2014 (7) TMI 1231 - AT - Income Tax

Addition u/s 14A - Held that - We find from section 14A(2) that in arriving at such a dissatisfaction over an assessee s claim of not having incurred any expenditure relatable to its exempt income in books of account, the concerned Assessing Officer has to take into account the said books and then only, he can resort to computation of such expenses under Rule 8D. In this case, the Assessing Officer has only drawn an inference that some indirect expenditure is always involved in supervision of such huge investments. And that too, without even specifically stating anything regarding the entries in the assessee s books. In our view, this approach is nowhere a part of the relevant statutory provision in section 14A(2) of the Act. So, both the lower authorities have wrongly made the disallowance in question u/s 14A r.w. rule 8D. The same stands deleted. - Decided in favour of assessee Disallowance to provision for insurance settlement - Held that - Admitted factual position is that the assessee being a bulk drug manufacturer had exported its produce to a Dutch consignee. A part of this consignment has been rejected for quality reasons because the produce was kept in a customs bonded house instead of immediate delivery resulting in deterioration of its quality. Before us, there is no cogent evidence produced to conclude that mere rejection of such a produce wholly or in part by whatsoever reasons gives rise to a compensation claim. The fact also remains that till date, the consignee entity is yet to raise its claim. The damages amount is yet to be ascertained. In these circumstances, we observe that the assessee has failed to prove the nature of liability claimed as an ascertained one. Therefore, we find no fault with the CIT(A) s order affirming the impugned disallowance - Decided against assessee TDS u/s 195 - Disallowance u/s 40(a)(i) - non deduction of TDS on export commission payments made to overseas agents - Held that -no cogent material has been placed on record to prove rendering of any technical or managerial services u/s 9 of the Act or that the payments are taxable as income in India. The assessee s overseas agents have procured export orders and rendered marketing services outside India and in lieu thereof payments have been made in foreign countries. hence no TDS liability arises to an assessee. See GE India Technology Centre Private Ltd. Versus Commissioner of Income Tax & Anr. 2010 (9) TMI 7 - SUPREME COURT OF INDIA .- Decided in favour of assessee

Summary

Issues:
1. Disallowance of expenses under section 14A r.w.r 8D for 'exempt' income and provision for insurance settlement.
2. Disallowance under section 40(a)(i) for non-deduction of tax on export commission payments.

Analysis:
1. Disallowance under section 14A r.w.r 8D:
- The assessee challenged disallowances of expenses related to 'exempt' income and provision for insurance settlement. The Assessing Officer made disallowances based on inferences without specific evidence from the assessee's books. The CIT(A) affirmed these disallowances.
- The ITAT Chennai found that the Assessing Officer's approach did not align with the statutory provision of section 14A(2) as he did not consider the assessee's books before applying rule 8D. The ITAT held that the disallowance of expenses amounting to Rs. 11,92,282 under section 14A r.w. rule 8D was unjustified and deleted it.

2. Disallowance of provision for insurance settlement:
- The provision for insurance settlement was made due to part rejection of an export consignment. The Assessing Officer disallowed this amount as a contingent liability. The CIT(A) upheld this disallowance citing pending litigation and unascertained liability.
- The ITAT noted that the rejection of the consignment did not automatically give rise to a compensation claim. As the consignee had not raised a claim and the damages were unascertained, the ITAT agreed with the CIT(A) and upheld the disallowance of Rs. 47,84,000 related to the provision for insurance settlement.

3. Disallowance under section 40(a)(i) for non-deduction of tax on export commission payments:
- The Revenue sought disallowance of Rs. 50,48,590 under section 40(a)(i) for non-deduction of tax on export commission payments. The Assessing Officer held that these payments, made to overseas agents, should have been subject to TDS provisions.
- The CIT(A) disagreed, stating that the payments were not taxable in India as the agents operated outside the country. Citing relevant case law, the CIT(A) ruled in favor of the assessee.
- The ITAT concurred with the CIT(A), emphasizing that TDS liability arises only if the payments are taxable in India. As the payments were for procuring export orders and made outside India, no TDS liability existed. The ITAT dismissed the Revenue's appeal and modified the disallowance amount to Rs. 40,07,215.

In conclusion, the ITAT partly allowed the assessee's appeal related to disallowance under section 14A r.w. rule 8D, upheld the disallowance of provision for insurance settlement, and dismissed the Revenue's appeal concerning non-deduction of tax on export commission payments under section 40(a)(i).