2021 (10) TMI 463 - HC - Income Tax

Denying deduction of expatriate costs u/s 37 1 - agreement between the assessee and the employees wherein it was agreed that the income tax liability on the salary to be paid to the employees, shall be borne by the assessee-company but no such contractual liability has been established by the assessee in the present case - HELD THAT - As the matter requires re-consideration by the Assessing Officer in the light of the ruling of this Court in M/s Rambus Chip Technologies India Pvt. Ltd. 2018 (7) TMI 2215 - KARNATAKA HIGH COURT - More particularly, in the orders impugned, no adjudication is made on the aspect of any existing contractual liability between the assessee and its employees inasmuch as the income tax liability. Hence, setting aside the impugned order, we restore the matter to the file of the Assessing Officer to re-consider the matter sans answering the substantial questions of law raised herein.

Summary

Issues:
1. Denial of deduction of expatriate costs under Section 37[1] of the Income Tax Act.
2. Establishment of commercial expediency in incurring expatriate costs.

Analysis:
1. The appeal was filed by the assessee challenging the order of the Income Tax Appellate Tribunal regarding the denial of deduction of expatriate costs under Section 37[1] of the Income Tax Act for the assessment year 2007-08. The assessee, a foreign company with a branch office in India, faced disallowances of expenditure related to expatriate costs by the Tax Authorities. The Dispute Resolution Panel and the Tribunal upheld the disallowances, leading to the present appeal.

2. The assessee contended that expatriate costs were essential for monitoring marketing activities and were included in operational costs. The Tribunal's disallowance was challenged based on the argument that the tax paid on employee salaries should be deductible under Section 37[1] of the Act. Reference was made to a previous judgment and the commercial expediency of incurring such costs was emphasized.

3. The Revenue argued that unlike a previous case where a contractual agreement existed between the company and employees regarding tax liabilities, no such agreement was proven in the current case. The absence of a contractual obligation to bear income tax liability on employee salaries distinguished this case from the precedent, justifying the disallowance upheld by the Tribunal.

4. The Court analyzed previous judgments and relevant legal provisions, emphasizing the need to establish contractual liability between the assessee and employees regarding income tax payments. Referring to a specific case, the Court highlighted the deductibility of contractual income tax liability under Section 37 of the Act. The Court found that the matter required re-consideration by the Assessing Officer to determine the existence of any contractual liability between the assessee and its employees regarding income tax.

5. Consequently, the Court allowed the appeal, setting aside the Tribunal's order and restoring the matter to the Assessing Officer for re-consideration. The Assessing Officer was directed to examine the contractual liability aspect in light of previous rulings and pass appropriate orders promptly. All rights and contentions of the parties were preserved for further adjudication on this limited issue.