TaxTMI 
TaxTMI 
2024 (6) TMI 264
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....nd admitted by ld. counsel for the assessee as well as ld.CIT-DR, these appeals are heard together and are disposed off by this common order. Since the facts and circumstances are exactly identical and grounds raised are also identically worded, we will take the facts and grounds from assessment year 2009-10 in ITA No.518/CHNY/2018 and will decide the issue. 3. The first common issue in these four appeals of assessee is as regards to the order of CIT(A) confirming the action of AO in disallowing the provision made for customer loyalty programs. The relevant ground No.2 raised by the assessee in assessment year 2009-10 reads as under:- 2. Disallowance of provision made for customer loyalty program((CLP) - Rs. 4,80,99,369 a. The Hon'ble CIT(A) has erred in disallowing the provision made against future claims under the CLP on the ground that the Appellant has not adopted any scientific method for applying the rate of provision. b. The Hon'ble CIT(A) has erred in stating that the expenditure, being unascertained and provision in nature, is not an allowable expenditure as per the Act. c. The Hon'ble CIT(A) failed to appreciate the fact ....
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.... the provision towards customer loyalty programme is based on some scientific method and moreover, the finding of fact given by the AO that the rate of redemption was at great variation viz-a-viz, the provision made is correct. Hence, he confirmed the action of the AO. Aggrieved, assessee came in appeal before the Tribunal. 3.3 Before us, the ld. counsel for the assessee made argument that the provision made towards customer loyalty program is an ascertained liability, created on a scientific basis and (i) it represents an obligation arising as a result of past event, (ii) it is probable that an outflow of resources will be required to settle the obligation, and (iii) a reliable estimate can be made of the amount of obligation. Therefore, he submitted that the provision is not a contingent liability but is in fact an ascertained liability. The ld. counsel further stated that in terms of Accounting Standard 29, a "contingent liability" is one where (i) it is not probable that an outflow of resources embodying the economic benefits will be required to settle the obligation; or (ii) a reliable estimate of the amount of obligation cannot be made. In the present case, the above condi....
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.... the above chart reproduced in the argument of the ld. counsel for the assessee in above para 3.4. We noted that the provision is created based on estimated percentage of redemption after analyzing the trend of redemption cycle of the customers in the preceding four quarters on the total outstanding points available at the year end. This system adopted by the assessee is based on scientific method as propounded by the Hon'ble Supreme Court in the case of Rotork Controls India Pvt. Ltd., supra, wherein the Hon'ble Supreme Court has observed as under:- "17. At this stage, we once again reiterate that a liability is a present obligation arising from past events, the settlement of which is expected to result in an outflow of resources and in respect of which a reliable estimate is possible of the amount of obligation. As stated above, the case of Indian Molasses Co. (supra) is different from the present case. As stated above, in the present case we are concerned with an army of items of sophisticated (specialiased) goods manufactured and sold by the assessee whereas the case of Indian Molasses Co. (supra) was restricted to an individual retiree. On the other hand, the case of ....
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.... impugned judgment of the Madras High Court dated 5.2.07 and accordingly the civil appeals stand allowed in favour of the assessee with no order as to costs." In view of the above, we are of the view that the assessee is consistently following the same method and even creation of provision created based on the remedy percentage of redemption is on scientific basis. As regards to excess provision is concerned, the difference between the provisions created for a particular year and the actual expenditure incurred in the subsequent year, the difference is offered to tax. In such situation, we cannot say that the provision created based on estimated percentage of redemption is not scientific. Hence, according to us, this is an allowable deduction and we allow accordingly. 3.5 Since facts and circumstances are exactly identical in assessment years 2010-11, 2011-12 & 2012-13, taking a consistent view, we allow the assessee's claim of disallowance of provision made towards customer loyalty program. Accordingly, this issue of assessee in all these four assessment years i.e., AYs 2009-10 to 2012-13 is allowed. 4. The second common issue in these four appeals of assessee is as regar....
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....lied on the Hon'ble Madras High Court decision in the case of Redington (India) Ltd., vs. ACIT reported in [2017] 77 taxmann.com 257. 4.3 When these facts were confronted to ld.CIT-DR, he could not point out how the AO has reached to a conclusion that there are expenses relatable to exempt income and there is any satisfaction recorded qua that, he could not argue anything. 4.4 After hearing both the sides, we noted that the AO has not at all recorded satisfaction as regards to disallowance to be made or not. Once there is no satisfaction recorded, in our view, the decision of Hon'ble Supreme Court in the case of Maxopp Investments Ltd., supra squarely applies. This being a covered issue, we set aside the order of CIT(A) and that of the AO on this issue and allow this issue of assessee's appeal. Accordingly, this issue raised by assessee in all the four assessment years, 2009-10 to 2012-13 is allowed. 5. The next common issue in these three appeals of assessee for assessment years 2009-10, 2011-12 & 2012-13 in ITA Nos.518, 506 & 507/CHNY/2020 is as regards to the order of CIT(A) confirming the action of the AO in disallowing expenditure on account of professional and consul....
