Income Tax Appellate Tribunal - Mumbai
Acit Rg. 10(1), Mumbai vs M/S. Cmc Ltd., Mumbai on 3 December, 2018
'C ', मुंबई ।
आयकर अपील य अ धकरण, मुंबई यायपीठ IN THE INCOME TAX APPELLATE TRIBUNAL MUMBAI BENCHES "C", MUMBAI Before Shri B.R.Baskaran, AM and Shri Ram Lal Negi, JM ITA No.922/Mum/2006 : Asst.Year 2002-2003 M/s.Tata Consultancy Services Ltd. The Asst.Commissioner of Income (upon merger of CMC Limited with Tata बनाम/ tax, Range 10(1) Consultancy Services Limited) Vs. Mumbai.
9 Floor, Nirmal Building th Nariman Point, Mumbai-400 021.
PAN : AAACR4849R.
(अपीलाथ /Appellant) (
यथ /Respondent)
ITA No.197/Mum/2006 : Asst.Year 2002-2003
The Asst.Commissioner of Income tax, M/s.Tata Consultancy Services Ltd.
Range 10(1) बनाम/ (upon merger of CMC Limited with
Mumbai. Vs. Tata Consultancy Services Limited)
9th Floor, Nirmal Building
Nariman Point, Mumbai-400 021.
(अपीलाथ /Appellant) (
यथ /Respondent)
Revenue by : S/Shri Percy Pardiwala & Harsh Kothari Assessee by : S/Shri H.M.Singh, CIT-DR, Abi Rama Kartikiyan, DR ु वाई क तार ख / सन घोषणा क तार ख / Date of Hearing : 05.09.2018 Date of Pronouncement : 03.12.2018 आदे श / O R D E R Per B.R.Baskaran (AM) :
These cross appeals are directed against the order dated 22.11.2005 passed by Ld CIT(A)-X, Mumbai and they relate to the assessment year 2002-03.
2. The assessee company is engaged in the business of design & development of software, sale of computer and other allied activities. It was 2 ITA Nos.922 & 197/Mum/2006. M/s.Tata Consultancy Services Ltd.
owned by Government of India up to 15.10.2001. Under the disinvestment policy, the Government sold 51% stake in the company to M/s Tata Sons Ltd on 16.10.2001.
3. We shall first take up the appeal filed by the assessee. The first issue relates to the addition pertaining to the assessment of receipts allocated towards Warranty period. The assessee was earlier following the system of accounting entire sale price as its income. As per the terms of sale, the assessee provides warranty to the computers sold by it for a certain period. The existing accounting system of declaring entire sales amount as revenue in the year of sale was found to be not in consonance with the requirement of Accounting standards, since the assessee would be claiming warranty expenses in the subsequent years. Hence the assessee changed its method of accounting from AY 1992-93 onwards and accordingly it allocated 10% of sales revenue as pertaining to Warranty period. Accordingly the same was not offered as income in the year of receipt and the same was shown as liability in the Balance Sheet. The assessee was offering the said liability as its income on proportionate basis, i.e., proportionate to the period of warranty. The said change of accounting system was not accepted by the AO since 1992-93 onwards and accordingly he assessed the sales revenue so assigned towards warranty period also as income of the assessee in the year of receipt. Following the same, in the instant year also, the AO assessed the sales amount allocated towards Warranty period as income of the assessee. In the earlier years, the Ld CIT(A) had directed that the warranty receipts assessed in the immediately preceding year should be set off against the income assessed during the current year.
3 ITA Nos.922 & 197/Mum/2006.M/s.Tata Consultancy Services Ltd.
4. During the year under consideration, the assessee had allocated Rs.1227.75 lakhs as receipts pertaining to warranty period and shown it as liability in the Balance Sheet. As followed in the earlier years, the AO assessed the same as income of the current year. In the immediately preceding year, the warranty period receipts amounting to Rs.1094.36 lakhs was assessed as income. The AO allowed set off of the same against the above said amount of Rs.1227.75 lakhs and accordingly assessed net income of Rs.133.38 lakhs as income of the assessee. The Ld CIT(A), following his earlier orders, confirmed the same.
