2023 (8) TMI 1610 - AT - Income Tax

Reopening of the assessment u/s 147 - Reasons to believe - undisclosed transactions carried out with its AE s - HELD THAT - Assessee has not filed the details of transactions carried out with its AE s in Form No.3CEB as noted by the DRP in its order and now it is not been controverted by the ld.counsel for the assessee. Hence we confirm the order of DRP directing the AO to affirm the reopening and reopening is accordingly held valid. This ground of assessee is dismissed. Adjustment to international transactions towards guarantee commission - HELD THAT - The issue being covered by the decision of in the case of Redington (India) Ltd. 2020 (12) TMI 516 - MADRAS HIGH COURT we direct the AO to restrict the disallowance at 0.5% of the guarantee value. Accordingly this common issue in both the appeals of assessee is partly-allowed. Disallowance of expenses relatable to exempt income by invoking the provisions of section 14A r.w.rule 8D(2)(ii) (iii) - HELD THAT - Assessee tried to show that interest free funds available are more than the investments giving rise to exempt income and the AO has nowhere proved the nexus between the interest bearing funds used for the purpose of investments giving rise to exempt income. We direct the AO to verify the interest free funds available and the investments giving rise to exempt income. The assessee will produce the books of accounts and the extract of details of investment before the AO. In term of the above this issue is set aside to the file of the AO. Disallowance u/Rule 8D(2)(iii) of the Act i.e. 0.5% of average value of investment being administrative expenses the AO will re-compute the disallowance only on the investments giving rise to exempt income and will exclude the investments which does not give exempt income. In term of the above this also will be verified by the AO. Hence this issue is remitted back to the file of the AO. Disallowance of interest expenditure on interest free funds to subsidiaries u/s.36(1)(iii) - HELD THAT - After hearing both the sides and going through the facts neither the AO nor the CIT(A) has carried out any exercise to verify availability of interest free funds used for the purpose of advancing this loan in term of the decision of Reliance Industries 2019 (1) TMI 757 - SUPREME COURT Since this exercise is not carried out we restore this issue back to the file of the AO with similar direction as given in assessment year 2011-12. Disallow software expenses - assessee has made payment for SAP license fee application software MS Office license fee AMC Antivirus software and onsite support. The DRP noted that the payments like purchase of MS office and other application software is to be considered as capital in nature as the same is not going to be used for short span but it is giving enduring benefit and directed that as regards to SAP licence fee AMC Antivirus software and onsite support the AO can verify from records as to whether the payments for the same is one-time payment or it is in recurring nature of expenditure - HELD THAT - Tribunal order in assessee s own case for assessment year 2010-11 2016 (3) TMI 1486 - ITAT CHENNAI wherein the Tribunal confirmed the findings of DRP for these two types of expenditure one is recurring annual expenses and another is permanent expenses. DRP has rightly found that the permanent license is in the capital field. As far as application of software is concerned again we have to see whether it was temporary one or for long period. If the application software is only for a short period then it has to be treated as revenue expenditure and it has to be allowed in the year in which it was incurred. If the application software is for a longer period then it will have an enduring benefit. Therefore as rightly found by the Dispute Resolution Panel the expenditure has to be capitalized. The Dispute Resolution Panel directed the AO to verify the nature of expenditure and thereafter to decide the issue. Therefore this Tribunal do not find any reason to interfere with the order of the lower authority and accordingly the same is confirmed. Issue of assessee s appeal is allowed for statistical purposes. TDS u/s 195 - Disallowance of export commission for non-deduction of TDS - Addition by invoking the provisions of section 40(a)(ia) as the payment made to non-residents is in the nature of technical services i.e. FTS - HELD THAT - We feel that the matter should be remitted back to the file of the AO and the AO will verify the facts in term of the decision of Faizan Shoes Pvt. Ltd. 2014 (8) TMI 170 - MADRAS HIGH COURT wherein held provisions of Income-tax Act need to be examined irrespective of the fact whether the circular of the CBDT is withdrawn or not. Therefore this Tribunal is of the considered opinion that the matter needs to be re-examined by the Assessing Officer. - In term of the above this issue is allowed for statistical purposes. Disallowing additional depreciation - Addition of the claim of balance 50% of additional depreciation in the current year in respect of the assets acquired in the 2nd half of preceding year - HELD THAT - Tribunal s decision for assessment year 2010-11 2016 (3) TMI 1486 - ITAT CHENNAI wherein the Tribunal has already allowed the claim of assessee by holding that the balance 50% has to be allowed in the immediately next year as statting assessee is eligible for additional depreciation in the subsequent year since the machinery was put to use for 180 days in the earlier assessment year. Thus assessee is entitled for claim of additional depreciation. Therefore we allow the claim of assessee.

