2023 (9) TMI 1114 - AT - Income Tax

Disallowance of subscription to Clayton Christensen Institute (CCI) and to the royal hospital for women Foundation treating the same as in the nature of donation - assessee submitted that this is paid towards sponsorship and not donation and hence is allowable u/s 37(1) - HELD THAT - On perusal of the MOU entered into between the assessee and CCI, we notice that as part of the research programme towards which, the impugned payment is made by the assessee, the employees of the assessee would undergo training in the theory of disruptive innovation. Under the fellowship programme CCI trains the employees of assessee which as per the programme, would help in the future growth of business of the assessee. We, therefore, see merit in the contention of the Ld.AR that though the amount is paid under the head donation , the actual nature of payment is towards the research programme which would benefit the assessee in long term and the same should be allowed as a deduction under section 37(1). Thus payment to CCI towards research program is incurred for the purpose of assessee's business and therefore should be allowed as a deduction under section 37(1). Payment made to Royal Hospital For Women amount is paid towards sponsoring the luggage prize at their annual dinner. Nothing has been brought on record by the assessee to substantiate the claim that sponsoring the prize at the dinner would help the business of the assessee. For the purpose of claiming deduction under section 37(1), it is important for the assessee to establish that the expenditure is incurred wholly and exclusively for the purpose of business, which, in our opinion, is not established by the assessee with respect to the payment made to Royal Hospital For Women. We hold that the amount paid towards sponsoring of prize at the dinner of the Royal Hospital For Women Foundation cannot be held to be incurred for the purpose of the business of the assessee. Accordingly, we uphold the order of the CIT(A) to this extent. This ground raised by the assessee is partly allowed. Advertisement expenditure - AR submitted that the expenditure in respect of advertisement in newspaper / magazine is routinely incurred for the ongoing business of the assessee and is not in the nature of any brand building - As submitted the additional evidence for the first time before Tribunal. Therefore respectfully following the above decision of the co-ordinate bench in assessee s own case for AY 2012-13 2022 (4) TMI 1558 - ITAT MUMBAI we remit the issue back to the Assessing Officer with similar direction with regard to the additional evidences submitted by the assessee. This ground is allowed for statistical purpose. Claim of deduction u/s 10AA in respect of interest income - claim denied for the reason that the claim is not made through filing the revised return - HELD THAT - In Goetze (India) Ltd 2006 (3) TMI 75 - SUPREME COURT held that the assessee can make a claim for deduction, which has not been claimed in the return, only by filing a revised return within the time allowed. In assessee's case, we notice that the assessee, in the computation of income has claimed the deduction under section 10AA without including the interest income to the profits of the business and has only revised the amount of deduction before the lower authorities by including the interest income. Therefore, we see merit in the contention of the Ld.AR that this is not a fresh claim, but a re-computation of the deduction already claimed while filing the return of income. We further notice that a similar view is expressed in the case of Symantee Software India P Ltd 2015 (1) TMI 110 - BOMBAY HIGH COURT while considering the deduction under section 10A of the Act. It is relevant to mention here that the manner of computing deduction under section 10A as per the provisions of subsection (4) of the said section is similar to subsection (7) of section 10AA and therefore the ratio of the above decisions rendered in the context of deduction under section 10A would equally be applicable to deduction claimed under section 10AA - we hold that interest income is also to be considered for the purpose of arriving at the profits eligible for deduction under section 10AA.AO is directed to re-compute the deduction under section 10AA accordingly. Foreign Tax credit in respect of income - AR submitted that foreign tax credit should be provided for taxes paid in overseas jurisdiction in respect of section 10AA eligible income in India as per the tax credit provisions of respective DTAA - HELD THAT - AR brought to our attention that the list of countries involved for the year under consideration from which we notice that the countries listed are same as considered in the above decision of the coordinate bench. Therefore, respectfully following the above decision of the coordinate bench, we hold that the foreign tax paid shall be eligible for the 9 countries as listed in the order of the co-ordinate bench. This ground of the assessee is allowed. Deduction u/s 10AA should be on commercial profit or income from business or profession - HED THAT - As similar issue in assessee s own case for A.Y. 2012-13 2022 (4) TMI 1558 - ITAT MUMBAI we remand the issue to the file of the Assessing Officer for de novo consideration of the issue keeping in mind the decision of the Hon ble Supreme Court in the case of Vijay Industries Ltd 2019 (3) TMI 171 - SUPREME COURT This ground is allowed for statistical purpose. State taxes paid in overseas countries - assessee submitted that the state taxes paid in the USA cannot be disallowed under the provisions of section 40(a)(ii) for the reason that the Explanation inserted with effect from April 1, 2006 provides that the taxes which are eligible for relief under sections 90 or 91 are not eligible for deduction - CIT(A) held that state taxes paid in USA is not eligible for relief under section 90 / 91 and, therefore, directed the Assessing Officer to factually verify and give relief to the assessee - HELD THAT - The deduction claimed towards state taxes paid in the USA has been a recurring issue in assessee s own case for AY 2012-13 2022 (4) TMI 1558 - ITAT MUMBAI as held taxes levied overseas which are not eligible for relief either under section 90 or 91 of the Act, would not come within the purview of section 40(a)(ii) of the Act. It is the specific plea of the assessee that the State tax is not covered either under Indo-US or Indo-Canada tax treaty, hence, not eligible for any relief under section 90 of the Act. Pertinently, unlike section 91 read with Explanation(iv), section 