Ita/902/2008 Of The Commissioner Of Income Tax v. M/S Wipro Ge Medical Systems Ltd

IN THE HIGH COURT OF KARNATAKA AT BENGALURU. DATEHBD THIS THE 1[TH|]DAY OF JANUARY 2016 PRESENT THE HON’BLE MR.JUSTICE N K PATIL AND THE HON’BLE MRS.JUSTICE S SUJATHA ITA No.902/2008 BETWEEN: 1.|Commissioner of Income-taxCentral Circle C R Building, Queens RoadBangalore|Bangalore| 2 |The Deputy Commissioner of Income-TaxCentral Circle-1(3)C R Building, Queens RoadBangalore...Appellants (By Sri. K.V.Aravind, Advocate ) AND M/s. Wipro GE Medical System Ltd.,Plot No.4, Kadugodi PlantationIndustrial AreavadaramangalaBangalore-560067. | .... Responde (By Smt. 8.R. Anuradha, Advocates )_ This Income-tax appeal is filed under Section 260-A ofIncome-tax Act, 1961, praying to set aside the order passed by theITAT, Bangalore in ITA No.810/Bang/2007, dated 16.05.2008|confirming the order of the Appellate Commissioner and confirm| the order passed by the Deputy Commissioner of Income-tax,Central Circle-1(3), Bangalore, in the interest of justice and equity. This appeal having been heard and reserved for orders on12 January 2016, coming on for pronouncement of Judgment|this day,SSujatha J.,delivered the following| JUDGMENT 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|2QQ0O2?-03. 2. FKacts in briet are: The respondent/assessee is a private limited company engaged in the business of manutacturing 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- O3 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.| (11) provision for warranty of Rs.52,84,504/- — (111) exchange gain fluctuation (iv) Sale Proceeds not realized within time (v) Allocation of Royalty payment| (vi) Reallocation of trading expenses-EHTP-I( Electronic hard wareTechnology Part-1) (vii) Exclusion from export turnover of expenditure incurred inforeign currency in providing technical services (vii) Allowability of deduction u/s.10A for STPs located at GoldenBKnclave (ix) Adjustment of Prior Period exenses 3.|The Assessing Officer proceeded to examine each of theclaim 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 Commissionerallowed the appeal granting relief in favour of the assessee. Beingagerieved 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 owncase relating to the earlier assessment years and granted relief infavour of the assessee, rejecting the appeal filed by the revenue.against which, the revenue is in appeal under Section 260A of the.Income Tax Act, 1961 (the “Act” for short) raising the followingsubstantial questions of law: ].Whether the Appellate Authorities were correct inholding that the provision in respect of a percentage ofsale to account for various expenses transferred to aseparate account is an allowable expenditure eventhough the same is a contingent liability which has notaccrued? 2.Whether the Appellate Authorities were correct inholding that a provision for reserves for warranty 1san allowable expenditure even though it is acontingent liability? ionWhether the Appellate Authorities were correct inholding that the gain in exchange rate te. due tofluctuation cannot be excluded when computingdeduction u/s.10A of the Act even though this amounthad not been directly arisen in the course of export? ].Whether the Appellate Authorities were correct inholding that the provision in respect of a percentage ofsale to account for various expenses transferred to aseparate account is an allowable expenditure eventhough the same is a contingent liability which has notaccrued? 2.Whether the Appellate Authorities were correct inholding that a provision for reserves for warranty 1san allowable expenditure even though it is acontingent liability? ionWhether the Appellate Authorities were correct inholding that the gain in exchange rate te. due tofluctuation cannot be excluded when computingdeduction u/s.10A of the Act even though this amounthad not been directly arisen in the course of export? 4.“Whether the Appellate Authorities were correct inholding that the sale proceeds not realized within thetume of 6 months granted by the Reserve Bank of Indiawithout their being any extension cannot be excludedfrom the total turnover when computation deductionu/s.10A of the Act?. 5.Whether the Appellate Authorities were correct inholding that allocation of expenditure towards royaltyfor use of trade mark and logo to Wipro Ltd., andMonogram Licencing International Incorporated at90:50% by the assessee should be upheld and not as worked out by the Assessing Officer based on localsales? 6. Whether the Appellate Authorities were correct inholding that allocation of expenditure as worked outby the assessee on account of consumables, salaryetc., on the basis of sales based on percentage shouldbe accepted without taking into account the fact that31.2% of sales were made through franchisers whichdid not require the sale percentage of expenditure asworked out by the Assessing Officer? 7.|Whether the Appellate Authorities were correct inholding that the computation of export turnover asworked out by the Assessing Officer in accordancewith Explanation 2 to Section 1OA of the Act byexcluding expenditure incurred in foreign currency inproviding travel, salary, rent, M and B charges,Ditalcom and others is not correct? 5.Whether the Appellate Authorities were correct inholding that the finding of the Assessing Officer thatthe deduction claimed u/s.10A of the Act in respect ofits unit at Golden Enclave which has commencedbusiness prior to 01.04.1993 in respect of one floorand after 01.04.1993 in respect of two floors whichwas shifted to Hoody Village, would amount toreconstruction of business and the assessee would not be entitled to claim 10A deduction was held to be notcorrect?