IN THE INCOME TAX APPELLATE TRIBUNAL
DELHI BENCH: `B' NEW DELHI
BEFORE SHRI J. S. REDDY, ACCOUNTANT MEMBER
AND
SHRI C. M. GARG, JUDICIAL MEMBER
I.T.A .No.-2846/Del/2012
(ASSESSMENT YEAR-2007-08)
ACIT Vs. Conviva Technologies Ltd.
Circle-3(1) Aravail Crescent, 1
New Delhi. Nelson Mandela Road,
New Delhi.
PAN:AABCB0102A
(APPELLANT) (RESPONDENT)
Revenue by:-Smt. Poonam Khaira Sidhu, CIT. DR
Smt. Parwinder Kaur, Sr. DR
Assessee by:- Sh. Anil Bhalla, CA
Date of hearing: 16/02/2015
Date of pronouncement: 23/03/2015
ORDER
PER C. M. GARG, JM.
This appeal has been has been preferred by the Revenue against the order
of CIT (Appeals)- VI, New Delhi vide dated 14.03.2012 in Appeal No.307/09-
10 for Assessment Year 2007-08.
2. The Revenue has raised following grounds in this appeal read as under:
"1. The Ld. CIT(A) has erred on facts and in law in
deleting the disallowance of provision for warranty
expenses amounting to Rs.4,00,978/- on the ground
that the same is unascertained liability.
I.T.A .No.-2846/Del/2012 2
2. The Ld. CIT(A) has erred on facts and in law in
deleting the disallowance of Software service charge
amounting to Rs.12,38,26,881/- as no details were
provided.
3. The Ld. CIT(A) has erred on facts and in law in
deleting the disallowance of depreciation on computer
peripherals/accessories @ 15% instead of rate of 60%
amounting to Rs.10,80,230/-.
4. The Ld. CIT(A) has erred on facts and in law in
deleting the disallowance of Rs.30,99,289/- by
applying provisions of Section 14A of the I.T. Act,
1961."
3. Briefly stated the facts giving rise to this appeal are that the assessee
company is engaged in the business of computer Software Development and
Trading of Bought Out Products. The assessee company filed its return of
income on 31.10.2007 declaring an income of Rs.19,03,01,880/- and the case
was selected for scrutiny. During the course of assessment proceedings the AO
made disallowances and additions on account of disallowance u/s 14A of the
Act, provisions for warranty expenses, software services charges, gratuity u/s
40A(7) of the Act and depreciation on computer peripherals and finalize the
assessment at Rs.31,90,62,670/- as against the returned income of
Rs.19,03,01,880/-.
I.T.A .No.-2846/Del/2012 3
4. Being aggrieved by the above assessment order the assessee preferred an
appeal before ld. CIT(A) which was allowed on all the counts deleting the
disallowance and additions made by the AO.
5. Now, the aggrieved Revenue is before this Tribunal with the main four
grounds as reproduced hereinabove.
Ground No.1
6. Apropos ground no. 1 the ld. DR submitted that the ld. CIT(A) has erred
on facts and in law in deleting the disallowance of provision for warranty
expenses amounting to Rs.4,00,978/- on the ground that the same is
unascertained liability. The ld. DR prayed that the impugned order may be set
aside and restoring by the AO on this issue.
7. Replying to the above, the ld. AR supporting the impugned order,
submitted that during earlier assessment order viz., 2005-06 and 2006-07 the
warranty expenses claimed by the assessee has been allowed by the Department
in the assessment order passed u/s 143(3) of the Act Income Tax Act, 1961 ( for
short `the Act'). The ld. AR further submitted a copy of the decision of ITAT
Delhi `B' Bench dated 30.04.2013 In ITA No.2804/Del/2012 for subsequent
assessment year 2008-09 in assessee's own case and contended that the issue is
squarely covered in favour of the assessee by the decision of the Tribunal in
assessee's own case.
