TaxTMI 
TaxTMI 
2026 (7) TMI 870
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....d by the Assessee had been developed in previous year and no new services had been performed in A.Y. 2010-11. 2. Whether on the facts and in the circumstances of the case and in law, the Ld. CIT(A) was justified in deleting the addition of Rs. 94,49,341/-, without considering the point that the adjustment could not be a payment under the condition u/s. 438 of the Act. 3. Whether on the facts and in the circumstances of the case and in law, the Ld. CIT(A) was justified in deleting the addition of Rs. 5,62,59,722/- as Royalty Payment, when the payment of Royalty could have been given the status of a capital expenditure owing to its enduring nature. 4. Whether on the facts and in the circumstances of the case and in law, the Ld. CIT(A) was justified in deleting the addition of Rs. 9,40,18,765/- as Rent payment without considering that the 'rent' calculated on Straight Lining of lease Rent Method' was notional and had no bearing with the actual expenditure on account of rent. 5. Whether on the facts and in the circumstances of the case and in law, the Ld. CIT(A) was justified in deleting the addition of Rs. 63,181/-, without considering t....
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....,569/ and Rs. 2,825/- actually not paid by the assessee but adjusted. Accordingly, it was disallowed. The Ld. DR further submitted that it relates to the employee's contribution to PF/ESI and not paid within the due date but paid before filing the return of income. The Hon'ble Apex Court have decided this issue in favour of the revenue in the case of Checkmate Services (P). Lt vs CIT reported in (2022) 143 taxmann.com 178 (SC) and the assessee has not paid within the due date specified in the respective Act. The ld. CIT(A) while deciding the issue has ignored the provision of u/s. 36(1)(va) of the Act and not considered properly the way of submission of the assessee. The Act is very much clear that the assessee should have paid the employee's contribution within the due date as per the respective Act. Therefore, the order of the AO should be upheld. 6. On the other hand, the Ld. AR relied on the order of Ld. CIT(A) and submitted that during the course of appellate proceedings detailed written submission were submitted which has been considered by the Ld. CIT(A), relying on various case laws he has allowed the appeal of the assessee on this point. He further submitted that simila....
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....C-1, to C-3 of the Tax Audit Report, a copy of which is enclosed herewith at Page No 278-356 of Paper Book. From a perusal of which it will be seen that the earlier amount of Employees Contribution towards PF and ESI had been paid and deposited before due date of filing the return 1. In this connection, your kind attention is drawn to the decision of Hon'ble Kolkata High Court in the case of Arambagh Hatcheries Ltd. vs. CIT Kolkata-XX wherein by their order dated 11.03.2011, it was held by Hon'ble Court as under- (underlined by us to lay emphasis) "After hearing the leamed counsel for the parties and after going through the materials on record, we find that the most vital question involved in these three appeals is whether the amendment made in section 438 of the Income-tax Act 1961 by the Finance Act, 2003 is clarificatory and thereby retrospective in nature. If the aforesaid question, is answered in favour of the assessee, in that event. Point No.3 formulated in all these three appeals should be answered in favour of the assessee in as much as the Tribunal below disallowed the amount of deposit towards provident fund on the sole ground that those were de....
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....und that since it represented "amount adjusted and not paid", it did not satisfy the conditions of Section 438 which required actual 'payment of the (lability. The appellant submits that the AO never called upon the assessee to explain the issue and unilaterally computed the said disallowance. The appellant submits that the aforesaid disallowance was fallacious, absurd & illogical. The Delhi High Court in the case of ACIT VS Kaiser Industries Limited (10 taxmann.com 133) has held that adjustment of any statutory liability enlisted under Section 438 is as good as payment of the liability. The Jharkhand High Court also in case of CIT Vs. Shakti Spring Industries P. Ltd (TS-4-HC-2013) held that Book adjustments constitutes actual payment for Sec-438 and therefore no disallowance is warranted under Section 438 of the Income tax Act, 1961. The appellant thus submits that the disallowance of Rs94,49,341/-deserves to be deleted in full. In this connection, it may also be kindly be appreciated that similar disallowances were made in A.Ys 2005-06 82006-07 and he issue was ultimately decided in assessee's favour by Hon'ble ITAT, Kolkata Benches in ITA No1826, 1827/K/2012....