5. The Ld A.R submitted that the assessee has changed its method of accounting the receipts pertaining to warranty period as per the requirement of accounting standards and accounting principles. He submitted that the earlier method of accounting followed by the assessee did not comply with the accounting principle of "revenue cost matching principle", as the revenue was accounted in one year and the costs were accounted in other years. He submitted that the assessee could not challenge the order passed by Ld CIT(A) in the earlier years, as the assessee was Government company in those years and did not get approval from Committee on Disputes. He further submitted that the present method of accounting was followed since AY 1992-93, i.e., almost for 10 years. He submitted that the method of accounting consistently followed by it should not be disturbed. He further submitted that the said method of accounting is also supported by the following decisions, where in proportionate method of accounting of income corresponding to the period of liability is upheld:-
4 ITA Nos.922 & 197/Mum/2006.M/s.Tata Consultancy Services Ltd.
(a) ACIT vs. Mahindra Holidays and Resorts (India) Ltd (39 SOT
438)(SB)(Chennai)
(b) Director of Income tax (IT)-II vs. BNP Paribas SA (214 taxman
548)
(c) CIT vs. Bank of Tokyo Ltd (1993)(71 Taxman 85)(Cal)
(d) CIT vs. Punjab Tractors Co-op Multipurpose Society Ltd (234 ITR
105)(P & H)
6. The learned DR, on the contrary, submitted that the assessee has collected amount as sales revenue by raising invoices on its customers and thereafter accounted for only 90% of the same as its sales revenue. The balance 10% was allocated by the assessee as "warranty period receipts". The Ld D.R submitted that the assessee did not offer the amount allocated as Warranty period receipts as its income. The assessee has changed its method of accounting as stated above from AY 1992-93 onwards. Since the entire amount was collected as "sales revenue" only, the the Assessing Officer did not accept the change in method of accounting since the assessment year 1992-93 onwards. The Ld D.R submitted that the view so taken by the AO is justified, since it is the assessee who is changing the character of receipt, i.e, it is the assessee who is segregating the sales revenue into Sales revenue and Warranty period receipts. He submitted that the customers of the assessee have paid the amount as per sales invoice raised upon them. The learned DR further submitted that the Revenue has taken a consistent view in this matter and hence the same should be considered as settled issue. Accordingly he submitted that the order passed by the learned CIT(A) does not call for any interference. The learned DR further submitted that the various case laws relied on by the assessee are 5 ITA Nos.922 & 197/Mum/2006. M/s.Tata Consultancy Services Ltd.
distinguishable on facts in as much as the nature of income considered therein was collected as receipt pertaining to a certain period, whereas in the instant case, the assessee has collected the amount as sales revenue but apportioned a portion of the same as warranty receipts.
7. In the rejoinder, the learned AR submitted that the assessee could have accounted the entire sales amount as its sales revenue and then provided for 10% of the same as ""Provision for warranty expenses". Instead of following the above said methodology, the assessee has accounted 90% of the sales bill amount as its revenue and taken 10% of the amount as warrantee receipts and shown the same as liability. The learned AR submitted that the net effect of both the method of accountings is one and the same, i.e., only 90% of the sales invoice shall be taken as revenue receipt. The learned AR further submitted that the assessee was constrained to change its method of accounting from the assessment year 1992-93 onwards in order to comply with the requirements of accounting principles and accounting standards. In the earlier years, the assessee could not challenge the order passed by the learned CIT(A) on this issue, as it did not get approval from the Committee on Dispute, then existing. He submitted that the change in method of accounting was for genuine reasons and the same would comply with real income principles. He submitted that the amount allocated as Warranty period receipts is also offered by the assessee on proportionate basis over the period. The learned AR further submitted that the Assessing Officer himself is allowing set off of amount assessed in the earlier years against the amount assessable during the current year. Accordingly, the learned AR submitted that the order passed 6 ITA Nos.922 & 197/Mum/2006. M/s.Tata Consultancy Services Ltd.
by the Assessing Officer only shifts the year of assessing the income whereas the methodology adopted by the assessee is in accordance with the accounting principles and accounting standards. Accordingly, the learned AR submitted that the addition made by the Assessing Officer should be deleted.