| 9 |Whether the Appellate Authorities were correct inholding that the adjustment entries for prior periodexpenses of Rs.25,57,54,378/- Should be alloweddespite the assessee not substantiating the claim byadducing the any proff?. Re. question No.1: 4. Sri K V Aravind, learned counsel appearing for the revenueplacing reliance on the Judgment of the Apex Court in the case of Rotork Controls India (P) Ltd. vs Commissioner of Income Tax reported in((2Z009) 314 ITR 62| wherein, the assessee herein wasalso 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 theprovision are: (a) an enterprise should have a present obligation as a result ofpast event (b) it is probable that an outtilow of resources will be required tosettle the obligation Re. question No.1: 4. Sri K V Aravind, learned counsel appearing for the revenueplacing reliance on the Judgment of the Apex Court in the case of Rotork Controls India (P) Ltd. vs Commissioner of Income Tax reported in((2Z009) 314 ITR 62| wherein, the assessee herein wasalso 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 theprovision are: (a) an enterprise should have a present obligation as a result ofpast event (b) it is probable that an outtilow of resources will be required tosettle the obligation (c) a reliable estimate can be made out of the amount of obligationHe would contend that only if these three tests laid down by theApex Court are satisfied by the assessee, provision made relating to.the percentage of sale to account for various expenses transferredto a separate account, whether is an allowable expenditure or not,would be ascertained though the same is a contingent lability|which has not accrued. None of the authorities below have|examined this issue in the light of the Judgment pronounced bythe Apex Court inRotork Controls Case(supra).No finding isforth coming from the records that the assessee has satisfied the|three conditions laid down by the Apex Court to claim the benefit ofa 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 laiddown by the Apex Court inRotork Controls Case(Supra). . On the other hand Smt.Anuradha, learned counselappearing for the assessee would contend that all these aspects|were considered by the authorities below and it 1s categorically heldby 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 theassessment year 1998-99 wherein similar provision was made as_per standard of accounting. Tribunal has allowed similar issue ofprovision in favour of the assessee and no remand is made. — 6. We have considered the submissions oft the learnedcounsel 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 ofRotork Controls Case(Supra) The ITAT having observed that the|only reason why the Assessing Officer has disallowed the claim ofthe assessee is on account that the provision is contingent lability,cannot be allowed, expenditure can be allowed only on payment.basis. The ITAT having considered the adequate material placedbefore it, thought it fit not to remit the matter to the Assessing.Officer. It is also noticed that the method of accounting followed bythe assessee is mercantile wherein the income and expenditure is.on accrual basis. We have examined this issue in the light of theJudgment pronounced by the Apex Court inRotork Controls Case(supra,) wherein the three tests are laid down to recognize a| provision under the Act. The ITAT being a last fact findingauthority has held that all these ingredients which goes to therecognition 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 revenueto remand the matter back to the Assessing Officer. The claim ofexpenditure being consistent with the method of accountingfollowed and the provision has been made on _ concludetransactions, the order of the Assessing Officer is held to be.incorrect. We do not see any reason to dilfer from this view, which18 in accordance with Section 145 of the Act. Re. Question No.2 provision under the Act. The ITAT being a last fact findingauthority has held that all these ingredients which goes to therecognition 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 revenueto remand the matter back to the Assessing Officer. The claim ofexpenditure being consistent with the method of accountingfollowed and the provision has been made on _ concludetransactions, the order of the Assessing Officer is held to be.incorrect. We do not see any reason to dilfer from this view, which18 in accordance with Section 145 of the Act. Re. Question No.2 7. The learned counsel Mr. K V Aravind appearing for therevenue reiterated the grounds urged before the ITAT and sought|for remanding the matter back to the Assessing Officer to examinethe issue in the light of the Judgment of the Apex Court inRotork Controls Case(SupraJe 8. Learned counsel Smt. Anuradha appearing for theassessee would contend that this issue is covered in favour of the|assessee 1n assesse’s own case by the order of this Court in ITA. 438-444/12, atlirmed by the Hon’ble Supreme Court inRotork Controls Case(Supra), in none of these cases remand is made. 9. Aiter considering the rival submissions of the learnedcounsel for the parties on this issue, we are of the view that this|issue is similar to that of Question no.l. In view of theobservations made in Question No.1, we are not inclined to remitthe 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 299 and 278 ITR 337 confirmed by the Apex|Court 1nRotork Controls Case(Suprajo Re. Question No.3 10. Both the learned counsel appearing for the parties agreethat 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 ITANo.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 thisissue is directly covered by the Judgment of this Court in ITA|No.8/79/2008 disposed of on 25.03.2015. 