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2015 (6) TMI 591 - AT - Income TaxDisallowance of payment for preliminary warranty and reworking costs - Non deduction of TDS u/s 195 - reimbursement of reworking cost paid - Disallowance of reimbursement of Information Technology costs being expenses on connectivity and software charges - Transfer pricing adjustments - Held that - Disallowance of payment for preliminary warranty and reworking costs - A perusal of the decision of the Hon ble Supreme Court in the case of Tejaji Farasram Kharawalla Limited 1967 (7) TMI 6 - SUPREME Court , clearly shows that Hon ble Supreme Court has categorically held that the reimbursement of the actual expenses would not be taxable in the hands of the person receiving the reimbursements. Further Hon bel Karnataka High Court in a recent judgment in the case of DIT v. Sun Microsystems India P. Ltd. 2014 (10) TMI 100 - HIGH COURT OF KARNATAKA exactly on the similar issue interpreting article 7 of the DTAA between India and Singapore, which is identically worded to article 7 of DTAA between India and Austria. The Explanation only explains the provision. The main provision of section 195(1) of the Act uses these specific words any other sum chargeable under the provisions of this Act . Therefore, for the invocation of the provisions of section 195(1) of the Act, the main condition is that the payment must be of the sum chargeable under the provisions of the Indian Income Tax Act, 1961. Admittedly there is a DTAA between India and Austria. As per the Article 5 read with Article 7 of the DTAA, it is categorical in so far as if the assessee in the contracting State does not have a PE in the other State, then the income of the assessee in the contracting State is liable to tax only in that contracting State and not in the other State. The facts in the present case clearly show that AT & S Austria is carrying out the re-working of the products of the assessee at its own manufacturing plant at Austria and there is no connection between the manufacturing activities done by AT & S Austria with the manufacturing process done by the assessee at its manufacturing facility in Nanjangud. Consequently the income, if any, generated by AT & S Austria on account of the repairing operations or manufacturing operations done by AT & S Austria at its manufacturing facility outside India cannot be held to generate any income taxable in India under the Indian Income Tax Act, 1961. Admittedly even as per the provisions of section 9(1)(vii) of the Act and the Explanation (2) thereto clearly excludes the consideration for the assembly undertaken by AT & S Austria from the rigours of section 9(1)(vii) of the Act.In these circumstances, as the income of AT & S Austria is not chargeable to tax under the Indian Income Tax Act, 1961, the requirement of deduction of tax at source under section 195 of the Act would not be applicable and consequently no disallowance under section 40(a)(ia) of the Act can be made. - Decided in favour of assessee. Disallowance of reimbursement of Information Technology costs being expenses on connectivity and software charges - Hon ble Karnataka High Court in a recent judgment in the case of DIT v. Sun Microsystems India P. Ltd. 2014 (10) TMI 100 - HIGH COURT OF KARNATAKA exactly on the similar issue interpreting article 7 of the DTAA between India and Singapore, which is identically worded to article 7 of DTAA between India and Austria held that the parent company has not made available to the assessee the technology or the technological services which was required to provide the distribution, management and logistic services. We further noticed that in the said order the Tribunal has taken into consideration the decision of the Hon ble Jurisdictional High Court in the case of CIT v Dunlop Rubber Co. Limited 1982 (2) TMI 24 - CALCUTTA High Court and in the similar circumstances that of the assessee to hold that the reimbursement of the expenditure does not generate any income in the hands of the recipient and consequently there was no requirement of deduction of TDS and consequently the provisions of section 40(a)(ia) could not be invoked. - Decided in favour of assessee. Transfer pricing adjustments - The DRP admittedly has not specified as to which is the appropriate profit level indicator? Whether it is a cash profit margin or whether it is operating profit margin. However, the DRP repeatedly talks of applying the cash profit margin. If cash profit margin is to be considered as the most appropriate profit level indicator, then obviously the NFA to sales ratio cannot be applied as that would be a filter which is more appropriate when adopting the operating profit to sales method for arriving at the PLI. Admittedly, perusal of Transfer Pricing Study and orders for AYs 2004-05, 2005-06 and 2008-09 show that the cash profit margin to sales is the method adopted for arriving at the appropriate PLI for the said AYs. In these circumstances, admittedly the principles of consistency would have to be followed and the methodology followed for the earlier years cannot be tinkered with or modified just for the purpose of assessment years in between with no variation in the facts and circumstances are available for the two AYs. In these circumstances, we direct that in the assessee s case most appropriate PLI is to be arrived at by applying the cash profit margin to sales ratio. - Decided in favour of assessee.