I.T.A .No.-2846/Del/2012 4
8. On careful consideration of above submissions from the order of the
Tribunal for AY 2008-09 dated 30.4.2013 (Supra) we note that the similar claim
of the assessee allowed by the ld. CIT(A), has been upheld by the Tribunal with
following observations and findings:
"7. The ground no.2 is against the deletion of addition made
by Assessing Officer of Rs.23,25,339/- on account of
provision for warranty expenses. 8. Ld. DR relied on the
order of the Assessing Officer and also submitted that the
provision has been made for unascertained liability. The
assessee was failed to prove the actual incurrence of
liability under the warranty clauses on 6 ITA
No.2804/Del./2012 the basis of fixing the percentage of the
turnover. In absence of such deductions, the claim of the
assessee on the basis of percentage of the turnover should
not have been allowed. He also relied on the order of
Hon'ble Madras High Court in the case of CIT vs. Totork
Controls India Limited 293 ITR 311. 9. On the other hand,
the ld. AR relied on the order of the CIT (A) and pleaded
that the company is doing the business of computer software
development and trading of bought out product. The
company develops software for the customer according to
their specifications. Such softwares need to have a
performance guarantee. In view of these facts, there was a
warranty clause in the commercial transactions as the
software supplied to the customers might have bugs/issues,
thus, the sale of the software and warranty are inextricably
bound by each other. In view of these facts, once the sale
I.T.A .No.-2846/Del/2012 5
has been recorded. Then the liability in respect of the
warranty has also to be considered as cost against the sales.
Such cost for warranty is not contingent liability. The
quantification of the warranty has been made on technical
estimates based on past experience and the warranty
clauses s contained in the agreements of sales with the
customer. Ld. AR further submitted that warranty clauses
imposed a liability on the company to discharge its
obligation under the clauses of the agreement for the period
of warranty. Thus, the liability is capable of being construed
in definite terms and has 7 ITA No.2804/Del./2012 arisen
on the sales effected in the accounting year. Since the
assessee is maintaining books of accounts on the mercantile
system basis, this liability has been accrued though it shall
be discharged at a future date. Therefore, such claim has to
be considered while working out the profit and gain of the
business for the year under consideration. He relied on the
decision of CIT (A). 10. We have heard both the sides on the
issue. The assessee company is doing the business of
computer software and trading of bought out products. The
company also produces softwares to its customers as per
their specifications. Thus, the assessee has to provide
performance guarantee and for the same, the clauses for
warranty is provided. Thus, the sales and warranty were
inextricably related to each other. The working of the
warranty is based on technical estimates and past
experience. The assessee company is maintaining the
accounts on the mercantile system. The liability for
warranty expenses is a committed liability at the very initial
I.T.A .No.-2846/Del/2012 6
stage of the sales. The amount of provision based on past
experience exhibits a direct nexus between the claim for
provision and obligation arising under the warranty clause.
In view of this, it can be said that it is a liability which has
arisen in the relevant year though its actual quantification
and discharge is deferred to a future date. The facts on the
record also do not show that such provision has been made
for evading the tax. In view of these facts, we find 8 ITA
No.2804/Del./2012 no fault in the order of CIT (A) and we
sustain the same on this issue. This ground of revenue is
dismissed."
9. In view of above, we are unable to see any valid reason to interfere with
the conclusion of the ld. CIT(A) for AY 2007-08 when the same claim of
expenditure has been allowed by the AO in the preceding assessment year 2005-
06 and 2006-07 in the order passed u/s 143(3) of the Act. We also note that the
same claim of the assessee in AY 2008-09 was also allowed by the ld. CIT(A)
VI vide his order dated 15.3.2012 which has been upheld by the ITAT Delhi
"B" Bench by the order dated 30.4.2013 (Supra). Hence, we hold that the issue
is squarely covered in favour of the assessee by earlier and subsequent orders,
therefore, same claim of warranty expenses was rightly allowed by the ld.
CIT(A) for the year under consideration. We are unable to see any infirmity or
any other valid reason to interfere with the same. Accordingly, ground no. 1 of
the Revenue, being devoid of merit, is dismissed.
