TaxTMI 
TaxTMI 
2025 (2) TMI 1573
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....r water Treatment and Desalination. As soon a project is completed, even in the middle of the year, the company makes a provision for warranty for the project. During the balance period in the year, Appellant spends towards warranty expenditure, which is adjusted against the provision made on the completion of the project. The Balance amount is shown as the outstanding provision for warranty at the end of the year. For the assessment year under consideration assessee has made a gross provision of Rs. 11,77,22,116/- out of which Rs. 5,71,48,339/- was spent during the year. Balance Provision of Rs. 6,15,07,670/- is claimed as provision for warranty. However, the Ld. Assessing Officer disallowed Rs. 6,15,07,670/- on the reasoning that provision should be created on either scientific basis or reasonable provision based on past trends, and the same should be supported by proper calculation. Hence, the ld. Assessing Officer disallowed a sum of Rs. 6,15,07,670/-. For AY 2018-19 the appellant provided gross provision of Rs. 15,38,61,854/- out of which Rs. 14,05,34,970/- utilized during year. The appellant claimed that net warranty of Rs. 1,33,26,884/- is debited to profit and loss account ....
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....ranty commitments were integral part of the sale price. It was submitted that the warranty provisions need to be recognized because the appellant had present obligations as a result of past events. The Ld. AO relied upon Hon'ble Apex Court's decision in the case of Rotork India Pvt Ltd 314 ITR 62 mandating that provision of warranty is a permitted expenditure only if based upon a scientific working. The Ld. AO did not concur with the assessee's submissions and made addition of Rs. 17,53,70,580/-. The Ld. Counsel further submitted that the Ld. First Appellate Authority deleted the addition after comprehensively examining the commercial viability for warranty expenses as well as relying upon a catena of decisions including one in the case of 314 ITR 62 Supra. Before us the Ld. Counsel for the assessee reiterated the submissions made before the Ld. CIT(A) viz vide ITA No.137 in assessee's own case for AY-2012-13 the Ld. First Appellate Authority and also submitted that the DRP Chennai for AY 2010-11 had held that provisions for warranty are allowable business expenditure. Additionally, the Ld. Counsel for the assessee invited our attention to the decision of Coordinate Bench of this t....
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....anty based scientific methods of accounting adopted by the assessee. This also depends upon historical trend and other related facts. The assessee has a contractual obligation to maintain the plant for a minimum period of two to three years depending upon the agreement and during this period the assessee has to freely replace the components if they became defective. This issue is settled by Hon'ble Supreme Court in the case of Rotok India Put. Ltd. (Supra), wherein it was held that warranty became an integral part of sale price, in other words, the warrant stood attached to the sale price of the product. Warranty provision had to be recognized because, the assessee had a present obligation as a result of past events resulting in an outflow of resources and a reliable estimate could be made of the amount of obligation. The value of contingent liability like warranty expenses, if properly ascertained and discounted on accrual basis, can be an item of deduction u/s. 37 of the Act. Since the assessee estimated the warranty and made a provision on a scientific basis the assessee is eligible to claim as revenue expenditure. Furthermore, the assessee reverses any excess provision made....
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.... shall apply mutatis mutandis in this year also. In the result we allow the grounds of appeal raised by the assessee for AY-2018-19 also. 9. Next issue is with regard to Allowance of bad debts in ITA No.2256/Chny/2024 for AY 2017-18 (Revenue Appeal): The appellant claimed amount due from Indian Oil corporation amounting to Rs. 13,02,094/- as bad debts stating that amounts are due from several years they are written off in books of company for the year. The amount totaling to Rs. 13,02,094/- is withheld by IOL for failure to complete job in time, in case supply of products below agreed standards of quality, for not reaching agreed output etc by appellant and while finalizing assessment the AO has not allowed deduction of bad debts holding that dues from Govt agencies cannot be allowed as deduction. Before us, Assessee submitted that after 1.4.1989, provisions of section 36(1)(vii), dealing with deduction of bad debts written off has under gone a change. Thereafter, it is not necessary for an Assessee to establish that the debt has become bad for it to be allowed and section 36(1)(vii). It will be sufficient if the assessee rights of the debt in the books of account and claims ....
