Income Tax Appellate Tribunal - Ahmedabad
Ge India Industrial (P) Ltd.,, New Delhi vs Assessee on 17 May, 2013
IN THE INCOME TAX APPELLATE TRIBUNAL
AHMEDABAD "C" BENCH
Before: D.K Tyagi, Judicial Member
and Shri Anil Chaturvedi, Accountant Member
ITA Nos. 3064/Ahd/2010 &2749/Ahd/2011
Assessment Year 2006-07 & 2007-08
GE India Industrial Pvt. Deputy Commission
Ltd, Dharamsingh Park, of Income-tax,
National High way No. 8, Vs Kheda Circle,
Nadiad Nadiad
PAN: AAACK4901D (Respondent)
(Appellant)
Revenue by: Sri D.C. Patwari, CIT-D.R.
with Mr. Anurag Sharma, TPO
Assessee by: Sri S.N. Soparkar, A.R.
Date of hearing : 17-05-2013
Date of pronouncement : 08-08-2013
आदे श/ORDER
PER BENCH:-
These two assessee's appeals are against the order of assessing officer dated 20-10-2010 and 21-10-2011 passed u/s 143(3) r.w.s. 144C(13) of the Act for assessment year 2006-07 and 2007-08 respectively in accordance with direction of Dispute Resolution Panel (DRP) dated 22-09-2010 and 27- 09-2011 respectively I.T.A Nos.3064 /Ahd/2010,2749/Ahd/2011 A.Y. 2006-07 &2007-08 Page No 2 GE India Industrial Pvt. Ltd. vs. DCIT
2. Both the parties at the outset submitted that the facts in both the appeals are identical except the figures. They further submitted that the submission made by them for Asst. Year 2006-07 would be equally applicable for A.Y. 2007-08, and therefore both the appeals can be heard together. We therefore are disposing off both the appeals by this consolidated order by taking the facts and grounds for A.Y. 2006-07.
3. Assessee is a company incorporated in India. During the year under appeal, assessee consisted of 12 divisions i.e. Plastic division, Lighting division, Transportation division, Betz division, Druck division, Bentley Nevada India division, Bentley Venada Sales division, Wind division, Energy Marketing division, Consumer & Industrial division, Growth team division, and Inspection technologies division. The assessee filed original return of income for A.Y. 2006-07 on 30/11/2006 showing Gross Total Income of Rs. 33,07,71,939/-. Subsequently the assessee filed revised return on 28/03/2008 showing Gross Total income of Rs. 31,85,25,884/- & after set off of brought forward business loss & depreciation the total taxable income under normal provisions of I.T. Act was shown at Rs. Nil. The case was selected for scrutiny. The international transactions of the assessee were referred for determination of Arm's Length Price (ALP) by the Assessing Officer (AO) to Transfer Pricing Officer (TPO). The TPO after assessment proceedings u/s 92(C) of the Act proposed the adjustment of Rs. 14,00,49,993/- in respect of some of the international transactions of some of the divisions of the assessee. The assessing officer issued the draft assessment order u/s. 143(3) r.w.s 144C vide order dated 29/12/2009 & incorporated the adjustments made by the TPO. Against this draft I.T.A Nos.3064 /Ahd/2010,2749/Ahd/2011 A.Y. 2006-07 &2007-08 Page No 3 GE India Industrial Pvt. Ltd. vs. DCIT assessment order, assessee made reference to Dispute Resolution Penal (DRP) u/s 144C(1) of the Act. DRP vide order dated 22/09/2010 issued directions u/s 144C(5). The adjustment made by the TPO and the outcome of the DRP directions can be summarized as under:
Particulars TPO (Amount in INR) DRP (Amount in INR) Power Controls 3,59,55,689 3,59,55,689 Division (Manufacturing function) Wind Energy Division 9,55,21,944 9,55,21,944 (Distribution Segment) Power Control Division 10,90,196 4,51,159 (Marketing support services) Lighting Division 63,623 24,586 (Marketing support services) Training Division 74,18,541 74,18,541 (Training & Administrative services) Total 14,00,49,993 13,93,71,920
4. The assessing officer issued the final assessment order in accordance with the directions of the DRP on 20th October 2010.
5. Aggrieved by this order of the AO, now the assessee is in appeal before us. The grounds of appeal, which were later modified reads as under:-
I.T.A Nos.3064 /Ahd/2010,2749/Ahd/2011 A.Y. 2006-07 &2007-08 Page No 4 GE India Industrial Pvt. Ltd. vs. DCIT "1. That the order f the Ld. AO's pursuant to the directions given by the Hon'ble DRP, to the extent detrimental to the Appellant, is perverse, erroneous on facts and bad in law and has been passed in violation of the principles of natural justice. 2.1 That the Ld. AO/DRP erred in not allowing the set off of brought forward business loss to the extent of Rs. 27,83,88,345. 2.2 That the Ld. AO/DRP erred in denying the set off of brought forward short term capital loss to the extent of Rs. 73,52,712. 2.3 That the Ld. AO/DRP erred in denying the set off of unabsorbed depreciation to the extent of Rs. 79,47,91,144. 2.4 That the Ld. AO/DRP erred in denying the carry forward of remaining unabsorbed depreciation to subsequent years. 3.1 That the Ld AO/DRP erred in disallowing the expenditure booked under the head 'warranty and replacement expenses' of Rs.1,73,53,932.
3.2 The Ld. AO/DRP erred in not allowing the warranty provision of Rs. 3,04,51,313 utilized during the year which were disallowed in prior years.
3.3 The Ld. AO/DRP erred in not allowing the deduction of warranty and replacement expenses of Rs. 1,73,53,932 in the years in which the said expenditure has actually crystallized. 4.1 That the Ld. AO/DRP erred in disallowing the claim of bad debts written off from profit & loss account of Rs. 2,31,09,143. 4.2 That Ld. AO/DRP erred in not allowing the deduction of 'bad debts' in the years in which the said bad debts have actually crystallized.
4.3 The Ld. AO/DRP erred in not allowing deduction of 'bad debts' as loss in the normal course of business u/s 29 of the Act. 4.4 Without prejudice to the above and even assuming but not admitting, that the bad debts written off are disallowed in the current year under consideration, the corresponding provision made and offered to tax in the past years ought to be allowed in the respective years.
5. That the Ld. AO/DRP erred in disallowing the claim of expenditure for the purchase of business rights as revenue expenditure under section 37(1) of the Act.
6. That the Ld. AO/DRP erred in not allowing deduction on amount of utilization of Rs. 71,82,595 in the current year out of the I.T.A Nos.3064 /Ahd/2010,2749/Ahd/2011 A.Y. 2006-07 &2007-08 Page No 5 GE India Industrial Pvt. Ltd. vs. DCIT provision for foreseeable losses created and disallowed in the prior years.
7. That the Ld. AO erred in not allowing depreciation @ 60 % on the written down value of software expenditure which was considered as capital expenditure in the assessment for Assessment Year 2005-06. 8.1 That the Ld. AO/DRP erred in not allowing deduction with regard to the Appellant's claim for write back of provision for customs duty of Rs. 7,76,673 u/s 43B of the Act.
8.2 That the Ld. AO/DRP erred in not allowing deduction with regard to the Appellant's claim for write back of provision for leave encashment of Rs. 5,67,853 u/s 43B of the Act.
9. That the Ld. AO/DRP erred in not allowing deduction with regard to Appellant's claim for doubtful advances of Rs. 16,93,926 written off against the provision account.
10. That the Ld. AO/DRP erred in not considering the adjustment of Rs. 3,79,984 pertaining to Asst. Year 2004-05 against the demand raised for Asst. Year 2007-08 in the order passed u/s 143(3) r.w.s. 144C of the Act.
11.1 That the Ld. AO erred in computing the 'Book Profit" erred in considering Profit before taxes ('PBT') at Rs. 106,60,61,319 as against PBT of Rs. 106,85,77,697 reflected in the financial and returned by the Appellant.
11.2 That the Ld. AO while computing the 'Book Profit' erred in considering the Profit before taxes ('PBT') at Rs. 106,60,61,319 as against PBT of Rs. 106,85,77,697 reflected in the financials and returned by the Appellant.
