Acer India Private Limited, Bangalore v. DCIT, Bangalore

PAGE 1 OF 11 ITA NO.784/BANG/2010 1 IN THE INCOME TAX APPELLATE TRIBUNAL BANGALORE BENCH A BEFORE SHRI GEORGE GEORGE K J.M. AND SHRI A MOHAN ALANKAMONY A.M ITA NO.784/BANG/2010 (ASSESSMENT YEAR 2005-06) M/S ACER INDIA PVT. LTD. 1 ST FLOOR GEORGE THANGAIAH COMPLEX (EAST) 80FT ROAD INDIRANAGAR BANGALORE-75. - APPELLANT VS THE DEPUTY COMMISSIONER OF INCOME TAX CIRCLE-11(1) BANGALORE. - RESPONDENT APPELLANT BY : SHRI SRIRAM SHESHADRI C.A. RESPONDENT BY : SHRI G V GOPALA RAO CIT-I ORD ER PER GEORGE GEORGE K : THIS APPEAL PREFERRED BY THE ASSESSEE IS DIRECTED AGAINST THE ORDER OF LEARNED CIT(A)-I BANGALORE DA TED 2/2/2010. THE ASST. YEAR CONCERNED IS 2005-06. 2. THE ASSESSEE HAS RAISED 8 GROUNDS IN THIS APPEA L. THE FIRST GROUND IS GENERAL IN NATURE AND NO SPECIFIC A DJUDICATION IS CALLED FOR. HENCE THE SAME IS DISMISSED. 3. GROUND NOS.2 TO 7 RELATE TO THE ISSUE AS TO WHE THER THE CIT(A) IS JUSTIFIED IN CONFIRMING THE DISALLOWA NCE MADE BY THE PAGE 2 OF 11 ITA NO.784/BANG/2010 2 A.O. ON ACCOUNT OF PROVISION FOR WARRANTY AMOUNTING TO RS.2 26 05 903/-. 4. THE EIGHTH GROUND RELATES TO THE ISSUE AS TO WH ETHER THE CIT(A) IS JUSTIFIED IN UPHOLDING THE EXCLUSION OF THE INTEREST INCOME OF RS.25 83 813/- FROM THE PROFITS OF THE EL IGIBLE UNITS FOR THE PURPOSE OF COMPUTING DEDUCTION U/S 80-IB OF THE ACT. 5. BRIEF FACTS OF THE CASE ARE AS FOLLOWS:- THE ASSESSEE IS A COMPANY. IT IS ENGAGED IN THE MANUFACTURE AND TRADING OF COMPUTER SYSTEMS AND COMP ONENTS. FOR THE RELEVANT ASST. YEAR RETURN OF INCOME WAS FILED ON 31/10/2005 DECLARING A TOTAL INCOME OF RS.3 28 93 910/-. THE CASE WAS SELECTED FOR SCRUTINY AND ASSESSMENT U/S 143(3) OF T HE ACT WAS COMPLETED VIDE ORDER DATED 26.12.2008 BY MAKING THE FOLLOWING ADJUSTMENTS TO THE RETURNED INCOME:- A) DISALLOWANCE OF PROVISION FOR WARRANTY AMOUNTING TO RS.2 26 05 903/- AND B) EXCLUSION OF THE INTEREST INCOME OF RS.25 83 813/- FROM THE PROFIT DERIVED BY THE PONDICHERRY UNIT (UNIT) FOR THE PURPOSE OF COMPUTATION OF DEDUCTION U/S 80-IB(4) OF THE ACT. 6. AGGRIEVED BY THE ASSESSMENT THE ASSESSEE CARRIE D THE MATTER IN APPEAL BEFORE THE FIRST APPELLATE AUT HORITY. 7. THE CIT(A) DISMISSED THE APPEAL OF THE ASSESSEE VIDE HIS IMPUGNED ORDER DATED 2/2/2010. PAGE 3 OF 11 ITA NO.784/BANG/2010 3 8. AGGRIEVED BY THE ORDER OF THE CIT(A) THE ASSESS EE IS IN SECOND APPEAL BEFORE US. 9. THE LEARNED AR REITERATED THE SUBMISSIONS MADE BEFORE THE AUTHORITIES BELOW. 