M+W Singapore Pte.Limited,, Hyderabad vs Assessee

M+W Singapore PTE Ltd., vs. Dy. Director of Income-tax - I, Hyderabad. International Taxation, Hyderabad PAN - AACCM4012H (Appellant) (Respondent)

Assessee by : Shri S. Rama Rao Revenue by : Shri C.R. Pati/D. Sudhakar Rao

Date of hearing 12-06-2015 Date of pronouncement 30-06-2015

O RDE R

PER SAKTIJIT DEY, J.M.:

This appeal by assessee is directed against the final assessment order passed u/s 143(3) read with section 254 read with section 147 read with section 144C of the Income-tax Act, 1961, for the AY 2006-07.

2. Assessee has raised five grounds before us. Ground Nos. 1 & 5 being general in nature, do not require any specific adjudication. As far as ground Nos. 2, 3 &4 are concerned, only common issue arising from these grounds relate to addition of an amount of Rs. 4,03,29,682 being the provision made towards purchases.

3. Briefly the facts relating to the issue in dispute are, assessee is a branch office of a company incorporated in Singapore. Assessee is basically engaged in the business of execution of work contract in installation of clean room and air conditioning systems. For the AY 2 ITA No. 30 /Hyd/2015 M + W Singapore PTE Ltd.

under consideration, assessee filed its return of income on 30/11/2006 declaring a loss of Rs. 1,03,69,300. Assessment in case of assessee was completed u/s 143(3) vide order dated 26/12/2008 determining the total loss at Rs. 95,21,820 after making certain disallowances. Subsequent to the completion of assessment, it was noticed by AO that assessee has debited an amount of Rs. 4,03,29,682 as provision for purchases in the P&L A/c. AO being of the view that provision of expenditure is not allowable, reopened the assessment u/s 147 of the Act and ultimately passed a draft assessment order disallowing the expenditure of Rs. 4,03,29,682 towards provision for purchases as debited to the P&L A/c. Of course, AO also made another disallowance with which we are not concerned in the present appeal. Being aggrieved of the draft assessment order assessee filed objections before the Dispute Resolution Panel (DRP). Since DRP upheld the disallowance of Rs. 4,03,29,682, AO passed final assessment order accordingly.

4. Against the said final assessment order, assessee preferred appeal before the ITAT. The ITAT vide order dated 03/08/2012 passed in ITA No. 2095/Hyd/2011 remitted the matter back to the file of AO with the following observations:

"9. We have heard both the parties and perused material on record. The primary contention of the assessee is that it is following PCM and it was not possible to book the revenue as well as expenses. Certain level of excess work is required where certain mismatch of revenue will be there. Being so sometimes huge expenses are required to be incurred for completion of the project Then to be in line with the concept of matching expenses and revenue in order to recognise the relevant revenue, the assessee made provisions in the books of account towards future expenses and will be reversed in the immediate next assessment year. This practice has been followed by the assessee year to year and there is no loss of revenue to the Department. Considering the above practice of the assessee-company, we are inclined to set aside the orders of the lower authorities and remand the matter back to the file of the Assessing Officer with a direction to verify whether the assessee is following this accounting method consistently or whether it is a reversal of provisions made for purchases in the very next assessment year and if it is so, the claim of the assessee has to be allowed. Accordingly, this issue is 3 ITA No. 30 /Hyd/2015 M + W Singapore PTE Ltd.

remitted back to the file of the Assessing Officer for fresh consideration after providing reasonable opportunity of hearing to the assessee."

5. In compliance to the direction of the ITAT, AO again initiated assessment proceeding by calling upon assessee to substantiate its claim that it is following same accounting policy/method in all the assessment years and also the fact that the provision for purchases were reversed in the immediately next AY. As observed by AO in the draft assessment order, assessee failed to substantiate its claim that it is following the same accounting method as followed in the instant AY consistently for all the preceding AYs. further, he also failed to demonstrate that provision made for purchases were reversed in the immediately next AY. Accordingly, AO passed draft assessment order disallowing the amount of Rs. 4,03,29,682. Assessee objected to the disallowance made by AO before the DRP. DRP after considering the submissions of assessee vis-à-vis facts and materials on record observed that assessee failed to bring any material on record to establish the fact that it is following similar accounting method consistently over the years and as well as it has reversed the provision made for purchases in the immediately next AY. Accordingly, ld. DRP sustained the disallowance made by AO. In pursuance to the order passed by ld. DRP, AO passed the impugned assessment order making addition of Rs. 4,03,29,682.

