2008 (8) TMI 399 - AT - Income Tax

Disallowance u/s 40(a)(i) - expenditure on VSAT uplinking charges and global accounts manager expenses - foreign exchange fluctuation - depreciation on computer to the extent it was attributable to the increase in WDV as a result of foreign exchange fluctuation - depreciation at a higher rate of 60 per cent on items such as UPS, printers, scanners, modem, NT server etc - expenditure incurred on leasehold improvements and temporary erections. Disallowance u/s 40(a)(i) - Nature of payment - expenditure on VSAT uplinking charges and global accounts manager expenses - business of supplying chain management, logistics and freight forwarding services in relation to movement of goods and cargo within India and outside India by road, rail, air or ship - CIT (A) deleted the entire disallowance made by the AO - HELD THAT - Keeping in view of the decision in the Skycell Communications Ltd. 2001 (2) TMI 57 - MADRAS HIGH COURT and PanAmSat International Systems Inc. 2006 (8) TMI 238 - ITAT DELHI-A , we are of the view that the VSAT uplinking charges paid by the assessee company to its parent company were not in the nature of fees for technical services and the same being not liable for deduction of tax at source, the disallowance made by the AO by invoking the provisions of s. 40(a)(1) was not sustainable. Similarly, we are of the view that the amount paid by the assessee company to its parent company on account of reimbursement of expenditure incurred in respect of global accounts manager cannot be treated as payment of salary so as to attract the deduction of tax at source. Undisputedly, the global management staff employed at headquarters were the employees of the parent company viz. Expeditors, USA and there being no employer employee relationship between the said employees and the assessee company, the reimbursement of expenses incurred in relation to them on proportionate basis by the assessee company to the parent company could not be treated as in the nature of salary paid by the assessee company. It was a case of reimbursement of common expenses incurred by the parent company for the benefit of all the group concerns including the assessee company which did not attract any deduction of tax and there was no question of making any disallowance by invoking the provisions of s. 40(a)(iii) for non-deduction of tax from such reimbursement. In that view of the matter, we uphold the impugned order of the learned CIT(A) deleting the disallowance made by the AO by invoking the provisions of ss. 40 (a)(i) and 40 (a)(iii). Ground No. 1 of the Revenue's appeal is accordingly dismissed. Disallowance on foreign exchange fluctuation - assessee company claimed a loss - CIT(A) deleted the disallowance - HELD THAT - This issue is squarely covered in favour of the assessee by the judgment in the case of CIT vs. Woodward Governor India (P) Ltd. Ors. 2007 (4) TMI 118 - DELHI HIGH COURT held that the liability arising out of contracts had already stood accrued the minute the contract was entered into and the mere postponement of the payment of such liability to a future date would not extinguish the same so as to render it notional or contingent. It was also held that any increase in such liability as a result of fluctuation in the value of foreign currency in relation to Indian currency thus was a fait accompli and such increase in liability as per the exchange rate prevailing on the last date of the financial year was allowable as deduction being not notional or contingent. Respectfully following the precedent, we uphold the impugned order of the ld CIT(A) on this issue and dismiss ground No. 2 of the Revenue's appeal. Disallowance made by the AO on account of depreciation on computer to the extent it was attributable to the increase in WDV as a result of foreign exchange fluctuation - CIT deleted the disallowance - HELD THAT - This issue is squarely covered in favour of the assessee by the judgment in the case of Woodward Governor India (P) Ltd. 2007 (4) TMI 118 - DELHI HIGH COURT held that in a case where an assessee has acquired any capital asset from abroad for the purpose of his business or profession on credit or on deferred payment terms or against a loan in foreign currency and the whole or part of the cost of such asset or of the loan in foreign currency is outstanding as on the date on which there was a change in the rate of exchange of currency, the original actual cost to the assessee of such asset is required to be increased or as the case may be reduced correspondingly, inter alia, for the purposes of depreciation. It was also held that the amendment made to s. 43A w.e.f. 1st April, 2003 was prospective and would accordingly apply in relation to AY 2003-04 and subsequent years - As the assessment year involved in this appeal is 2001-02, we respectfully follow the precedent, uphold the impugned order of the ld CIT(A) on this issue. Ground No. 3 of the Revenue's appeal is accordingly dismissed. Claim for depreciation at a higher rate of 60 per cent on items such as UPS, printers, scanners, modem, NT server etc. - Allowed by AO as well as by the ld CIT(A) @ 25 per cent - HELD THAT - This issue is squarely covered in favour of the assessee by the decision of a co-ordinate Bench of this Tribunal in assessee's own case for AY 2003-04, held that the peripherals such as printers, scanners, NT server, etc. form integral part of the computer and the same, therefore, are eligible for depreciation at a higher rate as applicable to a computer - Respectfully following the precedent, we set aside the impugned order of the ld CIT(A) and direct the AO to allow the depreciation as claimed by the assessee company. Ground No. 1 of the assessee's appeal is accordingly allowed. Disallowance on expenditure incurred on leasehold improvements and temporary erections - nature capital or revenue - On Persual of relevant record, it is clear that the expenditure claimed to be incurred by the assessee company on repairs thus was on capital account as well as on revenue account and it is, therefore, necessary to examine the same in detail with respect to each item to ascertain their exact nature being capital or revenue - A similar exercise is also required to be done in respect of expenses claimed to be incurred by the assessee company on temporary erections in the premises taken on lease for godown purposes as the perusal of the details of the said expenses clearly shows that some of them were of capital nature whereas some of them were of revenue nature being incurred on repairs. As this exercise has not been done either by the AO or by the ld CIT(A) appropriately in the desired manner, we find it just and proper to restore this matter to the file of the AO for deciding the issue afresh after doing such exercise - As a matter of fact, once the expenditure is held to be of capital nature, the same no more remains in the nature of repairs and it cannot be argued that the same is still allowable as expenditure on repairs under s. 30(a)(i) - We find from the perusal of the lease agreement of the paper book that the lease deed was for a period of three years which was renewable for a further period of three years with mutual consent of the parties as per cl. 17 of the lease agreement. It, therefore, cannot be said that the premises were taken on lease by the assessee company for a short period and the structures erected therein were thus temporary on this count. In any case, Explanation below s. 30(a) makes no distinction between the premises taken on lease for a short period or for a long period and this aspect of the matter thus has no bearing while ascertaining the exact nature of the expenses, whether capital or revenue - Therefore, we set aside the impugned order of the ld CIT(A) on this issue and restore the matter to the file of the AO for deciding the same afresh to ascertain exact nature of the expenses. Ground No. 2 of the assessee's appeal is accordingly treated as allowed. In the result, the appeal of the Revenue is dismissed whereas the appeal of the assessee is treated as allowed as indicated above.