1. ISSUES PRESENTED and CONSIDERED

The legal judgment presents and considers several core legal questions:

Whether the reopening of the assessment under Section 147 of the Income Tax Act, 1961, is valid.
Whether adjustments to international transactions towards guarantee commission are justified.
Whether disallowance of expenses related to exempt income under Section 14A read with Rule 8D is appropriate.
Whether disallowance of interest expenditure on interest-free funds to subsidiaries under Section 36(1)(iii) is justified.
Whether the disallowance of software expenses as capital expenditure is correct.
Whether the disallowance of export commission for non-deduction of TDS under Section 40(a)(ia) is valid.
Whether the disallowance of additional depreciation claimed by the assessee is justified.

2. ISSUE-WISE DETAILED ANALYSIS

Reopening of Assessment (Section 147)

Legal Framework and Precedents: The reopening of assessment is governed by Section 147 of the Income Tax Act, which allows reassessment if income chargeable to tax has escaped assessment.
Court's Interpretation and Reasoning: The court noted that the assessee did not file the necessary details of transactions with its Associated Enterprises (AEs) in Form No. 3CEB, as required.
Key Evidence and Findings: The absence of Form No. 3CEB details was pivotal.
Application of Law to Facts: The court upheld the reopening as valid due to non-compliance by the assessee.
Conclusions: The reopening of assessment was held valid, and the assessee's ground was dismissed.

Adjustment to International Transactions (Guarantee Commission)

Legal Framework and Precedents: The adjustment was based on the decisions of the jurisdictional High Court and other precedents, which set a benchmark rate for assessing corporate guarantees.
Court's Interpretation and Reasoning: The court relied on the precedent that corporate guarantees should be assessed at 0.5% of the guarantee value.
Key Evidence and Findings: The court acknowledged the provision of corporate guarantees to AEs.
Application of Law to Facts: The adjustment was directed to be restricted to 0.5% of the guarantee value.
Conclusions: The issue was partly allowed in favor of the assessee.

Disallowance of Expenses Relatable to Exempt Income (Section 14A)

Legal Framework and Precedents: Section 14A and Rule 8D govern the disallowance of expenses related to exempt income.
Court's Interpretation and Reasoning: The court noted the need to verify the availability of interest-free funds and the nexus with exempt income investments.
Key Evidence and Findings: The balance sheet and investment details were crucial.
Application of Law to Facts: The matter was remitted back to the AO for verification.
Conclusions: The issue was set aside for re-examination by the AO.

Disallowance of Interest Expenditure (Section 36(1)(iii))

Legal Framework and Precedents: The disallowance pertains to interest expenditure on loans to subsidiaries.
Court's Interpretation and Reasoning: The court highlighted the need to verify the availability of interest-free funds.
Key Evidence and Findings: The balance sheet and loan details were pivotal.
Application of Law to Facts: The issue was remitted back to the AO for verification.
Conclusions: The issue was allowed for statistical purposes.

Disallowance of Software Expenses

Legal Framework and Precedents: The nature of software expenses as capital or revenue expenditure was examined based on precedents.
Court's Interpretation and Reasoning: The court directed verification of the nature of software expenses.
Key Evidence and Findings: The distinction between recurring and permanent expenses was crucial.
Application of Law to Facts: The matter was remitted back to the AO for verification.
Conclusions: The issue was allowed for statistical purposes.

Disallowance of Export Commission (Section 40(a)(ia))

Legal Framework and Precedents: The disallowance was based on non-deduction of TDS on payments to non-residents.
Court's Interpretation and Reasoning: The court noted the need to examine the nature of services and applicable treaties.
Key Evidence and Findings: The nature of services provided by foreign agents was pivotal.
Application of Law to Facts: The issue was remitted back to the AO for verification.
Conclusions: The issue was allowed for statistical purposes.

Disallowance of Additional Depreciation

Legal Framework and Precedents: The disallowance pertained to additional depreciation claimed on assets.
Court's Interpretation and Reasoning: The court relied on earlier Tribunal decisions allowing such claims.
Key Evidence and Findings: The nature and use of assets were crucial.
Application of Law to Facts: The claim was allowed based on precedents.
Conclusions: The claim of additional depreciation was allowed.

3. SIGNIFICANT HOLDINGS

Reopening of Assessment: "The reopening is accordingly held valid."
Adjustment to International Transactions: "We direct the AO to restrict the disallowance at 0.5% of the guarantee value."
Disallowance of Expenses Relatable to Exempt Income: "This issue is set aside to the file of the AO."
Disallowance of Interest Expenditure: "This issue of assessee's appeal is allowed for statistical purposes."
Disallowance of Software Expenses: "This issue of assessee's appeal is allowed for statistical purposes."
Disallowance of Export Commission: "This issue is allowed for statistical purposes."
Disallowance of Additional Depreciation: "Therefore, we allow the claim of assessee."

The judgment provides a comprehensive analysis of each issue, applying relevant legal principles and precedents to the facts of the case. The court's reasoning and conclusions reflect a careful consideration of the evidence and arguments presented by both parties, resulting in a balanced and well-reasoned decision.

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