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....ous kinds of services were taken from its AE i.e. Engineering Services, Purchasing Services, Construction and technical Services and various kinds of services as submitted before the Appellate proceedings for 19 different kinds of services and detailed written submission was made which is incorporated by the ld. CIT (A). The ld. CIT(A) after considering the entire submission he allowed the appeal of the assessee. The ld. DR supported the order of the AO. The assessee counsel relied on the order of ld. CIT(A). Considering the rival submissions and perusing the entire materials available on record and order of authorities below we noted that the ld. CIT(A) has allowed observing as under:- "05. Findings & Decision : (Ground No. 1 to 21) I have considered the facts of the case. The issue pertains to payment of a sum of Rs. 12,37,50,000/- which has been paid by the assessee-company as a royalty pursuant to Technical Collaboration Agreement with the said AE. The facts as emerging out of the Ld. TPO's order and appellant's submission is that the assessee have been paying such royalty towards Technical Collaboration Agreement and during the F.Y 2007-08 relevant to....
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....dded the entire sum paid I.e. Rs. 12,37,50,000/- by way of adjustment to ALP. 3. In my considered view of the matter, the following aspects would require consideration in order to identify Intra group services requiring arm's length remuneration: Whether services were received from related party. Nature of services including quantum of services received by the related party. Services were provided in order to meet specific need of recipient of the services. The economic and commercial benefits derived by the recipient of intra group services. In comparable circumstances an independent enterprise would be willing to pay the price for such services? An independent third party would be willing and able to provide such services? Whether payment made to AE meets ALP criterion will be determined, keeping in mind all the above factors, as well. 4. The appellant's submission in brief can be summarized as follows: a. Technical information relating to design methods and manufacturing techniques including drawings, tracings, etc.: In respect of the same the appellant submitted that the AE provide....
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....t be sustained. 7. The material on record shows that the assessee entered Into a "Technical Collaboration Agreement" ("TCA") with Bata Ltd., Canada, (successor of Bata Lim) with effect from January 1, 2001 to avail the desired advisory and technical services. The said agreement has been approved by Government of India, Secretariat for Industrial Assistance vide approval letter No. 120(2000)/564(2000) PAB-EL dated October23,2000. Bata Limited, Canada. Such agreement was assigned to Global Footwear Singapore ("GFS") which is also an AE and which is engaged inter-alia in the business of providing comprehensive advisory services relating to production and distribution of footwear and associated products to clients across the world. The said company is stated to possess valuable knowledge expertise and experience and is stated to possess secret and specialized know-how, information and data in the field of production and distribution of footwear and associated products. 8. The following are instances of the technical and managerial support received by Bata India: a. Technical Information relating to design methods and manufacturing techniques including drawing....
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....didas, Lee Cooper, ID, Warner, etc. for marketing their products from Bata outlets in India. This strategy had given a big boost to Bata India by attracting the new generation of customers in Bata stores, resulting in an enhanced acceptability of Bata products. It was submitted that Bata India, with its established brand name, enjoyed an edge over its competitors and this has given it an acceptability and reach that all other brands can only aspire to achieve. The associated enterprise advised the assessee on the development of the brand, brand marketing plans, brand policies, etc. in accordance with the Indian market conditions. On the basis of the advisory services provided by the associated enterprise, the assessee was able to introduce new products in the Indian market and attract the new generation of customers in the Bata store, resulting in an enhanced acceptability of Bata products over the country. On the above submission of the Assessee the Ld. TPO was of the view that none of the brand related work was specifically directed towards the assessee. In any case, the assessee was in India for more than 70 years and was an established brand in itself. He held....
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.... to construct and reproduce the same. Similarly, It is seen that guidelines provided by GFS relating to the display and position of footwear, boards, hoardings, window display etc. It cannot be disputed that the material contained in the brand books have in fact been practiced in reality. Hence notice of the existence of directions contained in the brand book and they were in fact put in practice in the various Bata stores in India. Hence it is held that services in the form of technical information relating to design methods and manufacturing techniques were in fact provided by the AE to the Assessee. So also, Brand Development services were provided by the AE to the Assessee. d. Management Manpower Support: It was the contention of the Assessee that the AE has been assisting Bata India in identifying key personnel who have global experience and are experts in their own fields, to manage the operations of Bata India. These managers/directors have been assigned tasks of spearheading Initiatives in product development, quality control and distribution management, all of which are critical determinants of success in the footwear Industry. The analysts studied the fu....