11.3 That the Ld. AO while computing the said 'Book Profit' erred in not granting the deduction with regard to fringe benefit tax of Rs. 2,73,97,512 charged to the profit & loss account.
12. That the Ld. AO and the Ld. DRP, while making transfer pricing adjustment to the various division of the Appellant, erred in upholding the rejection of comparability analysis of the Appellant in the Transfer Pricing (TP) documentation by the Ld. Transfer Pricing Officer (Ld. TP;) and confirming the comparability analysis adopted by the Ld. TPO.
13. That the Ld. AO and the Ld. DRP, while making transfer pricing adjustment to the various division of the Appellant, erred in disregarding application of prior year data as used by the Appellant I.T.A Nos.3064 /Ahd/2010,2749/Ahd/2011 A.Y. 2006-07 &2007-08 Page No 6 GE India Industrial Pvt. Ltd. vs. DCIT in the TP documentation and holding that current year (i.e. Financial Year 2006-07) data for comparable companies should be used.
14. That the Ld. AO and Ld. DRP, while making transfer pricing adjustment to the various divisions of the Appellant, erred in rejecting the turnover filter applied by the Appellant in the TP documentation and applying the lower turnover threshold limit of Rs. 50 % less than the turnover of the respective divisions of the Appellant to reject companies as comparables.
15. That the Ld. AO and Ld. DRP erred in upholding the adjustment of INR 1,68,97,082 in the Power Controls division by rejecting the alternate economic analysis provided by the Appellant during the assessment proceedings and in upholding the TP adjustment even for the non associated enterprise transactions of the Appellant.
16. That the Ld. AO and the Ld. DRP erred in upholding the adjustments of INR 2,95,09,744 in the Lighting division of the Appellant by the Ld. TPO and therein confirming the TP adjustment even for the non associated enterprise transaction carried out by the Appellant.
17. That the Ld. AO and the Ld. DRP erred in upholding the adjustments of INR 2,34,84,807 in the Wind division of the Appellant by the Ld. TPO and in doing so erred in not excluding certain extraordinary expenses incurred by the Appellant relating to amortization of goodwill, provision of bad debts and extraordinary legal expenses.
18. That the Ld. AO and Ld. DRP erred in upholding the adjustment of INR 40,65,821 to the Transportation division of the Appellant by the Ld. TPO and doing so erred in not providing capacity adjustment on account of unutilized capacity of the employees and appropriate adjustment on account of higher import content.
19. That the Ld. AO/Ld. DRP erred in upholding the adjustment of INR 4,92,379 to the Inspection division of the Appellant by the Ld. TPO.
20. The Ld. AO/Ld. DRP erred, in law and facts, in computing the arms length price without giving benefit of +/-5 percent under the proviso to section 92C of the Act.
21. That the Ld. AO erred in consequently levying interest under section 234B of the Act to the extent of Rs. 17,30,08,600.
I.T.A Nos.3064 /Ahd/2010,2749/Ahd/2011 A.Y. 2006-07 &2007-08 Page No 7 GE India Industrial Pvt. Ltd. vs. DCIT
22. That the Ld. AO erred in levying excess interest under section 234C of the Act to the extent of Rs. 3,33,545."
6. Ground No. 1 is general and does not require any adjudication.
7. Ground No. 2 & sub grounds are with respect to set off and carry forward of losses:
Assessee in its revised computation has set off the brought forward unabsorbed loss and depreciation loss brought forward from earlier year against gross total income. AO on perusing the assessment order for AY 2005-06 dated 31.12.2008 noted that carried forward losses as quantified by the AO has been mentioned at Rs 1,11,81,89,583 out of which Rs 1,01, 25,07,648/- was set off against the total income of Asst. Year 2005-06 and the balance of Rs. 10,56,81,935/- was determined as losses allowed to be carried forward. AO further noted that assessee has mentioned business loss brought forward in the beginning of FY 2005-06 at Rs. 59,57,26,995- out of which Rs 31,73,37,650 was set off against current year's income. Similarly, brought forward business depreciation in the beginning of the FY 2005-06 was shown at Rs l,25,88,79,805/- out of which Rs 11,88,234 was set off against the current year and balance Rs. 1,25,76,91,571/- has been shown as carried forward figure of business depreciation. AO restricted the maximum loss to Rs 10,56,61,985 on the basis of assessment order of AY 2005-06 and set off of balance Rs 21,28,43,949 was denied. DRP also confirmed the order of AO and therefore the assessee is now in appeal before us. I.T.A Nos.3064 /Ahd/2010,2749/Ahd/2011 A.Y. 2006-07 &2007-08 Page No 8 GE India Industrial Pvt. Ltd. vs. DCIT
8. Before us, the Ld. A. R. submitted that the difference is figures of loss by the assessee and Revenue is on account of disallowance on account of s. 79 in earlier years. He submitted that on the last day of the previous year (31st March 2006) the shares of the company carrying not less than 51% of voting power were beneficially held by GE Pacific Pte Ltd, Singapore and GE Pacific (Mauritius) Ltd, who beneficially held shares of the company carrying, not less than 51% of voting power on the last day of the year in which the loss was incurred i e. March 31, 2000 , March 31, 2001 and March 31, 2002 and therefore the conditions stipulated in s. 79 of the Act are satisfied and therefore the assessee is entitled to carry forward and set off the entire business losses.
9. The Ld. D.R. on the other hand relied on the order of AO and DRP.
10. We have heard the rival submissions and perused the material on record. The issue in the present ground is with respect of allowance of carry forward of loss on account of provisions of s. 79. We find that the issue of carry forward would depend upon the finality of order for earlier years as it would have bearing on the year under appeal. We therefore remit the issue to the file of AO to determine the carry forward losses based on the outcome to the decsion for the earlier years. Thus this ground is a allowed for statistical purposes.
11. Gr. No 3 and the sub grounds are with respect to warranty expenses:
I.T.A Nos.3064 /Ahd/2010,2749/Ahd/2011 A.Y. 2006-07 &2007-08 Page No 9 GE India Industrial Pvt. Ltd. vs. DCIT
12. AO noticed that assessee had debited Rs 2,43,96,674/- to Profit and Loss account under the head "warranty and replacement expenses". Assessee submitted that warranty cost were estimated by the management on the basis of technical evaluation and past experience and the amount was utilized to make good the amount on replacement of parts and accessories and other related expenses in the event of the failure of the product. AO did not accept the contentions of the assessee. He noted that his predecessor had examined the issue in AY 2005-06 and held it to be not an ascertained liability but to be a contingent liability. He further noted that the accumulated provision for warranty as on 1st April 2005 and as on 31st March 2006 was nearly similar which means that the provision has not been made on the basis of technical evaluation or past experience but was in the nature of contingent liability. He also noted that the issue was examined by DRP and the disallowance was confirmed by it. He accordingly disallowed the amount of Rs. 2,34,96,674/- debited to Profit and Loss account. Aggrieved by the order of AO, assessee carried the matter before DRP. DRP upheld the order of AO by holding as under:
"8.5. From the facts of the case it can be seen that the assessee has not carried out any of the exercise as mandated/advocated by the Hon'ble SC, while making the provisions of warranty. No evidence has been led by the assessee to establish that it has captured relationship between the nature of the sales, the warranty provision made and the actual expenses incurred against it subsequently. Similarly no evidence has been led that the assessee has done re- estimation of the warranty estimates as mandated/advocated by the Hon'ble SC. In the present case the AO has stated that during the course of assessment proceedings the assessee has furnished a chart in respect of provision for warrantees made on invoices for transportation division for its Delhi Centre and Bangalore Centre, separately. The total value of provision for which the chart has been I.T.A Nos.3064 /Ahd/2010,2749/Ahd/2011 A.Y. 2006-07 &2007-08 Page No 10 GE India Industrial Pvt. Ltd. vs. DCIT furnished comes to Rs. 1 .76 crores and it is found that warrantee of different rates have been computed on different products. No further basis has been explained or submitted either before the AO or before us. The AO has rightly held that the fact of accumulated provision for warrantee as on April 1 , 2005 to the extent of Rs. 4.15crore and balance available as on 31.3.2006 to the extent of Rs. 4. 21 crore reveal that the provision has not been made on any technical evaluation or past experience but the same has been made on ad-hoc basis and it is in the nature of contingent liability. Had the provision been made on the basis of adopting any scientific or technical basis or on the basis of past experience, there could not have been such a huge balance in the provision for warrantee account in the beginning of the year as well as at the end of the year under consideration. The same principle has been laid down by the Hon'ble SC in the above referred case of Rotork Controls India (P) Ltd. reported in 314 ITR 62 as the Hon'ble SC has held that 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 year(s), may not arise in a significant way. The warrantee obligation without any proper basis cannot be treated as actual crystallization of the liability. The Assessee in the present case has failed to substantiate the basis for making the provision for warranty. There is no doubt that in the case of the assessee, the provisions are made in excess without any basis which has resulted into large accumulation of the balance and hence the same cannot be allowed as ascertained liability. In view of the above, the proposed disallowance of Rs.2,43,96,674/- on account of provisions for warranty is confirmed."