Ground No.2
I.T.A .No.-2846/Del/2012 7
10. Apropos ground no. 2 the ld. DR submitted that the ld. CIT(A) has erred
on facts and in law in deleting the disallowances of Software Services Charges
amounting to Rs.12,38,26,881/- as no details or explanation were provided by
the assessee to the AO during the assessment proceedings. The ld. DR further
contended that the AO was quite justified in disallowing the 50% of Software
Services Charges claimed by the assessee because the assessee could not
discharged its onus of substantiating the claim. The ld. DR also pointed out that
during the immediate preceding year the assessee has also not furnished similar
details which led out to the addition on this count. The ld. DR submitted that the
impugned order may be set aside by restoring that of the AO on this issue.
11. Replying to the above, the ld. AR supporting the impugned order
submitted that there was no basis for the AO for ad hoc disallowance of 50% of
Software Services Charges as there is no concept of ad hoc disallowances in this
regard. The ld. AR further drawn our attention towards this fact that during AY
2005-06 the AO made similar disallowance which was allowed by the ld.
CIT(A) dismissing the action of the AO, vide order dated 30.9.2009 which is
available on paper book page nos. 22 to 30. The ld. AR further contended that
as per information gathered by the assessee the Department has not gone in
appeal to the ITAT against the said order of the ld. CIT(A) which granted relief
for the assessee for AY 2005-06.
I.T.A .No.-2846/Del/2012 8
12. On careful consideration of above submissions and vigilant perusal of the
impugned order as well as order of the CIT(A) dated 30.9.2009 for AY 2005-
06, we note that the ld. CIT(A) granted relief to the assessee for the assessment
year under consideration with following observations and conclusion:
"5.4 I have carefully considered the submissions made
by the Ld. AR and gone through the assessment order. The
disallowance was made by the AO on the account of
software service charges mainly because the appellant
company failed to furnish the details in this regard. It is
seen that the AO requested the appellant company to furnish
the details regarding the software service charges on
18.11.2009. In response, the details were submitted by the
appellant company on 9.12.2009 and as per the appellant
company the AO did not raise any further query regarding
the software service charges. During the course of appellate
proceedings the ld. AR furnished the copy of ledger account
alongwith the bills and vouchers regarding the software
service charges which were forwarded to the AO for
verification vide this office letter dt. 29.10.2010. The AO in
his remand report dt. 2.2.2011 reiterated that the documents
were never produced before him during the course of
assessment proceedings. However, he did not prefer to give
his comments regarding the genuineness of these
documents. The AO has not did not dispute that the ledger
account of the software service charged were not produced
before him. His only objection was regarding the non
production of bills and vouchers. Since these are the
I.T.A .No.-2846/Del/2012 9
important documents for deciding the issue in question, the
same are being admitted under rule 46A of the IT Rules and
examined in detail. It is seen that the appellant company has
paid to the software service charges in the form of royalty
amounting to Rs.24,72,91,063/- to a Korean Company
namely "Wider Then" on account of Bharti Air Tel Mobility
(ring back tone agreement) through banking channels and
after the payments were made after deducting tax on source
(TDS) on it. Further, an amount of Rs.3,62,669/- has been
paid by the appellant company on account of revenue
sharing professional charges through the banking channels.
In view of these evidences, it cannot be said that the
expenses were not incurred genuinely by the appellant
company. Therefore, in my opinion there is no basis for
disallowing 50% of the expenditure on account of software
service charges as claimed by the appellant company in its
profit and loss account Therefore, the AO is directed to
delete the addition on account."
13. The only objection of the AO was that the assessee did not produce bills
and vouchers related to the claimed expenditure of Software Services Charges.
During the first appellate proceedings the ld. CIT(A) admitted the relevant
document on the issue under rule 46A of the IT Rules 1962 and the AO also
submitted remand report dated 2.2.2011 to the CIT(A). In the remand report the
AO reiterated this contention that the assessee did not produce relevant
documents before him during the course of assessment proceedings.
I.T.A .No.-2846/Del/2012 10
14. The ld. DR has not disputed this fact that the assessee company has paid
the Software Services charges in the form of royalty amounting to Rs.
24,72,91,063/- to a Korean Company on account of Bharti Airtel Mobility
through banking channels and the payments were made after due deduction of
tax at source (TDS) thereon.