10. THE LEARNED DR ON THE OTHER HAND SUPPORTED T HE IMPUGNED ORDERS OF THE INCOME TAX AUTHORITIES. 11. WE HAVE HEARD THE RIVAL SUBMISSION AND PERUSED THE MATERIAL ON RECORD. PROVISION FOR WARRANTY THE ASSESSEE HAD DEBITED A SUM OF RS.8 24 29 136/ - IN THE P&L ACCOUNT ON ACCOUNT OF PROVISION FOR WARRANT Y. THE ASSESSEE HAD ACTUALLY INCURRED AN EXPENDITURE OF RS. 4 92 32 936/- DURING THE YEAR. AT THE TIME OF SCRUTINISING THE AS SESSMENT A SUM OF RS.5 98 23 233/- WAS EXPENDED BY THE ASSESSEE. T HE ASSESSMENT WAS COMPLETED BY DISALLOWING THE UNEXPEND ED PORTION OF THE PROVISION FOR WARRANTY AMOUNTING TO RS.2 26 05 9 03/- [RS.8 24 29 136 RS.5 98 23 233] BEING THE EXCESS AMOUNT DEBITED TO THE P&L ACCOUNT OVER THE ACTUAL EXPENDITURE INCU RRED. 11.1 THE ACTION OF THE AO WAS UPHELD BY THE CIT(A). THE CIT(A) WE ARE OF THE VIEW HAS MISDIRECTED HIMSELF THAT THE ASSESSEE HAD CLAIMED DIFFERENT AMOUNTS TOWARDS PROV ISIONS BY COMPARING THE AMOUNT OF PROVISION DEBITED TO THE P& L ACCOUNT PAGE 4 OF 11 ITA NO.784/BANG/2010 4 RS.8 24 29 136/- DISALLOWANCE MADE BY THE AO BEING RS.2 26 05 903/- AND THE AMOUNT OF RS.12 16 75 204/ - BEING THE CLOSING PROVISION OF WARRANTY APPEARING IN THE BOOKS OF ACCOUNT. 11.2 THE ASSESSEE CREATES PROVISION FOR WARRANTY B ASED ON THE ESTIMATION OF EXPENDITURE LIKELY TO BE INCURRED ON THE PAST SALES MADE ON YEARLY BASIS AT THEN PREVAILING MARKET PRICES FOR SPARES AND LABOUR. FOR THE RELEVANT PREVIOUS YEAR THE ASSESSEE ESTIMATED THE WARRANTY LIABILITY AT RS.12 76 77 530/- AND CREATED A PROVISION ONLY FOR RS.12 16 75 204/- IN THE BOOKS OF ACCOUNT BY CHARGING A PROVISION OF RS.8 24 29 136/- TO THE DEB IT IN THE P&L ACCOUNT AND CLAIMED IT AS DEDUCTION. THE ASSESS EE COMPANY HAD CREATED THE PROVISION BASED ON THE ESTIMATION OF WA RRANTY LIABILITY WHICH IS BASED ON FAILURE RATES OF THE PAST YEAR DAT A/EXPERIENCE AND INDUSTRY TRENDS AND NOT ON ADHOC BASIS. THE ASS ESSEE HAS NOT CHANGED THE METHOD OF COMPUTING THE WARRANTY PROVISI ON AND IT HAS BEEN FOLLOWED CONSISTENTLY. 11.3 THE DECISION OF THE HONBLE SUPREME COURT IN THE CASE OF ROTORK CONTROLS INDIA PVT. LTD. 314 ITR 62 WOULD BE SQUARELY APPLICABLE TO THE FACTS OF THE CASE. THE HONBLE S UPREME COURT HAS HELD THAT PROVISION MADE ON PAST EXPERIENCE IS A SC IENTIFIC METHOD AND IS THE MOST APPROPRIATE METHOD. THE RELEVANT E XTRACT OF THE DECISION IS PROVIDED BELOW:- IN THIS CASE WE ARE CONCERNED WITH PRODUCT WARRANTIES. TO GIVE AN EXAMPLE OF PRODUCT PAGE 5 OF 11 ITA NO.784/BANG/2010 5 WARRANTIES