13. Aggrieved by the order of DRP, the Assessee is now in appeal before us.
14. Before us, the Ld. A.R. submitted that provision is made for estimated liability in respect of warranty cost in the year of sale and is utilized to make good the amount in replacement of parts and accessories and other related expenses in the event of failure of a product. He further submitted that I.T.A Nos.3064 /Ahd/2010,2749/Ahd/2011 A.Y. 2006-07 &2007-08 Page No 11 GE India Industrial Pvt. Ltd. vs. DCIT warranty period ranges from 2 to 4 years and the accumulated balance at the year end represents warranty provisions in respect of sales made in the past years including the current year. It was further submitted that warranty costs were estimated by management on the basis of technical evaluation and past experience. He further relied on the decision of Apex Court in the case of Rotork Control's India (P) Ltd 314 ITR 62. The Ld. A.R. submitted that if the claim of the assessee is not allowed then in the alternate the warranty expenses be allowed on utilization basis as per ground 3.2.
15. Ld D. R. on the other hand submitted that the provision has not been made on scientific basis or on the basis of technical evaluation. Further no details have been furnished with respect to the write backs made by the assessee in different years which could give an insight about the basis of estimation. He thus supported the order of AO and DRP.
16. We have heard the rival submissions and perused the material on record. It is an undisputed fact that assessee has debited expenses on account of warranty expenses. The expenses are with respect to warranty is an undisputed fact. The H'ble Apex Court in the case of Rotork Controls (supra) has laid down the conditions which are required to be satisfied for making claim in respect of post sale customer service and has laid down the principle pertaining to the same. The Hon'ble Apex Court in that case noted that provision made for warranty @ 2% of turnover based on past experience (historical trend) was most appropriate as it fulfilled accrual concept as well as matching concept. It further held that "for determining an appropriate historical trend, it is important that the company has a proper accounting system for capturing the relationship between the nature of the sales, the warranty provisions made and the actual expenses incurred against it subsequently. Thus, the decision on the warranty provision should be based on past experience of the company. A detailed assessment of the warranty provisioning policy is required particularly if the experiences suggests that I.T.A Nos.3064 /Ahd/2010,2749/Ahd/2011 A.Y. 2006-07 &2007-08 Page No 12 GE India Industrial Pvt. Ltd. vs. DCIT 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 the 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 should 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. It is important to note that the there are four important aspects of provisioning. They are-provisioning which relates to the present obligation, it arises out of obligating events, it involves outflow of resources and, lastly, it involves reliable estimation of obligation."
17. We find that in the present case there is no finding with respect to the compliance of aforesaid guidelines of Apex Court by assessee in the order of AO or DRP. We are therefore of the view that the matter needs to be examined in the light of the principles laid down by Hon'ble Apex Court. We therefore remit the matter to the file of AO for deciding the issue afresh in the light of the decision of Hon'ble Apex Court in the case of Rotork Controls (supra) and after giving a reasonable opportunity of hearing to the assessee. Thus this ground of assessee is allowed for statistical purposes.
18. Ground No 4 & 5 are with reference to reversal/utilization of provision for foreseeable losses & contingencies & since they are interconnected and they are considered together:
I.T.A Nos.3064 /Ahd/2010,2749/Ahd/2011 A.Y. 2006-07 &2007-08 Page No 13 GE India Industrial Pvt. Ltd. vs. DCIT
19. Assessee claimed deduction of the amount of Rs 1,19,44,410 on the basis of provision utilized/reversal. It was submitted that no new provision has been created during the year and the amount that is reversed is the one which was created in earlier year (F.Y. 2004-05) and was disallowed while computing the income by considering the same to the contingent liability and therefore the same is not taxable in the year under appeal. AO did not accept the contention of the assessee for the reason that against the disallowance made in earlier year, assessee was in appeal and the matter has not reached finality. He also noted that DRP has also approved the disallowance of contingency. Aggrieved by the order of AO, assessee carried the matter before DRP.
20. DRP upheld the order of AO by holding as under:-
"12.3 The assessee's submission has been considered carefully but the same have not been found acceptable. On this issue the assessee has relied upon its submission made for proposed disallowance for provision for warranty and contingencies. The said submission of the assessee has already been rejected while adjudicating the issue of disallowance of provision for warranty. Further the AO has rightly held that the assessee's claim of allowing deduction on the basis of utilization/reversal during the current year is not acceptable as the assessee has filed appeal against the addition of provisions made in the earlier years and the matter has not reached finality and the assessee has already claimed the deduction in earlier years though it was denied by the A.O. Hence, the AO was right in holding that at the moment, no deduction on the basis of provision utilized/ reversed can be allowed to the assessee. Accordingly the claim in this respect is rejected."
21. Aggrieved by the order of DRP, assessee is now in appeal before us. I.T.A Nos.3064 /Ahd/2010,2749/Ahd/2011 A.Y. 2006-07 &2007-08 Page No 14 GE India Industrial Pvt. Ltd. vs. DCIT Before us, the Ld. A.R. submitted that during the year under appeal no fresh provision has been created by the assessee. It was further submitted that the provision that was created in FY 2004-05 was disallowed by the AO. The amount of Rs 1,19,44,410 is reversal of the provision that was created in earlier year. Since the entire amount was disallowed in the earlier year, the disallowance made once again would amount to double disallowance. He therefore urged that the disallowance be deleted.
21. The Ld. DR on the other hand submitted that there is nothing on record to prove the claim of the assessee that the amount represents the reversal made out of the provision made in earlier year and which was disallowed. He therefore submitted that the matter be examined at the end of AO.
23. We have heard the rival submissions and perused the material on record. Before us, it is assessee's contention that the amount of disallowance (Rs 1,19,44,410/-) is out of the disallowance made in FY 2004-05 however there is nothing on record before us in support of the assessee's contention. We therefore feel that this aspect needs verification at the end of AO. We therefore remit this ground to the file of AO and direct him to verify as to whether the reversal in the year under appeal is out of the disallowance made in FY 2004-05. If the contention of assessee is found correct, the disallowance made be deleted. Thus this ground of assessee is allowed for statistical purposes.
24. Ground No 6 is with respect to disallowance of software expenses:
I.T.A Nos.3064 /Ahd/2010,2749/Ahd/2011 A.Y. 2006-07 &2007-08 Page No 15 GE India Industrial Pvt. Ltd. vs. DCIT
25. AO noted that assessee had stated that it had incurred Rs. 56 lacs towards software expenditure in AY 2005-06 and was claimed as Revenue expenditure. AO however while finalizing the assessment considered the same to be of Capital nature and accordingly granted depreciation @ 60%. During the year under appeal, assessee claimed depreciation @ 60% on the balance amount of Rs 22,40,000/-. The claim of the assessee was not found acceptable to AO for the reason that assessee has preferred appeal against the disallowance made in AY 2005-06 and the issue has not yet been finalised. Aggrieved by the order of AO, assessee carried the matter before DRP. DRP upheld the order of AO.
26. Aggrieved by the order of DRP, the assessee is now in appeal before us.
27. Before us, the Ld A.R. submitted that assessee has rightly claimed depreciation on the WDV as determined by the AO. He further submitted that the assessee be granted depreciation and in case the contention of assessee is not accepted in appellate proceedings in A.Y. 2005-06, the Revenue can pass the necessary orders. The Ld. DR. on the other hand relied on the order of AO and DRP.