15. In view of aforesaid factual matrix of the case as noted by the ld. CIT(A)
and not disputed by the AO, we are in agreement with the conclusion of the ld.
CIT(A) that it cannot be presumed that the expenses were not incurred by the
assessee company in absence of any adverse material or evidence. At the same
time, we are of the considered opinion that there was no good cause for the AO
for making 50% ad hoc disallowance of the Software Services Charges claimed
by the assessee as if, the AO was of the opinion that payment were not genuine
that the entire expenses should have been disallowed. We are unable to see any
valid reason or ground for making 50% disallowance by the AO. We cannot
ignore that the ld. CIT(A) for AY 2005-06 has also allowed similar claim of the
assessee and on specific query from the Bench the ld. DR was unable to guide
us whether the Department further agitated the issue before the Tribunal and
hence, we may safely presumed that the order of the ld. CIT(A) for AY 2005-06
has been accepted by the Department. On the rule of consistency it is a well
accepted proposition that although the principle of res judicata does not apply
to the taxation matter but the rule of consistency has to be followed by the
Revenue Authorities and flip flop approach on the similar issue is not
I.T.A .No.-2846/Del/2012 11
permissible unless and until any substantial change in the facts and
circumstances of the case is brought out. Thus, we hold that in the present case
the CIT(A) was right in deleting the ad hoc addition which was made by the AO
without any basis. Hence, we unable to see any ambiguity or perversity or any
other valid reason to interfere with the same and therefore, ground no. 2 of the
Revenue is also dismissed.
Ground No. 3
16. At the outset the ld. DR fairly accepted that the issue is squarely covered
in favour of the assessee by the decision of Hon'ble jurisdictional High Court of
Delhi in the case of CIT vs. BSES Rajdhani Powers Ltd. dated 31.08.2010 in
ITA No.1266/2010 therefore, we are of the considered view that the ld. CIT(A)
has rightly granted relief for the assessee on this issue and we upheld the same.
Accordingly, ground no. 3 of the Revenue is also dismissed.
Ground No.4
17. The ld. DR submitted that the ld. CIT(A) has erred on facts and in law in
deleting the disallowance by applying provisions of section 14A of the Act.
On this issue the ld. AR drawn our attention towards order of the ITAT Delhi
"B" Bench in assessee's own case for AY 2008-09 (Supra) and submitted that
the issue may be set aside to the file of AO for fresh adjudication in the same
line which was done for AY 2008-09.
I.T.A .No.-2846/Del/2012 12
18. The ld. DR submitted that the Department has no serious objection if the
matter is restored back to the file of the AO for fresh adjudication in the light of
decision of the Tribunal dated 30.4.2013 for AY 2008-09 (Supra).
19. On careful consideration of above submissions, we note that the ITAT
has restored the issue to the file of the AO with following observations and
conclusion:
"6. We have heard both the sides on this issue. Hon'ble Delhi
High Court in the case of Maxopp Investment Ltd. vs. CIT
[2011] 203 Taxmann 364 (Delhi) in paras 41 & 42 has held as
under :- "41. Sub-section (2) of section 14A, as we have seen,
stipulates that the Assessing Officer shall determine the amount
of expenditure incurred in relation to income which does not
form part of the total income "in accordance with such method
as may be prescribed". Of course, this determination can only be
undertaken if the Assessing Officer is not satisfied with the 4 ITA
No.2804/Del./2012 correctness of the claim of the assessee in
respect of such expenditure. This part of section 14A(2) which
explicitly requires the fulfillment of a condition precedent is also
implicit in section 14A(1) [as it now stands] as also in its initial
avatar as section 14A. It is only the prescription with regard to
the method of determining such expenditure which is new and
which will operate prospectively. In other words, section 14A,
even prior to the introduction of sub-sections (2) & (3) would
require the assessing officer to first reject the claim of the
assessee with regard to the extent of such expenditure and such
rejection must be for disclosed cogent reasons. It is then that the
I.T.A .No.-2846/Del/2012 13
question of determination of such expenditure by the assessing
officer would arise. The requirement of adopting a specific
method of determining such expenditure has been introduced by