Issues Involved:
1. Condonation of delay in filing the appeal by the assessee. 2. Disallowance of warranty and reworking costs under section 40(a)(i) due to non-deduction of TDS. 3. Disallowance of reimbursement of Information Technology costs under section 40(a)(i). 4. Transfer Pricing adjustments for AY 2006-07 and 2007-08. 5. Disallowance under section 14A read with Rule 8D. 6. Credit for TDS not allowed. 7. Charging of interest under sections 234B and 234D. 8. Non-issuance of refund order under section 143(1). Issue-wise Detailed Analysis: 1. Condonation of Delay: The assessee's appeal in ITA No. 186/Kol/2011 was delayed by 202 days due to a fire accident on 13.06.2010, which dislocated the relevant papers. The Tribunal condoned the delay, admitting the appeal as the delay was caused by a reasonable cause. 2. Disallowance of Warranty and Reworking Costs: The first common issue in cross appeals was the disallowance of Rs. 2,55,17,674/- for warranty and reworking costs under section 40(a)(i) due to non-deduction of TDS. The CIT(A) bifurcated the costs, allowing Rs. 28,33,215/- as reimbursement not liable to TDS and disallowing Rs. 2,26,84,459/- as technical services liable to TDS. The Tribunal upheld the CIT(A)'s decision regarding the warranty costs but deleted the disallowance for reworking costs, holding that the payments were reimbursement of actual costs and not liable to TDS. 3. Disallowance of IT Costs: The issue of disallowance of Rs. 1,50,44,031/- for reimbursement of IT costs was addressed. The Tribunal followed the decision in the assessee's own case for earlier years, holding that the reimbursement of actual costs does not generate income liable to TDS. Consequently, the disallowance under section 40(a)(i) was deleted. 4. Transfer Pricing Adjustments: For AY 2006-07 and 2007-08, the Tribunal addressed the adjustments towards Arm's Length Price. The DRP had rejected the assessee's methodology of cash profit margin on sales and excluded Fine Line Circuits Limited as a comparable. The Tribunal held that the cash profit margin on sales was the appropriate PLI and that the NFA to sales ratio filter was not applicable. Consequently, the adjustments made by the AO were deleted. 5. Disallowance under Section 14A: The Tribunal held that Rule 8D is applicable prospectively from AY 2008-09 and not for AY 2006-07. It directed the AO to restrict the disallowance to 1% of the exempt income under section 14A. 6. Credit for TDS: The Tribunal directed the AO to give credit for TDS after verifying the TDS certificates and allowing the assessee an opportunity to present the same. 7. Charging of Interest: The Tribunal held that charging of interest under sections 234B and 234D is procedural and consequential. The AO was directed to recompute the interest while giving effect to the Tribunal's order. 8. Non-issuance of Refund Order: The Tribunal advised the assessee to take up the issue with the AO and take appropriate steps as per law. Conclusion: The Tribunal allowed the assessee's appeals on the issues of warranty costs, IT costs, and transfer pricing adjustments, while partly allowing the appeal on the disallowance under section 14A. The revenue's appeal was dismissed. The AO was directed to give credit for TDS and recompute interest under sections 234B and 234D.
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