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2017 (8) TMI 1535 - AT - Income TaxTDS u/s 195 - payment to Honda motor Japan - payments to non-resident companies without deducting tax at source - disallowance u/section 40(a)(i) - HELD THAT - Non-discrimination clause of article 24(3) of the DTAA between India and Japan is not applicable over the assessee and there was no discrimination qua the payer. However, we find that as far as the payment to Honda motor Japan is concerned, the issue in dispute is squarely covered by the decision of the Tribunal in assessment year 2009-10 2016 (9) TMI 439 - ITAT DELHI , wherein the Tribunal has followed the decision of the Hon ble Delhi High Court in the case of CIT Vs. Herbalife 2016 (5) TMI 697 - DELHI HIGH COURT . We note that Hon ble High Court in the case of Herbalife (supra) has also considered the amendment in provisions of section 40(a)(i) of the Act by way of insertion of sub-clause(ia) w.e.f. 01/04/2005. Accordingly, respectfully following the decision of the Hon ble Delhi High Court and the order of Tribunal (supra), we delete the disallowance in respect of payment to Honda motor Japan. Payment to Honda Asia Thailand - As assessee contended that no PE has been held by the DRP in the case of non-resident company in assessment year 2010-11 and this fact was not controverted by the Ld. CIT-(DR), thus, following the decision of the Tribunal in assessment year 2009-10 2016 (9) TMI 439 - ITAT DELHI , we hold no disallowance could be made under section 40(a)(i) of the Act for payment made to Honda Asia Thailand without deduction of tax at source. Addition made towards royalty and lump sum fee - capital expenditure or revenue expenditure as claimed by the assessee - HELD THAT - Judgement of the Hon ble Supreme Court in assessee s own case for assessment year 1999-2000 to 2005-06 2017 (6) TMI 524 - SUPREME COURT would not be applicable in the assessment year under consideration, since the assessee was already engaged in the manufacturing of cars and spare parts and the payments towards royalty/technical knowhow paid in pursuant to agreement dated 01/04/2005 were not toward setting up of manufacturing facility, hence we hold that royalty/technical knowhow payment made by the assessee during the year under consideration were revenue in nature and the Ld. CIT-A has correctly allowed the said expenditure as revenue. Accordingly, we dismiss the ground of appeal of the Revenue. Expenditure on airfare booked under technical guidance fee - capital expenditure or revenue expenditure - HELD THAT - Since in the year under consideration on this issue also there is no change in facts as were existing in assessment year 2005-06, 2006-07, 2007- 08 and 2008-09, in which ITAT has given finding in appellant s favour. Therefore, respectfully following the ITAT s orders for the earlier year, on the identical facts, it is held that the expenditure claimed by the appellant on account of air fare and travel expenses is in nature of revenue expenditure. Disallowance of sales tax as claimed as deduction u/s 43B - according to AO the sale tax liability paid under protest, was not an ascertained tax liability and therefore, it was provisional nature and accordingly not allowable - HELD THAT - We find that the payment of sales tax as well as entry tax both are governed by the section 43B of the Act. Since the Ld. CIT-(A) has adjudicated the issue in dispute following the order of the Tribunal in earlier years, we do not find any infirmity in the order of the Ld. CIT-(A) on the issue in dispute and accordingly, we uphold the same. The ground of the appeal is accordingly dismissed. Allowability of software expenses - revenue or capital expenditure - HELD THAT - As the issue involved in the year under consideration is identical to that in assessment year 2007-08, 2008- 09 and 2009-10, hence, following the order of the Hon'ble ITAT in the appellant's own case for AY 2007-08 and AY 2008- 09, referred to above, and also the first appellate order for AY 2009-10 2016 (9) TMI 439 - ITAT DELHI , the payment of expenditure incurred on the above softwares, which are materially similar to the- software acquired by the appellant in earlier years, is held to be an allowable revenue expenditure. Addition in terms of section 14A - AO held that the assessee has incurred direct and indirect expenses in the activity of earning tax exempt income and accordingly invoking the rule 8D made disallowance u/r 8D(2)(ii) and rule 8D(2)(iii) - HELD THAT - The fact that no exempt income has been earned by the assessee during the year, has not been disputed by the Revenue. The Hon ble Delhi High Court in the case of Cheminvest Ltd. Vs. CIT 2015 (9) TMI 238 - DELHI HIGH COURT held that no disallowance under section 14A of the Act could be made where no exempt income has been earned by the assessee. Revenue appeal dismissed.