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....arty Amount (Rs.) TDS (Rs.) Net Amount (Rs.) Remarks KNS Consulting LLC 8950996.13 - 8950996.13 Reimbursement of expenses Raymond P Gallagher CPA., P.C. 2293256.55 - 2293256.55 Reimbursement of expenses Tata Incorporated 3546047.81 - 3546047.81 Reimbursement of expenses Tata Ltd 1508599.59 - 1508599.59 Reimbursement of expenses Titan International (Middle East)F 10187106.72 - 10187106.72 Reimbursement of expenses Total 26486006.8 26486006.8 According to AO, these services rendered by the above said persons are specialized technical services which require specialized provision of technical knowhow, expertise, skill knowhow. Hence, he held that the source from which the assessee has earned income was from India as the income earning activity is situated in India. He also held that payments to non-resident have been made for consultancy services for earning income from ultimate source in India and these are in the nature of technical services. Hence, said payment to foreign agent companies was disallowed by invoking the provisions of section 40(a)(i) of the Act. Aggri....
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....all years, without appreciating the material on record in an appropriate manner. 5.4 In this regard, the ld. counsel submitted that the services rendered by the foreign parties were towards operations in US/UK. Since the services were undisputedly used in a business outside India, no income chargeable to tax in India accrued/arose to the non-residents, and therefore there is no requirement to deduct tax at source. He further stated the disallowance under section 40(a)(i) of the Act is wholly unwarranted. Moreover, the services rendered also do not satisfy the test of 'make available' under the India-US/ India-UK DTAA and therefore the payments are not taxable. The ld. counsel placed reliance on the decision of the Hon'ble High Court of Karnataka in the case of CIT V. De Beers India Minerals (P.) Ltd. (reported in [2012] 21 taxmann.com 214 (Kar.)) 5.5 Without prejudice and in any event, he submitted that for the financial year 2008-09 relevant to the assessment year 2009-10, no disallowance can be made in view of the legal position as it stood at that point. The ld. counsel stated that until amendment of Section 9(2) of the Act by inserting an explanation thereto, ....
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....hearing rival contentions, we are of the view that for the relevant assessment year 2009-10, assessee cannot be made liable for TDS and it is an impossible act to be performed is asked to be done by the assessee. It is a matter of impossibility of the act and hence, for assessment year 2009-10, no disallowance is to be made and we held so. As regards to assessment years 2011-12 & 2012- 13, the amendment brought out by Finance Act, whereby Explanation to section 9(2) of the Act is to be pressed and accordingly, facts are to be examined. Therefore, we set aside this issue for these two assessment years 2011-12 and 2012-13 to the file of the AO. 6. The next issue raised by the assessee in assessment year 2009-10 is as regards to the order of CIT(A) confirming the action of the AO in disallowing loss on closure of boutique in United States. For this, assessee has raised following ground No.4:- 4. Disallowance of loss on closure of Boutique in United States (US)-Rs. 6,00,00,000 a. The Hon'ble CIT(A) has erred in ignoring the fact that the amount paid as other winding up cost does not give rise to any enduring benefit nor does it lead to creation of a capital ass....
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....expenditure claimed as slow moving/non-moving inventories of Rs. 1.94 Crores and other winding up costs of Rs. 2.34 Crores. In the absence of any evidence to the contrary, the disallowance made by the Assessing Officer is confirmed and the appellant fails on this count. As a result, the appellant gets a relief of Rs. 13.4 Crores and the balance amount of Rs. 6 Crores is confirmed. This ground of appeal is allowed partly." Aggrieved, assessee is in appeal before the Tribunal. 6.3 We have heard rival contentions and gone through facts and circumstances of the case. The ld. counsel for the assessee before us argued that the slow moving / non-moving inventory and other winding up costs are in the nature of revenue expenditure and the write off of slow moving inventory and costs in the nature of employee expenses, rent, maintenance and other miscellaneous overheads cannot be called as capital in nature. He argued that slow moving inventory could not be sold in US market and were brought back to India on closure of boutique and write off of 25% was done to sell them in the Indian market. Therefore, he relying on the decision of Hon'ble Karnataka High Court in the case of CIT vs. IB....
