2019 (9) TMI 922 - HC - Income Tax

TP Adjustment - rate of interest on loans given to Associated Enterprises -Tribunal restricting the rate @ LIBOR 2% instead of 17.22% proposed by the Transfer Pricing Officer - HELD THAT - It is an agreed position between the parties that the issue raised herein stand concluded against the Revenue and in favour of the Respondent Assessee. This by the decision of this Court in the case of the same Respondent viz. Principal Commissioner of Income Tax v/s. Manugraph 2018 (11) TMI 1693 - BOMBAY HIGH COURT as following M/S. EVEREST KENTO CYLINDERS LTD. 2015 (5) TMI 395 - BOMBAY HIGH COURT Nature of expenditure - expenses incurred for DRUPA Exhibition Germany - revenue or capital expenditure - HELD THAT - Apex Court in Taparia Tools vs. JCTI 2015 (3) TMI 853 - SUPREME COURT has held that there is no concept of deferred expenditure unless it falls in specified Sections. It held that ordinarily, if the Assessee claims the expenditure in a particular year, it has to be allowed. We note that the expenditure incurred on DRUPA Exhibition is in the nature of marketing and selling expenses. This expense is incurred with the hope of resultant increased sales. In fact this Court has in CIT V/s. Asian Paints (India) Ltd. 2016 (11) TMI 258 - BOMBAY HIGH COURT while following its earlier decision in CIT v/s. Geoffrey Manners Co. Ltd. 2009 (2) TMI 13 - BOMBAY HIGH COURT held that expenditure incurred in making advertisement films resulting in building the firm s brand image, is an expenditure in respect of an ongoing business and would be in the revenue field. There is no provision in the Act to disallow revenue expenditure under Section 37 of the Act in its entirety, in the year in which the expenditure is incurred, on the basis that it has to be allowed only to the extent benefit is received. No substantial question of law. TDS u/s 195 - Disallowance of reimbursement of expenses incurred by subsidiary of the Appellant - HELD THAT - Tribunal found that there was no income embedded in the reimbursement of expenses made, therefore following the decision of the Apex Court in the case of GE India Technology Cen. (P) Ltd. v/s. Commissioner of Income-tax 2010 (9) TMI 7 - SUPREME COURT it allowed the Respondent s appeal as held that requirement of deducting tax at source under Section 195 of the Act would only arise, if the payment is shown to have embedded income, taxable in India. In this case it is found that the payment which has been made is in the nature of reimbursement and therefore no obligation to deduct tax at source arises. Consequently, no occasion to disallow expenditure under section 40(a)(i) of the Act can arise. Appeal admitted on the substantial question of law at (b) and (c).

Summary

Issues:
1. Interpretation of Section 92C of the Income Tax Act regarding interest rates on loans to Associated Enterprises.
2. Determination of whether guarantee charges constitute an international transaction.
3. Assessment of corporate guarantee fees percentage if considered an international transaction.
4. Disallowance of expenses incurred for DRUPA Exhibition.
5. Disallowance of reimbursement of expenses to subsidiary.

Analysis:

Interpretation of Section 92C - Question (a):
The High Court noted that the issue regarding interest rates on loans to Associated Enterprises had been settled in favor of the Respondent in a previous case. The Court referenced decisions in similar cases and concluded that the question did not raise any substantial legal issue.

Guarantee Charges as International Transaction - Question (b):
The Court analyzed whether guarantee charges constituted an international transaction. It referred to previous judgments and concluded that the Tribunal's decision to not consider guarantee charges as an international transaction was appropriate based on the nature of the expenses and relevant legal provisions.

Corporate Guarantee Fees - Question (c):
In case the transaction of giving corporate guarantee was deemed an international transaction, the Court was to determine the appropriate percentage for corporate guarantee fees. However, as the Court did not find the transaction to be international, this question was not entertained.

Disallowance of DRUPA Exhibition Expenses - Question (d):
The Court examined the disallowance of expenses incurred for the DRUPA Exhibition in Germany. It analyzed the nature of the expenses and relevant legal provisions. The Court held that the expenses were allowable under Section 37 of the Act as they were incurred wholly and exclusively for business purposes, dismissing the Revenue's argument for spreading the expenses over four years.

Disallowance of Reimbursement to Subsidiary - Question (e):
Regarding the disallowance of reimbursement to a subsidiary for marketing expenses, the Court found that the payment was in the nature of reimbursement and did not involve any embedded income taxable in India. Citing relevant case law, the Court held that tax deduction at source was not required for such reimbursements, and thus, disallowance under Section 40(a)(1) of the Act was not justified.

In conclusion, the Court admitted the appeal on substantial questions of law related to guarantee charges and corporate guarantee fees, while dismissing other questions based on established legal principles and precedents.