Tax Tribunal Upholds Assessee's Claims, Dismisses Revenue's Appeal

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Case Name:

Commissioner of Income Tax and Another vs. Wipro GE Medical System Ltd. (High Court of Karnataka)

ITA No. 902 of 2008

Date: 19th January 2016

Key Takeaways:

- The court upheld the ITAT's decision, which favored the assessee, Wipro GE Medical System Ltd., on multiple tax-related issues.

- The case highlights the importance of adhering to accounting standards and past precedents in tax assessments.

- The court emphasized the need for consistency in accounting methods and the recognition of provisions based on established legal principles.

Issue:

The central legal question was whether the ITAT was correct in allowing various tax deductions and provisions claimed by the assessee, which the revenue had contested.

Facts:

Wipro GE Medical System Ltd., a private company engaged in manufacturing medical equipment, filed a tax return declaring a loss for the assessment year 2002-03. The company claimed several deductions, including provisions for sales expenditure, warranty, and exchange rate fluctuations. The Assessing Officer rejected these claims, but the Appellate Commissioner and ITAT ruled in favor of the assessee. The revenue then appealed to the High Court.

Arguments:

- Revenue's Argument: The revenue argued that the provisions claimed by the assessee were contingent liabilities and not allowable as deductions. They relied on the Supreme Court's judgment in Rotork Controls India (P) Ltd. vs. Commissioner of Income Tax to support their position.

- Assessee's Argument: The assessee contended that the provisions were based on accounting standards and past experiences, and similar claims had been accepted in previous years. They argued that the ITAT's decision was consistent with legal precedents.

Key Legal Precedents:

- Rotork Controls India (P) Ltd. vs. Commissioner of Income Tax: This case set out the conditions for recognizing provisions under the Income Tax Act, which include a present obligation from a past event, probable outflow of resources, and a reliable estimate of the obligation.

- Indo Nippan Limited's Case (261 ITR 775): This case emphasized the consistency of accounting methods with accepted principles.

Judgement:

The High Court upheld the ITAT's decision, ruling in favor of the assessee. The court found that the ITAT had correctly applied legal principles and accounting standards. The court dismissed the revenue's appeal, affirming the ITAT's findings on the allowability of the provisions and deductions claimed by the assessee.

FAQs:

1. Why did the court rule in favor of the assessee?

  - The court found that the ITAT had correctly applied legal principles and accounting standards, and the provisions claimed by the assessee were consistent with past precedents.

2. What was the significance of the Rotork Controls case in this judgment?

  - The Rotork Controls case provided the criteria for recognizing provisions under the Income Tax Act, which the court used to evaluate the assessee's claims.

3. What does this decision mean for future tax assessments?

  - This decision reinforces the importance of consistency in accounting methods and adherence to established legal principles in tax assessments.

4. Did the court remand any issues back to the Assessing Officer?

  - Yes, the court remanded the issue of royalty allocation to the Assessing Officer for further examination based on pre-existing agreements.

1. This appeal is filed by the revenue assailing the order passed by the Income Tax Appellate Tribunal (ITAT), Bangalore in ITA No.810/Bang/2007 dated 16.05.2008 for the assessment year 2002-03.

2. Facts in brief are:

The respondent/assessee is a private limited company engaged in the business of manufacturing of medical diagnostic equipments and accessories, software development, trading of various products and also providing services for various medical equipments. The return of income for the assessment year 2002-03 was filed by the assessee declaring a loss of Rs.49,39,90,600/-

on 31.10.2002. Assessee claimed:

(i) provision for sale expenditure in the course of commission

received in respect of sales in the agency business.

(ii) provision for warranty of Rs.52,84,504/-

(iii) exchange gain fluctuation

(iv) Sale Proceeds not realized within time

(v) Allocation of Royalty payment

(vi) Reallocation of trading expenses-EHTP-I( Electronic hard ware

Technology Part-1)

(vii) Exclusion from export turnover of expenditure incurred in

foreign currency in providing technical services

(viii) Allowability of deduction u/s.10A (of Income Tax Act, 1961) for STPs located at Golden

Enclave

(ix) Adjustment of Prior Period exenses

3. The Assessing Officer proceeded to examine each of the

claim made by the assessee. After consideration, the Assessing

Officer concluded the assessment rejecting the claim made by the

assessee. On appeal by the assessee, Appellate Commissioner

allowed the appeal granting relief in favour of the assessee. Being

aggrieved by the said order, the revenue preferred an appeal before

the ITAT. The ITAT considering the various issues raised,

proceeded to follow the view expressed by it in the assessee’s own

case relating to the earlier assessment years and granted relief in

favour of the assessee, rejecting the appeal filed by the revenue

against which, the revenue is in appeal under Section 260A (of Income Tax Act, 1961) of the

Income Tax Act, 1961 (the “Act” for short) raising the following

substantial questions of law:

1. Whether the Appellate Authorities were correct in

holding that the provision in respect of a percentage of

sale to account for various expenses transferred to a

separate account is an allowable expenditure even

though the same is a contingent liability which has not

accrued?

