2024 (6) TMI 1122 - AT - Income Tax

Disallowance u/s 40(a)(ia) for year end provision made - assessee explained that assessee company s account were finalized in 2nd week of April every year. In order to reflect its expenses in the books of account as per the applicable accounting standard and accounting policy, the company was required who merely provide for the expenses because the bills from the vendors were not received and these provisions were made on reasonable estimate basis and were debited to expense account and credited the provision account - HELD THAT - As decided in own case for assessment year 2013-14 2022 (4) TMI 1558 - ITAT MUMBAI 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. We have also perused the case laws relied upon by the AR GE India Technology Centre Private Ltd.( 2010 (9) TMI 7 - SUPREME COURT ) and Industrial Development Bank of India 2006 (7) TMI 248 - ITAT BOMBAY-H . Principles discussed in the said judgement is also support our view that provisions of tax deducted at source were not applicable in case consideration Ground number is decided in favour of the assessee. Claim of deduction u/s 10AA in respect of interest income - HELD THAT - As decided the case of the assessee for assessment year 2014-15 2023 (9) TMI 1114 - ITAT MUMBAI wherein as held 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. Accordingly we hold that interest income is also to be considered for the purpose of arriving at the profits eligible for deduction under section 10AA. The Assessing Officer is directed to re-compute the deduction under section 10AA accordingly. Decided in favour of the assessee. TDS u/s 195 - Disallowance of expenses incurred on payment of subscription fees u/s 40(a)(i) - assessee has made payment towards subscription services to various non-resident without deducting withholding taxes - HELD THAT - We have perused the decision of Dun Bradstreet Information Services India Pvt. Ltd 2011 (7) TMI 957 - BOMBAY HIGH COURT wherein held that payment to non-resident for import of business information reports from an American company were not liable to deduction of tax at source u/s 195 of the Act. Also perused the decision of American Chemical Society 2024 (3) TMI 1258 - ITAT MUMBAI wherein held that subscription fees received by assessee, a corporation based in USA from providing access to its online chemistry database and online authorise the independent customers would not qualify as royalty in terms of Sec. 9(1)(vi) and Article 12(3) of India USA DTAA. We have also considered the submission of the assessee that subscription was paid for the services pertaining to publication and same were not an information or advice given individually. The subscription services were not of the nature of transfer of right in the copyright in the article etc - AO has not contrary disproved the material fact that subscription was made for use of a copyrighted article and not for transfer of right in the copyright in the article and assessee had not received any licence for commercial exploitation of the copyright - CIT(A) is not justified in sustaining such disallowance - Decided in favour of the assessee . Disallowance of foreign tax credit in respect of income pertaining to Sec. 10A/10AA eligible units in India - HELD THAT - As perused the decision of ITAT for the assessment year 2009-10 2019 (11) TMI 408 - ITAT MUMBAI wherein as held where the respective tax treaty provides for benefit for foreign tax paid even in respect of income on which the assessee has not paid tax in India, still, it would be eligible for tax credit under section 90 of the Act. Like Article 25 of the Indo USA treaty, treaties with various other countries such as Indo Denmark, Indo Hungary, Indo Norway, Indo Oman, Indo US, Indo Saudi Arabia, Indo Taiwan also have similar provision providing for benefit of foreign tax credit even in respect of income not subjected to tax in India. However, Indo Canada and Indo Finland treaties do not provide for such benefit unless the income is subjected to tax in both the countries. Therefore, the foreign tax credit would be available to the assessee in all cases except the foreign tax paid in Finland and Canada. The Assessing Officer is directed to grant credit accordingly. Thus we direct the assessing officer to allow foreign tax credit subject to the terms and conditions as directed in the above referred order of the ITAT therefore, this ground of appeal of the assessee is allowed for statistical purposes. MAT computation on Addition of Provision for Diminution in value of Investment - Counsel contended that diminution in the value of investment charged to profit and loss account was in the nature of write off loss due to diminution in the value of investment and not the amount retained/provision set aside for diminution in value of investment - HELD THAT - We have perused the decision of ITAT Mumbai in the case of ACIT Vs. Reliance Welfare Association 2018 (1) TMI 855 - ITAT MUMBAI wherein held a debit appearing in Profit Loss Account is not a provisions set aside for diminution in value of investment but a actual charge to the Profit Loss account which has been written off against the value of the current asset. Therefore, we are of the considered view that debit appearing in Profit Loss Account is not a provision of set aside for diminution in value of investment but the actual charged for the loss in the diminution in value of investment. Therefore, we are of the view that for the book profit purpose of section 115JB is