2017 (1) TMI 1502 - AT - Income Tax

Addition u/s 36(1)(iii) - Held that - On perusing the provisions of Section 36(1)(iii) found any expenditure in nature of interest on borrowed capital shall be allowed as deduction provided it has been utilized for the purpose of business. We are of the opinion that the assessee could not satisfy with the correct allocation of interest and interest advance information and the Assessing Officer order also does not satisfy with the reasons except relying on the contention of the assessee. The Ld. TPO has also made adjustment as advance was provided to subsidiary company and these aspects are to be verified from the angle of commercial expediency, which the Assessing Officer has not made any enquiry or called for any documents from subsidiaries to prove that there exist a commercial expediency. Therefore, we are of the opinion, one more opportunity to be provided to the assessee to explain the commercial expediency of this transactions with the subsidiary company before the Assessing Officer and we remit the dispute of issue of interest disallowance made by the Assessing Officer on M/s. Prodapt Corporation Inc, USA, M/s. Prodapt Technology Holdings Pvt Ltd and M/s. Southern Group Industries Pvt. Ltd to the file of the Assessing Officer to verify and pass orders and the assessee should be provided opportunity of being heard before disposal of the order on merits. Non deduction of TDS - payment to the subsidiary company towards software development services - Held that - Considering the facts and the payment made to subsidiary for software development services does not come into the purview of applicability of provisions of TDS Section 40(a)(ia) of the act and accordingly we following the decision of this coordinate Tribunal M/s. Financial Software & Systems (P) 2016 (6) TMI 889 - ITAT CHENNAI direct the Assessing Officer to delete the addition and allow this ground of the assessee.

Summary

Issues Involved:
1. Eligibility for deduction under Section 10A of the Income Tax Act.
2. Disallowance of communication expenses under Section 40(a)(ia).
3. Disallowance of interest on advances to subsidiaries under Section 36(1)(iii).
4. Disallowance of software development expenditure for non-deduction of TDS.

Issue-wise Detailed Analysis:

1. Eligibility for Deduction under Section 10A:
The assessee claimed eligibility for deduction under Section 10A, asserting that actual manufacturing commenced in the financial year 2000-01 (assessment year 2001-02). The Assessing Officer (AO) disagreed, stating that production started in the assessment year 1999-2000 based on Form 56F and disallowed the deduction of ?3,11,80,617/-. The Dispute Resolution Panel (DRP) upheld the AO's decision. On appeal, the Tribunal found insufficient evidence from the Revenue to prove the commencement year and remitted the issue back to the AO for re-examination, emphasizing the need for a fair opportunity for the assessee to present its case.

2. Disallowance of Communication Expenses:
The AO disallowed communication expenses paid to Tata Communications and Reliance Communications for dedicated lease lines, treating them as royalty under Section 40(a)(ia) due to non-deduction of TDS. The DRP confirmed this disallowance. The Tribunal noted the lack of clarity on whether these payments were for internet charges or royalty and remitted the issue back to the AO for verification, instructing the AO to determine if the income was offered by the recipients and to provide the assessee an opportunity for hearing.

3. Disallowance of Interest on Advances to Subsidiaries:
The AO disallowed interest on advances given to subsidiaries, citing lack of commercial expediency and the assessee's interest liability of ?64,68,160/-. The DRP upheld this disallowance. The Tribunal, referencing the Supreme Court decision in SA Builders v. CIT, noted the need to verify the commercial expediency of these transactions and remitted the issue back to the AO. The AO was directed to re-examine the nature of these advances and the commercial rationale, ensuring the assessee had an opportunity to present supporting evidence.

4. Disallowance of Software Development Expenditure:
The AO disallowed ?1.57 crores paid to the subsidiary Prodapt Corporation Inc. for software development, treating it as technical services under Section 9(1)(vii) and subject to TDS. The DRP confirmed this disallowance. The Tribunal, citing a coordinate Bench decision, held that the payment for software development services did not fall under technical services requiring TDS deduction. The Tribunal directed the AO to delete the addition, recognizing the impossibility of the assessee to comply with retrospective TDS obligations.

Conclusion:
The appeal was allowed for statistical purposes, with issues remitted back to the AO for re-examination and verification, ensuring the assessee had the opportunity to present its case comprehensively. The Tribunal emphasized the need for clarity, proper verification, and adherence to established legal principles in determining the eligibility and disallowances under the Income Tax Act.