TaxTMI 
TaxTMI 
TaxTMI 
2022 (11) TMI 1351
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....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 respect of the warranty expenses. 4. Pursuant to TP adjustm....
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....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's analysis with fresh benchmarking analysis on his own conjectures and surmises. Thus, the Appellant prays that the fresh benchmarking analysis conducted....
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.... 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. Panel erred in confirming the same. 6. Erroneous data used by the TPO 6.1 The AO/ TPO has erred in law and the Ld. Panel further erred in confirming use of data, which was not contemporaneous and which was not available in the public domain at the ....
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....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 rendered by the Assessee to third party customers of the AE on behalf of the AE. Since the so called ITES are being rendered to third parties, it cannot be subject matter of TP assessment. The ld AR also submitted that the major post-sales support in relation to the warranty support and co-ordination, i.e., call centre support is not being provi....
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...., 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 who purchase products from the assessee, to provide logistics support to ensure delivery of products and services to the customers and also provide marketing support and Sales promotion services. The technical services are provided to the customers of products, and as such cannot be compared to the function of provision of ITES service. Therefore. we are no in agreement with the TPO's view in comparing such services to call entre activity, and there is no information for the ....
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....e 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 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%. 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. 17. The TPO made an adjustment on the basis that the Assessee had not made any recovery towards the warranty services....
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....ingly. 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 that the methodology followed by the Company for recognizing the provision for warranty of Rs. 216.52 crores is in line with the principles laid down by the Hon'ble Supreme Court in the case of Rotork Controls India (P) Ltd vs. CIT [2009] 180 Taxmann 422 which has also been upheld by the Honourable Tribunal in the appellant's own case for AY 2002-03 & 2003-04 vide order dated 13.02.2015. 1.3 The Honourable DRP having relied on the decision of the Honourable Tribunal in the appellant's own case has erred in not following the same." 22. The Assessee had cre....
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....ssee 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. f. Further, there are automatic reversals of the provision when products go out of warranty period. For the purpose of estimating the warranty provision, the assessee takes into account only those units in respect of which the warranty period has not expired as on the date of estimating the provision. g. Thus, the closing provision as on 31st March 2011 represents the cost involved for servicing the units for which the warranty period has not expired as on that day. h. Accordingly, the system would automatically exclude those products for which the warranty period has expired and include only those products (i.e. products sold in past for whic....
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.... 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 accounting team which tracks the incidents reported for each product country-wise and associated cost of providing warranty services. The total sales are divided into various categories of IT hardware products based on the warranty periods 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. The warrant cost is a product of the Field Incident Rate i.e., the number of repairs and the Cost per Incident. Field Incident Rate is determined based on the actual faults reported over the earlier years, the Cost per Incident is determined a scientific basis based on the past experience, which is the sum of the followin....
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....t: 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 warranty and nature of commitment. The company has a specialized warranty accounting team which tracks the incidents reported of reach product country-wise and associated cost of providing warranty services. The total sales are divided into various categories of IT hardware products based on the warranty periods attached to each such product. The fault are tracked on the basis of a unique identification number attached to each IT hardware so as to identify cases of faults." He also placed a chart in the paper book showing methodology of provision for warranty: From the above details, it is clear that provision for warranty is made following scientific method. From the chart it is also clear that as against provision of Rs. 144,114,000/- an amount of Rs. 11,97,00,000/- was utilized in th....
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....nd, 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. Dell International Services India (P.) Ltd. [IT Appeal Nos. 448 and 449 of 2008. The Hon'ble High Court of Karnataka vide judgment dated 26-9- 2012, remanded the matter to the Tribunal to decide the issue in the light of Hon'ble Supreme Court's judgment in Rotork Controls India (P.) Ltd. v. CIT [2009] 180 Taxman 422/314 ITR 62 (This is what is referred to by the AO in page 25, para 3 in the assessment order for assessment year 2009-2010). After remand, this Tribunal further remanded the matter to the Assessing Officer vide order dated 13-2-2015. The same was challenged by the assessee before the Hon'ble High Court of Karnataka in Dell International Services India (P.) Ltd. v. Asstt. CIT [2017] 88 taxmann.com 451/[2016] 382 ITR 37 (Kar.), set aside the remand order passed by the Tribunal and directe....
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....rned 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 case laws cited the products transacted were either milk, soft drinks, sim cards etc. which cannot be compared to a laptop or desktop. The Honourable Panel ought to have appreciated that irrespective of the products dealt with, the principal relating to applicability of TDS provisions on Rebate payment should apply." 30. During the assessment proceedings, the AO called for details of taxes deducted at source on various payments including an amount of Rs. Rs. 50,10,07,784/- was in the nature of rebate given to distributors. The assessee submitted before the AO that taxes were not liable to be deducted at source on the rebate given to distributors. The AO was of the view that the transaction was one between principal and agent and not principal to principal basis and therefore, the assessee is obliged to deduct tax under Section 194H of the Act. According....
