2016 (5) TMI 1253 - AT - Income Tax

TDS u/s 192 - reimbursement of salary of seconded employees - Disallowance under section 40(a)(i) for want of TDS - payment made by the assessee to M/s. RBESL-UK towards expatriate fees - Held that - Claim of the assessee of having paid and deducted tax at source from the amount in question as salary income is duly supported by TDS certificates issued in Form No. 16 and the same, in our opinion, is sufficient not only to establish that the amount in question is already subjected to TDS but also that there was employer-employee relationship between the assessee-company and the concerned two employees. Keeping in view that the assessee had already deducted tax under section 192 on entire salary reimbursed by him, it was held by the Tribunal that there was no case of disallowance under section 40(a)(i). The assessee was not liable to deduct TDS under section 194J on the reimbursement of salary of seconded employees. Thus we are of the view that the assessee was not liable to deduct tax at source from the amount in question paid to M/s. RBESL-UK towards reimbursement of salary paid to expatriate employees and the disallowance made by the Assessing Officer under section 40(a)(i) for the alleged failure of the assessee to deduct tax at source is not sustainable. See M/s. Nagase India Pvt. Limited (2014 (5) TMI 44 - ITAT MUMBAI) and Temasek Holdings Advisers India Pvt. Limited 2013 (9) TMI 48 - ITAT MUMBAI - Decided in favour of assessee Disallowance on account of provision made for marketing expenses - Held that - It is pertinent to note here that out of the total provision of ₹ 19.90 crores made by the assessee for marketing expenses, a sum of ₹ 18.20 crores was required to settle the obligation and only the balance amount of ₹ 1.69 crores, which is less than 10% of the total provision made by the assessee remained excess. Moreover, such excess provision was subsequently reversed by the assessee and offered to tax as the same rate as submitted by the ld. counsel for the assessee resulting into no loss with the Revenue. Having regard to all these facts of the case, it cannot be said that the estimate made by the assessee of the provisions for marketing expenses was not reliable. In our opinion, the provision for marketing expenses was rightly recognized and made by the assessee being its liability for the expenses of its business and the disallowance made by the Assessing Officer and confirmed by the ld. CIT(Appeals) merely on the basis that such provision is found to be finally excessive is not sustainable. We, accordingly, delete the disallowance made on this issue - Decided in favour of assessee Disallowance on account of cost of films produced by the assessee for the purpose of business promotion - Held that - There is no dispute that the expenditure in question incurred by the assessee on production of Ad-films is revenue expenditure and the same is disallowed on pro-rata basis by the authorities below only on the ground that the resultant benefit was not confined to the year under consideration and the same was partly available even in the subsequent year. The ratio of the decision of Core Health Care Limited (2008 (10) TMI 74 - GUJARAT HIGH COURT ) and Ashima Syntex Limited (2008 (10) TMI 298 - ITAT AHMEDABAD-B) thus is squarely applicable in the facts of the present case and respectfully following the same, we delete the disallowance made by the Assessing Officer and confirmed by the ld. CIT(Appeals) on account of cost of Ad-films on pro-rata basis - Decided in favour of assessee Disallowance of claim for deduction under section 80IA - Held that - The ld. counsel for the assessee has very fairly and frankly admitted that the relevant details as required by the Assessing Officer to justify the allocation of indirect expenses are not available with the assessee and in the absence of the same, there is nothing to dispute the allocation of indirect expenses made by the Assessing Officer in the ratio of sales of each unit. We, therefore, find no justifiable reason to interfere with the impugned order of the ld. CIT(Appeals) confirming the disallowance made by the Assessing Officer on account of assessee s claim for deduction under section 80IA to the extent of ₹ 47,34,361/- - Decided against assessee Transfer Pricing Adjustment - Held that - As rightly submitted by the ld. D.R., the fact that the export of PCMX, which constituted about 1/3 r d of the export made by the assessee to its AE, resulted in a loss as shown in the cost audit report clearly creates doubt about the reliability of the segmental financials taken by the assessee to work out the OP/TC