A COMPANY DEALING IN COMPUTERS GIVES WARRANTY FOR A PERIOD OF 36 MONTHS FROM THE DATE OF SUPPLY. THE SAID COMPANY CONSIDERS FOLLOWING OPTIONS : (A) ACCOUNT FOR WARRANTY EXPENSE IN THE YEAR IN WHICH IT IS INCURRED; (B) IT MAKES A PROVISI ON FOR WARRANTY ONLY WHEN THE CUSTOMER MAKES A CLAIM; AND (C) IT PROVIDES FOR WARRANTY AT 2% OF TURNOVER OF THE COMPANY BASED ON PAST EXPERIENCE (HISTORICAL TREND) UNDER THE CIRCUMSTANCES THE THIRD OPTION IS MOST APPROPRIATE BECAUSE IT FULFILLS ACCRUAL CONCEPT AS WELL AS THE MATCHING CONCEPT. FOR DETERMINING AN APPROPRIATE HISTORICAL TREND IT IS IMPORTANT THAT THE COMPANY HAS A PROPER ACCOUNTING SYSTEM FOR CAPTURING RELATIONSHIP BETWEEN THE NATURE OF THE SALES THE WARRANTY PROVISIONS MADE AND THE ACTUAL EXPENSES INCURRED AGAINST IT SUBSEQUENTLY.. 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. 11.4 IN THE ASSESSEES OWN CASE IN IDENTICAL FACTS FOR THE IMMEDIATELY PRECEDING YEAR THE TRIBUNAL IN ITA NO.77 4 & 877/BANG/2008 VIDE ORDER DATED 30.1.2009 HAS DECIDE D THE ISSUE IN FAVOUR OF THE ASSESSEE. THE RELEVANT FINDING OF THE TRIBUNAL AT PARA 5 OF ITS ORDER READS AS FOLLOWS:- WE HAVE HEARD THE RIVAL CONTENTIONS AND PERUSED THE MATERIAL AVAILABLE ON RECORD. WE ARE OF THE CONSIDERED VIEW THAT THE ASSESSEES CASE CLEARLY FALLS IN LINE WITH THE LEGAL RATIO SET OUT BY THE VARIOUS APPELLATE DECISIONS CITED AT BAR IN SO FAR AS PAGE 6 OF 11 ITA NO.784/BANG/2010 6 THE PROVISION FOR WARRANTY STOOD CRYSTALLIZED AS SOON AS THE SALE WAS MADE WHICH A CUSTOMER WOULD LIKE TO BE FULFILLED WITHIN THE WARRANTY PERIOD AND IS AT THE COST OF AN ASSESSEES GOODWILL. THEREFOR E THE RESIDUAL AMOUNT PURPORTED TO HAVE BEEN HELD BY THE AO AS AN EXCESS PROVISION CANNOT BE CONSIDERED AS A CONTINGENT PROVISION AND NOT AN ASCERTAINED LIABILITY. THE WARRANTY PERIOD CONTINUES BEYOND AN YEAR WHICH FACT WAS RIGHTLY CONSIDERED BY THE LD. CIT(A) CONFINING TO THE VARIOUS DECISIONS SUCH AS IBM INDIA LTD. (SUPRA) REPORTED IN 290 ITR (AT) 183 = (2007-TIOL-22- ITAT-BANG). SIMILAR VIEW HAS BEEN TAKEN BY OTHER COORDINATE BENCHES OF THE TRIBUNAL THEREFORE REQUIRES NO FURTHER DELIBERATION. IN THE LIGHT OF THE ABOVE WE HOLD THE VIEW THAT THE DECISION OF THE LD. CIT(A) REQUIRES NO FURTHER INTERFERENCE ON THE ISSUE. THE REVENUES APPEAL STANDS DISMISSED. 11.5 IN VIEW OF THE ABOVE FACTS AND THE DECISION R EFERRED ABOVE WE HOLD THAT DISALLOWANCE OF PROVISION OF WA RRANTY IS TO BE DELETED AND IT IS ORDERED ACCORDINGLY. 