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.... 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 the following case laws in this regard - - Harihar Cotton Pressing Factory v. CIT (Reported in [1960] 39 ITR 594 (Bombay) - Ahmedabad Stamp Vendors Association v. UOI (Reported in [2002] 124 Taxman 628 (Gujarat)) - CIT v. Ahmedabad Stamp Vendors Association (Reported in [2012] 25 taxmann.com 201 (SC - Bharti Airtel Ltd. v. DCIT (Reported in [2014] 52 taxmann.com 31 (Karnataka) - CIT v. United Breweries Ltd. (Reported in [2017] 80 taxmann.com 123 (Andhra Pradesh and Telangana) - CIT v. Intervet India (P.) Ltd. (Reported in [2014] 49 taxmann.com 14 (Bombay - ACIT v. Acer India (P.) Ltd. (Order dated 05.10.2018 passed by this Hon'ble Tribunal in ITA No. 1940/Bang/2018) 34. The ld. DR relied on the orders of the lower authorities. 35. We notice the coordinate bench of the Tribunal in assessee's own case for AY 2010-11 had considered a similar issue and held that "59. We hav....
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.... 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/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. Addition of deferred revenue - Ground No.II(3) 37. The relevant ground is extracted below :- "3. Deferred revenue- Rs. 1,391,721,213 3.1 The learned AO has erred in disallowing an amount of Rs. 1,391,721,213 contending that income has accrued to the appellant during the current financial year and hence, should be assessed to tax during the current year. 3.2 The learned DRP has erred in upholding the action of the learned AO by placing reliance on its directions for AY 10-11. Accrual of income 3.3 The learned AO ought to have appreciated that as the contracts to provide services extend beyond the current year, only the proportionate revenue pertaining to the current year can be assessed to tax. This is also upheld by the appellate author....
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....eferred revenue of Rs.139,17,21,213/- by holding that the Income-tax Act, 1961 ("the Act") does not provide for the concept of deferred revenue. 40. By placing reliance on the directions issued by the DRP in the Assessee's case for the assessment years 2009-10 and 2010-11, the DRP rejected the claim of the Assessee that only the proportionate revenue pertaining to the current year is to be brought to tax. Accordingly, the DRP rejected the objections of the Assessee and upheld the order of the AO 41. Ld AR submitted that - * At the outset, it is submitted that the AO erred in proceeding on an erroneous footing that there is no concept of deferment of income as per the Act and contending that the income of Rs. 139,17,21,213/- has accrued to the Appellant during the financial year 2010-11. * It is submitted that the AO ought to have relied on the cancellation policy provided under the terms of warranty wherein the customer has the right to cancel the contract with a prior notice and upon cancellation of the contract, the Assessee has to refund the entire consideration less cost of services already rendered. * In terms of Section 5 of the Act, the total income of any previous y....
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....o refund the consideration received originally, less cost of services already rendered. * It is submitted that as and 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. The movement of deferred revenue is as under: Assessment Year Opening Balance (under Other Liabilities) Closing Balance (under Other Liabilities) Net debit to Revenue (P&L) 2010-11 (216,92,03,935) (341,83,99,970) 124,91,96,035 2011-12 (341,83,99,970) (481,01,21,184) 139,17,21,213 * Clearly, the Assessee has been recognizing the revenue periodically on the basis of accrual and offered them to tax. 42. The ld AR also submitted that the issue is squarely covered by the order of this Hon'ble Tribunal in Assessee's own case for assessment year 2010-11 [order dated 18.08.2022 passed in IT(TP)A Nos. 562 & 400/Bang/2015] at paras 31-35, where the assessee's ground of appeal was allowed, accepting the above contentions and the addition deleted. 43. The ld DR relied on the order of the lower authorities. 44. We notice that the coordinate bench in assessee's own case for AY 2010-11, has dealt with a ....
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....le state/country/province law which may not be varied by agreement. Dell may cancel this Service at any time during the Service term for any of the following reasons: Customer fails to pay the total price for this Service in accordance with the invoice terms; Customer refuses to cooperate with the assisting analyst or on-site technician; 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 pe....
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.... Assessee and the basis of deferral of revenue is clearly given in paper book no.7 pages 1620 to 1897. Therefore there can be no dispute that the income deferred did not pertain to AY 2009-10, if one were to accept that deferral of income, though it has accrued to an Assessee, is possible. The principal 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 ....
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....#39; which would attract tax. Every receipt by the assessee is, therefore, not necessarily income in his hands. It bears the character of income at the time when it accrues in the hands of the assessee and then it becomes eligible to tax. What is relevant to determine whether money received 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 y....
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....see at point of receipt. The Tribunal held in favour of the Assessee. 96. As far as the decision of the Tribunal in the case of Optum Health & Technology (India) (P.) Ltd., is concerned, as rightly contended by the learned counsel for the Assessee the facts 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 Tr....
