TaxTMI 
TaxTMI 
2022 (11) TMI 1351
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....trading segment), provision of technical and marketing support services to its AEs, reimbursement and recovery of expenses to/from its AEs. We shall discuss the functions performed under each of the segments while discussing the adjustment determined by the TPO. 3. In the TP study maintained for the year under consideration, the Assessee treated all the international transactions as being at arm's length. During the year, the Assessee also recovered certain advertisement expenses from Intel USA ("Intel") and Microsoft USA ("Microsoft"). Since the transactions were with unrelated parties, the assessee did not benchmark the same. During the course of assessment proceedings, reference was made to the Transfer Pricing Officer (TPO). The TPO passed an order dated 29.01.2015 under Section 92CA of the Income-tax Act, 1961 ("the Act") determining a TP adjustment aggregating to Rs. 18,00,81,299/-, comprising of the following: A. Adjustment determined by bifurcating the marketing and business support services segment into ITES segment (adjustment of Rs. 3,73,98,104/-) and MSS segment (adjustment of Rs. 2,89,47,259/-); and B. Adjustment of Rs. 11,37,35,936/- determined in....
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....o make any adjustment under the provision of Chapter X of the Act. 2. Erroneous bifurcation of marketing and business support services into IT enabled services (`ITeS') and Marketing support services 2.1 The AO/ TPO has erred in fact and in law, in arbitrarily bifurcating Marketing and business support services segment into ITeS and Marketing support services without any basis. The Ld. Panel erred in upholding the actions of the AO/ TPO. 2.2 The AO/ TPO has erred on facts in arbitrarily apportioning the cost between ITeS and Marketing support services segments. The Ld. Panel erred in upholding the actions of the AO/ TPO. 2.3 The Ld. Panel and the AO / TPO erred in rejecting the value of international transactions as recorded in the books of account, as the arm's length price. 2.4 The Ld. Panel and the AO / TPO erred in determining a new arm's length price in substitution of the arm's length price determined by the Appellant. 2.5 The Ld. Panel and the AO/ TPO erred in law in holding that the fresh comparability analysis using non contemporaneous data conducted by the TPO and further substituting the Appellant'....
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....rsistent losses up to and including financial year 2010- 11. 4.2 The AO/ TPO also erred on facts in arbitrarily accepting companies without considering the turnover and size of the Appellant and comparables. The Ld. Panel erred in upholding the actions of the TPO. 4.3 The AO/ TPO also erred on facts in erroneously computing the margins of certain companies identified as comparable by the AO/ TPO. 4.4 The AO/ TPO erred in including Accentia Technologies Ltd., ICRA Online Ltd (seg), Jeevan Scientific Technology Ltd., Jindal lntellicom, despite these companies being functionally dissimilar to the Appellant. The Ld. Panel also erred in confirming the same. 4.5 The Ld. Panel erred in arbitrarily rejecting Cosmic Global Limited and e4e Healthcare Business Service Ltd. despite being functionally comparable companies. 5. Erroneous adjustment of Rs. 9.61 Crores as Warranty cost to be received from AEs 5.1 The TPO 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 9.61 Crores without considering the facts of the Appellant. The Ld. P....
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....hat the services under the technical and marketing services segment is essentially dissemination of information and the Assessee is acting as communication channel between the customers and the AEs, using IT medium. Thus, the services rendered by the Assessee are to be considered as ITES. Upon holding so, the TPO bifurcated the segment into ITES segment and MSS segment and benchmarked them separately. In arriving at this conclusion, the TPO relied on the order passed in the Assessee's case for the assessment year 2009-10. The DRP confirmed the TPO's order. Aggrieved the assessee is in appeal before the Tribunal. 10. The ld.AR submitted that under the technical and marketing support services segment, the Assessee does not render any services in the nature of ITES. The services rendered are in the nature in the nature of marketing support services and incidental technical services. On the erroneous basis that what the Assessee does is merely dissemination of information using IT media, the TPO held that the services are in the nature of ITES. The ld AR also submitted that even if the services rendered are considered to be ITES, the services that are being classified as ITES are re....
