2016 (2) TMI 1335 - AT - Income Tax

Treatment to profits on sale / redemption of investments (including amortization of securities) as taxable - HELD THAT - The year under appeal before us is assessment year 2008-09 i.e. the year in which the said provisions of Rule 5 of First Schedule were not on Statute. Similar claim was made by the assessee that the profit / loss arising on sale / redemption of securities, investment was not taxable and even the loss on account of amortization of securities was to be reduced from the taxable income of the year, arose before the Tribunal in assessee s own case in assessment year 2003-04 2009 (8) TMI 810 - ITAT PUNE-A Following the same parity of reasoning, we hold that while computing the income from insurance business under section 44 and First Schedule of the Act, there is no merit in holding the profit / loss on sale / redemption of securities / investments amounting to about ₹ 50 crores as taxable and the loss on amortization of securities is to be reduced from the taxable income of the assessee. The order of Tribunal in assessment year 2003-04 has been subsequently followed by the Tribunal in assessment year 2004-05 2010 (12) TMI 1191 - ITAT PUNE Appeal of assessee allowed. Disallowance u/s 14A r.w.r. 8D - HELD THAT - The issue arising before us is identical to the issue before the Tribunal for assessment year 2003-04 2009 (8) TMI 810 - ITAT PUNE-A and in the absence of any contrary material brought to our knowledge by the learned Departmental Representative for the Revenue, we find no merit in the orders of authorities below. The disallowance as made by the assessee under section 14A of the Act at ₹ 49,42,631/- as assessee itself had worked out the expenses disallowable under section 14A is upheld and the balance disallowance worked out by the Assessing Officer and DRP is thus, deleted. The ground of appeal No.2 raised by the assessee is thus, allowed. TDS u/s 195 - Disallowance computed by invoking the provisions of section 40(a)(i) - payment made to Allianz Reinsurance Asia Pacific Branch Singapore (ARAP) on account of re-insurance premium and payment of survey fees was also paid to non-resident surveyors - HELD THAT - Applying the said ratio laid down by the Hon ble Supreme Court in GE India Technology Centre P. Ltd. 2010 (9) TMI 7 - SUPREME COURT we hold that merely because remittance has been made to a foreign company, the same would not be liable to tax deduction at source, where the whole or part of the said payment is not liable to be taxed in India in the hands of recipient nonresident company. The provisions of section 195(1) of the Act postulates that the remittance should be chargeable under the provisions of the Act and where the same is not liable to tax in India, there is no requirement for tax deduction at source and the provisions of section 195(1) of the Act are not attracted and further the provisions of section 40(a)(i) of the Act are not to be applied. Payment of re-insurance premium to ARAP is not to be allowed in the hands of assessee as the assessee had not made any application under section 195(2) - The reading of sub-section itself show that the provisions of the said sub-section are applicable where the person who is responsible for making the payment to a non-resident is sure that such sum was chargeable under the Act. The first step to be fulfilled is that the payment paid to non-resident company is chargeable under the Act. We have already in the paras hereinabove, have come to a finding that sum paid by the assessee is not chargeable in the hands of non-resident company, as income arising in India. In view thereof, where the amount is not chargeable in the hands of non-resident company, the provisions of subsection (2) to section 195 of the Act cannot be invoked and we find no merit in the order of Assessing Officer in this regard. Determination of tax deductible by the assessee in respect of various payments made during the year under consideration - Before the DRP, the case of assessee was that in the proceedings under section 201(1) of the Act for the period up to 31.12.2008, all foreign remittances including re-insurance premium payments were subjected to assessment and after evaluating the transactions, the ADIT (International Transaction)-II, had passed consolidated order from assessment years 2005-06 to 2009-10, wherein it was concluded that the taxes were required to be withheld only on payment of certain survey fees paid to the non-residents. In view thereof, where the Revenue authorities have given a finding that no tax was required to be deducted out of reinsurance premium paid by the assessee to ARAP, we find no merit in the order of Assessing Officer in holding that the assessee should have made the application under section 195(2) of the Act. In order to fulfil the conditions of having PE by an agent acting on behalf of an enterprise of other contracting state, it is provided that such an enterprise would deemed to have PE in the first mentioned state, if this person has habitually exercised an authority to conclude the contracts on behalf of the enterprise and / or maintains stock of goods on merchandise, which he regularly delivers on behalf of the enterprise, in the first mentioned state or habitually secures orders wholly or almost wholly for the enterprise itself or for other enterprises, etc. The assessee claims that it was not acting on behalf of the foreign company. Further, it was not dependent on the foreign company and had no authority to conclude any contract on behalf of the foreign company. Where in such circumstances, there