8. We heard the rival contentions on this issue and perused the records. There is no dispute with regard to the fact that the assessee has obliged to provide warrantee on the computer sold by it for certain period. We find merit in the said submission of the learned AR. The methodology adopted by the A.O., in effect, only shifts the year of assessing the amount allocated towards warranty receipts. The contention of the assessee is that the method of accounting followed by the assessee complies with the accounting principle of "Revenue cost matching principle", i.e., the revenue is being spread by the assessee over the warranty period, since warranty expenditure shall be incurred by the assessee during the warranty period. Accordingly, we are of the view that the change in method of accounting made by the assessee in the assessment year 1992-93 was on account of genuine reasons and not with the purpose of avoiding any tax liability. It is well settled proposition of law that the genuine change in the method of accounting to comply with the requirement of the accounting principles and accounting standards should be accepted. As regards the methodology adopted by the AO, we notice the same only shifts the year of assessing the income, whereas the methodology adopted by the assessee would comply with the requirement of the accounting principles and the accounting standards. Accordingly we are of the view that there is no requirement to disturb the methodology adopted by the assessee in accounting for Warranty period 7 ITA Nos.922 & 197/Mum/2006. M/s.Tata Consultancy Services Ltd.
receipts. Accordingly we set aside the order passed by the learned CIT(A) on this issue and direct the Assessing Officer to delete the addition made by him on this issue.
9. The next issue urged by the assessee relates to the assessment of grant in aid of Rs.565.50 lakh received by the assessee. The assessee contended that the above said receipt is gratuitous in nature and hence it does not partake the character of the income. The A.O. did not accept the same and accordingly assessed the same as income of the assessee. The learned CIT(A) also confirmed the same by following the orders passed by him in the earlier years.
10. The learned AR submitted that an identical issue was considered by the co-ordinate Bench of the Tribunal in assessment year1988-89 in ITA No.1845/Bom/1992 and the Tribunal, vide its order dated 10.01.2003, has restored the matter to the file of the Assessing Officer for adjudicating the same afresh. The learned AR submitted that the Assessing Officer has not given effect to the order of the ITAT till date. The learned AR further submitted that the grant in aid received by the assessee in assessment year 1987-88 has been held by the Tribunal as not taxable. Accordingly, the learned AR submitted that the Tribunal may take an individual view on this matter in the year under consideration. The Ld A.R placed his reliance on the decision rendered in the case of Siements Ltd (390 ITR 1).
11. On the contrary, the learned DR submitted that the assessee was acting as implementing agency for many of the Government projects and the impugned grant in aid was given by the Government as per the agreement 8 ITA Nos.922 & 197/Mum/2006. M/s.Tata Consultancy Services Ltd.
entered between the Government and the assessee to meet part of cost of expenditure. Accordingly the learned DR submitted that the grant in aid shall form part of trading receipts of the assessee, as the same was given to meet the expenditure incurred by the assessee in the course of conducting of the business. He further submitted that the decision rendered in the case of Siemens Ltd (supra) is not applicable to the facts of the present case. Accordingly, the learned DR submitted that the tax authorities have rightly assessed the same as income of the assessee.
12. We heard the rival contentions and perused the records. We noticed that the co-ordinate Bench of the Tribunal has restored an identical issue to the file of the Assessing Officer for assessment year 1988-89 and also in assessment year 1989-90 in ITA No.1682/Mum/1993 dated 24.04.2003. Following the same, we restore the order passed by the learned CIT(A) on this issue and restore the same to the file of the Assessing Officer for adjudicating the issue afresh by duly considering the relevant documents. After hearing the assessee, the Assessing Officer may take appropriate decision in accordance with law.
13. The next issue contested by the assessee relates to the deduction claimed u/s 80HHE of the Act. The assessee had claimed deduction u/s 80HHE of the Act to the tune of Rs.86,35,105/-. The AO took the view that the deduction is not available on the following receipts, as they are independent income not related to the activities of export of software:-
(a) Project grants from Govt.
(b) Profit on sale of assets
(c) Dividend from subsidiary 9 ITA Nos.922 & 197/Mum/2006. M/s.Tata Consultancy Services Ltd.
(d) Transfer from Capital Reserve
(e) Provision written back
(f) Miscellaneous Income Accordingly the AO recomputed the deduction at Rs.57,56,781/- as against the claim of Rs.86.35 lakhs made by the assessee.