90 does not provide for inclusion of tax levied by any State/ local authority of that country within the expression 'income tax'. In view of the aforesaid, we direct the Assessing Officer to verify whether the State taxes paid by the assessee overseas are eligible for any relief under section 90 of the Act and if it is not found to be so, assessee's claim of deduction should be allowed. TDS u/s 195 - Expenditure on imported software disallowed u/s 40(a)(i) - HELD THAT - As in assessee s own case 2022 (4) TMI 1558 - ITAT MUMBAI given the definition of royalties' contained in article 12 of the DTAAs there was no obligation on the persons mentioned in section 195 of the Act to deduct tax at source, as the distribution agreements and end-user licence agreements did not create any interest or right in such distributors or end-users, which would amount to the use of or right to use any copyright. The provisions contained in the Act which deal with royalty, not being more beneficial to the assessees, had no application in the facts of these cases. The amounts paid by resident Indian end-users or distributors to non-resident computer software manufacturers or suppliers, as consideration for the resale or use of the computer software through enduser licence agreements or distribution agreements, was not royalty for the use of copyright in the computer software, and did not give rise to any income taxable in India, as a result of which the persons referred to in section 195 of the Act were not liable to' deduct any tax at source under section 195. Disallowance u/s 14A - AO held that the assessee has not worked out any expenditure relatable to earning the exempt income and that it is difficult to believe that such a meager expense is incurred for earning the huge exempt income - HELD THAT - We notice that the assessee has made a very detailed submission before the Assessing Officer with regard to the suo motu disallowance - AO in his finding, has simply stated that he is not satisfied with the correctness of the claim of expenditure since the amount disallowed by the assessee is very meager. It is the settled position that the AO cannot invoke the provisions of disallowance under section 14A read with rule 8D without recording any cogent reasons as to why he is not satisfied with the correctness of the claim of the assessee. Mere recording that the amounts being meager compared to the exempt income earned, cannot be construed as recording of satisfaction. Therefore, CIT(A) has correctly deleted the addition made by the Assessing Officer for want of recording of objective satisfaction with cogent reasons. This ground of the revenue is dismissed. Advertisement Expenses (Brand building expenses) - AO held that these expenses are more in the nature of brand building expenses and called on the assessee to file the details and the reason as to why the same cannot be treated as capital in nature - AR submitted that since the expenditure incurred are towards advertising and marketing is a routine expenditure and, therefore, should be allowed as revenue expenditure - HELD THAT - We notice that this ground is same as Ground No.2 contended by the assessee with regard to advertisement expenses in which the CIT(A) granted partial relief to the assessee. While adjudicating the ground raised by the assessee we have remitted the issue back to the Assessing Officer for a denovo adjudication based on the details that are submitted by the assessee. Since the issue contended by the revenue is same this ground of the revenue is disposed of in the same terms. Year-end Provision assessee had made certain provisions for expenses at the end of the year for which deduction of tax at source has not been made - HELD THAT - As similar issue for A.Y. 2013-14 in assessee s own case 2022 (4) TMI 1558 - ITAT MUMBAI held AO has not examined the issue about year-end payments. There is a difference between the payments that are made during the year and the payments made at the fag-end of the year. In our humble opinion in 2nd category of payments tax has been detected in the subsequent year when Bills are booked. In this regard we have also considered the amendment made to Sec.40(a)(ia) by the finance act, 2008, with retrospective effect from 1.4.2005. Principles discussed is also support our view that provisions of tax deducted at source were not applicable in case consideration. Ground decided in favour of the assessee. TP adjustment on provision of software and consultancy services - HELD THAT - As in assessee s own case for A.Y.2012-13 2022 (4) TMI 1558 - ITAT MUMBAI Commissioner (Appeals) has taken pains to examine in detail the alternative benchmarking done by the assessee with foreign comparables and after detailed analysis has shortlisted the final comparables to be considered for comparability analysis. No convincing argument or evidence has been brought on record by the learned Departmental Representative to persuade us to disturb the finding of learned Commissioner (Appeals) on these issues. In view of the aforesaid, we do not find any merit in the grounds raised by the Revenue on the issues. Accordingly, grounds are dismissed. Provision of loans to AE - HELD THAT - Lower authorities have not considered the submissions of the assessee that extending the loan is part of shareholder activity. Therefore respectfully following the assessee's own case for AY 2012-13 2022 (4) TMI 1558 - ITAT MUMBAI we remit the issue back to the Assessing Officer / TPO for denovo adjudication after giving a reasonable opportunity of being heard to the assessee. This ground is accordingly allowed for statistical purposes. Provision of guarantee to AEs - HELD THAT - We hold the provision of guarantee as an international transaction and direct the assessing officer to charge guarantee commission at the rate of 0.5% following the decision of the Hon'ble jurisdictional High Court in Everest Canto Cylinders Ltd 2015 (5) TMI 395 - BOMBAY HIGH COURT . Adjustment made towards receipt of brand royalty from AE - HELD THAT - We have in the earlier part of this order already held that the fee paid by the assessee towards the brand to Tata and Sons Ltd. is not capital in nature for the reason that the brand is not owned by the assessee. Accordingly there cannot be any royalty that needs to be charged on the brand since assessee is not the owner of the brand and there cannot be any TP adjustment towards the amount that ought to have been received by the assessee towards brand royalty. We therefore see no infirmity in the order of the CIT(A). This ground of the revenue is dismissed.

