2018 (5) TMI 1644 - AT - Income Tax

TDS u/s 195 - non deduction tds on marketing expense paid to foreign companies - addition u/s. 40(a)(i) - income accrued in India - India tax treaty benefits - Held that - Article 24(1)(a) provides that in order to avail the benefit of tax treaty more than 50% of the number of shares of a company should be owned directly or indirectly by one or more individual resident of one of the contracting states i.e. either in India or USA. In assessee s case, the shares of M/s. BNKe Solutions Inc., USA incorporated in USA were 100% owned by the Indian Tax Resident and, therefore, conditions of Article 24(1)(a) were clearly fulfilled. In the said circumstances, therefore, we do not find merit in the objection raised by the ld. DR at this stage before the Tribunal. We are in agreement with the assessee that the payment of ₹ 2,96,05,045/- made by the assessee to foreign entities towards marketing and sale support services were not chargeable to tax in India and in that view of the matter the assessee was right in law in not deducting any tax thereon under sec. 195 - Decided in favour of assessee Addition on account of employee s contribution to PF by invoking provision of section 36(1)(va) - contribution to PF after the due date of the relevant Act - held that - Deduction claimed should be allowed as the employee s contribution to PF & ESI has been admittedly remitted on or before the due date for filing the return of income u/s. 139(1) of the Act. See case of M/s. Akzo Nobel India Ltd. Vs. CIT 2016 (6) TMI 1128 - CALCUTTA HIGH COURT - Decided in favour of assessee Disallowance of bad debts u/s. 36(1)(vii) - Held that - Subsequent to the judgment of Hon ble Supreme Court in the case of TRF Ltd. (2010 (2) TMI 211 - SUPREME COURT), the CBDT has also issued a circular no. 12/2016 dated 30.05.2016 wherein the Board have clarified that it is no longer necessary for the assessee to prove irrecoverability of debts and once the debts are written off in the books of account, then the assessee is legally entitled to claim bad debts u/s. 36(1)(vii) of the Act subject to satisfying condition of section 36(2) - Decided in favour of assessee Disallowance of loss of sale of fixed assets not added back in the computation of income - Held that - . CIT(A) who found that the AO misperceived the separate accounting entries of the profit of ₹ 2,72,482/- and loss of ₹ 8,18,562/- derived by the assessee on sale of fixed assets in the P&L Account and the depiction of net addition of ₹ 5,46,200/- in the computation of income. Therefore, the Ld. CIT(A) held the finding of AO to be factually erroneous and hence, deleted the impugned disallowance holding it to be a double addition. . DR appearing on behalf of the revenue was unable to controvert this fact and could not point out any infirmity in the order of the Ld. CIT(A) - Decided in favour of assessee Disallowance of deduction claimed u/s. 35DD in respect of travelling expenses - Held that - There is no precondition set out in the above section mandating any certification from the auditor. We note that the tax auditor indeed did not report this claim u/s. 35DD of the Act but the tax auditor s non-report could not disentitle the assessee from making a claim which was otherwise legally permissible. We note that the Ld. CIT(A) after examining the details of travelling expenses found that it was incurred wholly and exclusively for the purpose of scheme of demerger and this finding has remained uncontroverted before us. In such a scenario, in our considered view, therefore, the claim made by the assessee u/s. 35DD of the Act was legally permissible - Decided in favour of assessee

Issues Involved:
1. Disallowance of marketing expenses under Section 40(a)(i) of the Income-tax Act, 1961.
2. Deletion of addition on account of employee’s contribution to PF.
3. Disallowance of bad debts under Section 36(1)(vii).
4. Disallowance of loss on sale of fixed assets.
5. Disallowance of deduction claimed under Section 35DD for travelling expenses.

Issue-wise Detailed Analysis:

1. Disallowance of Marketing Expenses under Section 40(a)(i):
The assessee engaged foreign companies for marketing support services and paid fees without deducting tax under Section 195. The AO disallowed the expenses under Section 40(a)(i) on the grounds that the income accrued in India. The CIT(A) upheld the disallowance, considering the payments as 'fees for technical services' under Section 9(1)(vii) and the India-USA Tax Treaty. The Tribunal found that the services were rendered outside India and did not involve technical services, thus not requiring TDS under Section 195. The Tribunal held that the disallowance was unsustainable and directed its deletion.

2. Deletion of Addition on Account of Employee’s Contribution to PF:
The AO disallowed the employee’s contribution to PF paid after the due date under Section 36(1)(va). The CIT(A) allowed the deduction, considering payments made before the due date of filing the return under Section 139(1). The Tribunal upheld the CIT(A)’s decision, referencing the Calcutta High Court's rulings in Akzo Nobel India Ltd. and Vijayshree Ltd., which allowed such deductions if payments were made before the due date of filing the return.

3. Disallowance of Bad Debts under Section 36(1)(vii):
The AO disallowed the bad debts claim, stating the assessee did not prove the debts had become bad. The CIT(A) allowed the claim, citing the Supreme Court’s decision in TRF Ltd., which held that writing off debts in the books is sufficient for claiming bad debts. The Tribunal upheld the CIT(A)’s decision, noting the CBDT’s circular supporting this view.

4. Disallowance of Loss on Sale of Fixed Assets:
The AO added back a portion of the loss on sale of fixed assets, misunderstanding the accounting treatment. The CIT(A) found the AO’s action factually erroneous and deleted the disallowance. The Tribunal upheld the CIT(A)’s decision, as the revenue could not controvert the facts.

5. Disallowance of Deduction Claimed under Section 35DD for Travelling Expenses:
The AO disallowed the deduction for travelling expenses related to the demerger, citing the absence of auditor certification. The CIT(A) allowed the deduction, finding the expenses were wholly and exclusively for the demerger. The Tribunal upheld the CIT(A)’s decision, noting that Section 35DD does not mandate auditor certification and the expenses were indeed related to the demerger.

Conclusion:
The Tribunal allowed the assessee’s appeal regarding the disallowance of marketing expenses and upheld the CIT(A)’s decisions on employee’s contribution to PF, bad debts, loss on sale of fixed assets, and deduction under Section 35DD. The revenue’s appeal was dismissed in its entirety.

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