2. Whether the Appellate Authorities were correct in

holding that a provision for reserves for warranty is

an allowable expenditure even though it is a

contingent liability?

3. Whether the Appellate Authorities were correct in

holding that the gain in exchange rate i.e. due to

fluctuation cannot be excluded when computing

deduction u/s.10A (of Income Tax Act, 1961) even though this amount

had not been directly arisen in the course of export?

4. “Whether the Appellate Authorities were correct in

holding that the sale proceeds not realized within the

time of 6 months granted by the Reserve Bank of India

without their being any extension cannot be excluded

from the total turnover when computation deduction

u/s.10A (of Income Tax Act, 1961)?.

5. Whether the Appellate Authorities were correct in

holding that allocation of expenditure towards royalty

for use of trade mark and logo to Wipro Ltd., and

Monogram Licencing International Incorporated at

50:50% by the assessee should be upheld and not as

worked out by the Assessing Officer based on local

sales?

6. Whether the Appellate Authorities were correct in

holding that allocation of expenditure as worked out

by the assessee on account of consumables, salary

etc., on the basis of sales based on percentage should

be accepted without taking into account the fact that

31.2% of sales were made through franchisers which

did not require the sale percentage of expenditure as

worked out by the Assessing Officer?

7. Whether the Appellate Authorities were correct in

holding that the computation of export turnover as

worked out by the Assessing Officer in accordance

with Explanation 2 to Section 10A (of Income Tax Act, 1961) by

excluding expenditure incurred in foreign currency in

providing travel, salary, rent, M and B charges,

Dialcom and others is not correct?

8. Whether the Appellate Authorities were correct in

holding that the finding of the Assessing Officer that

the deduction claimed u/s.10A (of Income Tax Act, 1961) in respect of

its unit at Golden Enclave which has commenced

business prior to 01.04.1993 in respect of one floor

and after 01.04.1993 in respect of two floors which

was shifted to Hoody Village, would amount to

reconstruction of business and the assessee would not

be entitled to claim 10A deduction was held to be not

correct?

9. Whether the Appellate Authorities were correct in

holding that the adjustment entries for prior period

expenses of Rs.25,57,54,378/- should be allowed

despite the assessee not substantiating the claim by

adducing the any proff?.

Re. question No.1:

4. Sri K V Aravind, learned counsel appearing for the revenue

placing reliance on the Judgment of the Apex Court in the case of

Rotork Controls India (P) Ltd. vs Commissioner of Income Tax

reported in ((2009) 314 ITR 62) wherein, the assessee herein was

also a party would strongly contend that, What is a provision is

elaborately considered by the Apex Court and the parameters are

set-out by the Apex Court to examine the recognition of provision

for the purposes of the Act.

The three Conditions to be satisfied for the recognition of the

provision are:

(a) an enterprise should have a present obligation as a result of

past event

(b) it is probable that an outflow of resources will be required to

settle the obligation

(c) a reliable estimate can be made out of the amount of obligation

He would contend that only if these three tests laid down by the

Apex Court are satisfied by the assessee, provision made relating to

the percentage of sale to account for various expenses transferred

to a separate account, whether is an allowable expenditure or not,

would be ascertained though the same is a contingent liability

which has not accrued. None of the authorities below have

examined this issue in the light of the Judgment pronounced by

the Apex Court in Rotork Controls Case (supra). No finding is

forth coming from the records that the assessee has satisfied the

three conditions laid down by the Apex Court to claim the benefit of

a provision. In such circumstances, he requests this Court to

remand the matter back to the Assessing Officer so as to enable

him to examine the case of the assessee in the light of the tests laid

down by the Apex Court in Rotork Controls Case (supra).

5. On the other hand Smt.Anuradha, learned counsel

appearing for the assessee would contend that all these aspects

were considered by the authorities below and it is categorically held

by the authorities that the provision is as per accounting standards

and is based on the past experience coupled with scientific and

rational basis. It is also contended that the department has

accepted the earlier order passed by the authorities for the

assessment year 1998-99 wherein similar provision was made as

per standard of accounting. Tribunal has allowed similar issue of

provision in favour of the assessee and no remand is made.