28. We have heard the rival submissions and perused the material on record. The factual position is that assessee's claim of revenue expenditure with respect to software expenses was rejected in AY 2005-06 but however assessee was granted depreciation @ 60%. For the year under appeal, I.T.A Nos.3064 /Ahd/2010,2749/Ahd/2011 A.Y. 2006-07 &2007-08 Page No 16 GE India Industrial Pvt. Ltd. vs. DCIT assessee has claimed depreciation @ 60% on the WDV amount of Rs 22,40,000/- but the claim of the assessee was rejected for the reason that against the disallowance made in AY 2005-06 assessee is in appeal and the matter is yet to be resolved. We are of the view that the assessee's claim of depreciation needs to be accepted in the year under appeal as it is based on the assessment order of AO. In case the appeal for AY 2005-06 is decided in favour of assessee, then the AO can take the necessary steps for rectification as per law. We thus allow this ground of assessee.
29. Ground No 7 is not pressed and therefore is dismissed.
30. Ground No 8 is with respect to assets written off of Rs. 24,68,840/-:
31. Assessee had debited to Profit and Loss account Rs. 7,32,01,710/- on account of assets written off. Assessee had sou moto added 78,51,331 in the computation and thus the balance of Rs 24,68,840 was claimed as expenses. It was submitted that the loss was on account of difference in General ledger and subsidiary ledgers arising out of posting error at the time of upgradation of ERP database and the same was allowable u/s 29. AO did not accept the contention as he was of the view that the loss was hypothetical and notional because posting error cannot create any loss more so when the tangible assets were still in existence. Aggrieved by the order of AO, assessee carried the matter before DRP who also upheld the order of AO. The assessee is therefore now in appeal before us.
I.T.A Nos.3064 /Ahd/2010,2749/Ahd/2011 A.Y. 2006-07 &2007-08 Page No 17 GE India Industrial Pvt. Ltd. vs. DCIT
32. Before us, the Ld. A R. reiterated the submissions made before AO and DRP. The Ld. D.R. on the other hand supported the order of AO.
33. We have heard the rival submissions and perused the material on record. It is assessee's contention that the loss is on account of posting error which occurred at the time of upgradation of ERP. We find that assessee has not filed any details of posting error either before AO, DRP or before us. In view of the aforesaid facts, we find no reason to interfere with the order of AO. Thus, this ground of assessee is dismissed.
34. Ground No 9 and 13 are considered together as the matter is identical:
AO noticed that in the profit and loss account assessee has written off advances of Rs 92.70 lacs. Assessee was asked to furnish party wise breakup of amount written off above Rs 5 lacs and also explain the fulfillment of provisions of s. 36(1)(vii). AO noted that assessee interalia submitted that the same being revenue loss and incidental to the operation of business, has direct nexus to the business activity and hence it was rightly claimed as deduction. In the absence of factual details like partywise breakup, purpose for advance, AO disallowed the claim of the assessee. DRP confirmed the order of AO by holding as under:
"17.7 The assessee's arguments have been considered carefully, but the same are found not acceptable. In the Draft assessment order the AO has recorded that during the course of assessment proceedings the assessee has not submitted any factual details of such advances written off viz. Party wise break up, purpose of the advance, date and year of such advances made and, why the same has been written off. The AO is right in holding that simply relying on different judgments I.T.A Nos.3064 /Ahd/2010,2749/Ahd/2011 A.Y. 2006-07 &2007-08 Page No 18 GE India Industrial Pvt. Ltd. vs. DCIT without furnishing facts involved cannot be a proper ground to allow deduction. Further the advances given are 'Debts' in nature and claim of writing off of same must be considered u/s 36(1)(vii) rws 36(2) of the Act. In the present case since the advances made by the assessee were never taken into considerations for computation of assessee's income, either in current assessment year or any earlier assessment year, so it can not held that the requirements of section 36(2) of the Act has been complied with. Hence the assessee's claim was otherwise also legally not allowable as "bad debts" u/s 36(l)(vii) r.w.s 36(2) of the Act. The assessee alternate argument that if not under section 36(l)(vii), then the said bad debts is otherwise allowable as business loss u/s 29 of the Act, is also devoid of merits as it is settled legal position that business loss can be allowable only in the year of such loss and not in any other succeeding year. Further, if any expense is governed by any specific or special provisions of the Act, then the allowability of the same has to be decided in that particular special provisions and not under general provision, since the special provisions overrides the general provisions. The maxim of generalia specialibus non derogant and generalia specialia derogant i.e. if a special provision is made on a certain matter that matter is excluded from the general provisions well settled in India and the same is also applicable to Income Tax provisions."
With respect to irrecoverable advances AO noticed that an amount of Rs 1,25,97,968/- was claimed as actual loss on account of irrecoverable advances from the provision account. It was further submitted that the provision for the aforesaid amount was offered to tax in the past years i.e. in the year in which the provision were created and therefore the loss incurred during the year and written off directly through provision account should be allowed as deduction in current year u/s 29. This issue was not discussed in the draft assessment order and therefore DRP after calling for the comments from AO disallowed the claim of assessee by holding as under:
I.T.A Nos.3064 /Ahd/2010,2749/Ahd/2011 A.Y. 2006-07 &2007-08 Page No 19 GE India Industrial Pvt. Ltd. vs. DCIT "21.7 The assessee's submissions have been considered, carefully and the same are not acceptable. It is admitted fact that the assessee has not made any such claim in the return of income nor has filed revised return of income making said therein. In absence of any such claim made either in original return of income or revised return of income, the AO could not have entertained the same, even though the same was made during the course of assessment proceedings. The AO in his comments have rightly submitted that entertaining of any claim made during the course of assessment proceedings, beyond the period u/s 139(5) of the Act will be violation of provisions of section 139(5) of the Act. This view has been confirmed by the Hon'ble SC in the case of Goetze (India) Ltd. Vs. CIT (2006) 234 ITR 323(SC), whereby the Hon'ble SC held as under :
"The question raised in this appeal relates to whether the appellant assessee could make a claim for deduction other than by filing a revised return. The assessment year in question was 1995-96. The return was filed on November 30, 1995, by the appellant for the assessment year in question. On January 12, 1998, the appellant sought to claim a deduction by way of a letter before the Assessing Officer. The deduction was disallowed by the AO on the ground that there was no provision under the IT Act to make amendment in the return of income by modifying an application at the assessment stage without revising the return.
The appellant's appeal before the Commissioner of Income-tax (A) was allowed. However, the order of the further appeal of the Department before the Income-tax Appellate Tribunal was allowed. The appellant has approached this court and has submitted that the Tribunal was wrong in upholding the Assessing Officer's order. He has relied upon the decision of this court in National Thermal Power Company Ltd., vs. CIT (1998) 229 ITR 383, to contend that it was open to the assessee to raise the points of law even before the Appellate Tribunal.
The decision in question is that the power of the Tribunal under Section 254 of the IT Act, 1961 is to entertain for the first time a point of law provided the fact on the basis of which the issue of I.T.A Nos.3064 /Ahd/2010,2749/Ahd/2011 A.Y. 2006-07 &2007-08 Page No 20 GE India Industrial Pvt. Ltd. vs. DCIT law can be raised before the Tribunal. The decision does not in any way relate to the power of the Assessing officer to entertain a claim for deduction otherwise than by filing a revised return. In the circumstances of the case, we dismiss the civil appeal. However, we make it clear that the issue in this case is limited to the power of assessing authority and does not impinge on the power of the Income-tax Appellate Tribunal under Section 254 of the Income-tax Act, 1961. There shall be no order as to costs."
21.8 In view of above it is held that the AO had rightly held that any claim which has not been made in return of income or revised return of income, can not be entertained by the AO. Further, the AO has rightly submitted that the assessee is not eligible to file any objection on any issue before the DRP, it AO has not proposed any variation in the returned income on such issue. Even, otherwise also, similar claim of assessee made in respect of 'Advances written off has been rejected by us on merits far the reasons mentioned in Para 10 of this order. Accordingly the assessee's clam on this issue is rejected."