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....o enhance their competencies: It was the contention of the Assessee that the AE has been undertaking regular trainings, seminars, conferences, etc., for the development of Bata India's personnel. Knowledge is the key in manufacturing and operational efficiency. The best practices have been transferred to Bata India through those trainings and conferences. Knowledge transfer has been a continuous process and Bata India has been able to significantly enhance the value of its human capital through such trainings. Under the said guideline, the associated enterprise provided services in relating to selection, recruitment and assessment of people for current and future roles within the assessee. Further, the associated enterprise also provided other human resource related services, such as identification and awareness of dress code of the employee, training of employee, awareness of code of ethics, etc. On the above submission of the Assessee, the TPO was of the view that if the courses claimed to have been held by the AE were being paid for separately, then how could these be claimed as technical services rendered under TCA for which another payment was made to the AE in th....
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....anning, assets management, etc.) and business indicators (like stock turns, forward weeks' inventory etc.) which are essential for controlling the shoe business (placed on record). It would assist the company in analysing its financial performance and provide guidance in formulating future business plans and strategies. h. Information system services: AE has developed a diverse range of Information systems for use by different departments for improving business efficiency. These systems have been adopted by Bata India under guidance of AE for installing and implementing of these information systems. Further, these systems have been modified to suit Indian conditions by the AE. It has also made recommendations to Bata India on their hardware and software to be used by Bata India to meet the requirements of the various information systems. The associated enterprise has developed a diverse range of information systems for use by different departments for Improving business efficiency. These systems have been adopted by the assessee under the guidance of associated enterprise for installation and implementation. Further, these systems have been modified to suit Indian cond....
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....hat does not mean that arm's length price of these services is 'nil'." It was further submitted that such services can, by no stretch of imagination be regarded as shareholder services. 11. In particular attention was drawn by the appellant / Ld. A.R to the OECD Transfer Pricing Guidelines which defines the shareholder activity as under: "Shareholder activity An activity which is performed by a member of an MNE group (usually of the parent company or a regional holding company) solely because of its ownership interest in one or more other group members, l.e. in its capacity as shareholder." 12. Further attention was drawn by the appellant to para 7.10 of the OECD Transfer Pricing Guidelines further provides the following examples of shareholder activity: 7.10 The following examples (which were described in the 1984 Report) will constitute shareholder activities, under the standard set forth in paragraph 7.6: a) Costs of activities relating to the juridical structure of the parent company Itself, such as meetings of shareholders of the parent, issuing of shares in the parent company and costs of the supervisory board;....
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....the associated enterprise has advised and provided guidelines to the assessee relating to the display and positioning of footwear, boards, hoardings, window display, etc., which were placed on record. On the above submission of the Assessee the Ld. TPO was of the view that the services were directed towards protecting or improving interest of the ownership shareholder. On this matter, also, in my considered view of the matter, in dealing with similar conclusion, it is to be held that the conclusion of the Ld. TPO/AO in this regard cannot be sustained, the reasons given for such conclusions will equally apply here also. 15. Conclusion: In the light of the foregoing discussion, I hold that the Assessee established the nature of services including quantum of services received by the related party, that services were provided in order to meet specific need of the Assessee for such services, the economic and commercial benefits derived by the Assessee of intra group services. 16. The next question is as to whether the consideration paid to the AE is at Arm's length. On this aspect, I have already observed that the Assessee in its Transfer Pricing Documenta....
