores interiors expenses [Ground II(5)] 19. For the assessment year 2013-2014, the assessee claimed an amount of Rs.2,90,47,055 being expenditure incurred towards fixtures and stores interiors as a revenue expenditure. It is submitted that the said expenditure was incurred by the assessee for maintaining uniformity in franchisee stores and the assessee not being the owner nor it derives any enduring benefit on such expenditure, the same ought to be allowed as revenue in nature. 19.1 The A.O. classified the expenditure as capital in nature for the reason that (i) Form 3CD filed for the assessment year 2013-2014 noted the said expenditure aggregating to Rs.2,90,47,055 as capital expenditure debited to profit and loss account; (ii) it was incurred towards purchase / acquiring of assets; and (iii) it is one time investment by the assessee and lifetime of the assets are more than one year giving enduring benefit to the assessee. The A.O., however, accepted the alternative cla....
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....chisees held that the expenditure incurred is in the nature of revenue and the same is to be allowed as a deduction. The relevant finding of the Tribunal in assessee's own case for assessment year 2012-2013 (supra), reads as follows:- "36. For the year under consideration the Assessee incurred an expenditure amounting to Rs. 4,25,15,813/- towards fixture and stores interiors expenses. The expenditure was claimed as being revenue in nature and deductible under Section 37(1) of the Act for the reason that the said expenditure was incurred for maintaining uniformity in the franchisee stores and the Assessee neither owns nor derives any enduring benefit on such expenditure. 37. The AO classified the expenditure as capital in nature for the reasons that (i) the Form 3CD filed for AY 2012-13 noted the said expenditure aggregating Rs. 4,25,15,813/- as capital expenditure debited to profit and loss account; (ii) it was incurred towards purchase / acquiring of assets; and (iii) it is one time investment by the Assessee and lifetime of the assets are more than one year giving enduring benefit to the Assessee. 38. The AO accepted the alternative claim of the Assesse....
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.... furniture for the stores, designs of the stores, etc. The AO on perusal of the agreement between the assessee and one of the franchisees viz., Pioneer Sports Company, New Delhi, found that all cots of refurbishment of the shop including and not limited to the cost of any new hardware and software solution shall be borne by the Nike i.e., the Assessee. According to the AO, these items of expenses cannot be regarded as revenue expenses as they endure for a longer period of time. The AO also made a reference to clause 12 of the agreement whereby the franchisee has to bear the insurance of goods and fixtures supplied by the assessee. Considering all these aspects, the AO concluded that the expenditure as a capital expenditure and he accordingly disallowed the claim of the assessee for deduction. The DRP agreed with the conclusions of the AO. 33. The learned Counsel for the assessee submitted that expenses are purely revenue in nature and the intention was to ensure that the franchisee showrooms confirmed to certain standards. It was submitted that the expenses do not add any value to existing assets and they are revenue in nature. Alternatively, it was claimed that the assess....
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....cision rendered by the ITAT Delhi in the case of Carrier Air-conditioning (supra) was a case of renovation to a leased premises and the finding was that it was a complete replacement of the existing premises. In this case we are concerned with refurbishing a show room to make it attractive for customers to visit and purchase assessee's products. In the given circumstances, we are of the view that the decision in the case of Emdee Apparels (supra) is applicable. Consequently, the claim made by the assessee is directed to be accepted and the relevant grounds of appeal are allowed." 43. The Assessee is primarily engaged in the manufacturing and trading of Dell brand Computer hardware and peripheral products. The sale of all these products in India are also carried out under a Franchise model. Under the said model, third party contractors would act as a Franchisee for the Assessee in India, where the said Franchise would open exclusive shops/ stores for sale of its products. To maintain the set standards and to ensure all the Franchise stores provides the customers an environment where these products are sold in Dell exclusive stores, the Franchisees are required to furnish th....