35. Aggrieved by the order of DRP on the aforesaid issues, assessee is now in appeal before us. Before us, with respect to the advances write off, the Ld. A.R. submitted that full details called for by the AO has been submitted. He pointed to the submissions made at page 502 of the Paper Book. He further submitted that advances are in the nature of trade advances which were made in the normal course of the business of assessee. It represents deposits/advances lying with suppliers, tax authorities, telecom department etc in the course of business which were no longer recoverable and hence written off in the books. He further relied on the decision in the case of Abdul Razzak 136 ITR 825 (Gu|) and other decisions. I.T.A Nos.3064 /Ahd/2010,2749/Ahd/2011 A.Y. 2006-07 &2007-08 Page No 21 GE India Industrial Pvt. Ltd. vs. DCIT
36. The Ld. D R on the other hand submitted that the assessee had not submitted the details called for by the AO. From the details submitted in the paper book, he pointed out that the details are not complete. He further submitted that the write off are not bad debts and further the requirement for write off u/s 36(1)(vii) are different than, that of s. 28 and therefore the case laws relied by the assessee are distinguishable. He thus supported the order of AO.
37. We have heard the rival submissions and perused the material on record. With respect to advances written off, AO has noted that the required details like name of the parties, the purpose for which the advance was granted etc were not furnished. Further even from the details submitted in the paper book, the Ld. DR has submitted that the details are not complete. Further, we find that there is no finding with respect to the compliance of conditions as per s. 36(1)(vii) of the Act. In view of the aforesaid fact we are of the view that the assessee be granted one more opportunity to substantiate its stand. We therefore remit the issue to the file of AO to decide the issue afresh after considering the submissions and the additional evidences placed by the assessee. Needless to state that the AO shall grant reasonable opportunity of hearing to the assessee. Thus both these grounds are allowed for statistical purposes.
38. Ground No 10 is with respect to loss due to floods of Rs. 51,05,951/-
39. AO noticed that an amount of Rs. 6,40,52,401/- was debited to the profit and loss account on account of loss of stock due to floods. The same I.T.A Nos.3064 /Ahd/2010,2749/Ahd/2011 A.Y. 2006-07 &2007-08 Page No 22 GE India Industrial Pvt. Ltd. vs. DCIT was claimed as deduction u/s 29. AO noticed that aforesaid loss was on account of loss occurred at Bhivandi Godown, Mumbai. On perusing the claim filed by the assessee, AO noticed that the claim of the assessee was not fully accepted and the Surveyor report had estimated liability of Rs. 5.25 crores. He further noted that the compensation granted to the assessee was to the extent of Rs. 5,89,46,450/- against the net loss of Rs.6,40,52,491/- claimed by the assessee. The AO was thus of the view that since the loss of Rs. 51,05,951/-( Rs. 6,40,52,491-5,89,46,450) was not entertained by insurance companies, the same was not allowable. He accordingly disallowed it.
40. Aggrieved by the order of AO assessee carried the matter before DRP. DRP after considering the submissions of the assessee upheld the order of AO by holding as under:-
"18.6 The assessee's arguments have been considered carefully and the same are found not acceptable. During the year under consideration, an amount of Rs. 6,40,52,401/- has been debited to the profit and loss account on account of loss of stock due to floods. The same was claimed in the return of income as the loss incurred in normal course of business and allowable as deduction while computing business income under section 29. The AO has observed that on perusal of the claim of the assesses before the insurance Company, it is found that the net loss of Rs. 6,40,52,401/- is arrived after deducting the stock salvaged amounting to Rs. 45.59,935/- from the total loss of Rs. 6,86,12,336/-. The claim was lodged with the New India Assurance Company Limited. However, as per the letter of the Surveyor written to the New India Assurance Company Limited dated 18.8.2005, it is found that the surveyor has informed the Insurance company about the estimated liability of approximately of Rs. 5.25 crores. The compensation granted by the insurance company was to the extent of Rs. 5,89,46,450/-. On perusal of Balance Sheet of the assessee, it is found that the assessee has credited insurance claim I.T.A Nos.3064 /Ahd/2010,2749/Ahd/2011 A.Y. 2006-07 &2007-08 Page No 23 GE India Industrial Pvt. Ltd. vs. DCIT receipt amounting to Rs. 5,23,41,134/- as other income in schedule 16 of Profit and loss Account in AY 2006-07. As per assessee, a further sum of Rs. 77,94,049/- was received during the A.Y. 2007-08 and the same was offered to tax in the tax return.
18. 7 From the above it is evident that the higher claim of the assessee filed before the insurance company was not accepted and the surveyor's report has also suggested estimated liability of Rs. 5.25 crore. The AO has rightly held that the assessee had overestimated its loss on account of stock and debited the P & L account with such inflated amount. The Insurance Company has also confirmed this fact by not allowing the full amount, as estimated by the assessee. The AO is right in holding that the assessee has written off excess amount on account of loss of stock and the excess written of over and above the amount received from insurance company amounting to Rs. 51,05,951/- is not allowable. Accordingly, the assessee's claim in this respect is rejected."
41. Aggrieved by the order of DRP the assessee is now in appeal before.
42. Before us the Ld. AR submitted that loss of stock due to floods to the extent of Rs. 51,05,951/- was incurred in the normal course of business. He further submitted that out of total loss of Rs. 6,40,52,491/- assessee was granted compensation only to the extent of Rs. 5,89,46,450/- and the balance amount of Rs. 51,05,951/- was rejected on account of credit items of Rs. 16,75,334/- and on account of specific exclusion stocks policy of the Insurance company. The Ld. AR further submitted that the scraped items were not considered by the insurance companies and were returned. The sale proceeds from scraped items were credited to Profit and Loss account by the assessee and have been offered to tax. He further placed reliance on the decision in the case of Prabhat Chandar Paul vs. ACIT 70 TTJ 934 He thus urged that the loss incurred by the assessee be allowed. Ld. D.R. on the I.T.A Nos.3064 /Ahd/2010,2749/Ahd/2011 A.Y. 2006-07 &2007-08 Page No 24 GE India Industrial Pvt. Ltd. vs. DCIT other hand submitted that some items of stocks which were lost in the floods were not covered by the insurance policy and, therefore the same is not allowable as a business loss. He thus supported the order of AO.
43. We have heard the rival submissions and perused the material available on record. It is an undisputed fact that the assessee has incurred loss due to flood. It is also a fact that entire claim of the assessee was not accepted and the reason for non-acceptance by the insurance company was on account of exclusion clause. It is not the case of the Revenue that the goods have not been lost in floods or the claim of the assessee was found to be bogus. In the case of Motamal Jethumal vs.CIT 15 ITR 155 the Hon'ble High Court has held that the loss due the accidental fire of a particular stock in trade of an assessee is a trading loss and he is therefore entitled to claim a deduction of the value of goods destroyed. In view of the aforesaid facts we are of the view that the loss incurred by the assessee is an allowable deduction and the claim of the assessee is allowed. Thus this ground of the assessee is allowed.
44. Ground No. 11 is with respect to disallowance of Rs. 32,60,325/- u/s 40A.
45. AO noticed that assessee in the revised return had reduced disallowance u/s 40A to the extent of Rs. 32,60,325/- paid to General Electric International. (INC) USA. According to the assessee it represented management fee and it did not fall within the preview of " fee for included services" and hence was not chargeable to tax in India, but inadvertently in I.T.A Nos.3064 /Ahd/2010,2749/Ahd/2011 A.Y. 2006-07 &2007-08 Page No 25 GE India Industrial Pvt. Ltd. vs. DCIT the tax audit report, the same was considered as not allowable u/s 40A. AO did not accept the contention of the assessee as he was of the view that the tax audit report containing report of the auditor who examined the non- compliance was a reliable document and the same was rightly disallowed as per provisions of section 40A. Aggrieved by the order of AO assessee carried the mater before the DRP. DRP upheld the order of AO by holding as under:
9.3 The assesses' submissions have been considered carefully, but the same are found not acceptable. It is admitted fact that the assessee's Auditor had audited the books of account and after verifying the nature of payments under consideration and the relevant law, in the audit report the Auditor has certified that above referred sum of Rs. 32,60,325/- was disallowable u/s 40(a) of the Act. The assessee has accordingly filed return of income duly disallowing the above referred sum of Rs. 32,60,325/- based on Tax Audit Report.