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....ision before arriving at the profit eligible for deduction under section 80IC of the Act. c. The Hon'ble CIT(A) ought to have observed that the design and development costs and assembly share for common facilities incurred at the factory largely represents salaries of the employees and not directly relatable to the value of watches produced. d. The Hon'ble CIT(A) failed to appreciate that the components transferred are compatible to various watches and it is not possible, at the time of transfer, to identify the final watch variant into which these components would be assembled and thus it is not possible or practical to allocate these expenses based on the value of the watch. e. The Hon'ble CIT(A) ought to have appreciated that the Appellant has allocated the expenses based on the business requirements of each unit and the appellant's allocation is the closest approximation to the actual expenditure allocable to the unit. 7.1 Brief facts are that the AO noted during the course of assessment proceedings that in addition to main manufacturing unit at Hosur, apart from this, the assessee company is having three units located at Dehradun, ....
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.... that the assessee claimed deduction u/s. 80IC with respect to their units at Dehradun (Units I & II) and in Baddi. The method of apportionment of certain corporate overhead expenditure was not accepted in earlier years. The assessee allocated the same on the basis of number of watches produced. However, the same was distributed by the revenue on the basis of turnover of the units. The assessee furnished revised working of profits u/s 80IC which was perused by Ld. AO. 7.2 The assessee also claimed depreciation on trade marks as acquired in earlier years. The trademarks were stated to be related towatch division as well as jewellery division. The units availing deduction u/s 80-IC were watch division. The entire deprecation was allocated by assessee to noneligible unit, which in the opinion of Ld.AO, was to be allocated to eligible units also. 7.3 Accordingly, adjusting the allocation of overhead and depreciation as above, Ld. AO reduced deduction by Rs. 18.02 Crores. Aggrieved, the assessee is in further appeal before us. 7.4 We find that similar issue has been adjudicated by us in ITANo. 1913/Chny/2011 for AY 2007-08 as under: - "4.2 We find tha....
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....e light of submissions made in the application. The corresponding grounds stand partly allowed for statistical purposes." Similar petition u/r 29 has been filed by the assessee for this year as well. Facts being pari-materia the same, our adjudication as above shall mutatis-mutandis apply to this year also. The matter, to a limited extent of allocation of depreciation, stands restored back to the file of Ld. AO on similar lines. The grounds relating to allocation of other overhead expenditure stand dismissed. The corresponding grounds stand partly allowed for statistical purposes." Hence, taking a consistent view, we confirm the disallowance of claim of deduction u/s. 80IC of the Act, as regards to apportionment of head office expenses. Since facts are identical in other three assessment years, taking a consistent view, this issue raised by the assessee in all these assessment years is dismissed. 8. The next common issue in these four appeals of assessee is as regards to the order of CIT(A) confirming the action of the AO in disallowing the claim of deduction u/s. 80IC of the Act on allocation of expenditure on trade mark qua the units which are claiming deduction u/....
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.... of depreciation on Trademarks to units claiming deduction u/s 80IC The Assessing Officer observes that the appellant capitalized trademarks to the tune of Rs. 63.27 crores during the previous year relevant to the A.Y. 2007-08 and in accordance with the same claimed depreciation for the A.Ys. under consideration. The Assessing Officer further observes that the depreciation was totally claimed for Hosur Unit and nothing was apportioned as depreciation on trademarks for 80IC Units namely, Dehradun, Baddi and Roorkee Units. Therefore, the Assessing Officer apportioned the depreciation amongst all the Units of the appellant-company on turnover basis. The appellant objects to the same stating that the trademark expenditure was incurred on exports, and therefore, the entire depreciation claimed was debited to the Hosur Unit since the 80IC Units cater to domestic market. This issue came up in appeal before the Dispute Resolution Panel(DRP), Chennai, and the Hon'ble DRP in its order in DRP/Chennai/44/2012 dated 31.08,2012 issued directions in this regard as follows: "Based on the submissions and details filed by the Eligible Assessee, the Assessing Authority ....