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....nsel for the assessee submitted that the controversy surrounding claim of bad debts is settled by the ratio laid down by Hon'ble Apex Court in the case of M/s. TRF Limited and of Southern Technologies and that the impugned judgements are fully applicable in its case. The Ld. DR submitted that the decision taken by the Ld. AO placing reliance upon cited judgements in the assessment order is the correct interpretation in law. 16.0 We have heard rival submissions in the light of material available on records. The Ld. AO has made the impugned disallowance on the singular premise that the assessee has written off bad debts in respect of government agencies and because a government can never deemed to become insolvent, claim of bad debts cannot be allowed. Before the Ld. First Appellate Authority, the assessee had also taken a stand that in AY2009-10 his predecessor had allowed the claim of bad debts. The Ld. Counsel for the assessee also argued that the amounts claimed as bad debts were actually those which were deducted by the government agencies on account of performance-based evaluation and therefore the decision of Hon'ble Madras High Court and Gujarat High Court Supra is d....
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....erefore, we are of the considered view that there is no case for any interference is required in his order. Accordingly, the order of the Ld. First Appellate Authority for AY-2017-18 is upheld and the ground of appeal raised by the revenue challenging the issue of bad debts is dismissed. Accordingly, we affirm the deletion of addition by the ld.CIT(A) in respect of bad debts written off Rs. 13.02.094/- for AY-2017-18. 12. As regards, ITA Nos. IT No.2257/ Chny/2024 for AY-2018-19 and ITA No.2258/Chny/2024 for AY 2020-21 (both revenue appeals), identical grounds of appeal have been raised by the revenue. No changes, save variations in figures, in facts of the case have been reported. Accordingly, the decision in AY-2017-18 Supra shall apply mutatis mutandis in these years also. In result, we dismiss the grounds of appeal raised by the revenue for AY-2018-19 and AY 2020-21 also. 13. Next issue in ITA No.2256/Chny/2024 for AY 2017-18 (Revenue Appeal) with regard to non-deduction of TDS from payment to Jafferji who resident of Sri Lanka: The AO has disallowed payment made to Jafferji od Rs. 2,89,92,420/- who is resident of Sri Lanka for rendering marketing and technical service....
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....re not attracted. Hence FTS paid to independent personal services outside India is not taxable in India and for this reason also the disallowance require to be deleted. 15. At the outset, the ld. Counsel for the assessee also pointed out that the issue of non-deduction of TDS on 'Fees for technical services' is already decided by the co-ordinate bench of Tribunal in favour of the assessee in ITA No.953/ Chny/ 2015 and 807/Chny/2016 for AY 2010- 11 and AY 2011- 12 dated 31.08.2023. 16. We find that the co-ordinate bench of Tribunal in ITA No.953/Chny/2015 and 807/Chny/2016 for AY 2010-11 and AY 2011- 12 dated 31.08.2023 held as under: "21. The next issue in this appeal of Revenue is as regards to the order of DRP allowing the claim of expenses incurred for engineering services rendered by third party outside India. For this, the Revenue has raised following Ground No.6.1: "The Hon'ble DRP failed to appreciate that the department has filed appeal before the Hon'ble High Court in the case of Ajappa Integrated Project management and that the disallowance of Rs. 2,96,49,439/- towards engineering charges by A.O is justified." 22. The brief facts are that ....
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....on of the decision is as under: DCIT V. Ajapa Integrated Project Management Consultants P Ltd [2011] 16 taxmann.com 269 (Chennai)/ (2012| 49 SOT 37 (Chennai)(URO) 16. We have perused the orders and heard the rival contentions. This issue is slightly different from the issue raised by the Revenue in its ground No.2. Here, the payments made by the assessee were to non-residents Indian who were working abroad. Assessee had made no deduction of tax at source whatsoever. As per the assessee, they were working for its business carried on in Nigeria and hence, by virtue of Section 9(1)(vi)(b) of the Act, the fees payable to such non-residents could not be considered as income accruing or arising to them in India. We find that that the ACIT in his directions under Section 144A of the Act, had stated as under: "S 9(1)(vi)(b) itself provides the exception. If the Resident- assessee utilizes the services of the Non-resident, in its business outside India, it is covered under the exception given in the section itself and the payment received by the non-resident cannot be deemed to accrue or arise in India. Here, the assessee company, utilized the services of two non-....
