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2024 (4) TMI 1140 - AT - Income TaxTDS u/s 195 - non deduction of TDS on payments to non-resident persons - Addition u/s 40(a)(i) - HELD THAT - Arguments now raised by the assessee before us against the taxability of the impugned expenses in India were never raised before the lower authorities. His contention is to the effect that the impugned expenses do not qualify as Fees for technical services, but are in the nature of Independent personal services, covered under Article 14 of DTAA with the concerned countries or in the alternate they qualify as business income whose taxability in India is to be read as per Article 7 of the DTAA. Since it is imperative to determine first the nature of the expenses and thereafter determine which Article of the DTAA deals with their taxability in source and residence country, the issue , in our view needs to be sent back to the AO with the direction to first cull out all the relevant facts relating to the impugned expenses and thereafter adjudicate the issue of their taxability in India both as per the domestic law and as per DTAA with the respective countries, considering all arguments/ contentions made by the assessee. The ground of appeal raised by the assessee is therefore allowed for statistical purposes. Weighted deduction u/s 35(2AB) - expenses incurred, both capital and Revenue in inhouse research and development activity - HELD THAT - When the specified authority itself had approved the incurrence of the capital expenditure for the purpose of carrying out in-house R D facility, there was no question for the AO to have doubted the same. We, therefore, agree with the ld.CIT(A) that there was no basis for the AO to arrive at a finding that the capital expenditure was not incurred in the R D facility of the assessee. We agree with the CIT(A) that the assessee had sufficiently evidenced the said facts to the authorities below. The ld.CIT(A), we hold, as rightly denied the disallowance made by the AO of the weighted deduction claimed by the assessee on the same. Disallowance of clinical trial expenses and analytical and testing expense not incurred in-house facility but testing R D facility - DR was unable to controvert in any way the finding of the ld.CIT(A) that the AO neither objected to the evidence filed by the assessee nor filed any remand report, despite repeated reminders given to him. In view of the same, we hold that the AO has no case before us to plead that these evidences did not support the case of the assessee. DR was unable to controvert the finding of the ld.CIT(A) that these additional evidence sufficiently prove the incurrence of analytical and testing expenses by the assessee; nor was he able to pointed out any infirmity in the explanation of the assessee regarding the incurrence of these expenses for the purpose of R D activity carried out by it - no reason to disagree with the ld.CIT(A) allowing the assessee s claim of weighted deduction on analytical and testing expenditure. Allowing the assessee s claim of weighted deduction on expenses, though not approved by the DSIR - allowance of claim u/s 35(2AB) of the Act cannot be made merely on the basis of disapproval of DSIR in Form No.3CL. See Schaeffler India Ltd 2023 (4) TMI 280 - ITAT AHMEDABAD and Provimi Animal Nutrition India P.Ltd 2020 (12) TMI 177 - ITAT BANGALORE . Addition towards foreign remittances u/s.40(a)(i) - CIT(A) deleted addition pertaining to legal and professional services rendered from entities based in USA - HELD THAT - CIT(A) correctly held services rendered by the afore-noted entities all based in USA were characterised by the AO to be in the nature of fee for technical services, and further noting that the DTAA with USA restricted the scope of taxability of FTS in the source country only with respect to such services, which made available any technical knowledge, skill or know-how . The ld.CIT(A) noted that the assessee having obtained legal or professional services towards registration of products in foreign country, it did not involve any technical knowledge, skill or knowhow, and therefore, the same is not liable to tax in India. DR was unable controvert any of the findings of the ld.CIT(A) as above, both with respect to the fact of services rendered not involving any transfer of technical knowledge, skill or know-how etc. as also with respect to Article 12 of the DTAA between India and USA restricting the scope of FTS such services which made available technical knowledge, skill or know-how etc. Thus, no reason to interfere in the order of the ld.CIT(A) deleting the disallowance made under section 40(a)(i). Nature of expenses - product registration expenses - HELD THAT - No reason to interfere in the order of the ld.CIT(A) deleting the disallowance of product registration expenses noting that this issue had been decided in favour of the assessee by the Hon ble jurisdictional High Court in Asst.Year 2006-07 2015 (1) TMI 1348 - GUJARAT HIGH COURT and also by the ITAT in assessee s own case for Asst.Year 2011-12 2017 (9) TMI 727 - ITAT AHMEDABAD Interest disallowance u/s 36(1)(iii) - disallowance was made with respect to loans advances given by the assessee to one to be sister concerns of the assessee - AO found that no business purpose was demonstrated by the assessee for making aforesaid advances - HELD THAT - CIT(A) noted that identical disallowance of interest made on advances made to CHPL had been deleted by the ITAT in the case of the assessee for Asst.Year 2006-07 in 2014 (7) TMI 684 - ITAT AHMEDABAD finding the advance to have been made for business purpose. Also noted from the facts demonstrated by the assessee that it had sufficient owned funds by way of shareholders fund for making impugned advances, therefore, following the ratio laid down by Reliance Utilities 2009 (1) TMI 4 - BOMBAY HIGH COURT , Ashok Commercial Enterprises 2010 (2) TMI 1182 - BOMBAY HIGH COURT , Hotel Savera 1997 (11) TMI 37 - MADRAS HIGH COURT deleted the disallowance of interest made by the AO in entirety. No reason to interfere in the order of the ld.CIT(A) deleting the disallowance of interest under section 36(1)(iii). Addition u/s 14A - disallowance of interest expenditure incurred for the purpose of earning exempt income - suo moto addition made by assessee - HELD THAT - No reason to interfere in the order of the ld.CIT(A) in restricting