not required to be increased as the same is not in the nature of provision. Decided in favour of assessee. Deduction u/s 10AA on commercial profits instead of income from business and profession - HELD THAT - As in the case of assessee for assessment year 2014-15 2023 (9) TMI 1114 - ITAT MUMBAI held that the expression profits and gains derived was subject matter of adjudication by the Hon ble Supreme Court in the case of Vijay Industries Ltd. 2019 (3) TMI 171 - SUPREME COURT wherein the Hon ble Apex Court observed that the profits and gains referred to commercial profits without deducting depreciation and investment allowance as per the Act. Since this aspect was not raised by the assessee before the lower authorities, accordingly, the lower authorities did not have an occasion to give their finding on the same. Hence, in the interest of justice and fair play, we deem it fit and appropriate to remand this issue raised in the additional ground to the file of the ld. AO for denovo adjudication - This ground is allowed for statistical purpose. Disallowance of taxes paid in overseas countries - assessee has paid the state taxes in the USA on its USA sourced income - same was claimed as a deductible expenses in the return of income - AO held that such claim was not allowable as deduction either u/s 37(1) or Sec. 40(a)(ii) - HELD THAT - As for assessment year 2009-10 2019 (11) TMI 408 - ITAT MUMBAI the tax which has been paid abroad would not be covered within the meaning of section 40(a)(ii) of the Act, since, the meaning of the word tax as defined under section 2(43) of the Act would mean only the tax chargeable under the Act. Thus, as per the aforesaid decision of the Hon'ble Jurisdictional High Court, 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. In view of our decision above, no separate adjudication of grounds no.1.2 is required. TDS u/s 195 - Disallowance of expenditure on imported software on account of non-deduction of TDS - HELD THAT - We have perused the decision of ITAT for assessment year 2012-13 2022 (4) TMI 1558 - ITAT MUMBAI ground of appeal of the revenue stand dismissed. Disallowance u/s 14A r.w.Rule 8D(ii) - mandation of recording of objective satisfaction with cogent reasons - HELD THAT - As decided in own case assessment year 2014-15, 2023 (9) TMI 1114 - ITAT MUMBAI it is the settled position that the Assessing Officer 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, we hold that the CIT(A) has correctly deleted the addition made by the Assessing Officer for want of recording of objective satisfaction with cogent reasons. Nature of expenses - disallowance of advertisement expenses (Brand building expenses) - HELD THAT - As it is evident from the details of expenditure mentioned in the aforesaid paragraphs, the expenditures were incurred by the assessee for the purpose of advertisement in newspaper, magazine, events, seminar, conferences, exhibition, advertisement at Airport, etc. We find that on identical issue, the Co ordinate Bench of the Tribunal 2019 (11) TMI 408 - ITAT MUMBAI , passed in assessee s own case in Tata Consultancy Services Ltd. v/s ACIT, for the assessment year 2009 10 held that AO has brought no material on record to establish that the expenditure is for brand building. As observed earlier, the expenditure relates to advertisement in newspaper, magazine, events, seminars, conferences, exhibitions, etc. Thus, the nature of expenditure incurred by the assessee clearly indicates that it was for promoting its own business. Further, considering the turnover of the assessee, the expenditure incurred on advertisement does not appear to be unusually high. That being the case, the expenditure incurred on advertisement cannot be treated to be in the nature of capital expenditure and amortized over a period of five years. Disallowance of payment towards Tata Brand Equity subscription - HELD THAT - We have perused the decision of ITAT for AY. 2011-12 2022 (4) TMI 544 - ITAT MUMBAI following the judicial precedence in case of sister concerns, we direct the Assessing Officer to delete the disallowance on account of subscription fees paid by the assessee to Tata Sons Limited. Disallowance of expenditure of commission to non-resident is allowable as deduction (disallowance u/s 40(a)(i) on account of non-deduction of TDS - HELD THAT - We have perused the decision of ITAT for assessment year 2009-10 in the case of the assessee 2019 (11) TMI 408 - ITAT MUMBAI facts on record clearly reveal that commission has been paid to non resident agents located in their respective countries towards services rendered by them in those countries in relation to obtaining export contracts for the assessee. No material has been brought on record by the Assessing Officer to demonstrate that the non resident agents either have any business connection in India or have PE in India so as to bring the commission payment within the tax net. The factual finding recorded by learned Commissioner (Appeals) that the non resident agents have rendered the services in their respective countries and do not have either any business connection in India or any PE in India has not been controverted by the Revenue. Further, the nature of payment viz. commission has also not been disputed by the Revenue. That being the case, since the commission paid to the non resident agents is not chargeable to tax in India at their hands, there is no necessity for the assessee to withhold tax under section 195(1) of the Act on such payment. - Decided in favour of assessee.