virtue of sub-section (2) of section 14A. Prior to that, the
assessing was free to adopt any reasonable and acceptable
method. 42. Thus, the fact that we have held that sub-sections (2)
& (3) of section 14A and Rule 8D would operate prospectively
(and, not retrospectively) does not mean that the assessing
officer is not to satisfy himself with the correctness of the claim
of the assessee with regard to such expenditure. If he is satisfied
that the assessee has correctly reflected the amount of such
expenditure, he has to do nothing further. On the other hand, if
he is satisfied on an objective analysis and for cogent reasons
that the amount of such expenditure as claimed by the assessee is
not correct, he is required to determine the amount of such
expenditure on the basis of a reasonable and acceptable method
of apportionment. It would be appropriate to recall the words of
the Supreme Court in Walfort (supra) to the following effect:-
"The theory of apportionment of expenditure between taxable
and non-taxable has, in principle, been now widened under
section 14A." So, even for the pre-Rule8D period, whenever the
issue of section 14A arises before an Assessing Officer, he has,
first of all, to ascertain the correctness of the claim of the
assessee in respect of the expenditure incurred in relation to
income which does not form part of the total income under the
said Act. Even where the assessee claims that no expenditure has
been incurred in relation to income which does not form part of
total income, 5 ITA No.2804/Del./2012 the assessing officer will
have to verify the correctness of such claim. In case, the
I.T.A .No.-2846/Del/2012 14
assessing officer is satisfied with the claim of the assessee with
regard to the expenditure or no expenditure, as the case may be,
the assessing officer is to accept the claim of the assessee insofar
as the quantum of disallowance under section 14A is concerned.
In such eventuality, the assessing officer cannot embark upon a
determination of the amount of expenditure for the purposes of
section 14A(1). In case, the assessing officer is not, on the basis
of objective criteria and after giving the assessee a reasonable
opportunity, satisfied with the correctness of the claim of the
assessee, he shall have to reject the claim and state the reasons
for doing so. Having done so, the assessing officer will have to
determine the amount of expenditure incurred in relation to
income which does not form part of the total income under the
said Act. He is required to do so on the basis of a reasonable and
acceptable method of apportionment." Here, on the one hand,
assessee claims that no expenditure was incurred for earning
dividend income and on the other hand, disallows suo moto Rs.1
lac towards earning such income. The Assessing Officer has to
reject the claim of assessee and apportion the expenditure on
reasonable and acceptable method. In our considered view, this
issue required to be restored to the file of the Assessing Officer to
decide afresh. We order accordingly. In the result, this ground of
revenue's appeal is allowed for statistical purposes.
20. In view of above, we observe that the Tribunal has restored the issue to
the file AO by following the decision of Hon'ble High Court of Delhi in the
case of Maxopp Investment Ltd. (Supra), wherein their lordship has held that
even if for the pre rule 8D period the procedure for making disallowance u/s
I.T.A .No.-2846/Del/2012 15
14A of the Act has been given. Respectfully following the decision of Hon'ble
High Court (Supra) and the Tribunal for AY 2008-09 (Supra), we hold that the
similar issue in the similar set of facts and circumstances of the present case
also deserve to be restored to the file of AO for fresh adjudication by following
the decision of Hon'ble High Court of Delhi in the case of Maxopp Investment
Ltd. vs. CIT (Supra) in the similar line which has been ordered by the Tribunal
order for AY 2008-09 (Supra). Accordingly, ground no. 4 of the Revenue is
deemed to be allowed for statistical purposes in the manner as indicated above.
21. In the result, appeal of the Revenue on ground nos. 1, 2 & 3 is disallowed
and appeal of the Revenue on ground no. 4 is deemed to be partly allowed for
statistical purposes.
Order pronounced in the open Court on 23/03/2015.
Sd/- Sd/-
(J. S. REDDY) (C. M. GARG)
ACCOUNTANT MEMBER JUDICIAL MEMBER
Dated: 23/02/2015
*AK VERMA*
Copy forwarded to:
1. Appellant
2. Respondent
3. CIT
4. CIT(Appeals)
5. DR: ITAT
ASSISTANT REGISTRAR
|
