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2016 (1) TMI 1372 - AT - Income TaxTDS u/s 195 - non-deduction of tax at source from the payment of royalty and consultancy fees made to a Japanese Entity - ddition u/s 40a)(i) - DTAA benefit - Held that - In the case of Millenium Infocom Technologies Limited -vs.- ACIT 2008 (1) TMI 437 - ITAT DELHI-E , it was held that since royalty payments to residents could not be disallowed for non-deduction of taxes, similar payments made to non- residents could not be disallowed in the hands of the assessee under section 40(a)(i) as per Article 26(3) of the Indo-U.S. DTAA. Since the relevant provision of Article 26 of Indo-Japanese DTAA is analogous to the provision of Article 26 of Indo-US DTAA, we respectfully follow the decision delete the disallowance - Decided in favour of assessee Addition on account of provision made by the assessee for warranty - Held that - As contended that the issue as to whether the assessee in the present case has satisfied the conditions laid down for allowing deduction on account of provision for warranty requires verification and since the same has not been done either by the Assessing Officer or by the ld. CIT(Appeals), the matter may be restored to the file of the Assessing Officer for the limited purpose of such verification. We find merit in this contention of the ld. D.R. and since the ld. Counsel for the assessee has also not raised any objection in this regard, we restore this issue to the file of the Assessing Officer Deduction on account of arrears of electricity charges - Held that - Assessee has invited our attention to the relevant documentary evidence placed in the paper book to show that the bills for arrears having been raised by the CESC Limited as per the order of the Hon ble High Court in the year under consideration, the liability on account of electricity charge arrears had arisen in that year, we find that the ld. CIT(Appeals) has already directed the Assessing Officer to verify this aspect from the relevant record after giving the assessee proper and sufficient opportunity of being heard. Addition on account of liquidated damages - Held that - There was no justification on the part of the authorities below to consider the claim of the assessee for liquidated damages as excessive or unreasonable without bringing any material on record in support. As rightly contended by the ld. Counsel for the assessee, the liquidated damages is a regular feature of any manufacturer like the assessee-Company and the Assessing Officer himself having allowed the claim for liquidated damages not in the earlier years and subsequent years but even partly in the year under consideration, the disallowance made by him for the remaining part without there being anything to support and substantiate the same, in our opinion, is not sustainable. We, therefore, delete the disallowance made by the Assessing Officer Addition on account of payment made by the assessee to Sonata Information Technology and on account of ERP expenses respectively - Held that - The upgradation of ERP, in our opinion, therefore, cannot be equated with replacement as contended by the ld. D.R. and the advantage being only incremental to the extent of the additional features in the new version, the same cannot be treated as the replacement of the entire ERP package so as to treat the expenditure incurred on upgradation as capital expenditure. Moreover, the use of any ERP package in the case of manufacturer like the assesese-Company is generally for coordinating and rationalizing its functions and business process in order to ensure that the business is carried on more efficiently and effectively and by applying the functional test, the expenditure incurred on ERP package, in our opinion, cannot be treated as capital expenditure as it does not result in creation of any new asset or advantage of enduring nature in the capital field. We, therefore, direct the Assessing Officer to allow the deduction claimed by the assessee on account of expenditure incurred on upgradation of ERP and implementation thereof treating the same as revenue in nature. Addition on account of provision made for leave encashment - Held that - As decided in case of Dy. CIT -vs.- BLA Industries Pvt. Ltd. 2015 (1) TMI 1286 - ITAT KOLKATA Deduction on account of provision of leave encashment was made on the basis of the judgment of Hon ble jurisdictional High Court in the case of Exide Industries Ltd. Vs. Union of India (2007 (6) TMI 175 - CALCUTTA High Court ) wherein it was held that insertion of clause (f) in section 43B is unconstitutional. Subsequently, the Hon ble Apex Court 2008 (9) TMI 921 - SUPREME COURT has stayed the operation of this judgment of the Hon ble Calcutta High Court rendered in the case of Exide Industries Ltd. v. UOI (supra) and therefore, the order of the ld. CIT (Appeals) by following this judgment of the Hon ble Calcutta High Court cannot be approved. Thus we set aside this issue to the file of the AO to await the decision of Hon ble Supreme Court and decide the issue accordingly. This issue of assessee s cross objection appeal is remitted back to the file of AO and allowed for statistical purposes. Reducing the technical know-how fees from the profits of the business for the purpose of computing deduction under section 80HHC - Held that - We irect the Assessing Officer to include the amount of technical know-how fees in the profits of the business for the purpose of computing deduction under section 80HHC as claimed by the assessee. Deduction towards additional contribution paid to Pension Fund - Held that - We decide this issue in favour of the assessee in principle and restore the matter to the file of the Assessing Officer for the limited purpose of verifying as to whether the amount paid by the assessee to Pension Fund is within the limits specified in the relevant Rules