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....n.com 179 (Chennai-Trib.)/2013] 23 1TR(T) 191 (Chennai - Trib.) Head- note: Section 9, read with section 40(a)(i), of the Income-tax Act, 1961 - Income - Deemed to accrue or arise in India Fees for technical services - Assessment year 2008-09 - Assessee was in business of providing underwater diving services in Saudi Arabia undera contract and paid fees to non-resident divers there - Whether, since services of non-residents, to whom technical fee was paid by assessee, were utilized for business carried on outside India for earning income from a source outside India, no TDS liability would arise- Held, yes (Para 19) 3.3.3 The facts of the present assessee's case are exactly similar to the facts involved in the above two cases. Hence the above decisions of the ITAT are equally applicable to the facts of the instant assessee. Therefore, respectfully following the decision of the jurisdictional ITAT in the above referred two cases, we hold that the above technical (engineering) service payments to the non-residents for services rendered outside India, are not assessable to tax in India in the hands of the recipients and consequently the assessee is not under any obligation....
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....donesia and Muscat for the purpose of making or earning any income from a source outside India, it is not an income earned in India as per section 9(1)(vi) of the Act and hence the question of deduction of tax does not arise. The transmission Corporation of India case applies to those situations where any sum is paid to nonresident which is chargeable to tax u/s. 4 of the Act. Since the technical fee paid to non-resident is not earned in India as per section 9(1)(vi) of the Act, it is not an income in the hands of the non-resident in India and the question of deduction of tax will not arise. The A.O's contention that TDS needs to be deducted in respect of engineering fee paid to non-resident is not right since it is well settled law that, the deduction of tax arise only if the income is earned in India. Since the engineering/technical fee paid to foreign agent is not an income earned or accrue or arise in India, as per section 9(1)(vi) of the Act, the question of deduction of tax does not arise. Hence, we are of the view that DRP has rightly deleted the addition and we confirm the same. This issue of revenue's appeal is dismissed. 17. However, the co-ordinate bench of Tribunal i....
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....for AY2010-11 whereby the issue has been restored back to the file of Ld. AO for readjudication of the matter after proper verification of facts of the case. The Ld. DR held the view that the addition made by the Ld. AO is based upon correct understanding of law. 11.0 We have heard rival submissions in the light of material available on records. The decision of the coordinate bench of this tribunal in assessee's own case for AY-2010-11 vide ITA No.953 / Chny / 2015 has been found to be having a direct bearing on the impugned controversy and hence is being considered. In the said case Hon'ble coordinate bench has observed as under:- "....46. Before us also, the Ld. counsel for the assessee relied on the decision of Hon'ble Madras High Court in the case of CIT v. Faizan Shoes (P.) Ltd. [2014] 48 taxmann.com 48 (Mad.), wherein the Hon'ble High Court has considered that the services rendered by non-resident agent for completion of export commitment would not fall under the definition for fee for technical services. The Hon'ble Jurisdictional High Court observed in para 12 as under: "12. In the light of the above said decisions and the finding rend....
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....In the result ground of appeal of revenue for these assessment years are also allowed for statistical purposes. 18. We have gone through the order of the ld.CIT(A) and find that in the present AY 2017-18 there was sufficient discussion regarding the issue in question. Hence, respectfully following the order of the co-ordinate bench of Tribunal in ITA No. No.953/Chny/2015 and ITA No.807/Chny/2016 and also in the light of Article 14 of India Sri Lanka DTAA, we refrain from interfering in the impugned order of the ld. CIT(A). In result, we dismiss the grounds of the revenue on this issue. 19. Next issue of TDS Credit in ITA No.2248/Chny/2024 (Assessee's Appeal): For the project carried out in Saudi Arabia, the remuneration received from the Client remitted the consideration for AY 2019-20 without TDS and the entire amount was offered for tax. For the current year the client has deducted tax for both the years and the Appellant had claimed deduction for the entire amount. AO and CIT(A) had declined to give credit for Rs. 5,11,92,058/- relying Rule 128 of the Income Tax Rules, 1962 which reads as "128. Foreign Tax Credit". While, the appellant relying upon Article 23 of DTAA be....