6. We have considered the submissions of the learned

counsel for the parties. This very argument was advanced by the

revenue before the ITAT to remand the matter to the Assessing

Officer to consider the issues in the light of the Judgment of

Rotork Controls Case (supra) The ITAT having observed that the

only reason why the Assessing Officer has disallowed the claim of

the assessee is on account that the provision is contingent liability,

cannot be allowed, expenditure can be allowed only on payment

basis. The ITAT having considered the adequate material placed

before it, thought it fit not to remit the matter to the Assessing

Officer. It is also noticed that the method of accounting followed by

the assessee is mercantile wherein the income and expenditure is

on accrual basis. We have examined this issue in the light of the

Judgment pronounced by the Apex Court in Rotork Controls Case

(supra,) wherein the three tests are laid down to recognize a

provision under the Act. The ITAT being a last fact finding

authority has held that all these ingredients which goes to the

recognition of provision are satisfied and as such, there is no need

to remit the matter back to the Assessing Officer. In such

circumstances, we do not see any ground made out by the revenue

to remand the matter back to the Assessing Officer. The claim of

expenditure being consistent with the method of accounting

followed and the provision has been made on concluded

transactions, the order of the Assessing Officer is held to be

incorrect. We do not see any reason to differ from this view, which

is in accordance with Section 145 (of Income Tax Act, 1961).

Re. Question No.2

7. The learned counsel Mr. K V Aravind appearing for the

revenue reiterated the grounds urged before the ITAT and sought

for remanding the matter back to the Assessing Officer to examine

the issue in the light of the Judgment of the Apex Court in Rotork

Controls Case (supra).

8. Learned counsel Smt. Anuradha appearing for the

assessee would contend that this issue is covered in favour of the

assessee in assesse’s own case by the order of this Court in ITA

438-444/12, affirmed by the Hon’ble Supreme Court in Rotork

Controls Case (supra), in none of these cases remand is made.

9. After considering the rival submissions of the learned

counsel for the parties on this issue, we are of the view that this

issue is similar to that of Question no.1. In view of the

observations made in Question No.1, we are not inclined to remit

the matter back to the Assessing Officer on this issue more

particularly, this issue being covered by the Judgment of the

Coordinate Bench of this Court in the very same assessee’s case

reported in 270 ITR 259 and 278 ITR 337 confirmed by the Apex

Court in Rotork Controls Case (supra).

Re. Question No.3

10. Both the learned counsel appearing for the parties agree

that the issue involved in this question is covered against the

revenue by the Judgment of this Court in ITA No.3202/2005

disposed of on 28.02.2012.

11. In view of the Judgment rendered by this Court in ITA

No.3202/2005 dated 28.02.2012, we answer this question against

the revenue and in favour of the assessee.

Re. Question No.4

12. Learned counsel appearing for the parties agree that this

issue is directly covered by the Judgment of this Court in ITA

No.879/2008 disposed of on 25.03.2015.

13. Following the said Judgment rendered by the Co-ordinate

Bench of this Court in ITA No.879/2008 disposed of on

25.03.2015, we answer this question in favour of the assessee and

against the revenue.

Re. Question No.5

14. Learned counsel appearing for the revenue would

contend that the ITAT negated the arguments of the revenue since

similar question was considered by the ITAT in ITA No.322-

328/B/02 and held against the revenue. A detailed inquiry is

required to be made regarding expenses allocated to royalty

payment with reference to the pre-existing agreements executed by

the assessee with M/s Wipro Limited relied on by the assessee and

accepted by the CIT. No such exercise having been done by the

authorities, he requests the matter to be remanded back to the

Assessing Officer for fresh consideration to examine on this issue.

15. Learned counsel appearing for the assessee has no

objections to the same.

16. Accordingly, we remand this issue to the Assessing

Officer to examine whether allocating a portion of the royalty to

EHTP Units as local sales is warranted or not after examining the

pre-existing agreement entered into by the assessee with M/s

Wipro Limited.

Re. Question No.6

17. Learned counsel appearing for the revenue seeks to

remand this issue also to the Assessing Officer as no adequate

material was made available before the authorities to come to a

conclusion that the allocation of expenditure as worked out by the

assessee on account of consumables, salary etc. are applicable to

the sales made through franchises.

However, learned counsel appearing for the assessee would

contend that Appellate Commissioner deleted the allocation of

expenses made by the Assessing Officer based on the order of ITAT

in the very same assessee’s case reported in 81 TTJ 455 and the

decision of the Apex Court in Indo Nipan Limited’s case (261 ITR

775). It is noticed that over 5.6% of the sales is made through

franchises, however, the assessee adopted sales as basis for

allocation. The sale made through the franchises stands on a

different footing than the sale made directly by the assessee

company. In the case of sale made through franchise, no effort is

involved by the assessee except getting commission whereas the

direct sales made by the assessee requires much more efforts and

obviously the expenditure of the nature of consumables, salary and

benefits etc., are incurred. It is also significant to observe that the

Assessing Officer has not disturbed the method adopted by the

assessee for the purpose of allocation of expenses in the trading

turnover. What the Assessing Officer has done is removing the

value of Franchise sales from the total sales as the Franchise sales

are different from direct sales. This methodology adopted by the

Assessing Officer is not properly considered by the CIT and ITAT.