12. IN THE RESULT GROUND NOS. 2 TO 7 RAISED HEREI N ARE ALLOWED. EXCLUSION OF INTEREST FOR THE PURPOSE OF COMPUTING THE DEDUCTION U/S 80-IB OF THE ACT 13. THE AO HAS DISALLOWED A SUM OF RS.25 83 813/- FROM THE PROFITS DERIVED BY THE UNIT FOR THE PURPOSE OF C OMPUTATION OF DEDUCTION U/S 80IB OF THE ACT. THE CIT(A) HAS DEC IDED THE ISSUE AGAINST THE ASSESSEE COMPANY BY FOLLOWING THE RATIO O F THE DECISION OF THE HONBLE SUPREME COURT IN THE CASE OF PANDIAN CHEMICALS (262 PAGE 7 OF 11 ITA NO.784/BANG/2010 7 ITR 278). BEFORE US THE LEARNED AR SUBMITTED THA T THE INTEREST CLAIMED FOR THE PURPOSE OF COMPUTING OF DEDUCTION U /S 80IB IS TO BE BIFURCATED AS FOLLOWS:- 1) LC MARGIN MONEY DEPOSITS WITH BANK RS.15 53 186/- 2) FIXED DEPOSITS WITH BANK - RS.10 30 627/- TOTAL - RS.25 83 813/- 13.1 IT WAS CONCEDED THAT WITH REFERENCE TO INTER EST ON FIXED DEPOSIT WITH THE BANK AMOUNTING TO RS.10 30 6 27/- THE ASSESSEE DOES NOT HAVE A CASE FOR CLAIMING DEDUCTIO N U/S 80IB SINCE IT WAS THE SURPLUS MONEY OF THE ASSESSEE WHIC H WAS DEPOSITED IN THE BANK. IT WAS CONTENDED THAT THE INTEREST EA RNED FROM DEPOSIT MADE FOR OPENING THE LETTER OF CREDIT WITH THE BANKS FOR THE PURPOSE OF AVAILING CREDIT FACILITY WAS FOR THE PURPOSE OF CARRYING ON THE BUSINESS AND THERE IS A DIRECT NEXUS WITH THE BUSINESS ACTIVITY CARRIED ON BY THE INDUSTRIAL UNDERT AKING OF THE ASSESSEE COMPANY. HE RELIED ON THE DECISION OF THE HONBLE DELHI HIGH COURT IN THE CASE OF CIT V ELTEK SGS PVT. LTD. (300 ITR 6) AND ALSO THE UNREPORTED DECISION OF THE MUMBAI BENC H OF TRIBUNAL IN THE CASE OF BAJAJ HEALTHCARE P. LTD. 13.2 THE RELEVANT PROVISIONS OF SECTION 80IB(1) OF THE ACT READS AS FOLLOWS:- SECTION 80IB-(1) WHERE THE GROSS TOTAL INCOME OF AN ASSESSEE INCLUDES ANY PROFITS AND GAINS DERIVED FROM ANY BUSINESS REFERRED TO IN SUB- SECTIONS (3) TO [(11) (11A) AND (11B)] (SUCH BUSIN ESS BEING HEREINAFTER REFERRED TO AS ELIGIBLE BUSINESS) PAGE 8 OF 11 ITA NO.784/BANG/2010 8 THERE SHALL IN ACCORDANCE WITH AND SUBJECT TO THE PROVISIONS OF THIS SECTION BE ALLOWED IN COMPUTIN G THE TOTAL INCOME OF THE ASSESSEE A DEDUCTION FROM SUCH PROFITS AND GAINS OF AN AMOUNT EQUAL TO SUCH PERCENTAGE AND FOR SUCH NUMBER OF ASSESSMENT YEARS AS SPECIFIED IN THIS SECTION .. (EMPHASIS SUPPLIED). 