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....1(1A) of the I.T.Act and claimed the same as an allowable expenditure u/s 37 of the I.T.Act. The A.O. disallowed the interest holding the same has no connection with the business carried on by the assessee. 20.1 The DRP rejected the contentions / objections of the assessee and upheld the disallowance made by the A.O. 20.2 Aggrieved, the assessee has raised this issue before the Tribunal. The learned AR relied on the following case laws:- (i) Total Environment Building Systems Pvt. Ltd. v. DCIT in ITA Nos. 45 & 46/Bang/2017 (order dated 29.06.2022). (ii) Resolve Salvage & Fire India (P.) Ltd. v. DCIT reported in (2022) 139 txmann.com 196 (Mum-Trib.) 20.3 We have heard rival submissions and perused the material on record. We find on identical facts, the Bangalore Bench of the Tribunal in the case of Velankani Information Systems Ltd. v. DCIT reported in (2018) 97 taxmann.com 599 (Bangalore-Tribunal) had decided the issue against the assessee. The relevant finding of the Tribunal reads as follows:- "21. As far as delay in remittance of tax deducted at source u/s. 201(1A) of the Act is concerned, we find that the Hon'ble Madras High Court in the ....
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.... The court held that an assessee could not possibly claim that it was borrowing from the State, the amounts payable by it as income-tax, and utilising the same as capital in its business, to contend that the interest paid for the period of delay in payment of tax amounted to a business expenditure". (emphasis supplied) 22. The decision cited by the ld. counsel for the assessee of Kolkata Bench of the Tribunal on the issue is contrary to the decision of the Hon'ble Madras High Court. Though the decision of the Tribunal is later in point of time, judicial discipline demands that the decision of the Hon'ble Madras High Court is to be followed. It is also worthwhile to mention that the Kolkata Bench of Tribunal in the case of Narayani Ispat (P.) Ltd. (supra), which was cited by the ld. counsel for the assessee, did not consider or did not have an occasion to consider the decision of the Hon'ble Madras High Court in the case of Chennai Properties and Investment Ltd. (supra). In these circumstances, we follow the decision of the Hon'ble Madras High Court & uphold the order of the CIT(A) insofar as it relates to disallowance of interest on delayed remittance of ta....
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....Even otherwise, the assessee has not disputed this fact that it has not paid the GST. The only contention of the assessee is that it has not debited this amount in the profit and loss account but directly taken to the balance-sheet. This modus operandi of the assessee is not acceptable as the GST is part and partial of the sales and turnover of the assessee and it has to be shown as part of the inventory/closing stock. The assessee is required to maintain the books of accounts as per the accounting standards which are notified in the official gazette from time to time as per section 145 of the Act. The method of accounting is required to be regularly followed by the assessee. Even as per the provisions of section 145A, the valuation of the purchase and sales of goods and services and sale of inventory shall be adjusted to include the amount of duty, cess or fee actually paid or incurred by the assessee. Hence, the contention of the assessee that it has not claimed any deduction on account of GST by taking the same directly to the balance-sheet and not taking through the profit and loss account is not acceptable. The assessee cannot be permitted to adopt a modus operandi and giving ....
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....the customers, is directly taken to balance sheet on the liability side, without first crediting to P & L A/c. Similarly, as and when the said GST collected from the customers is deposited to Govt A/c, the outstanding GST liability existing in the balance sheet is reduced by that amount, but the P & L A/c remains unaffected as no debit entries are passed in the P & L A/c. In this manner, the amount of GST is neither credited in profit and loss account at time of making collection from the customers, nor the amount of GST is debited in profit and loss account at time of depositing the GST to the Central Govt A/c. According to the assessee, since no debit entries on account of GST are at all passed in the P & L A/c, this means that the assessee has not claimed any GST expenses allowable to it consequently no disallowance u/s 43(b) should be made. In support of these arguments, the assessee has placed its reliance in the case of CIT v. Associated Pigments Ltd. (1973) 71 Taxman 244 (Cal), wherein according to the assessee, it was decided that where the assessee had credited sales tax collection and debited sale tax payment in a separate sales tax account that would not rendered the pro....