CIT was of the view that the course adopted by the Assessing

Officer in allocating the expenses amounts to prescribing a new

method of estimation based on the Proportionate turnover contrary

to the method of accounting regularly followed by the assessee and

accepted by the department in earlier years. This view is confirmed

by the ITAT placing reliance on the Judgment of the Apex Court in

Indo Nippan’s case (supra). The Apex Court in Indo Nippan’s case

has held that whatever method the Assessing Officer adopts, the

method has to be consistent with the accepted principles of

accountancy.

18. In the present case, what the Assessing Officer has done

is to delete the value of franchise sales from total expenses. No

method of accountancy adopted by the assessee is disturbed. The

course adopted by the Assessing Officer to delete the franchise

sales is based on the reasoning that franchise sales differs from the

direct sales. Such being the case, this method adopted by the

Assessing Officer is no way contrary to the Judgment of the Apex

Court in Indo Nippan’s case (supra). In the circumstances, we are

of the view that CIT and ITAT proceeded on a misconception that

Assessing Officer has disturbed the consistent method of

accountancy followed by the assessee for many years. In view of

the aforesaid reasons, we are of the opinion that the finding given

by the CIT confirmed by the ITAT on this issue is not sustainable

and accordingly, we decide this question in favour of the revenue

and against the assessee. The issue is remanded to the A.O. to re-

do the assessment in the light of the observations made above,

after providing an opportunity of hearing to the assessee. All

contentions are left open to the parties.

Re. Question No.7

19. Both the parties agree that the issue involved in this

question is squarely covered by the Judgment of this Court in the

case of Tata Elexsi Ltd.’s case (349 ITR 98). In view of the same,

this question is answered against the revenue and in favour of the

assessee.

Re. Question No.8

20. The issue involved herein is covered against the revenue

in the Judgment rendered by this Court in ITA No.391/2008

disposed of on 10.06.2014 which is not disputed by the parties.

Accordingly, we answer this question in favour of the assessee and

against the revenue.

Re. Question No.9

21. The Assessing Officer proceeded to disallow the loss

claimed by the assessee on the ground that the assessee was

making various inter unit transfers, it was necessary to examine

the entries which were not recorded properly in the first instance.

The assessee has not been able to substantiate this claim despite

being given sufficient time for the credit entries made and neither

has given any background for such high value reverse entries.

Assessing Officer was of the opinion that the assessee should have

produced the certificate from auditors in this regard. The assessee

having furnished the audit certificate before the CIT, it is observed

by the CIT that the assessee’s production of audit report

establishes the credentials and accordingly, accepted the error in

the books of accounts which has crept in, as a result of genuine

mistake and such error has been disclosed by the assessee

voluntarily along with the return of income. This view of the CIT is

upheld by the Tribunal .

22. Learned counsel Sri K V Aravind appearing for the

revenue would submit that no reconciliation is made by the CIT. It

cannot be accepted that a genuine error has occurred in

accounting entry and the same is corrected by the adjustments

made in the book entry by the assessee which has been confirmed

by the ITAT. Accordingly, he seeks to remand the matter to the

Assessing Officer to examine the correctness of the auditor’s report

furnished by the assessee before the CIT.

23. We do not see any flaw in the order passed by the ITAT

for the reason that the Assessing Officer himself while deciding the

issue in question has accepted the auditor’s certificate for the

assessment year 2003-04 and has categorically held that such a

certificate of the Chartered Accountant would have been suffice to

accept the claim of the assessee towards the adjustment entries for

prior period expenses. In such view of the matter, the assessee has

cured the defects pointed out by the Assessing Officer, by filing the

necessary auditor’s report before the CIT which was properly

considered and held that it was a genuine error in the book entry

and the same is confirmed by the ITAT which in our opinion is

justifiable. We are not inclined to interfere with the factual findings

given by the authorities regarding the genuiness of the adjustments

in the book entry. It is settled law that the no income can arise by

mere book entries (vide Kedarnath Jute Manufacturing Co. Ltd. vs

CIT (Central), Calcutta reported in 1982 ITR 363). It is also noticed

by us that error occurred in the book entries for the assessment

years 2002-03 and 2003-04, revenue has not raised this question

in appeal for the assessment year 2003-04. In such

circumstances, revenue challenging this issue only in this appeal

relating to assessment year 2002-03, without just cause is not

sustainable. This view is supported by the Judgment of the Apex Court

in Berger Paint India Ltd. v/s CIT, Calcutta reported in (2004)12 SCC

42. For the aforesaid reasons, we answer this question of law in

favour of the assessee and against the revenue.

24. For the foregoing reasons, this appeal is partly allowed

answering the questions of law as indicated above.

Ordered accordingly.

Sd/-

JUDGE

Sd/-

JUDGE