the disallowance under section 14A to the extent of exempt income earned by the assessee and thus allowing he assessee to withdraw suo moto disallowance made by it. MAT - adjustment made to book profits of the assessee under section 115JB of the Act on account of provision for bad and doubtful debts and provision for diminution in value of investments - HELD THAT - .CIT(A) deleted the adjustment so made taking note of the proposition of law laid down by case of CIT Vs. Vodafone Essar Gujarat Ltd 2017 (8) TMI 451 - GUJARAT HIGH COURT , Karnataka High Court decision in the case of CIT Vs. Yokogwa India Ltd 2011 (8) TMI 766 - KARNATAKA HIGH COURT holding that were provisions have been created by reducing the value of the respective assets, adjustment specified in Explanation (1)(i) to the book profits of the assessee by adding to the same, are not to be done. The ld.CIT(A) held that the Hon ble High Court had interpreted the Explanation 1(1) of section 115JB of the Act stating that only, when provisions were debited to P L account by creating provisions and not by obliterating the value of assets that Explanation 1(1) of the section 115JB was attracted. In view of the above proposition of law, he found that in the facts of the present case, the provision on account of bad and doubtful debts and on account of diminution in the value of assets, had been created by correspondingly reducing the value of the respective assets - Thus no adjustment in terms of Explanation 1(1) to section 115JB was warranted on account of these provisions. Thus, no reason to interfere in the order of the ld.CIT(A) deleting adjustment made to the book profits of the assessee on account of provision for bad and doubtful debts and provision for diminution in the value of the assessee. Adjustment made u/s 115JB of the Act in respect of disallowance u/s 14A of the Act - HELD THAT - CIT(A) restricted the disallowance made under section 14A to the extent of exempt income, which has been confirmed by us in the grounds no.8 9 of appeal raised by the Revenue. Therefore, the adjustment, if any, under section 115JB of the Act is to be restricted to this extent. Even otherwise, we have noted that the ld.CIT(A) deleted the entire adjustment made, finding the issue to be covered by the decision of Gujarat State Fertilizers Chemicals Ltd 2013 (7) TMI 701 - GUJARAT HIGH COURT and also noting that the ITAT had ruled in favour of the assessee on an identical issue in Asst.Year 2006-07.
Issues Involved:
1. Disallowance under section 40(a)(i) of the Income Tax Act. 2. Claim of weighted deduction under section 35(2AB) of the Act. 3. Product registration expenses treated as capital in nature. 4. Interest disallowance under section 36(1)(iii) of the Act. 5. Disallowance under section 14A of the Act. 6. Adjustments to book profits under section 115JB of the Act. Detailed Analysis: 1. Disallowance under Section 40(a)(i) of the Act: Issue: The assessee was partly disallowed expenses for non-deduction of tax at source on payments to non-residents. Facts: The Assessing Officer (AO) disallowed Rs.67,33,167/- for non-deduction of TDS on payments to non-residents, classifying them as Fees for Technical Services (FTS) under section 9(1)(vii) of the Act. The Commissioner of Income Tax (Appeals) [CIT(A)] partially allowed the appeal, deleting the disallowance for payments to USA residents but confirming Rs.19,34,368/- for payments to other countries. Judgment: The Tribunal remanded the issue back to the AO for re-examination, directing to determine the nature of expenses and their taxability under relevant DTAA provisions. 2. Claim of Weighted Deduction under Section 35(2AB) of the Act: Issue: The assessee's claim for weighted deduction on R&D expenses was disputed. Facts: The AO disallowed claims on capital and revenue expenses not approved by DSIR. CIT(A) deleted the disallowances, noting that the assessee had sufficient evidence and DSIR approval for the expenses. Judgment: The Tribunal upheld CIT(A)’s decision, confirming that the expenses were incurred in the R&D facility and approved by DSIR. 3. Product Registration Expenses Treated as Capital in Nature: Issue: Whether product registration expenses should be treated as capital expenditure. Facts: The AO treated product registration expenses as capital expenditure, creating intangible assets. CIT(A) deleted the disallowance, citing precedents from the High Court and ITAT favoring the assessee. Judgment: The Tribunal upheld CIT(A)’s decision, confirming that the issue had been consistently decided in favor of the assessee in previous years. 4. Interest Disallowance under Section 36(1)(iii) of the Act: Issue: Disallowance of interest on loans and advances given to sister concerns and on share application money. Facts: The AO disallowed interest, finding no business purpose for the advances. CIT(A) deleted the disallowance, noting sufficient owned funds and previous ITAT decisions favoring the assessee. Judgment: The Tribunal upheld CIT(A)’s decision, confirming that the advances were for business purposes and funded by sufficient owned funds. 5. Disallowance under Section 14A of the Act: Issue: Disallowance of expenses incurred for earning exempt income. Facts: The AO computed disallowance under Rule 8D, while CIT(A) restricted it to the extent of exempt income earned, allowing the assessee to withdraw suo-moto disallowance. Judgment: The Tribunal upheld CIT(A)’s decision, confirming that disallowance under section 14A should be restricted to the exempt income earned. 6. Adjustments to Book Profits under Section 115JB of the Act: Issue: Adjustments to book profits for provisions for bad debts, diminution in value of investments, and disallowance under section 14A. Facts: The AO made adjustments to book profits for these provisions. CIT(A) deleted the adjustments, citing High Court and ITAT precedents. Judgment: The Tribunal upheld CIT(A)’s decision, confirming that adjustments under section 115JB were not warranted as the provisions were created by reducing the value of respective assets. Conclusion: The Tribunal largely upheld the CIT(A)’s decisions, favoring the assessee on most issues, and remanded certain matters back to the AO for re-examination. The appeals of the Revenue were dismissed, and the assessee's appeals were allowed for statistical purposes.
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