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....t the sales tax collected by the assessee is revenue receipt even if it is shown by the assessee under non-revenue head and such treatment by the assessee is not decisive. Further, in the case of M/s. Jain Christopher v. DCIT in ITA No. 855/Bang/2012- order dated 12-4- 2013., it was held as under: - "7.2 During the course of assessment proceedings, the Assessing Officer observed that a sum of Rs. 29 lakhs representing service tax collected by the assessee had not been paid, but, was shown as 'outstanding liability'. Being queried, it was explained that it had not preferred any claim for deduction and, thus, it was argued, the question of disallowance tr/s 43B of the Act does not arise. The AO took a view that even though the assessee had not claimed the same in its P & L account as an expenditure and, therefore, section 43B has no application. However, he was of the view that the fact remains that service tax collected by the assessee but not paid to the Government account up-to the end of the financial year or even up-to the date of filing of the return of income and, thus, by not including this amount in its service, it had clearly made a claim indirectly. As rig....
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....he rigour of section 43B may be applicable in the case of Sales-tax or Excise Duty but the same cannot be said to be the position in case of Service-tax because of two reasons. Firstly, the assessee is never allowed deduction on account of service tax which is collected on behalf of the Govt. and paid to the Govt. accordingly. Therefore, a service provider is merely acting as an agent of the Govt. and is not entitled to claim deduction on account of service tax. Hence, on this account alone addition u/s 43B could not be made and the same has been correctly deleted by the CIT(Appeals)". However, in the instant case, as admitted by the assessee, service tax has been collected but not paid to the Government account either up-to the end of the financial year or even up-to the date of filing of the return of income. Thus, the case law relied on by the assessee is distinguishable and cannot come to the rescue of the assessee. (ii) CIT v. Noble and Hewitt India (P.) Ltd. (Del) 7.2.2 The Hon'ble Delhi High Court was predominantly concerned with the disallowance of deduction by invoking the provisions of section 43B of the Act. The Hon'ble Delhi High Court....
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....d u/s. 43B of the Act. We observe that the assessee has recorded his turnover after deducting the service tax received and the service tax has been credited separately. In section 145, of the Act for determining the income chargeable under the head profits and gains of business or profession or income from other sources, the same is to be computed in accordance with either cash or mercantile system of accounting regularly employed by the assessee. The said provisions were substituted by the Finance Act, 1995 w.e.f. 1-4-1997. Under section 145A of the Act, it is provided that notwithstanding anything to the contrary contained in clause(a) to section 145, the valuation of purchase and sale of goods and inventory, for the purpose of determining the income chargeable under the head profits and gains of business or profession, shall be (i) in accordance with method of accounting regularly employed by the assessee; and (ii) further adjusted to include the amount of any tax, duties, cess or fees, by whatever name called, actually paid or incurred by the assessee, to bring the goods to the place of its location and condition, as on the date of valuation. As per the explanation under the sa....
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....t produced any evidence regarding payment received from service recipients as to how they have paid-separately or inclusive of service Tax. He has also not produced any evidence regarding whether the TDS has been remitted on payment after excluding the service tax. After going through the paper book filed by the assessee, we observe that the assessee has utilized service tax credit towards payment of duty on capital goods and as per Reverse Charge Mechanism. Therefore, it is necessary to discuss the relevant provisions of the Cenvat Credit Rules, 2004 as well as section 43B of the IT Act. 7. Section 43B(a) is as under: 43B. Notwithstanding anything contained in any other provision of this Act, a deduction otherwise allowable under this Act in respect of- (a) any sum payable by the assessee by way of tax, duty, cess or fee, by whatever name called, under any law for the time being in force, or 8. Rule 4 of the CENVAT Credit Rules, 2004 reads as under: Rule 4. Conditions for allowing CENVAT credit. (1) The CENVAT credit in respect of inputs may be taken immediately on receipt of the inputs in the factory of the manufacturer or in ....
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.... grinding wheels and the like, and parts thereof falling under heading 6804 of the First Schedule to the Excise Tariff Act, are in the possession of the manufacturer of final products, or provider of output service in such subsequent years. Illustration.-A manufacturer received machinery on the 16th day of April, 2002 in his factory. CENVAT of two lakh rupees is paid on this machinery. The manufacturer can take credit upto a maximum of one lakh rupees in the financial year 2002-2003, and the balance in subsequent years. (3) The CENVAT credit in respect of the capital goods shall be allowed to a manufacturer, provider of output service even if the capital goods are acquired by him on lease, hire purchase or loan agreement, from a financing company. (4) The CENVAT credit in respect of capital goods shall not be allowed in respect of that part of the value of capital goods which represents the amount of duty on such capital goods, which the manufacturer or provider of output service claims as depreciation under section 32 of the Income-tax Act, 1961 (43 of 1961). (5) (a) The CENVAT credit shall be allowed even if any inputs or capital goods as such ....