Summary

Issues Involved:
1. Disallowance under Section 40(a)(ia) for year-end provision.
2. Claim of deduction under Section 10AA in respect of interest income.
3. Disallowance of expenses incurred on payment of subscription fees under Section 40(a)(i).
4. Disallowance of foreign tax credit in respect of income pertaining to Section 10A/10AA eligible units in India.
5. Addition of "Provision for Diminution in value of Investment" for computing profit under Section 115JB.
6. Rate of Dividend Distribution Tax on dividend paid to overseas shareholders.
7. Deduction under Section 10AA on commercial profits instead of income from business and profession.
8. Disallowance of taxes paid in overseas countries.
9. Disallowance of expenditure on imported software on account of non-deduction of TDS.
10. Disallowance under Section 14A.
11. Disallowance of advertisement expenses (Brand building expenses).
12. Disallowance of payment towards Tata Brand Equity subscription.
13. Disallowance of expenditure of commission to non-resident under Section 40(a)(i) on account of non-deduction of TDS.
14. Foreign tax credit in respect of income pertaining to Section 10A/10AA eligible units in India.

Detailed Analysis:

1. Disallowance under Section 40(a)(ia) for year-end provision:
During the assessment, the AO noticed that the assessee made year-end provisions without deducting tax. The AO disallowed Rs. 141,55,62,737/- under Section 40(a)(ia). The CIT(A) upheld this disallowance. However, the ITAT, following its previous decisions for AY 2013-14 and 2014-15, allowed the assessee's appeal, stating that the provisions were made on reasonable estimates and no specific vendor accounts were credited, thus no TDS was required.

2. Claim of deduction under Section 10AA in respect of interest income:
The AO disallowed the deduction claim of Rs. 958.82 crores under Section 10AA for interest income, stating it was not part of the return of income. The CIT(A) upheld this. The ITAT, referencing its decision for AY 2014-15, allowed the appeal, noting that the interest income was part of business profits and thus eligible for deduction under Section 10AA.

3. Disallowance of expenses incurred on payment of subscription fees under Section 40(a)(i):
The AO disallowed Rs. 974,46,988/- paid for subscription services, treating it as royalty. The CIT(A) upheld this. The ITAT, referring to the Bombay High Court decision in Dun & Bradstreet Information Services India Pvt. Ltd. and ITAT's decision in American Chemical Society, allowed the appeal, stating the payments were for copyrighted articles and not for transfer of rights in copyright.

4. Disallowance of foreign tax credit in respect of income pertaining to Section 10A/10AA eligible units in India:
The AO disallowed the foreign tax credit claim of Rs. 527,99,93,028/-. The CIT(A) allowed partial relief, directing the AO to allow credit for taxes paid in DTAA countries. The ITAT, following its decision for AY 2009-10, directed the AO to allow the foreign tax credit as per the terms and conditions of the respective DTAA.

5. Addition of "Provision for Diminution in value of Investment" for computing profit under Section 115JB:
The AO added Rs. 2,50,00,000/- to the book profit under Section 115JB. The CIT(A) upheld this. The ITAT, referring to the ITAT Mumbai decision in ACIT vs. Reliance Welfare Association, allowed the appeal, stating the amount was a write-off loss and not a provision.

6. Rate of Dividend Distribution Tax on dividend paid to overseas shareholders:
This ground was not pressed by the assessee and thus dismissed.

7. Deduction under Section 10AA on commercial profits instead of income from business and profession:
The ITAT remanded the issue to the AO for de novo consideration, following its decision in the assessee's case for AY 2012-13 and 2014-15, where it was held that the deduction should be on commercial profits.

8. Disallowance of taxes paid in overseas countries:
The AO disallowed Rs. 947,89,832/- paid as state taxes in the USA. The CIT(A) allowed the appeal, following the ITAT's decision for AY 2007-08 to 2010-11. The ITAT upheld the CIT(A)'s decision, directing the AO to verify and allow the deduction if the taxes were not eligible for relief under Section 90.

9. Disallowance of expenditure on imported software on account of non-deduction of TDS:
The AO disallowed Rs. 104,72,46,907/-, treating it as royalty. The CIT(A) allowed the appeal, following the ITAT's decision for AY 2005-06. The ITAT, referencing the Supreme Court decision in Engineering Analysis Centre of Excellence (P) Ltd., dismissed the revenue's appeal.

10. Disallowance under Section 14A:
The AO disallowed Rs. 280,58,643/- under Section 14A. The CIT(A) deleted the addition, stating the AO did not provide cogent reasons. The ITAT upheld the CIT(A)'s decision, following its previous decision for AY 2014-15.

11. Disallowance of advertisement expenses (Brand building expenses):
The AO treated Rs. 148,06,18,804/- as capital expenditure. The CIT(A) allowed the appeal, following the ITAT's decision for AY 2009-10. The ITAT upheld the CIT(A)'s decision, referencing its decision for AY 2011-12.

12. Disallowance of payment towards Tata Brand Equity subscription:
The AO treated Rs. 75 crores as capital expenditure. The CIT(A) allowed the appeal. The ITAT upheld the CIT(A)'s decision, following its decision for AY 2011-12.

13. Disallowance of expenditure of commission to non-resident under Section 40(a)(i) on account of non-deduction of TDS:
The AO disallowed Rs. 3,97,41,017/-. The CIT(A) allowed the appeal, following the ITAT's decision for AY 2008-09 and 2010-11. The ITAT upheld the CIT(A)'s decision, referencing its decision for AY 2009-10.

14. Foreign tax credit in respect of income pertaining to Section 10A/10AA eligible units in India:
This issue was adjudicated in favor of the assessee following the ITAT's decision for AY 2007-08 to 2013-14, directing the AO to allow the foreign tax credit as per the respective DTAA provisions.

Conclusion:
The appeals were partly allowed for the assessee and dismissed for the revenue, with the ITAT following its previous decisions and relevant case laws.