13. Following the said Judgment rendered by the Co-ordinateBench of this Court in ITA No.8/79/2008 disposed of on29.03.2015, we answer this question in favour of the assessee and)against the revenue. Re. Question No.5 14. Learned counsel appearing for the revenue wouldcontend that the ITAT negated the arguments of the revenue sincesimilar 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. ls. Learned counsel appearing for the assessee has noobjections to the same. 16. Accordingly, we remand this issue to the AssessingOfficer 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 toremand 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. ls. Learned counsel appearing for the assessee has noobjections to the same. 16. Accordingly, we remand this issue to the AssessingOfficer 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 toremand 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 ofexpenses made by the Assessing Officer based on the order of ITAT.in the very same assessee’s case reported in|81 TTJ 455and thedecision of the Apex Court inIndo Nipan Limited‘s case (261 ITR|7/o). It is noticed that over 5.6% of the sales is made through franchises, however, the assessee adopted sales as basis forallocation. The sale made through the franchises stands on adifferent footing than the sale made directly by the assesseecompany. In the case of sale made through franchise, no effort is.involved by the assessee except getting commission whereas thedirect sales made by the assessee requires much more efiorts andobviously the expenditure of the nature of consumables, salary andbenefits etc., are incurred. It is also significant to observe that theAssessing Officer has not disturbed the method adopted by theassessee for the purpose of allocation of expenses in the tradingturnover. What the Assessing Officer has done is removing thevalue of Franchise sales from the total sales as the Franchise salesare 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 newmethod of estimation based on the Proportionate turnover contraryto the method of accounting regularly followed by the assessee andaccepted by the department in earlier years. This view is confirmedby the ITAT placing reliance on the Judgment of the Apex Court inIndo Nippan’s case (supra). The Apex Court in Indo Nippan’s case_ has held that whatever method the Assessing Officer adopts, themethod has to be consistent with the accepted principles ofaccountancy. 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 franchisesales is based on the reasoning that franchise sales differs from thedirect sales. such being the case, this method adopted by the.Assessing Officer is no way contrary to the Judgment of the ApexCourt in Indo Nippan’s case (supra). In the circumstances, we areof 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 ofthe aforesaid reasons, we are of the opinion that the finding givenby the CIT confirmed by the ITAT on this issue is not sustainableand 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,alter providing an opportunity of hearing to the assessee. Allcontentions are left open to the parties. Re. Question No.7 19. Both the parties agree that the issue involved in thisquestion is squarely covered by the Judgment of this Court in the|case ot.Tata Elexsi Ltd.S case (349 ITR IS). In view of the same,this question is answered against the revenue and in favour of theaSSECSSFEC Re. Question No.8 Re. Question No.7 19. Both the parties agree that the issue involved in thisquestion is squarely covered by the Judgment of this Court in the|case ot.Tata Elexsi Ltd.S case (349 ITR IS). In view of the same,this question is answered against the revenue and in favour of theaSSECSSFEC Re. Question No.8 20. The issue involved herein is covered against the revenuein 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 andagainst the revenue. Re. Question No.9 21. The Assessing Officer proceeded to disallow the lossclaimed 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 haveproduced the certificate from auditors in this regard. The assessee_having furnished the audit certificate before the CIT, it is observedby the CIT that the assessee’s production of audit reportestablishes the credentials and accordingly, accepted the error inthe books of accounts which has crept in, as a result of genuinemistake 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 therevenue would submit that no reconciliation is made by the CIT. Itcannot be accepted that a genuine error has occurred inaccounting entry and the same is corrected by the adjustments—made in the book entry by the assessee which has been confirmedby the ITAT. Accordingly, he seeks to remand the matter to theAssessing Officer to examine the correctness of the auditor’s reportfurnished by the assessee before the CIT. 23. We do not see any flaw in the order passed by the ITATfor the reason that the Assessing Officer himself while deciding theissue 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 forprior period expenses. In such view of the matter, the assessee has_cured the defects pointed out by the Assessing Officer, by filing thenecessary auditor’s report before the CIT which was properlyconsidered and held that it was a genuine error in the book entryand the same is confirmed by the ITAT which in our opinion is—justifiable. We are not inclined to interfere with the factual findingsgiven by the authorities regarding the genuiness of the adjustmentsin the book entry. It is settled law that the no income can arise bymere book entries (vide Kedarnath Jute Manufacturing Co. Ltd. vs_CIT (Central), Calcutta reported in 1982 ITR 363). It is also noticedby us that error occurred in the book entries for the assessment.years 2002-03 and 2003-04, revenue has not raised this question1nappealforthe assessment|VYCar2003-04.Insuchcircumstances, revenue challenging this issue only in this appealrelating 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/- JU DGE Sd/- JU DGE Brn