Subsequently the assesses revised its return of income, wherein the disallowance u/s 40(a) of the Act was reduced by Rs. 32,60,325/-. However the assessee has not submitted any revised report of the Auditor certifying that his earlier report on disallowance u/s 40(a) of the Act was not correct and the said sum is not disallowable u/s 40(a) of the Act. Under section 44AB of Act, the assessee is required to get its accounts audited by the Auditor and such Auditor audits the accounts of the assesses and gives its report in the prescribed form, in the present case the assessee got its account audited by the auditor appointed by it and such auditor after analyzing the above referred payments have certified that them same is disallowable as the assessee had not complied with the provisions of section 40(a) of the Act. The AO has rightly held that the Tax Audit report, being a statutory report and a report of a professional, is an important piece of evidence and the same can not be brushed aside. In the present case the assessee neither before the AO nor before us has submitted the revised report from the Auditor certifying that his earlier report was not correct and the above referred sum is not disallowable u/s 40(a) of the Act. In view of the above the proposed disallowance of Rs. 32,60,325/- u/s 40(a) of the Act is confirmed."
I.T.A Nos.3064 /Ahd/2010,2749/Ahd/2011 A.Y. 2006-07 &2007-08 Page No 26 GE India Industrial Pvt. Ltd. vs. DCIT
46. Aggrieved by the aforesaid order of DRP the assessee is now in appeal before us.
47 Before us the Ld. AR submitted that the amount represented management fees paid by the assessee to a branch office of General Electric International (INC) USA in Japan. It was submitted that the management fee was for various management support services, executive support service, quality improvement, market and sales support etc provided by General Electric International to assessee. The said services were not technical or consultancy in nature and were in the nature of managerial services and did not fall within the preview of "fee for included services" as per Article 12 of Indo-USA Double Taxation Avoidance Agreement. Thus the aforesaid sums was not chargeable to tax in India, and hence no tax was required to be deducted at source and therefore there can be no disallowance. Ld. D.R. on the other hand submitted that the auditor in its auditor report had certified the same to be disallowable u/s 40A after verifying the nature of payment and after taking into consideration the relevant law. He therefore submitted that the amount was rightly disallowed by A.O. He thus supported the order of AO 48 We have heard rival submissions and perused the material on record. We find that neither the AO has examined the issue of the taxability of the aforesaid amount paid nor has given any finding as to whether the amount paid by assessee is taxable or not. We therefore are of the view that in the aforesaid circumstances, the matter needs re-examination. We therefore I.T.A Nos.3064 /Ahd/2010,2749/Ahd/2011 A.Y. 2006-07 &2007-08 Page No 27 GE India Industrial Pvt. Ltd. vs. DCIT remit the matter to the file of AO to examine as to whether the amount paid by assessee to General Electric Interventional (INC), is taxable as per law and thereafter decide the issue on merits and law by passing a speaking order and after giving a reasonable opportunity of hearing to the assessee. Thus, this ground of the assessee is allowed for statistical purpose.
49. Ground no. 12 and its sub-grounds are with respect to the claim of Rs. 28,52,492/- towards of debt written off:-
AO noticed that assessee has claimed deduction of Rs. 28,52,492/- on account of bad and doubtful debts written off directly against the provision account. He also noticed that an amount of Rs. 59,54,433/- was debited to the Profit and Loss account on account of bad debts and was not adjusted against the provision account. The assessee was asked to justify its claim. On perusing the details submitted by the assessee, AO noticed that the amounts involved were mostly in the nature of liquidated damages and according to him it were not on the nature of bad debts. He noted that in respect of Rs. 4.7 crore no details and even the party-wise break-up was filed. In respect of Rs. 3.01 crore, only party-wise break-up along with one line reasons in some of the cases were submitted. He also noted that the there was no external correspondences in any of the cases where the sums were written off. He thus concluded that the assessee has failed to prove that the trade loss had occurred during the year under consideration and has also failed to prove justification for claiming such deduction. He also noticed that some of the parties involved were Government Companies/organizations or big concerns having good financial base. He also noticed that with respect to liquidated damages written off no details I.T.A Nos.3064 /Ahd/2010,2749/Ahd/2011 A.Y. 2006-07 &2007-08 Page No 28 GE India Industrial Pvt. Ltd. vs. DCIT with respect to payment sought as liquidated damages etc was made available. He thus concluded that the assessee has failed to prove as to why the amount can be treated as bad debts, more so, when it was adjusted against the provision account instead of debiting it to the Profit and Loss account. He therefore held that the claim of assessee was not allowable. DRP also has confirmed the action of AO in disallowance of the claim.
50. Aggrieved by order of AO assessee carried the matter before DRP. DRP upheld the action of AO by holding as under:
10.3 The assessee's submissions have been considered carefully, but the same are found not acceptable. The assessee in the revised computation of income had claimed deduction of Rs. 28,00,52,402/-
on account of bad and doubtful debts written off directly against the provision account. The AO had observed that perusal of profit and loss account, revealed that an amount or Rs. 59,54,433/- has been debited to profit and loss account on account of bad debts written of which is charged to profit and loss account and which has not been adjusted against the provision account. Schedule 9 of the Balance Sheet containing details of sundry debtors revealed that provision for doubtful debts has decreased from Rs. 45,26,24,979/- as on 31.03.2005 to Rs. 17,44.28,068/- as on 31.03.2006. The difference between the two is coming to Rs. 27,81,96,911/- which along with other provisions and adjustments has been adjusted against the bad debts written off. The AO has rightly held that the Bad debts written off has to be charged to profit and loss account and its adjustment against any provision account without touching the profit and loss account during the year is not a write off to be allowed under section 36(1)(vii) read with section 36(2). Reliance in this respect is placed on decision of the Hon'ble Kerala HC in the case of CIT v. Hotel Ambassador [2002] 253 ITR 430 (Ker), wherein the Hon'ble HC has held as under:
"We feel that writing off bad debts, without charging the same in the profit and loss account is not write off at all because the I.T.A Nos.3064 /Ahd/2010,2749/Ahd/2011 A.Y. 2006-07 &2007-08 Page No 29 GE India Industrial Pvt. Ltd. vs. DCIT assessment is made based on the audited accounts and the profit and loss account and the Balance Sheet filed along with the returns. It is not enough if the assessee writes off the same in some of the books maintained by it, which do not form part of the audited accounts including the profit and loss account based on which assessment is made. Unless the write off took place at the time of finalization of accounts and is reflected into the books of accounts, it cannot be treated as written off at all."
Hence it is held that the conditions of writing of the debts in the books as stipulated in section 36(1)(vii) r.w.s. 36(2) has not been fulfilled in this case and accordingly the above referred claim of bad debt is not allowable.
10.4 Without prejudice to above legal ground the AO has held that on facts also the assessee's claim of bad debt is not allowable. Before us the assessee has not made any submissions in respect of factual finding of the AO given in the Draft assessment order. Hence it is presumed that the assessee has nothing to say on the factual finding given by the AO on this issue in the draft assessment order. The assessee has not controverted the actual finding of the AO given in the draft assessment order that in most of the cases, the assessee has not submitted the details of the parties. the nature of debts, why said debts have been considered as bad and the evidence that the said debts have been actually written off as irrecoverable in its accounts. Even before us the assessee has not submitted any details in this regard.
10.5 Similarly in the Draft assessment order the AO has given factual finding that on perusal of the details filed it is found that the amounts involved are mostly in the nature liquidated damages and not the bad debts in its true sense perse, the assessee has not made any submission on the said finding of the AO and hence it is presumed that the assessee has nothing to say on the said finding of the AO. The AO has rightly held that the year in which any liability is to be allowed in case of such liquidated damages are very much relevant. In case of liquidated damages the relevant issue is to examine the nature of dispute, the year in which the customer deducted the amount payable to the assessee. The reasons for deduction are also relevant. In case the assessee has failed to fulfill any contractual obligation and the I.T.A Nos.3064 /Ahd/2010,2749/Ahd/2011 A.Y. 2006-07 &2007-08 Page No 30 GE India Industrial Pvt. Ltd. vs. DCIT other parties have deducted liquidated damages in earlier years, the liability towards such loss has to be taken crystallized in the earlier years. The unilateral decision of the assessee not to claim those liabilities in earlier year and to carry forward and claiming as deduction in subsequent year at its own convenience cannot be allowed. It is a settled law that, where the assessee follows mercantile system of accounting, loss/liability is allowable in the year of accrual provided it is an essential liability. Trading allowance not allowed not for some reason in the year in which it has incurred is not an allowable deduction in subsequent year. In the current year the deduction can be permitted in respect of only those losses which are incurred in the relevant accounting year. The AO has further held that in this case, the assessee has failed to prove that the said trading loss has occurred during the year under consideration. The assessee has failed to prove justification for claiming such deductions during the year. The AO has rightly held that on factual ground also the assessee's claim of bad debts is not allowable. In view of above the proposed disallowance of Rs. 28,00,52,402/- on account of bad debt is confirmed."
