2017 (4) TMI 394 - AT - Income Tax

Disallowance of commission paid to non-residents - Held that - Once the agreements and related invoices have been furnished by the assessee at the assessment as also at the appellate stage, and no specific defects have been pointed out in the same, it cannot be open to the revenue to contend that genuineness of commission payments is not established. The commission payments are made with regulatory approvals and through banking channels, and all the requisite documentation is furnished for perusal. In these circumstances, we are of the considered view that the CIT(A) was indeed justified in his well reasoned conclusions on this aspect of the matter. We approve the same. As regards the question as to whether the assessee had any obligations to deduct tax at source from these payments of commission to non resident agents, as learned representatives fairly agree, the issue is now covered, in favour of the assessee, by a coordinate bench decision in the case of DCIT Vs Welspun Corporation Ltd 2017 (1) TMI 1084 - ITAT AHMEDABAD wherein held payer is bound to withhold tax from the foreign remittance only if the sum paid is assessable to tax in India. The assessee cannot, therefore, be faulted for not approaching the Assessing Officer under section 195 either. As regards the withdrawal of the CBDT circular holding that the commission payments to non resident agents are not taxable in India, nothing really turns on the circular, as de hors the aforesaid circular, we have adjudicated upon the taxability of the commission agent s income in India in terms of the provisions of the Income Tax Act as also the relevant tax treaty provisions - Decided against revenue Disallowance on account of provision for warranty - Held that - As long as the assessee has made the provision for warranty claims on a scientific basis and historical data, this is admissible as deduction in computation of business income. As noted the warranty provision was computed as a three step process to quantify such provision (a) the assessee determines, on the basis explained above, percentage of defects likely to occur in the product sold by the assessee; (b) the assessee determines, based on the past experience and the repair cost estimate received from the vendors, average per unit likely repair costs; and (c) the assessee determines the likely number of units which are likely to have such defects, by adopting percentage (a) to the total units sold, and estimates the provision required by multiplying the number of units so likely to receive warranty service, with the average cost incurred on such service as a result of (b) above. This method, in our considered view, a fairly scientific basis, supported by historical data, and it meets the tests laid down by Hon ble Supreme Court in Rotork Control s case (2009 (5) TMI 16 - SUPREME COURT OF INDIA) above.The Assessing Officer ought to have reconciled to the fact that, as is the legal position as on now, the liability in respect of provision for warranty claims is not a contingent liability but rather a reasonably estimated, to borrow the felicitous words employed by Their Lordships, present obligation as a result of past events (i.e. sale of products) resulting in an outflow of resources (in future) . Learned CIT(A) was, therefore, quite justified in granting the impugned relief. We uphold his action and decline to interfere in the matter.- Decided against revenue Disallowing the employees contribution to ESI of ₹ 43,908 under section 2(24)(x) r.w.s. 36(1)(va) - Held that - This issue is covered, against the assessee, by Hon ble Gujarat High Court s judgment in the case of CIT Vs Gujarat State Toad Transport Corporation 2014 (1) TMI 502 - GUJARAT HIGH COURT . Disallowance of Marked to Market Loss - Held that - The gains on foreign exchange contracts in the same year have been taxed as other income , the losses on foreign exchange contracts have not been allowed as deduction. Such an approach cannot meet any judicial scrutiny. As for the CBDT instructions, it is only elementary that any instructions issued by the CBDT cannot bind the assessee even though the assessee is entitled to, and can legitimately ask for, any benefits granted to the assessee by such instructions or circulars. Nothing, therefore, turns on the CBDT instruction even if it is actually contrary to the claim of the assessee. Allowing entire foreign tax credit - Held that - Coming to the scope of Explanations to Section 40(a)(ii), on which learned counsel for the assessee has relied upon so much, we may only add that if the main provision, as is the claim of the learned counsel, does not cover the taxes paid abroad, there cannot be any occasion to include, under Explanations to Section 40(a)(ii), taxes in respect of which relief under section 90 and 91 is not admissible. These Explanations donot extend the scope of the Section 40(a)(ii) but rather explain the scope of the said section. If something is covered by the Explanation, it cannot be said that it is not covered by the main provision. If taxes in respect of which tax credit under section 90 or 91 are covered by the proviso, these are covered by the scope of Section 40(a)(ii) as well. And if these taxes are covered by Section 40(a)(ii), the theory that meaning of tax under section 40(a)(ii) must remain confined to the taxes levied under Income Tax Act, 1961 comes to a naught since the taxes in respect of which credits are available under section 90 or 91 cannot be, under any circumstances, imposed under the Indian Income Tax Act. The argument of the learned counsel, if we have understood it correctly, is devoid of, in our considered view, legally sustainable merits. In view of the above discussions, we are of the considered view that no deduction under section 37(1) can be allowed in respect of any income tax withheld abroad as the same will be, for the detailed reasons set out above, hit by the disabling provisions under section 40(a)(ii) of the Act. The relief granted by the CIT(A), by directing the grant of deduction of ₹ 52,50,507 in respect of income tax withheld abroad in respect of which no foreign tax credit is admissible, under section 37(1) of the Act must, therefore, stand vacated. We direct so. We further direct that, as a result of our directions earlier in this order, in the event of assessee being allowed only partial tax credit in respect of taxes withheld abroad, the assessee cannot be allowed any deduction, in respect of the balance of the taxes so withheld abroad, under section 37(1) of the Act.

