2015 (3) TMI 1320 - AT - Income Tax

Payment made on account of corporate services - ALP determining - Held that - How assessee has received the financial services which have led to the benefits to the assessee to the tune of 8.88 crores. Therefore we set aside the order of Assessing Officer and direct him to re-compute the amount of adjustment by reducing 50% of 8.88 crores from the total Corporate service charges i.e. 7, 99, 31, 741/- minus 4.44 crores (i.e. 50% of 8.88 crores) i.e. (Rs. 7, 99, 31, 741 4, 44, 00, 000) 3, 55, 31, 741/-. The Assessing Officer may also examine the amount of benefit calculated by the assessee and verify the amount if the conclusion is different the Assessing Officer may decide the issue accordingly. Otherwise adjustment shall be made for 3, 55, 31, 741/-. Payment of commission to the non resident parties to the file of Assessing Officer for reexamination in terms of direction contained in the order of Tribunal for assessment year 2006-07. Therefore this aspect is allowed for statistical purposes. Disallowance u/s 14A - Held that - If there is no exempt income then provisions of section 14A cannot be invoked. Therefore in our opinion if there was no income during the year then no disallowance is called for. Since in the case before us investment itself has been written off therefore there could not be any income. Accordingly we delete this addition. Disallowance of proportionate interest in terms of provisions of section 36(1)(iii) - Held that - No particular loan has been taken for the asset which has been shown under the head capital work in progress then disallowance could not have been made. However each loan and its utilization requires fresh examination therefore we remand this issue to the file of Assessing Officer with a direction to ascertain details of various loans and how they were fully utilized and then only decide the issue in accordance with law. TDS u/s 194H - non deduction of tds - Held that - It is not clear from the records whether these amount pertains to bank charges because Schedule 20 simply shows financial charges therefore we remit this matter back to the file of Assessing Officer with a direction to verify whether assessee has paid bank charges to different banks then no disallowance is required to be made otherwise the issue may be decided in accordance with the law. Ex. gratia paid for earlier years u/s 43B read with section 36(1)(ii) - Held that - Ex.gratia payment made to employees which consists of bonus payment over and above the Bonus Act should be allowed as business expenditure. Therefore if sum of the ex.gratia payment was payable for that year the same was required to be allowed on accrual basis as part of the business expenditure. Since this aspect has not been examined by the Assessing Officer therefore we set aside his order and remand the matter back to his file for reexamination of the computation of the ex.gratia payment and if some of the ex.gratia payment pertains to the assessment before us i.e. Assessment year 2009-10 then the same should be allowed on accrual basis as business expenditure otherwise the issue may be decided in accordance with law. Taxable income on account of provisions written back - Held that - No details are available in assessment order. We have also gone through paper book but do not find any detail therein therefore in the interest of justice we set aside the order of Assessing Officer and remit the same back to his file to examine whether any claim of expenditure was allowed in the earlier years when this provision was created. If no such expenses was allowed then writing back of the provisions cannot be treated as income However if such expenditure was allowed in the earlier years then the same is required to be added in the income. Therefore he should decide the issue after examining these facts. Penalty on custom duty - Held that - Firstly the amount is 0.2 million i.e 2 lakhs and not 20 lakhs. Secondly a contingent liability represents a liability which may arise or not arise on happening of a particular event and it is not the actual liability. Therefore it cannot be said that assessee has claimed this amount as expenditure. Accordingly the amount mentioned under the head contingent liability cannot be disallowed therefore we set aside the order of Assessing Officer and delete this addition. Revenue expenditure - payment of royalty - Held that - We set aside the order the Assessing Officer and hold that expenditure incurred for payment of royalty is allowable and therefore delete the addition. Disallowance on account of training expenses - Held that - In any case when separate disallowance has been made for 14, 82, 137/- on account of training expenses this would amount to double disallowance. Therefore in the interest of justice we set aside the order of Assessing Officer and remit the same back to his file for re-examination of the issue and the same should be decided after considering the contention of double disallowance on account of training expenses as well as after verification of the supporting bills filed before the DRP. Bad debt which are clearly allowable by writing off such amounts because simply an amount has been shown as discount the same cannot be disallowed. Therefore we set aside the order of Assessing Officer and delete this addition. TDS u/s 195 - reimbursement of expenses incurred on the training of a particular employee abroad - Held that - Merely reimbursement of expenses incurred on the training of a particular employee abroad cannot be termed as fee for technical services. Even if assuming for the argument sake that this would amount to fee for technical services then it is to be seen that such service was rendered in India which has not happened. Therefore in our opinion this amount of reimbursement of expenses does not attract provisions of section 195 and tax was not deductible. Accordingly we set aside the order of Assessing Officer and delete this addition. MAT computation - provision for wealth tax and provision for FBT - Held that - Wealth Tax is not enumerated in the provision to section 115JB therefore the same cannot be added to the book profits. This position was also confirmed by the Hon ble Bombay High Court in the case of CIT v Echjay Forgings Pvt. Ltd 2001 (2) TMI 56 - BOMBAY HIGH COURT . In our opinion the same logic would apply in case of FBT. Therefore we set aside the order of Assessing Officer and direct him to reduce the provision for wealth tax and provision for FBT from the book profit.