51. Aggrieved by the aforesaid order of DRP the assessee is in appeal before us.
52. Before us Ld. AR submitted that the amount of Rs. 28,00,52,402/ represented the actual bad debts incurred during the year and has been rightly written off in the book of accounts directly from the provision for doubtful debts account. He further submitted that the provision for doubtful debts which were debited to the profit and loss account in the past years were added in the computation of income in the respective past years when provision was made, as the same was not allowable as deduction as per explanation 2 to section 36(1)(vii) of the Act. Once the debt became bad in the current year, the same were written off as irrecoverable in the books of I.T.A Nos.3064 /Ahd/2010,2749/Ahd/2011 A.Y. 2006-07 &2007-08 Page No 31 GE India Industrial Pvt. Ltd. vs. DCIT accounts by debiting "provision of doubtful debts" and crediting "debtors" account. It was further submitted that the assessee has duly applied that the provision of section 36(i)(vii) read with 36(2) of the Act. Ld. AR further submitted that after amendment made to clause (vii) of sub-section 1 of section 36, it is not necessary for the assessee to establish that the debt has become bad and it would suffice if the debts are merely written off in the books as bad, and hence not recoverable. He also placed reliance on the decision of Apex Court in the case of TRF Ltd vs. (Civil Appeal No. 5293 of 2003) Ld. AR also relied on the decision of Gujarat High Court in the case of Torrent Cable on the matter of liquidated damages. Ld. DR on the other had submitted that the bad debts were not written off in the Profit and Loss account. He further submitted that the party-wise details, nature of debts, when the same was offered to tax was not submitted by the assessee. In case of liquidated damages, the nature of dispute, the year in which the customer deducted the amount, the reason for deduction were also not submitted by the assessee, and thus he supported the order of AO & DRP.
53. We have heard the rival submissions and perused the material on record. From the details placed on record it is seen that bad debts written off also includes liquidated damages like nature of dispute, the year in which the customer deducted the amount, reasons for deduction etc. Before us the Ld DR has stated that the details of liquidated damages have not been furnished by assessee We further find that the matter with respect to liquidated damages has not been commented by the AO and therefore there is no finding of AO. The hon'ble apex court in the case of TRF Ltd (supra) has held as under:-
I.T.A Nos.3064 /Ahd/2010,2749/Ahd/2011 A.Y. 2006-07 &2007-08 Page No 32 GE India Industrial Pvt. Ltd. vs. DCIT "After 1.4.1989, it is not necessary for the assessee to establish that the debt, in fact, has become irrecoverable. It is enough if the bad debt is written off as irrecoverable in the accounts of the assessee."
54. In view of the aforesaid facts, we feel that the matter needs fresh examination more so in the light of the aforesaid decision of Hon'ble Apex Court. We therefore remit the matter to the file of AO to decide the issue afresh and also direct to him to examine the issue of liquidated damages for writing off. The assessee is also directed to co-operate by submitting promptly the details required by assessing officer for deciding the issue. Thus this ground of the assessee is allowed for statistical purpose.
55. Ground No 14 is with respect to reversal of freight expenses amounting to Rs. 92,38,344/-
Assessee submitted before DRP that in the assessment order for AY 2005- 06, AO had disallowed the claim in respect of freight outward expenses amounting to Rs 92,28,344/- ignoring the contention that the expenses represented the year end freight accrual expenses for the services received by the assessee and for which the payments were made in the subsequent years. The contentions of the assessee were rejected for the reason that the provision made at the year end by the assessee was merely a provision entry to inflate the expenses. Assessee had preferred appeal before CIT(A). In the year under appeal, assessee submitted that the amount reversed in the current year represented the amount disallowed in earlier year. Since the AO had not discussed the issue in the draft assessment order, comments of the AO was I.T.A Nos.3064 /Ahd/2010,2749/Ahd/2011 A.Y. 2006-07 &2007-08 Page No 33 GE India Industrial Pvt. Ltd. vs. DCIT called for. After considering the comments of the AO, DRP disallowed the claim of assessee by holding as under:
22.6 The assessee's submissions have been considered, carefully and the same are found not acceptable. It is admitted fact that the assessee has not made any such claim in the return of income nor has filed revised return of income making said claim therein. In absence of any such claim made either in original return of income or revised return of income, the AO could not have entertained the same, even though the same was made during the course of assessment proceedings. The AO in his comments have rightly submitted that entertaining of any claim made during the course of assessment proceedings, beyond the period u/s 139(5) of the Act will be violation of provisions of section 139(5) of the Act. This view has been confirmed by the Hon'ble SC in the case of Goetze (India) Ltd. Vs. CIT (2006) 284 ITR 323(SC) as already discussed in para 22.5 above.
22.7 In view of above, it is held that the AO had rightly disallowed the claim which has not been made in return of income or revised return of income. Further, the AO has rightly submitted that the assessee is not eligible to file any objection on any issue before the DRP, if AO has not proposed any variation in the returned income on such issue.
Even, otherwise also similar claim of assessee made in respect of 'Provision of foreseeable losses' has been rejected by us on merits for the reasons mentioned in Para 6 of this order. Accordingly the assessee's claim on this issue is rejected."
56. Aggrieved by the order of DRP, assessee is now in appeal before us.
57. Before us, The Ld. A.R. reiterated the submissions made before DRP. He also placed reliance on the decision in the case of Dattraya Gopal Shetyc 150 ITR 460 (Bom) and CIT Vs Symphony Comforts Systems Ltd (Tax Appeal No 97 of 2010. The Ld. DR on the other hand supported the order of DRP.
I.T.A Nos.3064 /Ahd/2010,2749/Ahd/2011 A.Y. 2006-07 &2007-08 Page No 34 GE India Industrial Pvt. Ltd. vs. DCIT
58. We have heard the rival submissions and perused the material on record. From the comments of AO as reproduced by DRP under para 22.5, it is seen that the AO has not verified the submissions of assessee on merits but has submitted that the plea of the assessee is not acceptable in view of the fact that assessee has not filed revised return to include the claim of deduction. It is seen that even DRP has not examined the issue on merits. In the interest of justice we therefore are of the view that the matter needs to be examined afresh on merits. We therefore remit the issue to the file of AO and direct him to consider the submissions of the assessee and also the evidence filed by the assessee and then decide the issue on merits. Needless to state that AO shall grant a reasonable opportunity of hearing to the assessee and the assessee is also directed to cooperate by filing promptly the details called for by the AO. Thus this ground of the assessee allowed for statistical purposes.
59. Ground No 15 with respect to adding back of the provisions while computing book profits u/s 115JB:
60. AO noticed that for computing the book profits assessee had made in its profit and loss account provision for foreseeable losses, (Rs. 23,41,87,69) Provision for claims (Rs. 41,42,43,02/-) Provision for import duty demands (Rs 29,70,6000). He further noticed that in the tax audit report it was stated that the aforesaid provisions were liability of contingent nature. According to the AO the provisions were in the nature of unascertained liabilities and I.T.A Nos.3064 /Ahd/2010,2749/Ahd/2011 A.Y. 2006-07 &2007-08 Page No 35 GE India Industrial Pvt. Ltd. vs. DCIT therefore he added the aforesaid sums to arrive at the book profits u/s 115JB. The aforesaid addition was also confirmed by DRP by holding as under:
"19.7 The assessee's submissions have been considered carefully, but the same are found not acceptable. In the computation of 'Book Profit' the assessee has not added back the provisions for doubtful debts at Rs. 18,55,416/- and provision for doubtful advances at Rs. 20,31,681/- , both aggregating to Rs. 38,87,097/-. A new clause (i) has been added to Explanation 1 of section 115JB by the Finance Ac!, 2009 with retrospective effect from 1.4.2001 which mentions that the net profit is to be increased by the amount or amounts set aside as provision for diminution in the value of any asset. Undoubtedly, the debts and the advances given by the assessee were assets for the assessee and the provision for doubtful debts or advances are nothing but provision for diminution in the value of the asset and hence the same is required to be added back while computing the book profit. Hence the action of the AO in adding back the same for computation of 'Book profit' is confirmed.