was no merit in the order of DRP in applying the approach of look through . Similar issue of providing re-insurance in India and whether in the absence of any PE in India, the entire business income was not taxable in India, arose before Mumbai Bench of Tribunal in Swiss re-insurance Co. Ltd. 2015 (4) TMI 905 - ITAT MUMBAI considered the aspect of PE of the said company within purview of Article 5 of Swiss Treaty and held that the conditions laid down in Article 5 were not fulfilled to treat the Indian entity as PE. Further, reference was made to the OECD guidelines. It was observed that in the absence of any business connection and in the absence of any agency, it was held that the said foreign entity had no PE in India. - Appeal of assessee allowed. Disallowance on account of risk inspection charges - AO had treated the claim of the assessee as bogus - HELD THAT - As we are aware that as against the insurance charges paid by the respective insurer in case of the damages being compensated by the insurance company, the volumes are very high. In such circumstances, it was the responsibility of the assessee to take the requisite steps to protect itself from future losses, if any, in this regard. The risk inspection was the necessary tool in the hands of the assessee. However, in view of the evidence collected by the Revenue Department and in the totality of the facts and circumstances, we hold that the entire expenditure is not allowable in the hands of the assessee. It is not correct to make estimated disallowance of expenses. However, in view of the evidence filed against the assessee and in the absence of complete details available before us and to prevent leakage of revenue, we are constrained to disallow 25% of the said expenditure in the hands of assessee. The disallowance would be worked out by taking net expenditure of ₹ 11.91 crores i.e. total expenditure of ₹ 14.62 crores minus ₹ 2.17 crores allowed by the Assessing Officer. Further, the assessee himself had withdrawn the claim of expenditure of ₹ 32,67,497/- and has further furnished evidence of ₹ 68,07,042/-. The Assessing Officer shall verify the additional evidence filed by the assessee and if the same is found to be in order, the said expenditure would be allowed in the hands of the assessee. Then out of balance remaining, the Assessing Officer shall disallow 25% of the expenditure. The ground of appeal No.4 raised by the assessee is thus, partly allowed. Addition on account of income from software consultancy charges - international transactions undertaken by the assessee - assessee had during the year shown international transactions with its associated enterprises on account of provision of software consultancy charges. The TPO while benchmarking the international transactions of the assessee found it not to be at arm s length in view of the arithmetic mean of the comparable companies taken at 42.30% and proposed an addition - HELD THAT - Admittedly, in case the said receipts are taxed in the hands of assessee for the year under consideration, there is enhancement of income, for which the requirement of law is that enhancement notice should be issued to the assessee before such an addition is made in the hands of the assessee. Further, in the case of the assessee, no such enhancement notice was issued to the assessee either by DRP or by Assessing Officer. Further, the plea of the assessee of recognition of revenue was in respect of determination of arm's length price of international transactions and the same was recognized for working out the margins of the assessee as compared to the margins of comparables. DRP has directed the Assessing Officer not to consider the said revenue of as receipts of assessment year 2009-10 for the purpose of TP adjustment, if any, to be made in assessment year 2009-10. The said amount does not result in addition as income in the hands of assessee for the captioned assessment year. Accordingly, we find no merit in the order of Assessing Officer in this regard and the addition of ₹ 3.01 crores is deleted. Before parting with the issue, we may also mention that the said receipts have been shown as part of the income of assessee in assessment year 2009-10. The ground of appeal No.5 raised by the assessee is thus, allowed. Deduction in respect of amount collected towards environmental relief fund which was disallowed under section 43B of the Act - HELD THAT - We find an identical issue arose before the Tribunal in assessee s own case in assessment year 2006-07 the matter was set-aside to the file of Assessing Officer with a direction to decide the issue afresh and in accordance with law. The issue arising before us is identical to the issue before the Tribunal and in view thereof, we remit this issue back to the file of Assessing Officer to decide the same in line with the directions of the Tribunal in earlier year after affording reasonable opportunity of the hearing to the assessee. The ground of appeal No.6 raised by the assessee is thus, allowed for statistical purposes. Non-granting of credit for self assessment tax paid by the assessee and non-credit of TDS allowed - assessee pointed out that the assessee has made an application for rectification under section 154 of the Act, which till date has not been disposed of - HELD THAT - Accordingly, we direct the Assessing Officer to allow the claim of the assessee in accordance with law after verifying the claim of the assessee while computing income and tax payable thereon, pursuant to the order of Tribunal. The grounds of appeal raised by the assessee are thus, allowed.