Summary

Issues Involved:

1. Transfer Pricing Matters
2. Corporate Tax Matters
3. Disallowance of Finance Expenses
4. Disallowance of Commission Expenses
5. Disallowance under Section 14A
6. Disallowance of Interest/Finance Expenses
7. Disallowance of Bank Charges under Section 40(a)(ia)
8. Disallowance of Ex-Gratia Payments
9. Disallowance of Provisions Written Back
10. Disallowance of Penalty on Customs Duty
11. Disallowance of Royalty Payments
12. Disallowance of Miscellaneous Expenses
13. Disallowance of Discounts
14. Disallowance of Training Expenses
15. Charging of Interest under Sections 234B and 234C
16. Initiation of Penalty Proceedings under Section 271(1)(c)
17. Adjustment of Loss Brought Forward and Unabsorbed Depreciation
18. Addition to Book Profits under Section 115JB

Detailed Analysis:

1. Transfer Pricing Matters:
The Tribunal found that the Assessing Officer (AO) erred in determining the arm's length price (ALP) for corporate service fees using the Comparable Uncontrolled Price (CUP) method. The AO's adjustment was based on presumptions and disregarded the benefits received by the assessee. The Tribunal directed the AO to re-compute the adjustment by reducing 50% of the financial benefits received by the assessee from the total corporate service charges.

2. Corporate Tax Matters:
The AO disallowed finance expenses, commission expenses, and other deductions based on various grounds. The Tribunal addressed each disallowance separately, providing specific directions for re-examination or deletion based on the merits of each case.

3. Disallowance of Finance Expenses:
The AO disallowed finance expenses alleging that borrowed funds were used for interest-free advances to a joint venture company. The Tribunal found that the advances were for business purposes and allowed the deduction.

4. Disallowance of Commission Expenses:
The AO disallowed commission expenses paid to foreign and domestic parties. The Tribunal remanded the issue of commission paid to foreign parties for re-examination and allowed the domestic commission expenses based on previous Tribunal decisions.

5. Disallowance under Section 14A:
The AO disallowed expenses under Section 14A, invoking Rule 8D. The Tribunal deleted the disallowance, citing the Punjab & Haryana High Court's decision that Section 14A cannot be invoked if there is no exempt income.

6. Disallowance of Interest/Finance Expenses:
The AO disallowed interest expenses, alleging that borrowed funds were used for capital expansion. The Tribunal remanded the issue for fresh examination of loan utilization.

7. Disallowance of Bank Charges under Section 40(a)(ia):
The AO disallowed bank charges, alleging non-deduction of TDS under Section 194H. The Tribunal remanded the issue for verification of whether the charges were indeed bank charges, which do not require TDS.

8. Disallowance of Ex-Gratia Payments:
The AO disallowed ex-gratia payments, stating they were not covered under Section 43B. The Tribunal remanded the issue for re-examination, allowing ex-gratia payments as business expenditure if they pertain to the relevant assessment year.

9. Disallowance of Provisions Written Back:
The AO added back provisions written back, assuming they were previously claimed as expenses. The Tribunal remanded the issue for verification of whether the provisions were allowed as expenses in earlier years.

10. Disallowance of Penalty on Customs Duty:
The AO disallowed a contingent liability for customs duty penalty. The Tribunal deleted the addition, clarifying that contingent liabilities do not represent actual expenses.

11. Disallowance of Royalty Payments:
The AO disallowed royalty payments, treating them as capital expenditure. The Tribunal allowed the payments as revenue expenditure, citing the Supreme Court's decision in CIT v I.A.E.C (Pumps) Ltd.

12. Disallowance of Miscellaneous Expenses:
The AO disallowed miscellaneous expenses due to lack of supporting bills. The Tribunal remanded the issue for re-examination, emphasizing the need to consider additional evidence submitted by the assessee.

13. Disallowance of Discounts:
The AO disallowed discounts, treating them as prior period expenses. The Tribunal allowed the discounts, stating that they could be claimed as bad debts if unrecoverable.

14. Disallowance of Training Expenses:
The AO disallowed training expenses, treating them as fees for technical services requiring TDS under Section 195. The Tribunal deleted the addition, ruling that reimbursement of training expenses does not attract TDS provisions.

15. Charging of Interest under Sections 234B and 234C:
The Tribunal directed the AO to charge interest as per the provisions of law, as this issue is consequential in nature.

16. Initiation of Penalty Proceedings under Section 271(1)(c):
The Tribunal held that the issue of penalty proceedings is premature and does not require separate adjudication.

17. Adjustment of Loss Brought Forward and Unabsorbed Depreciation:
The Tribunal directed the AO to allow the MAT credit as per the provisions of the Act.

18. Addition to Book Profits under Section 115JB:
The Tribunal addressed several adjustments to book profits, including the write-off of investments, provision for wealth tax and fringe benefit tax (FBT), and disallowance under Section 14A. The Tribunal deleted these additions, providing specific reasons for each adjustment.

Conclusion:
The Tribunal allowed the appeal partly, providing detailed directions for re-examination, deletion, or allowance of various disallowances and adjustments made by the AO. The decision emphasized the importance of proper verification and adherence to legal principles in tax assessments.