6. Ld. AR more or less reiterating the submissions made before the departmental authorities submitted, assessee has been following the same accounting method over the years in booking the provision towards purchases and has reversed the provision made towards purchases in the AY wherein actually the expenditure was actually incurred. In this context, he drew our attention to a working of the provision of purchases made, a copy of which is at page 185 of the assessee's paper book. Ld. AR submitted, since the Tribunal has directed for allowance of the provision made, AO was not justified in disallowing the same.

4 ITA No. 30 /Hyd/2015 M + W Singapore PTE Ltd.

7. Ld. DR, on the other hand, strongly relying upon the disallowance made by AO and DRP submitted before us, neither before AO nor before DRP, assessee, was able to establish the fact that it was consistently following the same method of accounting relating to the provision made of purchases and also the fact that the provision made was reversed in the immediately next AY. He submitted, even after availing ample opportunity, as assessee could not establish/substantiate its claim before the departmental authorities, the disallowance made is justified.

8. We have considered the rival submissions and perused the orders of the departmental authorities as well as other materials on record. As could be seen, it is the second visit of assessee to the Tribunal. In the earlier round of litigation before this Tribunal when this particular issue came up for consideration, a specific plea was taken by assessee that it is following percentage completion method for recognizing revenue as well as expenditure. Hence, following the matching principle, assessee made provision in the books of account towards future expenses which according to assessee will be reversed in the succeeding AY. Considering the aforesaid submissions of assessee, Tribunal remitted the matter back to AO with a direction to allow assessee's claim after verifying firstly whether assessee is following the accounting method consistently and secondly whether it has reversed the provision made for purchases in the immediately next AY. In course of hearing, when the bench called upon ld. AR to demonstrate as to whether provision created for purchases in the impugned AY has been reversed in the succeeding AY, Ld. AR submitted, in the immediately next FY 2006-07, assessee has reversed an amount of Rs.1,43,70,885 through journal entries made on 25/08/2006. In this context, he drew our attention to ledger copy of outstanding provisions for purchases for FY 2006-07. It was further submitted, necessary entries were also made in the purchases account debiting the said amount against purchases actually made 5 ITA No. 30 /Hyd/2015 M + W Singapore PTE Ltd.

during the year. In support of such claim, assessee referred to the ledger copy of the purchases made from 01/04/2006 to 31/03/2007. Ld. AR submitted, the closing balance of the provisions made for purchases amounting to Rs. 2,59,58,797 as on 31/03/2007 was reversed in the FY 2007-08 by debiting the purchase account. In this context, he referred to the ledger copy of outstanding provisions for purchase account for period of 01/04/07 to 31/03/08, a copy of which is at page 301 of assessee's paper book. Thus, from the aforesaid facts, as it appears, assessee has reversed the provisions made for purchases of Rs. 4,03,29,682 made in the impugned AY in two succeeding AYs i.e. Rs. 1,43,70,885 in AY 2007-08 and Rs. 2,59,58,797 in AY 2008-09. At this juncture, it needs to be mentioned, though, assessee has submitted ledger copy of purchases made for AY 2007-08 showing reversal of provisions made to the extent of Rs. 1,43,70,885, but, no such evidence in respect of reversal of provisions made for an amount of Rs. 2,59,58,797 for AY 2008-09 has been produced before us. Therefore, without verifying the authenticity of assessee's claim, deduction cannot be allowed. In view of the aforesaid fact, we are inclined to remit the matter back to the file of AO to verify the fact as to whether assessee has debited the amount of Rs.2,59,58,797 to the purchases account in A.Y. 2008-09 while reversing provisions made for the impugned AY and if it is found to be so, then, no addition is required to be made. We make it clear that AO must provide adequate opportunity of being heard to assessee to explain its case.

9. In the result, assessee's appeal is partly allowed for statistical purposes.

Pronounced in the open court on 30 th June, 2015.

Sd/- Sd/- (P.M. JAGTAP) (SAKTIJIT DEY) ACCOUNTANT MEMBER JUDICIAL MEMBER Hyderabad, Dated: 30 th June, 2015 kv 6 ITA No. 30 /Hyd/2015 M + W Singapore PTE Ltd.

Copy to:-

1) M+W Singapore PTE Ltd., C/o Shri S. Rama Rao, Advocate, Flat No. 102, Shriya'e Elegance, 3-6-643, Street No. 9, Himayatnagar, Hyderabad - 500 029

2) DRP, Hyderabad

3) Addl. CIT, Transfer Pricing, Hyderabad-500 004

4) CIT - II, Hyderabad - 500 004.

4) The Departmental Representative, I.T.A.T., Hyderabad.