2016 (10) TMI 179 - AT - Income Tax

Disallowance under the head Branding Expenses - liability to deduct tax on the payment made u/s 195 - whether expenses paid to a company established in the United Kingdom and having no permanent establishment in India, and are in the nature of reimbursement of expenses? - Held that - No doubt the branding expense has been incurred outside India and as is evident from various records available and also the application made under the FEMA regulation in Form 15CA. It is also not the case of the Assessing Officer that this has been incurred in India. The recipient Muthoot Global Transfers Pvt. Ltd. being a foreign company registered under the UK laws, cannot be held to have any business connections in India, though they are carrying out the service for some of the group concerns. it is also not the case of the Department that they are having any permanent establishment in India. As stated by the Ld. Counsel if at all they are taxable it will be under the UK laws. Therefore, in our considered view, the assessee company is not liable to deduct tax on the payment made. The assessee company has also been earning income and incurring expense which would establish that the expenses have been laid out and expended in the course of carrying on of the business. - Decided in favour of assessee Disallowance u/s 14A r.w.r. 8D - Held that - It is a fact that assessee has not earned any exempt income during the year. These investments have been exclusively in the shares of foreign companies as evidenced by Schedule 5 of the audited Balance Sheet produced. Thus e investments are made in foreign companies, we hold that section 14A r.w.r. 8D has no applicability to the facts of this case. See Kariali Steels and Alloys (P) Ltd. vs. JCIT 2016 (2) TMI 79 - ITAT COCHIN - Decided in favour of assessee

Summary

Issues Involved:
1. Disallowance of ?57,51,630 under the head Branding Expenses.
2. Invocation of provisions of Section 14A read with Rule 8D.

Issue-wise Detailed Analysis:

1. Disallowance of ?57,51,630 under the head Branding Expenses:

The assessee, engaged in the business of currency exchange and inward money remittance, claimed branding expenses paid to a UK-based company, Muthoot Global Transfers Pvt. Ltd., as reimbursed expenses. The Assessing Officer (AO) disallowed these expenses on the grounds that there was no written agreement, the bill provided was cryptic and lacked authenticity, and no proof of expenditure was furnished. The AO also noted that the transactions were not at arm's length and were not monitored effectively by the assessee. Consequently, the AO concluded that the expenses were not expended for business purposes and disallowed them under section 37(1) of the Income Tax Act. Additionally, the AO disallowed the expenses under section 40(a)(ia) for non-deduction of tax at source.

The Commissioner of Income Tax (Appeals) [CIT(A)] upheld the AO's decision, stating that the payment was shown as 'other remittance' and not as a professional fee or reimbursement. The CIT(A) concluded that the business income is deemed to accrue or arise in India due to business connections and operations in India, and thus, tax should have been deducted at source.

The Tribunal, however, found that the branding expenses were incurred outside India, and the recipient company did not have a permanent establishment in India. The Tribunal noted that the payment was made after obtaining permission under FEMA regulations and that the foreign company was not taxable under Indian laws. Therefore, the Tribunal concluded that the assessee was not liable to deduct tax on the payment made and deleted the disallowance of ?57.51 lakhs.

2. Invocation of provisions of Section 14A read with Rule 8D:

The AO invoked Section 14A read with Rule 8D to disallow ?6,02,559 as expenses attributable to exempt income. The AO's view was that the provisions apply even if no exempt income was earned during the year, as exempt income includes positive income, nil income, and negative income (loss).

The CIT(A) upheld the AO's decision, stating that the assessee failed to establish that the investments were made from interest-free funds and that there was no nexus between the expenditure and the investments.

The Tribunal, however, found that the assessee did not earn any exempt income during the year and that the investments were in shares of foreign companies, which are taxable in India. The Tribunal relied on judgments from the Punjab and Haryana High Court and its own decision in a similar case, concluding that Section 14A read with Rule 8D does not apply when no exempt income is earned. Therefore, the Tribunal deleted the disallowance of ?6,02,559.

Conclusion:

The Tribunal allowed the appeal of the assessee, deleting the disallowances of ?57.51 lakhs under branding expenses and ?6,02,559 under Section 14A read with Rule 8D. The judgment emphasized the non-applicability of tax deduction at source for payments made to a foreign entity without a permanent establishment in India and the inapplicability of Section 14A when no exempt income is earned.