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....onth immediately following the respective month). However, the payment for the month of March is required to be made by 31st of March itself. As per rule 6(4) of the Service Tax Rules, 1994, the assessee can pay for provisional payment of service tax in case he is not able to correctly estimate the tax liability. In such a situation, he may request in writing to the jurisdictional Assistant/Dy. Commissioner for the same. 10. As per section 73A of the Finance Act, 1994, any person who has collected any sum on account of Service Tax, is under obligation to pay the same to the Government. He cannot retain the sum so collected with him by contending that the service tax is not payable. 11. As per section 173A of the Service Tax Act, in case, the service tax is collected, the provision is as under: 173A. Service Tax collected from any person to be deposited with Central Government.-(1) Any person who is liable to pay service tax under the provisions of this Chapter or the rules made thereunder, and has collected any amount in excess of the service tax assessed or determined and paid on any taxable service under the provisions of this Chapter or the rules made ....
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....xation shall be, - (a) the time when the invoice for the service provided or agreed to be provided is issued: Provided that where the invoice is not issued within the time period specified in rule 4A of the Service Tax Rules, 1994, the point of taxation shall be the date of completion of provision of the service. (b) in a case, where the person providing the service, receives a payment before the time specified in clause (a), the time, when he receives such payment, to the extent of such payment: Provided that for the purposes of clauses (a) and (b), - (i) in case of continuous supply of service where the provision of the whole or part of the service is determined periodically on the completion of an event in terms of a contract, which requires the receiver of service to make any payment to service. provider, the date of completion of each such event as specified in the contract shall be deemed to be the date of completion of provision of service; (ii) wherever the provider of taxable service receives a payment up to rupees one thousand in excess of the amount indicated in the invoice, the point of taxation to the extent of such....
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....ice provider. Therefore, in all those decisions it was held that service tax outstanding is hit by the provisions of section 43B of the Income-tax Act. 1961. Due to the change in the law now those decisions do not help to the assessee. Moreover, the assessee has filed the service tax returns belatedly, i.e., for April to June on 16-4-2015, for July to September and half yearly from October to March, 2013 on 8-7-2015. In view of all these facts, the Id. CIT(A) has rightly dealt with the issue in question by giving elaborate findings in the impugned order regarding confirmation of addition u/s. 43B of the Act, which we do not find fit to be interfered with. Accordingly, the appeal of the assessee deserves to be dismissed." 4.2 In view of the above binding precedents, we are of the view that the service tax collected by the assessee and not paid to the Government exchequer before the due date of filing of return, is to be disallowed, though it was not charged to the profit and loss account and it attracts the provisions of section 438 of the Act and the present provisions of section 145A of the Act cannot be applied in view of non obstante clause in section 438 of the Act. Th....
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.... Thereafter, Hon'ble ITAT relied upon the judgement delivered by Hon'ble ITAT, Delhi in the case of M/s. Hemkunt Infratech (P.) Ltd. v. DCIT [ITA No. 6683/Del/2017 - order dated 23-3-2018. (iii) In the present case of the assessee, the issue is of "GST". As held by Hon'ble Apex Court in the case of Chowringhee Sales Bureau (P.) Ltd. v. CIT [1973] 87 ITR 542 (SC), the sales tax collected by the assessee is revenue receipt even if it is shown by the assessee under non-revenue head and such treatment by the assessee is not decisive. Accordingly, not only the provisions of s.43B are applicable in the case of assessee as GST is a "tax", but also GST collected by the assessee is revenue receipt even if it is shown by the assessee under nonrevenue head and such treatment by the assessee is not decisive. Consequently, in view of judgement of Hon'ble ITAT, Cochin Bench, Cochin in the case of "M/s. Kunnel Engineers & Contractors (P) Ltd as referred above, the non-payment of GST liability into the Govt A/c on or before the due date of filing ITR u/s 139(1) clearly attracted disallowances u/s 43B, irrespective whether the GST component of the sales was....