14. Before Ld CIT(A), the assessee submitted that it did not include incomes, viz., profit on sale of assets, dividend from subsidiary, transfer from capital reserve and project grant from Government for the purpose of computing deduction u/s 80HHE of the Act. Accordingly it was submitted that the AO was not correct in excluding the above said income again. However, since the Ld CIT(A) had held that the project grant from Government is taxable, the assessee put a fresh claim before Ld CIT(A) that the same shall form part of profits of business and hence the same shall be considered for the purpose of computing deduction u/s 80HHE of the Act. It was also contended that the provisions written back and miscellaneous income are related to the business activities of the business and hence they should also be considered as part of profits of business.
15. The Ld CIT(A) rejected the claim of the assessee with regard to Project grant from Government by holding that the same does not form part of its operating business. The Ld CIT(A) also held that the "provisions written back" also cannot be considered as part of operating profit. With regard to miscellaneous income, the Ld CIT(A) noticed that the assessee has failed to furnish the details thereof. Accordingly he rejected the said claim also.
10 ITA Nos.922 & 197/Mum/2006.M/s.Tata Consultancy Services Ltd.
16. We heard the parties and perused the record. We have earlier restored the issue relating to Grants in aid to the file of the AO for examining its taxability afresh by duly considering the agreement entered by the assessee with the Government. Hence the claim of the assessee for deduction u/s 80HHE in respect of this income would depend upon the view that will be taken by the AO in the set aside proceedings. As contended by Ld D.R, if it is found that the Government has given grant in aid to meet the expenses incurred in development and implementation of government programs and accordingly if it was held that the same is taxable, then we are of the view that the grant in aid shall form part of operating income and would be eligible for deduction u/s 80HHE of the Act.
17. The next item is Provisions written back. The Ld CIT(A) took the view that the amount so written back may represent expenses claimed in the year in which the assessee was not eligible for deduction u/s 80HHE of the Act. He further took the view that the writing back of liability cannot be regarded as operating profit eligible for deduction u/s 80HHE of the Act. Accordingly, the Ld CIT(A) confirmed the order of the AO passed on this issue.
18. The Ld A.R submitted that the writing back of liability is not a separate source of income, as it is not a "receipt" contemplated in the definition of Profits of business given in sec. 80HHE of the Act. We agree with the said submission of the assessee. It is quite normal in any business to create provisions for known liabilities and to write back the same when the liability is no longer payable. The amount so written back is usually treated as income of the year in which it is so written back. Hence, we do not find any merit in 11 ITA Nos.922 & 197/Mum/2006. M/s.Tata Consultancy Services Ltd.
the apprehension of Ld CIT(A). Accordingly we agree with the contentions of the assessee that the amount so written back should be treated as part of operating profit of the assessee, as it is not an independent source of income. Accordingly we direct the AO to include the amount written back by the assessee in "Profits of business" and allow deduction u/s 80HHE of the Act.
19. The next item relates to the miscellaneous income. The assessee could not furnish break-up details of miscellaneous income and hence the Ld CIT(A) rejected the claim of the assessee for deduction u/s 80HHE of the Act. The Ld A.R submitted that the miscellaneous income consisted of various types of income received during the course of business like registration charges, bond money recoveries, sale of scrap etc. He submitted that due to passage of time, the assessee is not able to furnish the break-up details. Accordingly he submitted that the assessee may be allowed deduction u/s 80HHE of the Act on miscellaneous income also.
20. The Ld D.R, on the contrary, supported the order of Ld CIT(A). We heard the parties on this issue. Since the assessee could not furnish break- up details of miscellaneous income, the Ld CIT(A) rejected the claim of the assessee. However, there is some merit in the submission of the assessee that the miscellaneous income consisted of receipts arising during the course of carrying on of business. However, in the absence of actual details, in our view, it would be difficult to accept the claim of the assessee. Hence, in order to put this issue at rest, we direct the AO to take 50% of the 12 ITA Nos.922 & 197/Mum/2006. M/s.Tata Consultancy Services Ltd.
miscellaneous income as income eligible for deduction u/s 80HHE of the Act and allow deduction accordingly.
21. The last issue relates to the levy of interest u/s 234D of the Act. The Ld A.R fairly admitted that this issue has been decided against the assessee by Hon'ble Bombay High Court in the case of CIT vs. Indian Oil Corporation Ltd (2012)(25 taxmann.com 284)(Bom). We notice that the Ld CIT(A) has decided this issue against the assessee. However, he has directed the AO to verify the computational error pointed by the assessee. In view of the above said binding decision, we confirm the order passed by Ld CIT(A).