Summary

Issues Involved:
1. Disallowance of expenditure on VSAT uplinking charges and global account manager expenses.
2. Disallowance of foreign exchange fluctuation loss.
3. Disallowance of depreciation on computers attributable to foreign exchange fluctuation.
4. Claim for higher depreciation on computer peripherals.
5. Disallowance of expenditure on leasehold improvements and temporary erections.

Detailed Analysis:

1. Disallowance of expenditure on VSAT uplinking charges and global account manager expenses:
The Revenue's appeal contested the CIT(A)'s decision to delete the disallowance made by the AO regarding VSAT uplinking charges and global account manager expenses. The AO disallowed these expenses under Sections 40(a)(i) and 40(a)(iii) for non-deduction of tax at source. The CIT(A) held that VSAT uplinking charges were not fees for technical services, and the global account manager expenses were reimbursements, not salary payments. The Tribunal upheld the CIT(A)'s decision, noting that the VSAT charges were for a standard communication facility and not technical services, and the global account manager expenses were reimbursements without an employer-employee relationship.

2. Disallowance of foreign exchange fluctuation loss:
The AO disallowed the assessee's claim for a foreign exchange fluctuation loss, treating it as notional. The CIT(A) allowed the claim, relying on a Special Bench decision which held that such a loss was a fait accompli. The Tribunal upheld this decision, citing the Delhi High Court's judgment in Woodward Governor India (P) Ltd., which recognized such losses as actual and not notional.

3. Disallowance of depreciation on computers attributable to foreign exchange fluctuation:
The AO disallowed depreciation on the increased WDV of computers due to foreign exchange fluctuation. The CIT(A) allowed the claim, relying on the pre-amended Section 43A and a Gujarat High Court decision. The Tribunal upheld the CIT(A)'s decision, referencing the Delhi High Court's judgment in Woodward Governor India (P) Ltd., which allowed such adjustments for depreciation purposes.

4. Claim for higher depreciation on computer peripherals:
The assessee claimed a higher depreciation rate of 60% on items like UPS, printers, scanners, and servers, which the AO and CIT(A) allowed at 25%. The Tribunal allowed the higher rate, following a previous decision in the assessee's case for the assessment year 2003-04, which recognized these items as integral parts of a computer.

5. Disallowance of expenditure on leasehold improvements and temporary erections:
The AO treated the expenditure on leasehold improvements and temporary erections as capital in nature, allowing only 10% depreciation. The CIT(A) upheld this view but directed bifurcation under different asset blocks. The Tribunal found that the expenses included both capital and revenue items and remanded the matter to the AO for detailed examination to distinguish between capital and revenue expenditures.

Conclusion:
The Tribunal dismissed the Revenue's appeal and allowed the assessee's appeal in part, directing specific re-examinations and adjustments as per the detailed findings above.