2015 (6) TMI 383 - AT - Income Tax

Reimbursements at cost to UPS Worldwide Forwarding Inc. (UPSWWF ) - treated as taxable income and disallowed under Section 40(a)(i) - Held that - Invoices raised by UPSWWF on assessee can be matched back-to-back with the invoices raised by Titus, the payment so made was in the nature of reimbursement. However, since payment was made to resident legal firm, same was subject to TDS and liable for disallowance u/s.40(a)(i). However, keeping in view the purpose behind insertion of second proviso by Finance Act, 2012 in Section 40(a)(ia), it can be said to be declaratory and curative in nature and therefore, it should be given retrospective effect from 1-4-2005, being the date from which sub clause (ia) of section 40(a) was inserted by Finance (No.1) Act, 2004.In view of the above discussion, we restore the matter back to the file of AO to verify as to whether the Titus has paid tax on the impugned payments by incorporating the same in their respective income. If the AO finds that the Titus has already paid tax by including such payments in its income, no further tax can be collected from assessee which amounts to double taxation and no disallowance can be made in the hands of the assessee u/s.40(a)(ia) - Decided in favour of assessee for statistical purposes. Disallowance of depreciation - Held that - Payment has been made by assessee to the custom authority while importing the assets. The payment for purchase of computers so made has been accepted by TPO. We, therefore, do not find any merit in the action of the lower authorities for declining the claim of depreciation on the assets so imported. - Decided against assessee. Advertisement and public relation expenses disallowed under Section 37(1) - Held that - Assessee has paid a sum of ₹ 20,05,985/- to UPSWWF for advertisement services rendered by Ogilvy. Vide submission dated 25-11-2011 and 7-12-2011, the assessee has submitted all the relevant copies of invoices, articles, media release published in leading newspapers and news channels, demonstrating the advertising services rendered by Ogilvy during the year and the same was for the purpose of assessee s business. After recording detailed finding at para 6.3, as reproduced above, the CIT(A) has deleted the disallowance. The finding of the CIT(A) has not been controverted by ld. DR by brining any positive material on record. We also found that similar payments were made by the assessee in the A.Y.2007-08 and 2010-11, which was allowed by the AO. Accordingly, we do not find any infirmity in the order of CIT(A) for deleting the disallowance of advertisement expenses of ₹ 20,05,985/-. Decided in favour of assessee.

Summary

Issues Involved:
Cross appeals filed by Revenue and assessee against CIT(A) order for AY 2008-09 under Section 143(3) of the IT Act.

Analysis:

1. Disallowance of Expenditure:
- AO disallowed reimbursements to UPS Worldwide Forwarding Inc. and Titus, advertisement expenses, and depreciation claimed on assets purchased from UPSWWF.
- CIT(A) deleted disallowance of advertisement expenses but confirmed disallowance of reimbursements and depreciation.

2. Grounds of Appeals:
- Assessee appealed on disallowance of reimbursements and depreciation.
- Revenue appealed on deletion of advertisement expenses disallowance.

3. Reimbursements Disallowance:
- Assessee made payments to UPSWWF for services by RMS, claiming reimbursement nature.
- CIT(A) held payments taxable under Section 9(1)(vii), not covered by India-USA DTAA.
- Tribunal found payments were reimbursement without profit element, not taxable under Section 40(a)(i).

4. Legal Services Disallowance:
- Payment to Titus for legal services reimbursed by assessee.
- CIT(A) confirmed disallowance under Section 40(a)(i) due to TDS non-compliance.
- Tribunal upheld disallowance but noted second proviso to Section 40(a)(ia) as curative.

5. Depreciation Disallowance:
- AO disallowed depreciation on assets imported from UPSWWF.
- CIT(A) upheld disallowance citing lack of verifiable evidence.
- Tribunal overturned disallowance, finding payment accepted by TPO.

6. Advertisement Expenses Disallowance:
- CIT(A) deleted disallowance based on submitted evidence of genuine expenditure.
- Tribunal upheld deletion, noting relevant invoices and media releases supporting advertisement services.

7. Final Decision:
- Assessee's appeal partially allowed, Revenue's appeal dismissed.
- Tribunal directed AO to verify tax payment by Titus for reimbursement payments to avoid double taxation.

This judgment clarifies the tax treatment of reimbursements, TDS compliance for legal services, evidence requirements for depreciation claims, and the deductibility of advertisement expenses, providing insights into the interpretation and application of relevant tax provisions.