2014 (9) TMI 165 - AT - Income Tax

Nature of expenses capital or not u/s 37(1) - Professional fees disallowed u/s 40(a)(i) TDS not deducted on payment made to Non-resident Held that - The payment was made to the M/s RPC, a USA company for providing marketing and sale support to promote new/proposed products of the assessee viz. Frozen Desserts and Veggie Magic - the grounds taken by the tax authorities for disallowing the amount are not found to be correct - the agreement with M/s RPC does not provide that their services shall be restricted to foreign countries alone and they may be rendering services in India also - CIT(A) has held that M/s RPC has made available its services in India - CIT(A) has held that M/s RPC has made available its consultancy services to the assessee - the sales promotion or marketing services will not fall in the category of Fee for technical services - the agreement entered between the assessee and M/s RPC specifically provide that the services shall be provided from outside India and it will not have permanent establishment in India - the payment was made in foreign currency to M/s RPC - the tax authorities have failed to show that the payment received by M/s RPC was liable to tax in India either in terms of Indian Income tax Act or in terms of Indo-US DTAA, the assessee was not liable to deduct TDS on such payments made to a foreign resident, as decided in GE India Technology Centre Private Ltd. Versus Commissioner of Income Tax & Anr 2010 (9) TMI 7 - SUPREME COURT OF INDIA - the assessee had paid the amount to M/s RPC before the Explanation was inserted u/s 9(2) of the Act with retrospective effect - the order of CIT(A) is set aside Decided in favour of assessee. Architect fees disallowed Expenses capital in nature or not Held that - The payment was made to the Architect in connection with an existing factory building - the architect has carried out some work to suit the Vaastu - the expenditure has been incurred in connection with an existing factory building and it is not the case of the revenue that a new asset has come into existence due to spending of the amount - There is no material on record to substantiate the view of the tax authorities that the consultation provided by the architect would have enduring benefit the payment cannot be considered as Capital in nature Decided in favour of assessee. Software expenses disallowed u/s 40(a)(ia) TDS not deducted u/s 194J Effect of retrospective amendment - Whether the software purchases would fall in the category of royalty and the disallowance made u/s 40(a)(ia) of the Act is justifiable or not Held that - The payments for purchase of software have been made during the period from 1.4.2006 to 31.3.2007 - The amendment to sec. 9(1)(vi) has been brought by Finance Act, 2012 w.e.f. 1.6.1976 - the contention of the assessee is accepted that a liability cannot be imposed on the assessee in respect of a past transaction on the strength of the amendment brought into the Act subsequently with retrospective effect it shall apply to the entire amount which was disallowed u/s 40(a)(ia) of the Act for non-compliance with the provisions of sec. 194J of the Act - the tax authorities are not justified in disallowing the same u/s 40(a)(ia) of the Act on the basis of an amendment brought into the Act subsequent to 31.3.2007 with retrospective effect the order of the CIT(A) is set aside Decided in favour of assessee. Valuation of stock - Difference between balance of CENVAT u/s 145A Adjustment of Excise duty and VAT Held that - The inclusive method and exclusive method are two different methods of accounting the transactions - Profitability would not be affected under either of methods - assessee is following exclusive method for accounting taxes relating to raw materials/packing materials - it is the duty of the assessee to prepare financial statements under inclusive method in order to satisfy the AO that there was NIL effect on the profitability - the AO has followed some methodology to work out the addition in the immediately preceding year, the assessee did not appear to have furnished revised financial statement prepared under inclusive method - If the assessee fails to furnish the revised financial statement in this year also, the AO has got no other option, but to adopt some method to work out the addition to be made the matter is to be remitted back to the AO for fresh consideration Decided in favour of assessee.

Summary

Issues Involved:

1. Disallowance of professional fees under Section 40(a)(i) of the Income Tax Act.
2. Disallowance of architect fees as capital expenditure.
3. Disallowance of software expenses under Section 40(a)(ia) of the Income Tax Act.
4. Addition under Section 145A of the Income Tax Act for Excise duty and VAT on closing stock.

Detailed Analysis:

1. Disallowance of Professional Fees under Section 40(a)(i):

The assessee contested the disallowance of professional fees of Rs. 41,84,737 paid to M/s. Rich Products Corporation (RPC), USA, under Section 40(a)(i) of the Income Tax Act. The Assessing Officer (AO) had disallowed the expenditure on the grounds that it was capital in nature and also constituted "fees for technical services," necessitating tax deduction at source (TDS) under Section 195. The CIT(A) upheld the AO's decision, relying on the Explanation to Section 9(2) and the judgment in CIT v. Samsung Electronics Co. Ltd. However, the Tribunal found that the payment was for marketing and sales support, did not result in the creation of a new asset, and thus was revenue in nature. Additionally, the Tribunal held that the payment did not qualify as "fees for technical services" under Section 9(1)(vii) and thus was not subject to TDS. The Tribunal also noted that the relevant amendment to Section 9(2) was introduced retrospectively, which should not affect transactions prior to the amendment. Consequently, the disallowance was deleted.

2. Disallowance of Architect Fees as Capital Expenditure:

The assessee challenged the disallowance of Rs. 45,000 paid as architect fees for Vastu work and site visits, which the AO and CIT(A) classified as capital expenditure. The Tribunal noted that the expenditure was related to an existing factory building and did not result in the creation of a new asset. As there was no material evidence to support the view that the expenditure provided an enduring benefit, the Tribunal held that the payment was revenue in nature and directed the AO to delete the addition.

3. Disallowance of Software Expenses under Section 40(a)(ia):

The assessee objected to the disallowance of software expenses amounting to Rs. 97,968 on the grounds of non-deduction of TDS under Section 194J. The AO and CIT(A) treated the payment as "royalty" under Section 9(1)(vi), invoking Section 40(a)(ia). The Tribunal, however, observed that the term "royalty" was included under Section 194J only from 13.07.2006, and the payments made before this date should not attract TDS. Furthermore, the Tribunal emphasized that the retrospective amendment by Finance Act, 2012, should not impose liability on past transactions. Therefore, the disallowance was deleted.

4. Addition under Section 145A for Excise Duty and VAT on Closing Stock:

The assessee disputed the addition of Rs. 2,36,021 under Section 145A for Excise duty and VAT on closing stock of raw materials and work in progress. The Tribunal noted that the assessee followed the exclusive method for accounting taxes on raw materials and packing materials, while inclusive method was mandated under Section 145A. The Tribunal directed the AO to re-examine the issue, considering that the inclusive method should not affect profitability and that the assessee's alternative submission suggested a different calculation method used in the preceding year. The case was remanded to the AO for fresh examination.

Conclusion:

The appeal was allowed for statistical purposes, with directions for the AO to re-examine certain issues. The Tribunal pronounced the order on 28th August 2014.