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....aterial on record. The TPO held that services under the technical and marketing services segment is essentially dissemination of information and the assessee is acting as communication channel between the customers and the AEs using IT medium. According to the TPO, those services rendered by the assessee are to be considered as ITES. After holding so, the TPO bifurcated segment into IT segment and MSS segment and bench marked them separately. 7.8.1 In this context, it is pertinent to note that for assessment year 2013-2014, the DRP granted relief to the assessee by holding that services rendered are in the nature of marketing support services. Copy of the DRP's order for assessment year 2013-2014 is placed on record at page 770 Vol.4 of the case law compilation. The DRP has given the above directions at page 10. The relevant finding of the DRP in assessment year 2013-2014 reads as follows:- "Having considered the submissions, and on perusal of the details filed, we note that as per the Services Agreement entered between the assessee and Dell Global BV (Singapore branch) dated 01.01.2009, the assessee is required to prove certain technical support to the customers ....
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....10 and therefore respectfully following the decision of the coordinate bench of the Tribunal, we remit the issue back to the AO/TPO for fresh consideration in the light of the DRP's directions for assessment year 2013-2014. It is ordered accordingly. 15. Since assessee's main issue relating technical and marketing support segments raised in ground no. 2 is restored to the AO / TPO for fresh consideration, the other grounds in this segment also are restored to the TPO for fresh adjudication (as the same would be relevant if TPO rejects the assessee's contentions in ground 2). The grounds I(2) to I (4) and I(6) to I(7) are allowed for statistical purposes. Adjustment determined in respect of warranty cost - Ground I(5) 16. The Assessee provides telephonic support services for standard problems to the customers who purchase the products sold by DGBV in India. The technical support services include services in relation to products sold by DGBV which are under warranty period. In relation to warranty services, the cost of third party service provider and spares are borne by the Assessee, and recovered from DGBV. The warranty obligation as regards the sales made by the AEs direc....
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....kup 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." 20. Respectfully following the above decision we direct the TPO to re-examine the issue raised in ground no.5 afresh. It is ordered accordingly. This ground is allowed for statistical purposes. CORPORATE TAX ISSUES Provision for warranty and warranty expenses (Ground No.II(1)) 21. The relevant ground reads as under :- II. Corporate Tax 1. Disallowance of Provision for Warranty- Rs. 2,165,200,000 1.1 The learned Assessing officer ("AO") has erred in stating that the appellant has failed to substantiate the basis of creation of provision for warranty without appreciating the detailed back up workings submitted by the appellant substantiating the basis of creation of provision for warranty. 1.2 The learned AO ought to have appreciated the fact ....
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....les are divided into various categories of IT hardware products based on the warranty period attached to each such product. The faults are tracked on the basis of a unique identification number attached to each IT hardware so as to identify cases of faults; c. Thus, the warranty cost is nothing but the product of number of incidents reported and cost involved in servicing each unit under various categories of products; d. The system of tracking the faults and related warranty costs is extremely scientific with minimal margin of error as it is based on actual faults reported and costs incurred in servicing them. e. The assessee neither creates the provision customer wise nor the utilization of such provision for warranty would be tracked customer wise. The tracking is based on the products and not customers. The warranty service for products sold is carried out based on the service tag number ascribed to each such product. Hence, non-submission of the list of customers for whom the warranty expense has been incurred cannot be the basis to conclude that the assessee does not create provision for warranty on a scientific basis, as has been done by the AO. ....
