2021 (7) TMI 1286 - AT - Income Tax

TP Adjustment of royalty - HELD THAT - As these services are ultimately benefitting the assessee in terms of increasing its turnover, sales of the assessee is taken as the basis for allocation. This method is consistently followed by the assessee over the years and by the group companies world over. The royalty payment is based on the agreement between the assessee and its parent company. The agreement is dated 15.12.2001. This issue of payment of royalty was subject matter the appeal be fore the Tribunal for the assessment year 2005-06 2020 (12) TMI 723 - ITAT DELHI Thus AO is directed to delete the addition made on account adjustment of royalty. Tax withholding u/s 192 on Global Accounting Manager (GAM) expenses - AO considered these expenses as payment of salary to non-resident and accordingly held that the same is liable to withholding tax under section 192 of the Act. In the absence of tax withholding, AO disallowed the expense under section 40(a) - HELD THAT - We find that this issue stands adjudicated by the Coordinate Bench of the Tribunal in taxpayer s own case for AY 2005-06 2020 (12) TMI 723 - ITAT DELHI upheld the order passed by the ld. CIT (A) while deciding the issue in assessee s favour has given a finding that the payments made by the assessee as GAM charges cannot be treated as payment of salary to non-resident but were in the nature of reimbursement of expenses and there fore assessee was not required to deduct TDS on such payments. - Decided in favour of assessee. TDS on payment of lease rent charges do not fall in the category of FTS - HELD THAT - payment of lease rent charges do not fall in the category of FTS. In the absence of any material change in the factual as for A.Y. 2005-06 2020 (12) TMI 723 - ITAT DELHI as well as the legal aspect of the assessee, we hereby hold that the disallowance made by the AO is directed to be deleted. Capital Advance - Assessee purchased software for the purpose managing fixed assets database, cheque preparation software, MIS etc. which was returned due to operational deficiencies - HELD THAT - The software was at first instance capitalized by the assessee in. its books of accounts and after returning the software, the Assessee had written off the advances paid to Softline considering the same to be irrecoverable.Subsequent to this, during the AY 2011-12, the Assessee received half of the advance written off from Softline which was duly offered to tax by the Assessee under the head other income' in the profit and loss account as evident from schedule 11 of the signed financial statements for the AY 2011-12. From the facts, it can be concluded that the expense went into drain by de fault and the assessee could recover 50% of the expenses paid. Since, the expenses involved pertain to the purpose of the business and not in the nature of any capital expenditure in real sense, the same can be treated as allowable revenue expenditure. The ground of the assessee is treated as allowed. TDS u/s 194H - Disallowance u/s 40(a)(ia) - disallowing bank guarantee commission charges and cash management charges under section 40(a)(ia) of the act on basis of Notification No. 56 - 2012 dated 31.03.2012 and holding that TDS was deductible on such payments - HELD THAT - The Co-ordinate Bench of ITAT Mumbai Benches, Mumbai in the case of Kotak Securities Ltd. 2012 (2) TMI 77 - ITAT MUMBAI had held that there was no principal agent relationship between a bank issuing bank guarantee and the taxpayer and hence the payment though termed as commission was not covered under section 194H - Thus the ground of appeal is decided in favour of the assessee by the ld. CIT (A). The addition made by the AO is dismissed. Education cess paid on the income tax - Whether an allowable deduction for computing total income given the fact that the same was not hit by the provisions of Section 40(a)(ii)? - HELD THAT - Education Cess is not of the nature described in sections 30 to 36, Education Cess is not in the nature of capital expenditure, Education Cess is not personal expense of the Assessee, it is mandatory for it to pay Education Cess and for the purpose of computation of Education Cess, the Income Tax is taken as the criteria for computational purpose. Thus, the expense of Education Cess is mandatory expenses to be paid but does not fall under capital expense and personal expenditure and hence may be allowed as deduction. Keeping in view the provisions of the Act pertaining to Section 40(a)(ii) and Section 115JB, Circular of the CBDT No. 91/58/66- ITJ(19), the orders of Co-ordinate Benches of ITAT and judicial pronouncements of the Hon ble High Court of Bombay and Hon ble High Court of Rajasthan, we hereby hold that the assessee is eligible to claim the deduction of the Education Cess as per the provisions of Section 37 of the Income Tax Act.