22. We shall now take up the appeal filed by the revenue. The solitary issue urged therein is whether the Ld CIT(A) was justified in deleting the addition of lease rentals claimed by the assessee. During the year under consideration, the assessee paid lease rentals to the tune of Rs.84.14 lacs to various finance companies in respect of lease transactions entered in the earlier years. The AO noticed that, during the course of assessment proceedings relating to AY 1999-2000, these lease transactions were considered as finance lease by the assessing officer and accordingly the claim for deduction of lease rentals was rejected. The AO also noticed that the disallowance so made by the AO was deleted by Ld CIT(A) in those year, but the revenue has preferred appeal before ITAT. Accordingly, the AO disallowed the claim of lease rentals of Rs.84.14 lakhs made by the assessee. However, the AO allowed deduction of depreciation of Rs.29.28 lakhs and interest component of Rs.31.79 lakhs in respect of these lease transactions. Hence net addition made by the assessee worked out to Rs.23.07 lakhs.
13 ITA Nos.922 & 197/Mum/2006.M/s.Tata Consultancy Services Ltd.
23. The Ld CIT(A), by following his earlier orders, deleted the addition made by the AO. The revenue is aggrieved.
24. We heard the parties on this issue and perused the record. We notice that the AO has mainly treated the lease transactions as finance transactions, only for the reason that the lessor has purchased the computers as identified by the assessee and further the relevant invoices also contained the name of the assessee as "Lessee". We notice that the Ld CIT(A), in the order passed for AY 1997-98, has examined the identical issue and decided the same in favour of the assessee. We notice that the Ld CIT(A) has taken support of the decision rendered by Hon'ble Bombay High Court in the case of Development Credit Bank vs. Prakash Industries Ltd (Civil suit no.3196 of 1998) and held that the lessor is the real owner of the assets. The Ld CIT(A) also held that so long as the invoices bear the name of lessor, then the lessor shall be considered to be the owner of the assets. He has further observed that the lessor should have claimed depreciation on the assets and hence allowing depreciation again to the assessee would result in double allowance. Accordingly the Ld CIT(A) held that the genuineness of the lease transactions should accepted. Accordingly he directed the AO to allow the lease rentals claimed by the assessee. The above said order was followed in subsequent years by Ld CIT(A).
25. We heard the parties and perused the record. We notice that the Ld CIT(A) has considered the issue in detail in AY 1997-98 and has given a finding that the lessor is the owner of the assets. It was not shown to us that the above said finding of Ld CIT(A) was reversed by the Tribunal or High 14 ITA Nos.922 & 197/Mum/2006. M/s.Tata Consultancy Services Ltd.
Court, meaning thereby, the said finding shall hold the field. During the year under consideration, the assessee has not entered into any fresh lease transactions and has paid only the lease rentals on the lease agreement entered in the earlier years. Hence the Ld CIT(A) was justified in following his order passed in the earlier years on the very same issue. Accordingly we uphold the order passed by Ld CIT(A) on this issue.
26. In the result, the appeal of the assessee is treated as partly allowed and the appeal of the revenue is dismissed.
Order has been pronounced in the Court on 03.12.2018 Sd/- Sd/-
(Ram Lal Negi) (B.R.Baskaran)
या यक सद य / JUDICIAL MEMBER लेखा सद य / ACCOUNTANT MEMBER
मंब
ु ई Mumbai; दनांक Dated : 03rd December, 2018.
Devdas*
आदे श क! " त$ल%प अ&े%षत/Copy of the Order forwarded to :
1. अपीलाथ / The Appellant
2. यथ / The Respondent.
3. आयकर आय"
ु त(अपील) / The CIT, Mumbai.
4. आयकर आयु"त / CIT(A)-X, Mumbai
5. %वभागीय (त(न)ध, आयकर अपील य अ)धकरण, मुंबई / DR, ITAT, Mumbai
6. गाड- फाईल / Guard file.
आदे शानस ु ार/ BY ORDER, स या%पत (त //True Copy// उप/सहायक पंजीकार (Dy./Asstt. Registrar) आयकर अपील य अ धकरण, मंब ु ई / ITAT, Mumbai