of its export with AEs at 7.96%. It is pertinent to note here that nothing has been brought on record either before the authorities below or before us to shows that the figures reported in the cost audit report showing the loss in the export of PCMX are not correct. In reply to a specific query raised by us, the ld. counsel for the assessee has not been able to explain the basis on which these segmental financials showing OP/TC of the export of the assessee-company to its AE at 7.96% are taken. In our opinion, the OP/TC of the relevant transactions worked out by the assessee, therefore, cannot be taken as basis for bench marking the relevant transactions by adopting TNMM and it would be more appropriate to take the OP/TC at the entity level by taking into consideration the entire transactions of the assessee. The entity level OP/TC thus taken is required to be compared with the OP/TC of the entities which are functionally similar by taking the financial data of only the relevant year and not on the basis of multiple year data as taken by the assesese in the Transfer Pricing Study Report, which is not permissible as per the relevant Rules. We, therefore, set aside the impugned order of the ld. CIT(Appeals) on this issue and restore the matter to the file of the Assessing Officer/Transfer Pricing Officer with a direction to do afresh the exercise of determining the ALP of the relevant international transactions of the assessee-company with its AEs by following TNMM and by taking OP/TC at entity legal as PLI. - Decided in favour of assessee for statistical purposes. Determination of rate of tax payable by the assesese on capital gain arising from the sale of flats - Held that - Although the ld. counsel for the assessee has relied on certain judicial pronouncements, it is observed that the same are not applicable in the present context involving the issue relating to rate of tax applicable to the capital gain arising from sale of depreciable assets. On the other hand, the relevant provisions of section 50 as applicable in the present context are very clear and specific as rightly held by the ld. CIT(Appals) and as per the said provisions, which are overriding in nature, the capital gain arising from the sale of depreciable assets is chargeable to tax at the rate applicable to short-term capital gains irrespective of the holding period. Disallowance u/s 14A by applying Rule 8D - Held that - Rule 8D is applicable only prospectively from AY 2008-09. As further held by the Hon ble Bombay High Court in the case of Godrej & Boycee Manufacturing Co. Limited (2010 (8) TMI 77 - BOMBAY HIGH COURT ), disallowance under section 14A for the years prior to 2008-09 is required to be determined on some reasonable basis. In this regard, it is observed that the Coordinate Benches of this Tribunal has taken a consistent view by holding that disallowance under section 14A to the extent of 1% of the exempt income would be fair and reasonable. Following this consistent view taken by the Tribunal, we modify the impugned order of the ld. CIT(Appeals) on this issue and direct the Assessing Officer to restrict the disallowance under section 14A to the extent of 1% of the exempt income earned by the assessee. Deductibility of loss suffered by the assessee on abandoned capital WIP - Held that - The issue involved therein relating to the deductibility of loss suffered by the assessee on abandoned capital WIP is squarely covered in favour of the assessee by the decision of the Hon ble Calcutta High Court in the case of Benani Services Limited -vs.- CIT 2015 (3) TMI 849 - CALCUTTA , wherein it was held that expenditure incurred for construction/ acquisition of new facility, which was subsequently abandoned at work-in-progress stage is allowable in order to write off as incurred wholly and exclusively for the purpose of business. Respectfully following the said decision of the Hon ble jurisdictional High Court, we direct the Assessing Officer to allow the loss claimed by the assessee on account of abandoned capital WIP. - Decided in favour of assessee Disallowance of writing off of deposit given for gas and electricity - Held that - Deposits towards gas and electricity were paid by the assessee during the course of its normal business and the loss suffered as a result of non-recovery of the said deposits was a loss incidental to the business of the assessee. The ld. CIT(Appeals), in our opinion, therefore was fully justified in allowing the claim of the assessee for the said loss and we find no infirmity in the impugned order of the ld. CIT(Appeals) giving relief to the assessee on this issue - Decided in favour of assessee