Issues Involved:
1. Disallowance under section 40(a)(ia) for non-deduction of tax at source. 2. Disallowance of provision for warranty. 3. Disallowance of arrears of electricity charges. 4. Disallowance of liquidated damages. 5. Disallowance of payment to Sonata Information Technology and ERP expenses. 6. Disallowance of provision for leave encashment. 7. Reduction of technical know-how fees from "profits of the business" for deduction under section 80HHC. 8. Disallowance of additional contribution to Pension Fund. 9. Disallowance of provision for warranty for A.Y. 2004-05. Detailed Analysis: 1. Disallowance under section 40(a)(ia) for non-deduction of tax at source: The assessee's appeal for A.Y. 2003-04 challenged the disallowance of Rs. 42,94,336/- for non-deduction of tax at source from payments made to a Japanese entity for royalty and consultancy fees. The Tribunal found in favor of the assessee, referencing the Indo-Japanese Tax Treaty and similar cases where payments to residents were not disallowed for non-deduction of taxes. Thus, the disallowance was deleted. 2. Disallowance of provision for warranty: For A.Y. 2003-04, the assessee made a provision of Rs. 17.65 crores for warranty based on past experience and Accounting Standard AS-29. The Assessing Officer disallowed it, considering it a contingent liability. The Tribunal referred to the Supreme Court's decision in Rotork Controls India (Pvt.) Limited, which allows such provisions if specific conditions are met. The issue was remanded to the Assessing Officer for verification. 3. Disallowance of arrears of electricity charges: The assessee claimed Rs. 41.25 lakhs for arrears of electricity charges paid based on a High Court order. The Assessing Officer disallowed it, stating it pertained to earlier years. The CIT(A) directed verification of whether the payment was per the High Court's order. The Tribunal upheld this direction, allowing the assessee to present relevant documents. 4. Disallowance of liquidated damages: The assessee claimed Rs. 2.99 crores for liquidated damages, which the Assessing Officer partly disallowed as excessive. The Tribunal noted that the claim was allowed in principle but partly disallowed without cogent reasons. The Tribunal deleted the disallowance, stating no material supported the excessive claim. 5. Disallowance of payment to Sonata Information Technology and ERP expenses: The assessee incurred Rs. 2.05 crores for ERP upgradation and Rs. 69.21 lakhs for related services. The Assessing Officer treated these as capital expenses. The Tribunal, referencing various decisions, held that ERP upgradation expenses are revenue in nature and allowed the deduction. 6. Disallowance of provision for leave encashment: For A.Y. 2003-04, the assessee made a provision of Rs. 1.51 crores for leave encashment based on actuarial valuation. The Assessing Officer disallowed it under Section 43B(f). The Tribunal, noting the ongoing Supreme Court case on the provision's validity, remanded the issue to the Assessing Officer to await the final decision. 7. Reduction of technical know-how fees from "profits of the business" for deduction under section 80HHC: For A.Y. 2004-05, the Assessing Officer reduced Rs. 34,08,824/- from profits for deduction under section 80HHC, considering it similar to brokerage or commission. The Tribunal disagreed, noting the fees were directly linked to exports and should not be excluded from business profits for deduction purposes. 8. Disallowance of additional contribution to Pension Fund: The assessee made an additional contribution of Rs. 9.14 crores to the Pension Fund due to actuarial shortfall. The Assessing Officer disallowed it, citing non-compliance with Section 36(1)(iv) and related rules. The Tribunal, referencing a similar case, allowed the deduction in principle but remanded the issue for verification of compliance with specified limits. 9. Disallowance of provision for warranty for A.Y. 2004-05: Similar to A.Y. 2003-04, the Tribunal directed the Assessing Officer to verify the reasonableness and scientific basis of the provision for warranty and allowed the claim in principle. Conclusion: Both appeals filed by the assessee for A.Y. 2003-04 and 2004-05 were partly allowed, with several issues remanded for further verification. The Tribunal's decisions were based on established precedents and relevant legal provisions, ensuring a thorough and fair review of the assessee's claims.
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