2023 (4) TMI 325 - AT - Income Tax

Refund of DDT in respect of payments made to non-resident shareholders - levy of Dividend Distribution Tax ('DOT') liability by considering the benefit of applicable DTM between India - Netherlands and India - Germany respectively qua the rate of tax (i.e. 10%) towards payment of dividend to the non-resident shareholders - HELD THAT - We find that the issue relating to claim of refund of DDT in respect of payments made to non-resident shareholders has been dealt in the case of Reckit Benkiser India Pvt. Ltd. 2020 (6) TMI 474 - ITAT KOLKATA wherein it was set aside to the file of Ld. AO for factual verification in the light of an agreement and other relevant documents and the provisions of DTAA. Thus we are unable to lay our hands on this submission - remit the matter back to the file of AO for verification of the amount of dividend paid relating to DDT deposited by the assessee, relevant agreement and documents in respect of non-resident shareholding and the DTAAs of the respective countries of the non resident shareholders and thereafter consider granting of refund of the DDT so claimed by deciding the issue in accordance with law. Deduction towards education cess paid on income-tax and DDT as allowable expenditure u/s. 37(1) - HELD THAT - The issue is no longer res integra as the coordinate bench in the case of Kanoria Chemicals Industries Ltd. 2021 (10) TMI 1153 - ITAT KOLKATA has held that it is not an allowable expenditure u/s. 37(1) of the Act which has been adequately affirmed by the subsequent amendment vide Finance Act, 2021 with retrospective effect. Accordingly, additional ground raised by the assessee for claim of deduction of education cess as allowable expenditure are admitted and dismissed in terms of observations hereinabove. Disallowance of royalty u/s 40(a)(ia) - payment to Kolkata Port Trust ('KOPT') due to non-deduction of tax at source - HELD THAT - We find it proper to remit the matter back to the file of Ld. AO for the limited purpose of verification of discharging of tax liability by KOPT on the impugned amount of royalty payable by the assessee to KOPT - In this respect, we also direct the Ld. AO to exercise his powers available under the Act to call for the relevant information from KOPT for the factual verification and confronting the same to the assessee for its reply, if so desired - ground taken in this respect is allowed for statistical purposes. Disallowance u/s. 14A r.w.r. 8D(2)(iii) - investment made by assessee in shares which yielded dividend - HELD THAT - By placing reliance on the decision in the case of REI Agro Ltd. 2013 (9) TMI 156 - ITAT KOLKATA and in view of the above findings of the coordinate bench of ITAT, Kolkata in assessee's own case 2021 (4) TMI 239 - ITAT KOLKATA CIT(A) correctly directed the Ld. AO to verify and re-compute the disallowance @ 0.5% of the average value of those investment which resulted in exempted income.

Summary

Issues Involved:
1. Disallowance under Section 40(a)(ia) due to non-deduction of tax at source on additional amount provided as payable to KOPT.
2. Disallowance under Section 14A of the Act read with Rule 8D(2)(iii).

Issue-Wise
Detailed Analysis:

1. Disallowance under Section 40(a)(ia) due to non-deduction of tax at source on additional amount provided as payable to KOPT:

Background:
The assessee, engaged in port operations, cargo handling, and related services, filed returns for AY 2012-13, reporting a total income of Rs. 13,02,02,450/-. The case was selected for scrutiny, resulting in additions/disallowances. The primary issue was the disallowance of Rs. 31,24,829/- as royalty payable to KOPT.

Arguments and Findings:
- Allowability under Section 37(1): The Ld. AO disallowed the amount on the grounds that it was an estimated liability and not an ascertained one. However, the coordinate bench of ITAT, Kolkata, in the assessee's own case for AY 2009-10, had allowed similar royalty payments as an ascertained liability. The Ld. CIT(A) followed this precedent, allowing the royalty payable under Section 37(1).

- Non-deduction of TDS under Section 194J: The Ld. AO also disallowed the amount for non-deduction of TDS, invoking Section 40(a)(ia). The Ld. CIT(A) upheld this disallowance, stating that the liability to deduct TDS on royalty payable to a resident payee under Section 194J was no longer contingent upon arbitration outcomes.

Remand for Verification:
- The Ld. Counsel for the assessee referred to the second proviso to Section 40(a)(ia), inserted by the Finance Act, 2012, effective from AY 2013-14, which deems TDS as deducted and paid if the payee has discharged its tax liability. The Ld. Counsel cited judicial precedents to argue for retrospective application of this proviso.
- The Tribunal remitted the matter back to the Ld. AO for verification of KOPT's tax liability discharge on the royalty amount. The Ld. AO was directed to call for relevant information from KOPT and decide the allowability of the amount under Section 40(a)(ia).

2. Disallowance under Section 14A of the Act read with Rule 8D(2)(iii):

Background:
The Ld. AO noted the value of investments and the exempt income earned by the assessee. The assessee claimed that no expenditure was incurred to earn the exempt income, thus no disallowance under Section 14A was warranted.

Arguments and Findings:
- The Ld. CIT(A) referred to the coordinate bench of ITAT, Kolkata's decision in the assessee's own case for AY 2009-10, which directed the Ld. AO to compute disallowance under Rule 8D(2)(iii) only for investments yielding exempt income.
- The Tribunal upheld the Ld. CIT(A)'s directions, following the jurisdictional High Court's affirmation in CIT vs. REI Agro Limited, which validated the computation of disallowance under Rule 8D(2)(iii) only for investments yielding exempt income.

Conclusion:
- For the issue of disallowance under Section 40(a)(ia): The Tribunal remitted the matter back to the Ld. AO for verification of KOPT's tax liability discharge and subsequent decision on the allowability of the royalty amount.
- For the issue of disallowance under Section 14A: The Tribunal upheld the Ld. CIT(A)'s directions for verification and recomputation of disallowance under Rule 8D(2)(iii) for investments yielding exempt income.

Result:
All three appeals of the assessee were partly allowed for statistical purposes. The order was pronounced in the open court on January 9, 2023.