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....ount (Rs.) 1 Wolverine Worldwide Ince, USA 1,12,08,316 2 SSL TTK Limited - Chennai 2,39,07,975/- 3 Wolverine Worldwide Ince, USA 1,29,02,066 4 SSL International Plc. UK 82,41,365 5,62,59,722/- 15. In this regard, the assessee furnished reply and AO observed that the submission made is similar to the AY 2008-09 and 2009-10 and AO observed that in the above two assessment years the royalty payment was held as enduring nature and treated as capital expenditure against which the assessee filed appeal before the Ld. CIT(A) taking Ground No. 28 to 29 and filed details and submissions. The Ld. CIT(A) after going through the entire submissions and his previous order treated the expenditure claimed as revenue expenditure and allowed the grounds. On the other hand, the Ld. DR relied on the order of AO. During the course of hearing, the Ld. Counsel submitted that the issue is covered in favour of the assessee in assessee's own case for AY 2009-10 in ITA No. 1844/Kol/2017. 16. Considering the rival submissions and going through the order of Ld. CIT(A) and order of assessee's own case the Co-ordinate Bench in which it has been hel....
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....ed that the notional lease rent cannot be allowed. 21. On the other hand, the Ld. Assessee counsel relied on the order of Ld.CIT(A) and detailed written submission filed before the Ld. CIT(A). Further, he submitted that in assessee's own case for the AY 2008-09 in ITA No. 225/Kol/2024 order dated 06.09.2019, the issue has been discussed in detail and decided in favour of the assessee. Considering the rival submissions and going through the same, we noted that in assessee's own case for the AY 2008-09 the similar issue has been dealt as under in favour of the assessee on the similar set of facts which is as under: "31. We note that Hon'ble Supreme Court explained the importance of mandatory accounting standards in the case of J. K. Industries Ltd. Vs UOI (297 ITR 776) wherein the Court held that the main object sought to be achieved by Accounting Standards which are now made mandatory is to see that accounting income is adopted as taxable income and not merely as the basis from which taxable income is to be computed. The Supreme Court explained its position by citing examples. In case of inventories, the valuation rules are laid down in the Accounting Standards which are....
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....in accordance with Section 211 of the Companies Act, 1956 and the notified accounting standards. It is by now well settled that matching principle of accounting ensures purity of Profit & loss Account and ensures true & fair ascertainment of income. Accordingly, in light of Guidance Note issued by EAC of ICAI and the accounting guidelines laid down in Paras 23 & 24 of AS-19, the assessee had changed its accounting treatment of operating leases expenses. In consonance with AS-19 the lease rent expenditure was recognized on a straightline basis which was considered to be a more systematic and rational basis by accounting experts. On accounting of escalating rentals in the operating lease agreements, it led to creation of additional lease rental liability in the relevant year under consideration which was debited to the P&L A/ c under the head "Rent Straight-Lining". This accounting treatment was in sync accounting guidelines laid down by ICAI which the assessee was required to mandatorily follow. The profits so determined after accounting for the expense towards straight-lining of lease rentals reflected a better & accurate picture of the true commercial profits of the assessee compa....
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....593. In the assessee's case, it has followed accounting standard issued by ICAI relating to operating lease. As a result of straight-lining recommended by the accounting standard, there was a requirement to make provisions for scheduled rent increase. Such provision relating to the year under consideration was of Rs. 4,06,47,000/-. The accounting standard was not in conflict with any provision of the Act or notification made by the Central Government u/s. 145(2) of the Act. It is also not the case of the assessing officer that the system of accounting followed by the assessee was such that the correctness and completeness of accounts was to be doubted. Rather, the assessee has followed accounting standard issued by ICAI. The assessee had made the claim in the assessment proceedings and the assessing officer has neither allowed nor given reason for its rejection. In the remand report dated 03.01.2014, the assessing officer has objected to the assessee's claim on the ground that such claim was not made by way of filing revised return. Apparently, he intends to draw strength from the decision of the Hon'ble Supreme in the case ofGoetze India Ltd. 284 ITR 323, though he has not spe....
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....ion issued by the Institute of Chartered Accountants of India ("ICAI") in the context of Accounting Standard AS-19 for accounting for leases, the assessee had to compute the impact of straight lining of lease rent from 01.04.2001 to 31.03.2007 which was determined at Rs. 3,97,18,000/-. The same was shown as 'prior period expenses' in the profit and loss account. Additionally, liability for the current year was debited to the profit and loss account in an amount of Rs. 4,06,47,000/-. The assessee had inadvertently added back the amount of Rs. 4,06,47,000 in the return of income but the same was subsequently claimed before the assessing officer during the course of assessment. The assessing officer omitted to deal with the said claim. The same was, however, allowed on appeal by the CIT(A) against which the Revenue has come up in appeal (S. No. 5 of Grounds of Appeal), which we have already adjudicated in para 31 of this order. In so far as the amount of Rs. 39,718,000/- is concerned, assessing officer added back the same while computing book profit under section 115JB of the Act. The adjustment made by the assessing officer was deleted by the CIT(A) for which the Revenue is in appeal....
