2012 (9) TMI 335 - AT - Income Tax

Disallowance of service charges - services agreement between the assessee and its holding company - allegation of clear intention of reducing the tax liability of the assessee and increasing the non-taxable profits - Held that - CIT (A) has identified some of the expenditure on electricity, rent advertisements etc which is selective and not appropriate according to the facts. - considering the extent of expenditure in both the cases and the fact that in both the companies are reporting the above amount as service charges recovered/paid from/to each other, no reason to doubt that assessee has not incurred the expenditure and the other company has not provided any services - also levy of service tax exists in each month s bill at 12.5% as if only tax avoidance is main issue in allocation of expenditure to assessee, there is no need for allocating the expenditure to assessee paying service tax at 12.5% directly on the gross amount - direction to AO to allow the expenditure - in favour of assessee. Disallowance of deputation charges - common services in the areas of Finance, Accounts, Taxation, Legal, Administration, HRD, education, Training, Research etc. - Held that - the expenses on account of deputation charges as well as other expenses are not covered under the aforesaid agreement. The other reasons given by the AO for making the impugned disallowance cannot also be sustained - in favour of assessee. Non deduction of TDS while making payment towards purchase of software - Disallowance u/s 40(a)(ia) - the payment in question is in the nature of Royalty as per AO - Held that - Following the view expressed by the Hon ble Dellhi High Court in the case of DIT v. Ericsson AB (2011 (12) TMI 91 - DELHI HIGH COURT) that consideration paid merely for right to use cannot be held to be royalty which is favourable to the Assessee to hold that the consideration received by the Assessee for software was not royalty. Admittedly the Assessee who is a non resident does not have a permanent establishment and therefore business income of the Assessee cannot be taxed in India in the absence of a permanent establishment - as the assessee was asked to explain whether the facts involved in assessee s own case (payments to non residents) wherein payments made to non-residents has held that the amounts are royalty in nature are similar to the payments made to the Indian Companies where the assessee expressed inability to furnish the details immediately and has no objection if the matter is examined by AO direction to AO to examine the issue afresh in the light of facts before the Hon ble High Court of Karnataka and the facts involved in payments made to Indian Companies and decide the issue fresh after giving due opportunity to assessee. Disallowance of an amount u/s 14A while computing the book profits under section 115JB - Held that - Once AO has made the disallowance on account of interest expenditure, it was for assessee to produce evidence that the investments were made out of free surplus funds of assessee and that no part of the interest bearing funds had been used for the purposes of making the investments. As the assessee failed to prove the disallowance of the proportionate interest expenditure has to be necessarily made by the mandatory method prescribed in Rule 8D - No reason to interfere with the orders of the authorities for disallowing proportionate expenditure under section 14A and consequent to the above disallowance, the same is also to be disallowed under section 115JB working as well - against assessee.

Issues Involved:
1. Disallowance of service charges paid to SSL.
2. Disallowance of deputation charges and reimbursement of expenses.
3. Disallowance under section 40(a)(ia) for non-deduction of TDS on software purchases.
4. Disallowance under section 14A for expenses related to exempt income.

Issue-wise Analysis:

1. Disallowance of Service Charges Paid to SSL:

The assessee company claimed an expenditure of Rs. 14,98,56,338/- as service charges paid to its holding company, SSL, under a service agreement. The AO disallowed this expenditure, arguing that the service charges were a mere diversion of income to reduce taxable profit and increase non-taxable profits of SSL. The AO also held that the assessee failed to provide evidence that SSL rendered the claimed services.

On appeal, the CIT(A) confirmed the disallowance, differing from his predecessors' decisions and the Tribunal's earlier orders favoring the assessee. The Tribunal, however, noted that similar issues had been decided in favor of the assessee in earlier years, where it was held that the allocation of service charges based on turnover was justified. The Tribunal found no reason to deviate from the earlier decisions and directed the AO to allow the expenditure.

2. Disallowance of Deputation Charges and Reimbursement of Expenses:

The AO disallowed Rs. 10,02,95,870/- as deputation charges and Rs. 25,63,434/- as reimbursement of expenses, arguing that the assessee failed to provide supporting evidence. The AO also held that these expenses were not distinct from the services covered under the existing agreement with SSL.

The CIT(A) confirmed the disallowances, stating that the assessee did not justify the expenditures. The Tribunal, however, held that the expenses on deputation charges and other reimbursements were not covered under the service agreement and found merit in the assessee's grounds. Consequently, the Tribunal allowed these grounds.

3. Disallowance Under Section 40(a)(ia) for Non-Deduction of TDS on Software Purchases:

The AO disallowed Rs. 199,79,11,595/- for non-deduction of TDS on software purchases, treating the payments as royalty. The CIT(A) confirmed the disallowance, following the Karnataka High Court's decision in Samsung Electronics, which treated such payments as royalty.

The Tribunal noted conflicting decisions from different High Courts on whether payments for software constitute royalty. The Tribunal directed the AO to re-examine the issue, considering the facts of the case and the relevant judicial pronouncements. The Tribunal also instructed the AO to verify the amounts outstanding as of 31st March, as per the Special Bench decision in Merilyn Shipping, and to consider whether the recipients had paid taxes, following the principles laid down by the Supreme Court in Hindustan Coca Cola.

4. Disallowance Under Section 14A for Expenses Related to Exempt Income:

The AO disallowed Rs. 10,66,228/- under section 14A, applying Rule 8D, for expenses related to earning exempt income. The CIT(A) upheld the disallowance, stating that the assessee failed to prove that investments were made out of surplus funds and not from interest-bearing funds.

The Tribunal found no reason to interfere with the disallowance, agreeing with the AO and CIT(A) that the proportionate expenditure disallowed was according to the facts and law. Consequently, the disallowance under section 14A and the corresponding adjustment under section 115JB were upheld.

Conclusion:

The Tribunal allowed the assessee's appeal on the disallowance of service charges and deputation charges but remanded the issue of disallowance under section 40(a)(ia) for re-examination. The disallowance under section 14A was upheld. The appeal was partly allowed.

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