Summary

Issues Involved:
1. Disallowance under Section 40(a)(i) for expatriate fees.
2. Disallowance of provision for marketing expenses.
3. Disallowance of cost of films for business promotion.
4. Deduction under Section 80IA.
5. Transfer Pricing Adjustment.
6. Disallowance under Section 40A(i) for connectivity services.
7. Rate of tax on capital gains from the sale of flats.
8. Disallowance under Section 14A.
9. Deductibility of loss on abandoned capital WIP.
10. Writing off of gas and electricity deposits.

Detailed Analysis:

1. Disallowance under Section 40(a)(i) for expatriate fees:
The assessee claimed that the payment of ?1.35 crores to RBESL-UK was a reimbursement of salaries paid to expatriate employees, which was not subject to TDS under Section 195. The Assessing Officer (AO) disagreed, treating the payment as fees for technical services and disallowed it under Section 40(a)(i). The Tribunal found that tax was deducted at source on the entire salaries, including the portion reimbursed, and held that the disallowance under Section 40(a)(i) was not sustainable. The Tribunal relied on similar cases, such as ACIT vs. Nagase India Pvt. Limited and Temasek Holdings Advisers India Pvt. Limited, to support its decision.

2. Disallowance of provision for marketing expenses:
The AO disallowed ?1,69,27,615/- out of a total provision of ?19.90 crores for marketing expenses, deeming it excessive. The Tribunal held that the provision was made on a reliable estimate basis and any excess provision was offered to tax in subsequent years. Citing the Supreme Court's decision in Rotork Controls India (Pvt.) Limited vs. CIT, the Tribunal ruled that the provision was justified and deleted the disallowance.

3. Disallowance of cost of films for business promotion:
The AO disallowed ?1,76,50,483/- on a pro-rata basis, arguing that the benefit of the films extended beyond the current year. The Tribunal found that the expenditure was revenue in nature and should be allowed in the year incurred. The Tribunal referred to the decisions in ACIT vs. Ashima Syntex Limited and DCIT vs. Core Health Care Limited, which held that the Income Tax Act does not recognize deferred revenue expenditure.

4. Deduction under Section 80IA:
The AO reallocated indirect expenses among different units and reduced the deduction under Section 80IA by ?47,34,361/-. The Tribunal upheld the AO's allocation due to the assessee's inability to provide adequate details to justify its allocation method.

5. Transfer Pricing Adjustment:
The AO made a Transfer Pricing Adjustment of ?19,56,989/- based on the cost audit report and internal comparables. The Tribunal found the segmental financials unreliable due to discrepancies and directed the AO/TPO to re-determine the ALP using the entity level OP/TC and appropriate comparables.

6. Disallowance under Section 40A(i) for connectivity services:
The AO disallowed ?16,54,516/- for global connectivity services, treating it as royalty and subject to TDS. The Tribunal upheld the disallowance but noted that the assessee could claim the deduction in AY 2009-10 when the tax was paid.

7. Rate of tax on capital gains from the sale of flats:
The AO taxed the capital gains from the sale of depreciable assets at the rate applicable to short-term capital gains under Section 50. The Tribunal upheld this decision, noting that the provisions of Section 50 are clear and specific.

8. Disallowance under Section 14A:
The AO disallowed ?4,91,323/- under Section 14A, estimating expenses related to exempt income. The Tribunal modified the disallowance to 1% of the exempt income, following the consistent view of the Tribunal and the Bombay High Court's decision in Godrej & Boycee Manufacturing Co. Ltd. vs. DCIT.

9. Deductibility of loss on abandoned capital WIP:
The Tribunal allowed the loss on abandoned capital WIP, citing the Calcutta High Court's decision in Benani Services Limited vs. CIT, which held that such expenditure is allowable as it is incurred wholly and exclusively for business purposes.

10. Writing off of gas and electricity deposits:
The AO disallowed the write-off of ?55,000/- for gas and electricity deposits, arguing it was not offered for tax in earlier years. The Tribunal allowed the deduction, stating that the loss was incidental to the business.

Conclusion:
The Tribunal partly allowed the assessee's appeals and dismissed the revenue's appeals, providing relief on several disallowances and adjustments while upholding some of the AO's decisions. The Tribunal's detailed analysis and reliance on judicial precedents ensured a comprehensive resolution of the issues.