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....the instant case and, therefore, we see no reason to differ with the view taken by the Tribunal in the impugned order." 34. We note that in the context of change in method of valuation of closing stock, the Courts have in the undernoted judgements held that the impact of the change had to be allowed deduction in the year in which the changed method was adopted for the first time: - CIT v. Carborandum Universal Ltd. : [1984] 149 ITR 759 (Mad.) - SLP dismissed vide 187 ITR (St) 38; - Melmould Corporation vs. CIT: [1993] 202 ITR 789 (Bombay). We note that Hon'ble Gujarat High Court in the case of Saurashtra Cement & Chemical Industries Ltd. vs. CIT: 213 ITR 523 held that: "Merely because an expense relates to a transaction of an earlier year it does not become a liability payable in the earlier year unless it can be said that the liability was determined and crystallized in the year in question on the basis of maintaining accounts on the mercantile basis." In view of the aforesaid decision in law, the incremental liability on account of lease rental equalization provided for pursuant to the clarification issued by the Expert Ad....
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....e ld. CIT(A) for A.Yr. 2007-08 clearly shows that there were other issues which were a subject matter of appeal before the Tribunal for the A.Yr. 2007-08. Admittedly the issue of depreciation on the river embankment was a small one but the revenue has not filed any appeal against the same. The depreciation having been allowed for A.Yr. 2007-08, it cannot now be denied for the A.Yr. 2005-06 especially when it has been accepted as part of the block of assets. In the circumstances we are of the view that the findings of the ld. CIT(A) on this issue is on a right footing and does not call for any interference. 13. In the result ground no.2 of the revenue's appeal stands dismissed." 24. Respectfully following the above judgment of the coordinate Bench in the assessee's own case we dismiss the grounds raised by the revenue. Ground No. 6 25. During the course of assessment proceedings, the AO observed that the assessee has made provision for warranty for Rs. 4,78,72,000/- and in rectification it was reduced to Rs. 39,01,000/- claimed as expenditure which was not allowed and the reversal of warranty is not material. Accordingly, the provision was disallowed. During the co....
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.... It is submitted that the Assessee is engaged in the business of manufacture and sale of footwear. In the ordinary course of its business, and in line with prevailing industry practices, the Assessee sells its products in both domestic and export markets with an associated warranty obligation. Under the terms of such warranty, the Assessee undertakes to replace or repair defective products within a specified period ranging from 60 to 90 days from the date of sale. The extent of such warranty replacement varies between 25% to 100%, depending upon the nature of the product and the terms applicable for the relevant period. The warranty obligation entails costs in the nature of repair and/or replacement of footwear sold during the warranty period. Accordingly, the Assessee creates a provision for warranty at the end of each financial year. The said provision is computed on a scientific and reasonable basis, having regard to past experience, particularly the average expenses incurred towards warranty claims in earlier years. In this regard, reference is invited to Note 14 of the audited financial statements filed for Assessment Year 2010-11, wherein the basis of such p....
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....Additions 1,12,140 Utilisation 1,05,960 Reversals 11,590 Closing balance 7,630 Assessment Year 2014-15 Particulars Total (in Rs. 000) Opening balance 7,630 Additions 1,23,310 Utilisation 1,08,810 Reversals 10,270 Closing balance 11,860 Additionally, a tabular representation of the expenses claimed over the years is enclosed along with this submission as Annexure D. Though the provision for of warranty made in earlier years was added back in the computation of income in the earlier years, the assessee in view of law laid down by the Supreme court in the case of Rotork Controls India Ltd. vs. CIT: 314 ITR 62, claimed deduction of the provision for warranty made in the relevant year. The assessing officer made disallowance of the amount of the provision warranty made during the year, on the ground that the assessee could not produce evidence to prove that the amount of provision for warranty was scientifically worked out and actual settlement was made and in the past the assessee itself offered the amount of provision for warrant to tax, while completely ignoring the detailed working/calcu....