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.... that - "12.5 We have heard rival submissions and perused the material on record. As regards the provision for warranty, the learned AR explained that the methodology followed by the assessee for estimating warranty cost is on a scientific basis and it is based on past years experience. The detailed explanation of the learned AR is recorded in para 12.2 (supra), hence, the same is not reiterated. The Tribunal in assessee's own case for assessment year 2002-2003, 2003-2004 and 2005-2006 had dismissed the appeal of the Revenue and held that the provision of warranty claimed is based on scientific basis and held that it is entitled for deduction. The relevant finding of the Tribunal in assessee's own case Dell International Services India (P.) Ltd. v. Dy. CIT [2018] 89 taxmann.com 44 (Bang. - Trib.), reads as follows:- "21. We have given a very careful consideration to the rival submissions. The basis on which provision for warranty was made by the assessee was that the Assessee has arrived at a model for ascertaining the warranty cost, based on the type of equipment, periodicity of warranty and nature of commitment. The Assessee has a specialized warranty ac....
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.... 2002-2003 and 2003-2004 in ITA Nos.362 & 363/Bang/2007 (order dated 18-3-2016,). The relevant finding of the Tribunal reads as follows:- '5. Learned AR of the assessee submitted that in the earlier order, though the Hon'ble Tribunal held that provision for warranty was made following scientific method and the past history, still the matter was remanded to the AO for verification. He submitted that when the entire material is on record, it is not in the fitness of things, to remand the matter to the file of the AO. Our attention was drawn to the material on record wherein the methodology and basis of estimating warranty provision was made out which reads as under: "5. Warranty provisioning policy - Methodology and basis of estimating warranty cost: The company has submitted a detailed methodology of estimating the warranty provision before the AO vide its submission on 17-3-2006 for AY 2003-04. An extract of the acknowledged copy of the same is attached herewith as Annexure 2. Please find below a summary of the same: The company has arrived at a model for ascertaining the warranty cost, based on the type of equipment, periodicity of warra....
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....ovision required to be created in the subsequent years, it, in effect, leads to the same being credited to the profit and loss account in the subsequent year. In view of the parity of basis of provision for warranty for assessment years 2002-2003, 2003-2004, 2005-2006 and the relevant assessment year, the ruling of the Tribunal in assessment years 2002- 2003, 2003-2004, 2005-2006 is squarely applicable for this assessment year also. 12.5.3 We noticed in the final assessment order, the A.O. had commented that the ITAT order in assessee's group case, namely, CIT v. Dell International Services India (P.) Ltd. (wrongly mentioned as assessee's group company) has been set aside by the Hon'ble High Court and restored to the Tribunal with a direction to examine the claim of warranty. In this background, it is necessary to recapitulate the background of the Tribunal order for assessment years 2002-2003 and 2003-2004. In the first round, the Tribunal vide its order dated 16-12- 2017 (in ITA Nos.362/Bang/2007 & 363/Bang/2007) dismissing the appeals filed by the Revenue. The said order was challenged by the Revenue before the Hon'ble High Court of Karnataka in CIT v. D....
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....owards warranty, the alternate claim of the ld AR to consider the amount actually spent substantiated by evidences has become academic and does not warrant adjudication. Disallowance under section 40(a)(ia) of rebates given to customers [Ground No. II(2)] 29. The relevant ground reads as under: - "2. Disallowance of expenditure u/s 40(a)(ia) - Rebate and Volume discount - Rs. 501,007,784 2.1 The learned AO has erred in disallowing the payment towards Rebate of Rs.501,007,784 under Section 40(a)(ia) without appreciating that the provisions of TDS is not applicable on Rebate provided to distributors working on a Principal to Principal basis. 2.2 Having accepted that the ownership has been transferred to the distributors, the learned AO has erred in stating that the ownership of the distributors is temporary. The learned AO failed to appreciate the fact that once the appellant sells the goods, the title is passed on to the distributor and any unsold goods would not be returned to the Company. 2.3 The Honourable DRP has erred in stating that the case laws relied by the appellant are distinguishable from the facts of the present case as in the c....
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....or at a predetermined price. The title in the goods is passed on to the distributor upon delivery of goods subsequent to sale by the Assessee. It is the responsibility 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. 33. 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....