Summary

Issues Involved:
1. Disallowance of subscription to Clayton Christensen Institute (CCI) and Royal Hospital for Women Foundation.
2. Advertisement expenditure.
3. Disallowance of MAT credit to be carried forward.
4. Disallowance of claim of deduction under section 10AA in respect of interest income.
5. Foreign tax credit as per the provisions of section 90(1)(a)(ii) of the Act.
6. Transfer pricing adjustment.
7. Provision of software and consultancy services.
8. Granting of loans to AE.
9. Provision of guarantee to AEs.
10. General issues.

Issue-wise Summary:

1. Disallowance of Subscription to CCI and Royal Hospital for Women Foundation:
The Tribunal held that the payment to CCI for a research program is incurred for the purpose of the assessee's business and should be allowed as a deduction under section 37(1). However, the payment to the Royal Hospital for Women Foundation for sponsoring a prize at a dinner was not established to be for the purpose of business, and thus, the disallowance was upheld.

2. Advertisement Expenditure:
The Tribunal remitted the issue back to the Assessing Officer for de novo adjudication based on the additional evidence submitted by the assessee. The issue of allowability of advertisement expenditure was previously remitted back for earlier assessment years as well.

3. Disallowance of MAT Credit:
The assessee did not press this ground during the hearing, and it was dismissed as not pressed.

4. Claim of Deduction under Section 10AA in Respect of Interest Income:
The Tribunal held that interest income should be considered for computing the deduction under section 10AA, following the decisions of the Jurisdictional High Court and the Full Bench of the Karnataka High Court. The Assessing Officer was directed to re-compute the deduction accordingly.

5. Foreign Tax Credit:
The Tribunal allowed the foreign tax credit for taxes paid in overseas jurisdictions in respect of section 10AA eligible income, following the co-ordinate bench's decision in the assessee's own case for earlier years. The credit was restricted to nine countries listed in the decision.

6. Transfer Pricing Adjustment:
The Tribunal upheld the CIT(A)'s decision to adopt the PLI of gross margin on sales and to include the cost of outsourcing/sub-contracting to the TCS for computing the margin. The Tribunal found no merit in the grounds raised by the Revenue and dismissed them.

7. Provision of Software and Consultancy Services:
The Tribunal upheld the CIT(A)'s decision on the TP adjustment related to software and consultancy services, following the co-ordinate bench's decision in the assessee's own case for earlier years.

8. Granting of Loans to AE:
The Tribunal remitted the issue back to the Assessing Officer/TPO for de novo adjudication, considering the assessee's submission that extending the loan was part of shareholder activity.

9. Provision of Guarantee to AEs:
The Tribunal held that the provision of guarantee is an international transaction and directed the Assessing Officer to charge guarantee commission at the rate of 0.5%, following the jurisdictional High Court's decision.

10. General Issues:
The general grounds raised by the assessee did not warrant any separate adjudication.

Conclusion:
The Tribunal provided detailed directions for each issue, often remitting matters back to the Assessing Officer for further examination, while also upholding the CIT(A)'s decisions on several points. The decisions were largely influenced by precedents set in the assessee's own case for earlier years.