Summary

Issues Involved:
1. Allowability of education cess as a deduction.
2. Disallowance of lease line connectivity charges (VSAT uplinking charges).
3. Treatment of lease line connectivity charges as royalty under Explanation 6 to Section 9(1)(vi) of the Income Tax Act.
4. Deletion of addition made on account of Arm’s Length Price (ALP) adjustments.
5. Disallowance of Global Account Management (GAM) expenses.
6. Disallowance of capital advance for software purchase.
7. Disallowance under section 40(a)(ia) for non-deduction of TDS on bank guarantee commission charges and cash management charges.

Detailed Analysis:

1. Allowability of Education Cess as a Deduction:
The assessee argued that education cess paid on income tax is an allowable deduction, not covered under Section 40(a)(ii). The Tribunal accepted this argument, referencing CBDT Circular No. 91/58/66-ITJ(19) and various judicial precedents, including the Hon’ble Rajasthan High Court in Chambal Fertilizers and Chemicals Ltd. Vs JCIT, which held that education cess is an allowable expenditure. The Tribunal concluded that education cess is not a tax and is deductible under Section 37 of the Income Tax Act.

2. Disallowance of Lease Line Connectivity Charges (VSAT Uplinking Charges):
The assessee contested the disallowance of lease line connectivity charges, arguing that these charges were not royalty and should not be subjected to TDS under Section 40(a)(i). The Tribunal referenced its previous decisions and the Hon’ble Delhi High Court’s rulings, which supported the assessee's position that these charges do not constitute royalty and should not be disallowed.

3. Treatment of Lease Line Connectivity Charges as Royalty:
The Tribunal reviewed whether lease line connectivity charges should be treated as royalty under Explanation 6 to Section 9(1)(vi). It concluded that these charges do not fall under the definition of royalty and, therefore, should not be disallowed under Section 40(a)(i).

4. Deletion of Addition Made on Account of Arm’s Length Price (ALP) Adjustments:
The Tribunal examined the ALP adjustments made by the AO. It upheld the CIT(A)’s decision to delete these adjustments, citing the assessee’s compliance with the Transactional Net Margin Method (TNMM) and the lack of evidence from the TPO to justify the adjustments. The Tribunal referenced previous rulings, including CIT vs. EKL Appliances Limited and Dresser-Rand India Pvt. Ltd. vs. Addl. CIT, to support its decision.

5. Disallowance of Global Account Management (GAM) Expenses:
The Tribunal reviewed the disallowance of GAM expenses, which the AO treated as salary payments requiring TDS. The Tribunal found that these payments were reimbursements of expenses and not salary, referencing judicial precedents such as IDS Software Solutions P. Ltd. vs. ITO and CIT v. Industrial Engineering Projects (P.) Ltd. It upheld the CIT(A)’s decision to allow these expenses.

6. Disallowance of Capital Advance for Software Purchase:
The assessee argued that the software purchased was unsuitable and returned, and the advance paid was written off as irrecoverable. The Tribunal accepted this argument, concluding that the expense was a revenue expenditure and allowable as a deduction, as it was incurred for business purposes and not capital in nature.

7. Disallowance under Section 40(a)(ia) for Non-Deduction of TDS on Bank Guarantee Commission Charges and Cash Management Charges:
The Tribunal reviewed the disallowance of bank guarantee commission charges and cash management charges under Section 40(a)(ia). It referenced the ITAT Mumbai Bench’s decision in Kotak Securities Ltd and DCIT vs. Laqshya Media (P) Ltd, which held that such payments do not require TDS deduction. The Tribunal upheld the CIT(A)’s decision to allow these expenses, finding no principal-agent relationship between the bank and the assessee.

Conclusion:
The Tribunal allowed all the appeals of the assessee and dismissed all the appeals of the revenue, providing detailed justifications for each issue based on judicial precedents, legislative provisions, and the facts of the case. The order was pronounced in the open court on 30/07/2021.