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....roducts and the godowns at their cost. They are even prevented from making any representation to the retailers unless authorized by the assessee. What is given by the assessee to its Distributor/ Channel Partner is a trade discount. It is not commission. 60. It is the contention of the assessee 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." 36. Respectfully following the above decision we remit this issue to the AO for verification of the agreements which the assessee has entered into with the distributors in relation to discount/r....
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....t the gross receipts. 3.10 Notwithstanding the above contention, if the deferred revenue is taxed in the current year, corresponding relief ought to be provided in the subsequent year where the same is offered to tax." 38. The Assessee is engaged in the business of sale of computer hardware, and also offers warranty service to the customers, which represents a contractual obligation on part of the Assessee to provide services for a defined period for a given consideration agreed. Though the entire sale price for warranty is invoiced to customers along with sale of products during the previous year, the obligation to provide services and the outflow of resources (cost of spares, labour and logistics) would happen over a period of time. Therefore, in line with the matching principles of accounting, the revenue for the same would be recognized proportionately in the year of providing the services. Also, following the matching concept, the cost in relation to providing such services would also be recognized in the same year. 39. The AO brought to tax the deferred revenue of Rs.139,17,21,213/- by holding that the Income-tax Act, 1961 ("the Act") does not provide for the c....
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....me proportion. Thus, though the full consideration for providing the service is agreed and received during the FY 10-11, the obligation to service the customer arises over a period of time in FY 10-11 (4 months), 11-12(12 months) and 12-13 (8 months). Thus, the contracts which are extending beyond the current financial year, the consideration towards such contracts should also be assessed to tax on annual basis in which the services are provided. Until such consideration is recognized as revenue, the same shall be classified under other liabilities. * Under the Act, income accrues or arises when the Assessee acquires a right to receive the same. The right to receive is coupled with the liability on the other party to make the payment. In the Assessee's case, in relation to contracts for services extending beyond the financial year 2010-11 under consideration, the Assessee is under a contractual obligation to render the service to the customer in the subsequent years and the same would involve outflow of cost/resources for the Assessee. Further, in case the contract is cancelled, the Assessee is liable to refund the consideration received originally, less cost of services a....
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.... would accrue with receipt and it cannot be considered as advance income, which could be deferred for tax purpose." 32. However it is submitted that upon cancellation of the contract, the Assessee has to refund the entire consideration less cost of services already rendered. On perusal of a sample warranty terms (pages 2527- 2540, relevant page 2537, Volume 6 of the paperbook) we notice that the assessee would refund the money upon premature cancellation of warranty service. The extract of the clause in the agreement is reproduced below for reference:- "Cancellation. Subject to the applicable product and services return policy for Customer's geographic location, Customer may terminate this Service within a defined number of days of Customer's receipt of the Supported Product by providing Dell with written notice of cancellation. If Customer cancels this Service within that period, Dell will send Customer a full refund less the costs of support claims, if any, made under this Service Description. However, if that period has transpired since Customer's receipt of the Supported Product, Customer may not cancel this Service except as provided by an applica....
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....dered. From the detailed working and sample invoices submitted before the DRP (pages 2294 and 2541 to 3192 of Volume 6 of the paperbook) that the when the services are rendered in a particular year, the revenue deferred to such year is recognized as revenue during such year (amortised) and offered to tax and therefore it is clear that the Assessee has been recognizing the revenue periodically on the basis of accrual and offered them to tax. 34. The coordinate bench of the Tribunal in the case in Schneider Electric IT Business India Pvt. Ltd. v. JCIT, LTU [ITA Nos. 299/Bang/2014 and 218/Bang/2014) dated 30.04.2019] has considered a similar issue and held that - "91. We have carefully considered the rival submissions. The first aspect which we would like to clarify is that it was not correct on the part of the AO to characterize the sum of Rs.5,38,22,153 as undisclosed income. The income is disclosed in the books of accounts but is not recognized for the purpose of income tax computation because of the Assessee's accounting policy which in turn is based on AS-9 of ICAI. The second aspect which has to be clarified is that the deferment of revenue as not pertainin....