Summary

Issues Involved:
1. Deleting the disallowance of ? 65,96,434 on account of commission paid to non-residents.
2. Deleting the disallowance of ? 60,48,228 on account of provision for warranty.
3. Restricting the disallowance of foreign tax credit to ? 3,10,799 and directing the balance unallowed foreign tax credit of ? 52,50,507 to be allowed as deduction under section 37(1).
4. Disallowing the employees' contribution to ESI of ? 43,908 under section 2(24)(x) r.w.s. 36(1)(va).
5. Disallowing marked to market loss of ? 71,29,913 on account of forward contracts entered into for hedging export sales.
6. Not allowing the entire foreign tax credit amounting to ? 55,61,306.

Issue-Wise Detailed Analysis:

1. Deleting the disallowance of ? 65,96,434 on account of commission paid to non-residents:

The issue revolves around the payment of commission to non-resident agents for procuring business without withholding tax. The Assessing Officer (AO) disallowed the commission payment citing the lack of evidence to justify the reasonableness and genuineness of the payment, and the non-compliance with Section 195. The CIT(A) deleted the disallowance, stating that the services provided by non-resident agents were genuine, substantiated by invoices and purchase orders, and that no tax was required to be withheld as the income was not taxable in India. The Tribunal upheld the CIT(A)'s decision, emphasizing that the agreements and related invoices were furnished, and no specific defects were pointed out by the revenue. The Tribunal also referenced the Supreme Court's ruling in GE India Technology Centre Private Ltd., which held that Section 195 is not applicable if the payments are not taxable in India.

2. Deleting the disallowance of ? 60,48,228 on account of provision for warranty:

The AO disallowed the provision for warranty, considering it a contingent liability and not based on a consistent and scientific method. The CIT(A) reversed this decision, citing the Supreme Court's judgment in Rotork Controls India Pvt Ltd, which allows such provisions if based on a scientific method and historical data. The Tribunal upheld the CIT(A)'s decision, noting that the provision was computed on a scientific basis, supported by historical data, and met the tests laid down by the Supreme Court in Rotork Controls' case.

3. Restricting the disallowance of foreign tax credit to ? 3,10,799 and directing the balance unallowed foreign tax credit of ? 52,50,507 to be allowed as deduction under section 37(1):

The AO granted a foreign tax credit of only ? 3,10,799 out of the claimed ? 55,61,306. The CIT(A) upheld this quantification but allowed the balance amount as a deduction under section 37(1). The Tribunal remitted the matter back to the CIT(A) for fresh adjudication on the quantification aspect, in light of its order for the assessment year 2009-10. The Tribunal also held that no deduction under section 37(1) can be allowed in respect of any income tax withheld abroad, as it is hit by the disabling provisions under section 40(a)(ii).

4. Disallowing the employees' contribution to ESI of ? 43,908 under section 2(24)(x) r.w.s. 36(1)(va):

The Tribunal noted that this issue is covered against the assessee by the Gujarat High Court's judgment in CIT Vs Gujarat State Road Transport Corporation, which disallows such contributions if not paid within the due date. The Tribunal upheld the CIT(A)'s decision, confirming the disallowance.

5. Disallowing marked to market loss of ? 71,29,913 on account of forward contracts entered into for hedging export sales:

The AO disallowed the marked to market loss, considering it notional and contingent. The CIT(A) upheld this disallowance, relying on CBDT instruction no. 3 of 2010. The Tribunal, however, referred to the Supreme Court's judgment in CIT Vs Woodward Governor India Pvt Ltd, which allows such losses if they are in accordance with the accounting standards. The Tribunal allowed the assessee's claim, emphasizing that the accounting treatment was consistent with AS-11 and that the loss was not notional.

6. Not allowing the entire foreign tax credit amounting to ? 55,61,306:

The Tribunal remitted the matter back to the CIT(A) for fresh adjudication on the quantification aspect, in light of its order for the assessment year 2009-10. The Tribunal also held that no deduction under section 37(1) can be allowed in respect of any income tax withheld abroad, as it is hit by the disabling provisions under section 40(a)(ii).

Conclusion:

The Tribunal partly allowed both the cross appeals. It upheld the CIT(A)'s decisions on issues related to the commission paid to non-residents, provision for warranty, and employees' contribution to ESI. It allowed the assessee's claim on marked to market loss and remitted the matter regarding foreign tax credit back to the CIT(A) for fresh adjudication. The Tribunal also held that no deduction under section 37(1) can be allowed for income tax withheld abroad.