13.3 THE DECISION OF THE HONBLE DELHI HIGH COURT IN THE CASE OF CIT V ELTEK SGS (P) LTD. (300 ITR 6) IS MOST APP ROPRIATE IN THE PRESENT CASE. THE DELHI HIGH COURT HAS HELD THAT T HE LANGUAGE USED IN SECTION 80HH OF THE ACT IS DIFFERENT FROM THE LA NGUAGE USED IN 80IB OF THE ACT. THE RELEVANT EXTRACT IS PROVIDED BELOW FOR REFERENCE: 13. A PERUSAL OF THE ABOVE WOULD SHOW THAT THERE IS A MATERIAL DIFFERENCE BETWEEN THE LANGUAGE USED IN SECTION 80HH OF THE ACT AND SECTION 80IB OF THE ACT. WHILE SECTION 80-HH REQUIRES THAT THE PROFITS AND GAINS SHOULD BE DERIVED FROM THE INDUSTRIAL UNDERTAKING SECTION 80IB OF THE ACT REQUIRES THAT THE PROFITS AND GAINS SHOULD BE DERIVED FROM ANY BUSINESS OF THE UNDERTAKING. IN OTHER WORDS THERE NEED NOT NECESSARILY BE A DIRECT NEXUS BETWEEN THE ACTIVITY OF AN INDUSTRIAL UNDERTAKING AND THE PROFITS AND GAINS.. 20. IT IS CRUCIAL TO APPRECIATE THE DIFFERENCE IN LANGUAGE IN SECTION 80HH AND SECTION 80IB. WHILE THE LANGUAGE USED IN SECTION 80HH AND 80I ARE SIMILAR THERE IS A CLEAR DEPARTURE IN THE LANGUAGE USED IN SECTION 80IB AND IT IS THIS CHOICE OF WORDS THAT MAKES ALL THE DIFFERENCE. PAGE 9 OF 11 ITA NO.784/BANG/2010 9 HENCE FOR THE PURPOSE OF SECTION 80IB OF THE ACT THE EXPRESSION PROFITS AND GAINS FROM ANY BUSINESS OF THE UNDERTAK ING HAS TO BE INTERPRETED IN A WIDER SENSE. THERE NEED NOT BE AN Y DIRECT NEXUS BETWEEN THE ACTIVITY OF THE INDUSTRIAL UNDERTAKING AND PROFITS AND GAINS. FURTHER THE HONBLE DELHI HIGH COURT IN TH IS CASE HAS DISTINGUISHED THE PRINCIPLES LAID DOWN BY THE APEX C OURT IN THE CASE OF PANDIAN CHEMICALS. THE HONBLE MUMBAI BENCH OF THE TRIBUNAL IN THE CASE OF BAJAJ HEALTHCARE P LTD. (UNREPORTED) HA S ALLOWED INTEREST ON DEPOSITS MADE FOR AVAILING BANK FACILIT IES BY FOLLOWING THE DECISION OF THE HONBLE DELHI HIGH COURT IN THE CASE OF CIT V ELTEK SGS (P) LTD. (300 ITR 6). THE RELEVANT FINDI NG OF THE MUMBAI BENCH OF THE TRIBUNAL IN THE CASE OF BAJAJ H EALTHCARE P. LTD. (SUPRA) IS REPRODUCED BELOW:- WE HAVE PERUSED THE RECORDS AND CONSIDERED THE MATTER CAREFULLY. THE DISPUTE RAISED IS REGARDING ALLOWABILITY OF DEDUCTION U/S 80IB IN RESPECT OF DEPB LICENSES AND INCOME FROM INTEREST AND DIVIDEND. THE AUTHORITIES BELOW HAVE NOT ALLOWED THE CLAIM ON THE GROUND THAT THERE IS NO DIRECT NEXUS BETWEEN THE AFORESAID RECEIPTS AND THE INDUSTRIAL UNDERTAKING FOLLOWING THE JUDGEMENT OF HONBLE SUPREME COURT IN THE CASE OF STERLING FOODS LTD. (SUPRA) AND IN CASE OF PANDYAN CHEMICALS LTD. (SUPRA). IT HAS BEEN POINTED OUT THAT ABOVE JUDGEMENT HAVE BEEN DELIVERED IN CONNECTION WITH THE DEDUCTION U/S 80HH IN WHICH THE DEDUCTION WAS ALLOWABLE IN RESPECT OF PROFIT DERIVED FROM THE UNDERTAKING WHEREAS THE LANGUAGE USED IN SECTION 80IB IS PROFIT ARRIVED FROM THE