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....g receipts of the year directly connected with the business of servicing and repairs of tractors. He, accordingly, set aside the assessment. On appeal, the Tribunal upheld the Assessing Officer's action disagreeing with the finding of the Commissioner. On reference, the Hon'ble Punjab & Haryana High Court held as follows: "The taxability of income normally depends upon the system of accounting followed by the assessee. Even in the case of an assessee following the mercantile system of accounting, a mere claim, by the assessee in respect of an amount without the right to claim cannot form the basis for taxability. Where the assessee follows the cash system of accounting, the taxability is to be based on receipt basis and not on accrual basis. Receipt, either accrued or deemed, is not made a condition precedent to taxability. Profits or gains are taxable if they have accrued or have arisen or are, under the Act, deemed to have accrued or arisen to the assessee in the accounting year. Generally, income must accrue first, receipt normally follows the accrual. In other words, the right to receive must come into existence before the actual receipt takes place. Receipt, b....
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....with identical case. The facts of that case were that the Assessee had not offered for tax an amount being difference between progress billing as on 31-3- 2007 and cumulative revenue booked as per accounts as on 31-3- 2007 in respect of three contracts. The assessee explained to Assessing Officer that progress billing was inclusive of advances received from customers which amount did not reflect work performance. It was also explained that progress billing was done not only for amount of work done but also for mobilisation and other advances receivable by it as per terms of relevant contract and that mobilisation and other advances received by assessee by raising progress billings did not represent income of assessee at time of raising progress bills and same therefore had no effect whatsoever on income of assessee, which was recognised by method of percentage of completion. The Assessing Officer, however, held that amount due to customers as shown by assessee was nothing but understatement of its profits and added same to total income of assessee. On further appeal the question before the Tribunal was as to whether amount due to customers as shown by assessee was nothing but recei....
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....gent in nature without appreciating that such losses arise out of a contractual obligation existing as of the reporting date and the same cannot be of contingent nature. 4.3 The learned AO has erred in not placing reliance on the judicial precedents quoted by the appellant which deals with issue of MTM loss being ruled in favor of appellant. 4.4 The learned AO has erred in placing reliance on CBDT Instruction 3, 2010 and disallowing the MTM loss without considering the fact that the transaction was for hedging and not for speculative purpose. DRP directions not followed by AO 4.5 The learned AO has erred in not following the directions of the Honourable DRP which has directed to allow the MTM loss if MTM gain was offered to tax in AY 2010- 11. 4.6 Without appreciating that the details of such MTM gain offered to tax was submitted before the officer during the assessment proceedings for AY 2010-11, the learned AO has erred in stating that whether the forex gain offered to tax in AY 2010-11 was in the nature of MTM loss/gain or otherwise is not established. 4.7 Notwithstanding the above, in case if the said MTM loss were to be dis....
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....submitted that the recognition of MTM losses in the books of accounts is in accordance with the AS notified under Section 145 of the Act as the above accounting principles of prudence and accrual require accounting for MTM loss as at the Balance Sheet date. * It is submitted that the principles of accounting should be applied for the purpose of ascertaining taxable profits of a business as long as they are not in contradiction with any express provisions of the statute. * It is a settled position that any expenditure not being in the nature of capital or personal expense, and laid out wholly and exclusively for the purpose of business or profession carried out by the assessee would be allowable as a deduction. In the present case, the MTM loss having arisen on account of hedging in revenue transactions and not being capital in nature, it is submitted that the same is allowable as business expenditure. * Detailed workings of the losses for every contract entered into along with bank confirmations are furnished before the AO at pages 759 of Volume 2 of paperbook read with pages 789-791 of Volume 3 of the paperbook. * The AO erred in holding that MT....