19.8 In the computation of 'Book Profit' the assessee has not added back the provisions for foreseeable losses at Rs. 2,34,18,769/- provision for claims at Rs. 41,42,302/- and provision for import duty at Rs. 2,97,06,000/-, though the same were debited to the P & L account. The assessee itself has added back these sums in computation of income, while computing taxable income and the same conclusively proves that these are unascertained liability. Further in clause 17(K) of the Tax Audit Report', the Auditor has also certified the same as 'liability of contingent nature'. Since these provisions were made for meeting liabilities other than ascertained liabilities so as per provisions of section 115JB of the Act the same are required to be added back for computation of 'Book profit'. Hence the action of the AO in adding back the same for computation of 'Book profit' is confirmed.
19.9 The AO has observed that during the year under consideration, an amount of Rs. 2,43,96,764 was debited to the profit and loss account under the head Warrantee and Replacement Expenses. The I.T.A Nos.3064 /Ahd/2010,2749/Ahd/2011 A.Y. 2006-07 &2007-08 Page No 36 GE India Industrial Pvt. Ltd. vs. DCIT same was claimed as deduction while computing the book profit u/s. 115JB of the Act, considering the same as ascertained liability. This issue has already been examined and we have held in Para Nos, 1.3, 1.4 and 1.5 of this order that such provision for 'Warranty and replacement' is not an ascertained liability hence the action of the AO in adding back the same for computation of 'Book profit' is confirmed."
61. Aggrieved by the order of DRP, assessee is now m appeal before us.
62. Before us, the Ld A.R. reiterated the submissions made before AO and DRP. The Ld D.R. on the other hand relied on the order of AO and DRP and further submitted that as per cl (c) of Expln 115JB the additions were rightly made by AO. He thus supported the order of AO.
63. We have heard the rival submissions and perused the material on record. Before us, the Ld AR. could not controvert the findings of DRP. On some of the issues like provision for bad and doubtful debts and advances, provision for claims the issue has been remitted to the file of AO by us for fresh examination. We therefore direct the AO to re-compute the book profits after considering the same. On other aspects, we are in agreement with the reasoning of the DRP and therefore find no reason to interfere with his order. Thus this ground of assessee is partly allowed for statistical purposes.
64. Ground No 16 is with respect to charging of interest u/s 234B. Since this ground is consequential in nature, the same is not adjudicated. I.T.A Nos.3064 /Ahd/2010,2749/Ahd/2011 A.Y. 2006-07 &2007-08 Page No 37 GE India Industrial Pvt. Ltd. vs. DCIT
65. Ground No. 17 to 24 relate to transfer pricing matter out which ground no. 17 is general and ground no. 18, 20 and 22 were not pressed at the time of hearing, thus only three grounds survive for adjudication as last ground is consequential to earlier three. In the remaining three grounds, assessee challenged the transfer pricing adjustment made in respect of Power Control Division, Wind Energy Division and Training Division. The TPO in the order passed u/s 92CA(3) had proposed the following adjustments namely:-
Sr. No. Description
Amt (Rs.)
1 Downward adjustment in the related party 3,59,55,689
transaction in GE Power Control Division
2 Upward adjustment to the sale price of re-export 9,55,21,944
of equipment to the AE
3 Upward adjustment on cost in respect of the 10,90,196
transactions of marketing support services in the Power Control Division 4 Upward adjustment on cost in respect of the 63,623 transactions of marketing support services in the Lighting Division 5 Upward adjustment on cost in respect of the 74,18,541 transactions of training and administrative services in the training division.
Total 14,00,49,993
66. The AO included the aforesaid additions in the draft assessment order passed u/s 144C(1) of the Act against which the assessee filed objections before the Dispute Resolution Panel (DRP). DRP vide directions dated 22.9.2010 confirmed the adjustments suggested by TPO in respect of the above three divisions.
I.T.A Nos.3064 /Ahd/2010,2749/Ahd/2011 A.Y. 2006-07 &2007-08 Page No 38 GE India Industrial Pvt. Ltd. vs. DCIT
67. Further aggrieved the assessee is now in appeal before us.
68. Before us at the outset, the Ld. A.R. submitted that on each of the points with respect to transfer pricing issues, assessee had submitted detailed and voluminous submissions before DRP. DRP though has reproduced the objections of the assessee in its order, but has not given any finding on the objections raised by the assessee and has simply approved the conclusions arrived at by TPO without fully meeting the objections and detailed submissions made by assessee. He referred to the submissions made before DRP in the paper book filed before us. He further submitted that the directions passed by DRP u/s 144C(5) are not speaking as to how the objections raised by the assessee are not found to be acceptable. He then also made detailed submissions on merits of the case on each of the grounds. The Ld D R. and the TPO on the other hand supported the order of AO and DRP and also filed written submission to counter the arguments of the ld. counsel of the assessee.
69. We have heard both the parties and perused the order of DRP and the written submission filed by the ld DR and find that in respect of various adjustments proposed by TPO, assessee filed voluminous submission /objections before DRP. The same were reiterated before us. We further find that DRP has been very liberal in reproducing the same in its order but has equally been miser in giving its findings on them. The DRP has not dealt with the objections raised by the assessee by giving any cogent reasons as to why these objections are not acceptable to them. The DRP has simply I.T.A Nos.3064 /Ahd/2010,2749/Ahd/2011 A.Y. 2006-07 &2007-08 Page No 39 GE India Industrial Pvt. Ltd. vs. DCIT approved the adjustments made by the TPO. This has resulted in DRP's order being non-speaking. We further find that Ld. DR has tried very hard to meet these objections by referring to various relevant income tax rules and the case laws but this effort of Ld. DR is not arising out of the order of the DRP. Therefore we are of the considered opinion that assessment orders passed by assessing officer in consequence to the DRP's order have to be set aside. In holding so, we find support from the decision of Hon'ble Delhi High Court in the case of Vodafone Essar Ltd vs. Dispute Resolution Panel reported in 340 ITR 352 wherein it was held that when quasi-judicial forum like DRP deals with section 144C of the Act then it is obligatory on its part to ascribe cogent and germane reasons as reasons are the heart and soul of the matter and facilitate the appreciation of the order when the matter is called in question either before a superior or appellate forum. Accordingly the DRP's order along with the impugned order is set aside in respect of transfer pricing adjustments to the file of DRP with the direction to pass a speaking order after taking into consideration the submissions of both the parties. After receiving the order from DRP, the assessing officer will again pass order. We hold accordingly.
70. In the result, both the appeals of the assessee are partly allowed for statistical purposes.
Order pronounced in open court on the date mentioned hereinabove at caption page Sd/- Sd/-
(D.K. TYAGI) (ANIL CHATURVEDI) JUDICIAL MEMBER ACCOUNTANT MEMBER Ahmedabad : Dated 08/08/2013 I.T.A Nos.3064 /Ahd/2010,2749/Ahd/2011 A.Y. 2006-07 &2007-08 Page No 40 GE India Industrial Pvt. Ltd. vs. DCIT ak
आदे श कȧ ूितिलǒप अमेǒषत / Copy of Order Forwarded to:-
1. अपीलाथȸ / Appellant
2. ू×यथȸ / Respondent
3. संबंिधत आयकर आयुƠ / Concerned CIT
4. आयकर आयुƠ- अपील / CIT (A)
5. ǒवभागीय ूितिनिध, आयकर अपीलीय अिधकरण, अहमदाबाद / DR, ITAT, Ahmedabad
6. गाड[ फाइल / Guard file.
By order/आदे श से, उप/सहायक पंजीकार आयकर अपीलीय अिधकरण, अहमदाबाद