BUSINESS OF UNDERTAKING. THE HONBLE HIGH COURT OF DELHI IN CASE OF SGS PVT. LTD. (300 PAGE 10 OF 11 ITA NO.784/BANG/2010 10 ITR 6) AFTER NOTING THE SAID DIFFERENCE HAVE ALLOWED THE DEDUCTION IN RESPECT OF DUTY DRAWBACK AND FOLLOWING THE SAID JUDGEMENT THE TRIBUNAL IN ASSESSEES OWN CASE IN ASSESSMENT YEAR 2001-02 ALLOWED THE DEDUCTION IN RESPECT OF EXPORT INCENTIVES AND TERM DEPOSITS AS WELL AS DIVIDEND INCOME FROM THE BANK. THE TRIBUNAL HELD THAT TERM DEPOSIT HAD BEEN USED AS A COLLATERAL SECURITY FOR THE PURPOSE OF BUSINESS AND DIVIDEND HAD BEEN RECEIVED FROM THE BANK IN RESPECT OF SHARES WHICH HAD BEEN PURCHASED WITH A VIEW TO SECURE LOAN FROM THE BANK AND THEREFORE THE INTEREST AND DIVIDEND INCOME WAS INEXTRICABLY LINKED WITH THE BUSINESS OF THE ASSESSEE. WE HAVE TO FOLLOW THE DECISION OF THE COORDINATE BENCH OF THE TRIBUNAL IN ASSESSEES OWN CASE AND RESPECTFULLY FOLLOWING THE SAME WE ALLOW THE DEDUCTION IN RESPECT OF DEPB LICENSES INTEREST ON TERM DEPOSITS AND DIVIDEND FROM BANK. HOWEVER THIS YEAR THE ASSESSEE HAS ALSO CLAIMED DEDUCTION IN RESPECT OF INTEREST ON SHORT TERM DEPOSITS WHICH HAS NOT BEEN USED AS COLLATERAL SECURITY FOR THE BUSINESS. THEREFORE THE ASSESSEE WILL NOT BE ENTITLED TO DEDUCTION IN RESPECT OF INTEREST FROM SHORT TERM DEPOSIT. WE HOLD ACCORDINGLY. 13.4 IN VIEW OF THE ABOVE DECISIONS THE INTEREST INCOME EARNED FROM DEPOSITS MADE FOR OPENING LETTER OF CRE DIT WITH THE BANKS FOR THE PURPOSE OF AVAILING CREDIT FACILITIES TO CARRY ON THE BUSINESS MUST BE TREATED AS INCOME FROM BUSINESS S INCE IT HAS DIRECT NEXUS WITH THE BUSINESS ACTIVITY CARRIED ON B Y THE INDUSTRIAL UNDERTAKING OF THE ASSESSEE FIRM. HOWEVER SINCE THE BREAK-UP OF INTEREST CLAIMED FOR THE PURPOSE OF COMPUTING DEDUC TION U/S 80IB OF THE ACT WAS NOT BEFORE THE INCOME TAX AUTHORITIE S THIS ISSUE IS PAGE 11 OF 11 ITA NO.784/BANG/2010 11 RESTORED BACK TO THE FILE OF THE AO WITH THE SPECIF IC DIRECTION TO ALLOW THE CLAIM OF DEDUCTION U/S 80IB IN RESPECT OF LC MARGIN MONEY DEPOSITS WITH BANK. THEREFORE GROUND NO.8 RA ISED HEREIN IS ALLOWED FOR STATISTICAL PURPOSES. 14. IN THE RESULT THE APPEAL FILED BY THE ASSESSE E IS ALLOWED FOR STATISTICAL PURPOSES. THE ORDER PRONOUNCED ON FRIDAY THE 25 TH DAY OF FEBRUARY 2011 AT BANGALORE. SD/- SD/- (A MOHAN ALANKAMONY) (GEORGE GEORGE K) ACCOUNTANT MEMBER JUDICIAL MEMBER COPY TO : 1. THE REVENUE 2. THE ASSESSEE 3. THE CIT CONCERNED. 4. THE CIT(A) CONCERNED. 5. DR 6. GF MSP/24/2/ BY ORDER ASST. REGISTRAR ITAT BANGALORE.