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....n revaluation of outstanding forward contracts entered to safe guard the underlying revenue assets cannot be considered as notional loss and accordingly the same is eligible for deduction while computing total income. The following observations made by the co-ordinate bench in the case of M/s Quality Engineering and software Technologies P Ltd (supra) are relevant:- "4.5.11 As discussed earlier, in the case on hand, there has been an existing contract with a binding obligation accrued against the assessee when it entered into forex forward contracts. The forward contracts are in respect of consideration for export proceeds, which are revenue items. There is an actual contract for sale of merchandise. In this factual matrix, it is clear in our view that the transaction in question will not qualify to be called as speculative transaction. In view of the facts and circumstances of the case on hand, as discussed above, we hold that the provision on derivative contracts is allowable as expenditure. We, accordingly allow the Grounds at S. Nos. 1 to 9 raised by the assessee." The above said decision rendered by the co-ordinate bench states that the loss arising on reinst....
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....- Sub-contracting charges 66,23,06,308/- 66,09,18,054/- 13,88,254/- Advertisement 31,40,80,812/- 31,35,83,739/- 4,97,073/- Total 32,54,369 56. In the return of income, the assessee also claimed allowance of an amount of Rs. 28,13,64,044/- u/s.40(a)(ia) and the details pertaining to the same were also called for by the AO. The AO disallowed an amount of Rs. 62,13,963/- out of the deduction claimed under section 40(a)(ia) of the Act on the ground that the details of TDS were not furnished for the same. 57. The ld AR submitted that the assessee had entered into innumerable transactions, of which certain portion of expenses may not attract TDS and further, providing details of every line of item of expenses may not be practically possible. The ld AR also submitted that the AO ought to have appreciated that despite the same, the assessee had provided substantial information to establish that it had complied with the provisions of TDS and ought to have allowed the deduction claimed. The ld AR further submitted that since details for 99.8 % in the case of expenses and 97.8% in the case of 40(a) disallowance of earlier years have been....
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....ng out verification on test check basis. Further, the TPO/Assessing Officer has not pointed out any defect/discrepancy in the bills/supporting documents furnished by the Appellant which constitute 78% of the out of pocket expenses reimbursed by the Appellant to its AE. The Appellant has not furnished bills/supporting documents for INR 42,40,116/- which constitute balance 22% out of pocket expenses reimbursed and only 3.5% [(42,40,116/11,85,22,998) x 100] of the total expenses reimbursed by the Appellant to its AEs for the relevant assessment year. In view of the aforesaid facts, we are inclined to accept the submission advanced by the Ld. Authorised Representative for the Appellant that the Appellant has substantially complied with the directions given by the Assessing Officer and therefore, in our view, the TPO/Assessing Officer was not justified in making additions of INR 42,40,116/-. Further, in our view, the TPO has also failed to determine the ALP of the transaction and has, in effect, made disallowance holding that the Appellant had failed to substantiate the claim. Accordingly, in view of the aforesaid, we delete the addition of INR 42,40,116/-. Ground No. 2.3 raised by the ....
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.... 11,allowed the Assessee's objections and accordingly. The revenue is appeal against the final order of assessment passed in accordance with the directions of the DRP. 66. The ld AR submitted that the exchange loss of Rs.54,95,55,000/- claimed as deduction represents realized and unrealized net exchange loss arising on account of various transactions in foreign currency. These losses are accounted in accordance with the principles laid down in Accounting Standard - 11 (AS-11). AS-11 requires a foreign currency transaction to be initially recognized using the exchange rate as on the date of the transaction. However, at each balance sheet date, the foreign currency monetary items would be required to be reported using the closing rate. Thus, in line with the requirement of AS -11, the Company has recorded each and every transaction entered into in foreign currency at the exchange rates prevailing as on the date of the transaction and has subsequently recognized a net exchange loss of Rs.54,95,55,000 on settlement or upon revaluation of such transaction. 67. We notice that the coordinate bench in assessee's own case for AY 2009-10 has considered a similar issue and held that - ....