Issues Involved:
1. Disallowance under Section 40(a)(i) for non-deduction of tax at source on payments to non-residents. 2. Treatment of royalty and lump sum fee as capital or revenue expenditure. 3. Treatment of expenditure on airfare under technical guidance fee as capital or revenue expenditure. 4. Deductibility of sales tax under Section 43B. 5. Treatment of software expenses as capital or revenue expenditure. 6. Disallowance under Section 14A for expenses related to earning exempt income. Issue-Wise Detailed Analysis: 1. Disallowance under Section 40(a)(i) for Non-Deduction of Tax at Source on Payments to Non-Residents: The assessee made payments to non-resident entities without deducting tax at source under Section 195, leading to a disallowance of ?1525,83,26,392/- by the Assessing Officer (AO). The CIT(A) reduced this amount to ?1259,88,03,232/- after some deletions. The Tribunal, following its decision for the previous year and the Delhi High Court's ruling in CIT vs. Herbalife International India Pvt. Ltd., deleted the disallowance for payments to Honda Motor Japan and Asian Honda Thailand. The Tribunal held that the non-discrimination clause in the Indo-Japan DTAA applied, and no Permanent Establishment (PE) existed for Asian Honda Thailand. 2. Treatment of Royalty and Lump Sum Fee as Capital or Revenue Expenditure: The AO treated the royalty and lump sum fee of ?159,74,53,889/- as capital expenditure. The CIT(A) reversed this, relying on the Tribunal's decision for earlier years. The Tribunal upheld the CIT(A)'s decision, distinguishing the Supreme Court's ruling for earlier years, which pertained to initial setup costs, from the current year where the payments were for ongoing business operations. 3. Treatment of Expenditure on Airfare under Technical Guidance Fee as Capital or Revenue Expenditure: The AO capitalized the airfare expenses of ?2,85,14,345/-, but the CIT(A) treated them as revenue expenditure, following the Tribunal's earlier rulings. The Tribunal upheld this decision, noting no change in facts from previous years. 4. Deductibility of Sales Tax under Section 43B: The AO disallowed the sales tax payment of ?6,80,73,802/- paid under protest, considering it provisional. The CIT(A) allowed the deduction under Section 43B, a decision upheld by the Tribunal, which found no distinction between sales tax and entry tax payments allowed in earlier years. 5. Treatment of Software Expenses as Capital or Revenue Expenditure: The AO capitalized software expenses of ?97,32,768/-. The CIT(A) treated these as revenue expenditure, following the Tribunal's earlier rulings. The Tribunal upheld this decision, noting that the software expenses did not provide enduring benefits and were for operational efficiency. 6. Disallowance under Section 14A for Expenses Related to Earning Exempt Income: The AO made a disallowance of ?31,80,007/- under Section 14A, but the CIT(A) deleted it, noting that no exempt income was earned during the year. The Tribunal upheld this decision, citing the Delhi High Court's ruling in Cheminvest Ltd. vs. CIT, which held that Section 14A does not apply if no exempt income is received. Conclusion: The Tribunal allowed the assessee's appeal, deleting the disallowances under Section 40(a)(i) and treating royalty, lump sum fees, airfare, and software expenses as revenue expenditure. It also upheld the CIT(A)'s decisions on sales tax deductibility and Section 14A disallowance. The Revenue's appeal was dismissed.
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