Summary

Issues Involved:
1. Taxability of profits on sale/redemption of investments and amortization of securities.
2. Disallowance under section 14A of the Income-tax Act, 1961 (the Act) read with Rule 8D of the Income-tax Rules, 1962.
3. Disallowance under section 40(a)(i) of the Act in respect of reinsurance premium paid to Allianz Reinsurance Asia Pacific Branch, Singapore.
4. Disallowance of Risk Inspection charges for want of purchase orders.
5. Addition of income from software consultancy charges offered to tax in AY 2009-10.
6. Disallowance of amount collected towards environmental relief fund under section 43B of the Act.
7. Disallowance under section 40(a)(i) of the Act in respect of survey fees paid to non-resident surveyors.
8. Non-granting of credit for self-assessment tax paid.
9. Non-granting of credit for tax deducted at source (TDS).

Issue-wise Detailed Analysis:

1. Taxability of Profits on Sale/Redemption of Investments and Amortization of Securities:
The assessee contested the taxability of Rs. 53,11,07,601/- arising from the sale/redemption of investments and amortization of securities. The Tribunal held that profits/losses from the sale/redemption of investments are not taxable under Rule 5 of the First Schedule of the Act, as established in the assessee's own case for earlier years. The Tribunal followed its earlier decisions and allowed the assessee's claim, stating that such profits/losses should not be included in the taxable income.

2. Disallowance under Section 14A Read with Rule 8D:
The Assessing Officer (AO) disallowed Rs. 7,48,44,804/- under section 14A read with Rule 8D, attributing expenses to exempt income. The Tribunal, referencing its earlier decisions, held that section 14A does not apply to insurance companies whose income is computed under section 44 of the Act. The disallowance made by the AO was deleted, and the initial disallowance of Rs. 49,42,631/- made by the assessee was upheld.

3. Disallowance under Section 40(a)(i) for Reinsurance Premium:
The AO disallowed Rs. 62,67,76,979/- paid to Allianz Reinsurance Asia Pacific Branch, Singapore, for non-deduction of TDS. The Tribunal found that the reinsurance premium was not taxable in India as the recipient did not have a Permanent Establishment (PE) in India. Citing the Supreme Court's decision in GE India Technology Centre P. Ltd. vs. CIT, the Tribunal held that no TDS was required if the income was not chargeable to tax in India. The disallowance was deleted.

4. Disallowance of Risk Inspection Charges:
The AO disallowed Rs. 11,91,11,201/- for lack of purchase orders. The Tribunal noted that while risk inspection charges were necessary for the insurance business, not all expenses were substantiated. It allowed the claim for Rs. 2.71 crores, disallowed Rs. 32,67,497/- withdrawn by the assessee, and directed the AO to verify additional evidence for Rs. 68,07,042/-. For the balance, a 25% disallowance was directed to prevent revenue leakage.

5. Addition of Income from Software Consultancy Charges:
The AO added Rs. 3,01,25,934/- as income for AY 2008-09, which the assessee had offered in AY 2009-10. The Tribunal held that the addition was not justified as no enhancement notice was issued. The Tribunal deleted the addition, stating that the income was already reported in the subsequent year.

6. Disallowance of Environmental Relief Fund under Section 43B:
The AO disallowed Rs. 74,03,321/- collected towards the environmental relief fund under section 43B. The Tribunal remitted the issue back to the AO to decide afresh in line with its earlier decision for AY 2006-07.

7. Disallowance of Survey Fees under Section 40(a)(i):
The assessee did not press this ground, and the Tribunal dismissed it as not pressed.

8. Non-granting of Credit for Self-Assessment Tax Paid:
The assessee claimed non-grant of credit for Rs. 12,00,803/- paid as self-assessment tax. The Tribunal directed the AO to verify and allow the credit as per law.

9. Non-granting of Credit for TDS:
The assessee claimed non-grant of TDS credit of Rs. 18,53,689/- against Rs. 11,73,785/- allowed. The Tribunal directed the AO to verify and allow the correct TDS credit.

Conclusion:
The appeal was allowed in favor of the assessee on most grounds, with specific directions issued for verification and re-computation by the AO where necessary.