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....,000/- towards loss on marked-to-market derivative contracts entered into by the Assessee to hedge its foreign currency payables in future. The Assessee had entered into forward contracts to hedge a part of its foreign currency payables in future relating to imports amounting to USD 210,000,000 (INR 97,74,53,47,500). As on 31.03.2011, such contracts valued at market price prevailing on that date has resulted in MTM loss amounting to Rs. 28,43,64,000/- which has been debited to profit and loss account. 48. The AO held that loss on MTM loss is a notional loss which is contingent in nature and cannot be allowed to be set off against the taxable income. Accordingly, the AO proposed Rs. 28,43,64,000/- to be added back to the total income. 49. After considering the Assessee's objections, the DRP directed the AO to verify the claim that MTM gain was offered to tax in the earlier year and that if found to be correct, the proposed disallowance is to be deleted. However the disallowance of MTM loss was retained in the final order of assessment by the AO by holding that in view of section 144C(13) of the Act, no further opportunity could be given to the assessee and the verification of deta....
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.... as on the Balance Sheet date wherein a reliable estimate of the loss occurring form an existing contract is made, though the same is required to be discharged in the future. In view of the same, MTM losses are not inchoate, unascertained or uncertain obligations as on the reporting date. * Therefore, it is submitted that the MTM loss on unsettled forex derivatives as on the Balance Sheet date is not a notional loss and is not contingent in nature and the same is allowable as business expenditure while computing taxable income if the forex derivative was entered into on revenue account and the same has accrued during the year. * It is also submitted that CBDT Instruction No. 3/2010 is not applicable to MTM loss on forward contracts which are for the purpose of hedging the risk. * The Assessee has been consistently following the mercantile system of accounting where all estimated losses and gains arising out of forex transactions are accounted as and when they accrue. * For AY 2010-11, the Assessee had a MTM gain of Rs. 9,10,11,994, which was offered to tax by netting off the same against the exchange loss for the year and a net exchange loss of Rs. 15,49,68,827 was debited ....
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....g that the loss claimed by the assessee is either notional/contingent loss or speculative loss. Since the loss is related to the revenue assets, the same is allowable as deduction. Accordingly, we direct the AO to delete the disallowance of loss of Rs.68.24 crores. 53. Respectfully following the above decision we hold that the MTM loss is related to the revenue assets, the same is allowable as deduction. Accordingly, we direct the AO to delete the disallowance of loss of Rs. 28,43,64,000/- claimed by the assessee. This ground is allowed in favour of the assessee. Disallowance of expenditure under section 40(a)(ia) of the Act (Ground No. II(5) 54. The relevant ground reads as under - "5. Disallowance of expenditure u/s 40(a)(ia) of the Act - Rs. 9,468,332 5.1 The learned AO has erred in disallowing an amount of Rs. 3,254,369 without appreciating the fact that details of TDS were submitted for a substantial amount of 198.96 crores out of the total disallowance of Rs. 199.29 crores. 5.2 The learned AO has erred in disallowing an amount of Rs. 6,213,963 out of the deduction claimed under section 40(a)(ia) of the Act during the current year without appreciating the fact that th....
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....used the material on record. We notice that with respect to the various expenses verified by the AO the assessee has submitted substantial portion of the evidences and also with respect to expenses claimed u/s.40(a)(ia) the assessee has submitted evidenced to a major extent. It is also noticed that the AO has not disallowed these expenses on the ground that tax was not deducted at source but on the basis that the assessee has not produced the evidences. We also notice that the Mumbai Bench of the Tribunal in the case of M/s Infinity Retail Limited vs ACIT (ITA No. 7718/MUM/2012 dated 13.10.2022) has considered a similar issue and held that - 18. We have heard the rival submissions and perused the material on record. While we are not inclined to accept the contention advanced on behalf of the Appellant that an assessee cannot be directed to produce bills/supporting documents pertaining to entire amount of expenses claimed as deduction, we are also alive to the possible burden an assessee would be subjected to during the assessment proceedings in case such a direction is issued to the assessee. However, in cases where the bills and/or supporting documents called for during the asse....
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....g documents are submitted. Considering the above fact of the case and the decision of Hon'ble Tribunal in the case of M/s Infinity Retail Limited (supra) we of the considered view that the assessee should be allowed full deduction of these expenses basis that more than 95% of the details are submitted and no discrepancy is found on the same. We therefore direct the AO to delete the additions. This ground is allowed in favour of the assessee. 61. Ground no.6 is with regard to TDS credit. It is submitted that in the final assessment order, the AO has given credit of TDS of Rs. 23,07,94,453/- as against Rs.24,57,03,634/- as reflected in Form 26AS. We therefore direct the AO verify and grant credit of TDS as appearing in Form 26AS in accordance with law after giving a reasonable opportunity of being heard. 62. Ground no. 7 and 8 are consequential and does not warrant separate adjudication. IT(TP)A No.641/Bang/2016 (Revenue's appeal) 63. Ground No.1 to 6 of the revenue appeal is with regard to the transfer pricing adjustment. These grounds do not warrant separate adjudication in view of the decision on the TP issues while considering the assessee's appeal in paragraph 14 herein abov....