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.... loan - Rs. 1,83,25,468 a. The Hon'ble CIT(A) has erred in not appreciating the fact that the Appellant has considered the MTM gain on ECB loan as capital in nature. b.. The Hon'ble CIT(A) has also erred in not appreciating the fact that the Assessee has voluntarily disallowed the loss/ allowed the gain on reinstatement of ECB loan in each of the earlier AY's. c. The Hon'ble CIT(A) erred in not appreciating the fact that the provision which has been disallowed earlier at the time of creation/accrual ought to be allowed as a deduction when the same is subsequently reversed/utilised. d. The Hon'ble CIT(A) ought to have allowed the amount which is already been disallowed by the Appellant in its ROI for past years. 2.2 Disallowance of MTM loss due to hedging exposures related to commitments on sales and purchases - Rs. 33,91,426 a. The Hon'ble CIT(A) has erred in not appreciating the fact that the total MTM losses debited to the profit and loss account Rs. 33,91,426 is inclusive of MTM gain on ECB loan amounting to Rs. 51,23,274 and MTM loss due to hedging exposures related to commitments on sales and purchas....
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....tion in foreign exchange as on the last date of the financial year. For balance sum of Rs. 1,83,25,468/-, it was claimed before the AO by the assessee that the net marked to market loss / gain on ECB loan i.e., net of reversal of the earlier year losses amounting to Rs. 132.02 lakhs at the beginning of the financial year 2011-12, an amount outstanding of Rs. 1,83,25,468/- as already been effected in the computation of total income and therefore, no further disallowance of the same is called off. The assessee has given complete working of computation of marked to market loss / gain vide its Annexure -1 to the reply dated 17.02.2015. But the AO has not agreed with the claim that the losses arising out of actual settlement of derivatives, transactions can be held to be nonspeculative loss but the notional loss incurred on derivatives i.e., restatement of gain / loss, which is not incurred by actual settlement cannot be allowed to be set off against the profit of business. The AO tried to distinguish the case law of Hon'ble Supreme Court in the case of CIT vs. Woodward Governor India (P.) Ltd., reported in [2009] 179 Taxman 326 by holding that this case law does not deal with derivativ....
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....essee now before us explained that the AO as well as the CIT(A) failed to appreciate that the disallowance comprises of two different components one being loss and the other being gain. The details of the gain and loss are filed by the assessee as under:- MTM gain on ECB loan Rs. 1,83,25,468/- MTM loss due to hedging exposures related to commitments on sales and purchases Rs. 33,91,426/- Total amount of disallowance Rs. 2,17,16,894/- According to ld. counsel, the loss arises on account of fall in the value of underlying derivative contract as on the reporting date, the same represents loss on an onerous contract existing on the reporting date, albeit to be discharged/settled on a future date. According to ld. counsel, such marked to market loss is not notional or contingent but have accrued as on the balance sheet date. He further explained that the marked to market gain on ECB loan is capital in nature and assessee has reduced the gain on restatement of ECB loan in each year since the same is capital in nature. He argued that in the previous assessment years, the assessee had disallowed the loss arisen on restatement of ECB loan and consequently, in the curren....
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....and offered to tax. On this very count, the addition cannot be made. Secondly, this issue is squarely covered by the decision of the Hon'ble Supreme Court in the case of Commissioner of Income Tax Vs. Woodward Governor India Private Limited (supra); wherein it is held as under: "For valuing the closing stock at the end of a particular year, the value prevailing on the last date is relevant. This is because profit/losses embedded in the closing stock. While anticipated loss is taken into account, anticipated profit in the shape of appreciated value of the closing stock is not brought into account, as no prudent trader would care to show increase in profits before actual realization. This is the theory underlying the rule that closing stock is to be valued at cost or market price whichever is lower." As the Assessee is consistently adopting the policy as and when loses arises, the same is disclosed as loss earned and is a claimed deduction. Hence, we allow the claim of the Assessee. Since we have allowed the claim of the Assessee on merits on regular assessment, similar to the decision on computing the book-profit u/s. 115JB of the Act, the appeal of the Assessee is....
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....hat the assessee company has claimed depreciation on UPS which was for exclusive use of computers @ 60% being integral part of computer. This issue now remains no res-integra and covered by the order of Hon'ble Madras High Court in the case of CIT vs. Cactus Imaging India (P.) Ltd., reported in [2018] 98 taxmann.com 396, wherein the Hon'ble High Court has considered this issue in paras 7 & 8 as under:- 7. We need not labour much to answer the substantial question of law, which has arisen for consideration in the instant case, as in the assessee's own case, the question has been decided in favour of the assessee and the appeal filed by the Revenue, viz., T.C.(A) No.867 of 2014, was dismissed by the Hon'ble Division Bench by judgment dated 18.11.2014. The operative portion of the judgment reads as follows: "4. The issue that arises for consideration is whether the printing machinery, namely printer and scanner, should be treated as an integral part of computer and eligible for 60% depreciation as against 25% as indicated by the Department. There is no dispute on the fact that the printer and scanner is used as an office equipment in business and that is part....