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....g the said obligations as a whole. In this connection, it may be noted that in the case of a manufacture and sale of one single item the provision for warranty could constitute a contingent liability not entitled to deduction u/s. 37 of the said Act. However, when there is manufacture and sale of an army of items running into thousands of units of sophisticated goods, the past event of defects being detected in some of such items leads to a present obligation which results in an enterprise having no alternative to settling that obligation. In the present case, the assessee has been manufacturing and selling Valve Actuators in large numbers since 1983- 84 onwards. Statistical data indicates that every year some Actuators are found to be defective. The data over the years also indicates that being sophisticated item no customer is prepared to buy the Valve Actuator without a warranty. Therefore, warranty became integral part of the sale price of the Valve Actuator(s). In other words, warranty stood attached to the sale price of the product. These aspects are important. As stated above, obligations arising from past events have to be recognized as provisions. These past events are kno....
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....rranty provision should be based on past experience of the company. A detailed assessment of the warranty provisioning policy is required particularly if the experience suggests that warranty provisions are generally reversed if they remained unutilized at the end of the period prescribed in the warranty. Therefore, the company should scrutinize the historical trend of warranty provisions made and the actual expenses incurred against it. On this basis a sensible estimate should be made. The warranty provision for the products should be based on the estimate at year end of future warranty expenses. Such estimates need reassessment every year. As one reaches close to the end of the warranty period, the probability that the warranty expenses will be incurred is considerably reduced and that should be reflected in the estimation amount. Whether this should be done through a pro rata reversal or otherwise would require assessment of historical trend. If warranty provisions are based on experience and historical trend(s) and if the working is robust then the question of reversal in the subsequent two years, in the above example, may not arise in a significant way. In our view, on the fac....
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....ed on scientific study and actuarial basis that is precisely done by the assessee in the instant case and, therefore, we see no reason to differ with the view taken by the Tribunal in the impugned order." It has been similarly held in the following decisions: • Calcutta Company Ltd. v. CIT: 37 ITR 1 (SC) • Bharat Earth Movers v. CIT: 245 ITR 428 (SC) • CIT vs Woodward Governor India Ltd .: 321 ITR 147 (Del.) • CIT vs Ericssion Communications (P) Ltd .: 318 ITR 340 (Del.) • CIT vs Hewlett Packard India (P) Ltd .: 314 ITR 55 (Del.) • CIT vs Vinitech Corporation (P) Ltd .: 278 ITR 337 (Del) • CIT vs. Hero Briggs and Stratton Auto Ltd .: ITA No. 536/2007 (Del.) • CIT vs Hinditron Services (P) Ltd .: 321 ITR 263 (SLP dismissed) • CIT vs Sony India (P) Ltd .: 160 Taxman 397 (Del.) • Kone Elevator India (P) Ltd. vs ACIT: 340 ITR 46 (Mad.) • CIT vs BeemaMfrs (P) Ltd: 130 Taxman 400 (Mad.) • C.I.T. v. Indian Transformers Ltd .: 270 ITR 259 (Ker.) • CIT v. Jay Bee Industries: 171 Taxman386 (P&H) • JCIT v....
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....isation 1,08,810 Reversals 10,270 Closing balance 11,860 Assessment Year 2010-11 2011-12 2012-13 2013-14 2014-15 Particulars Total (in Rs. 000) Total (in Rs. 000) Total (in Rs. 000) Total (in Rs. 000) Total (in Rs. 000) Opening balance 18,404 22,308 29,370 13,040 7,630 Additions 47,872 66,820 89,560 1,12,140 1,23,310 Utilisation 43,971 52,850 74,180 1,05,960 1,08,810 Reversals - 6,910 31,710 11,590 10,270 Closing balance 22,308 29,370 13,040 7,630 11,860 30. On the observation of the replacement period (warranty period) as noted by the ld. CIT(A) in para NO. 25 for ground No. 36,37&38 the replacement period and quantum is given. However, as per written submission (noted supra), the assessee counsel has submitted the warranty period is 60 to 90 days from the date of sales. We found deviation on the submissions made before the ld. CIT (A) as well as before us on the period of warranty and the assessee is also stated that the replacement varies between 25% to 100% depending upon nature of products and th....