2024 (12) TMI 199 - AT - Income Tax

Addition by allocating the expenses of head office against the profits of the MEPZ unit - HELD THAT - The common expenditure of the head Quarters needs to be allocated on a reasonable and scientific basis to the eligible unit for correctly determining its profit during the year. We also of the considered view that the commission and fees paid to the Directors, the audit and certification fees, claimed as HO expense, was in the nature of the expenses that relate to activities at the strategic, managerial, regulatory and overall oversight level and has a direct nexus with the activities at MPEZ availing deduction under Section 10AA. The Head Office (HO) does not exist for its own sake, but its existence is relevant for all activities undertaken by various undertakings /divisions/profit centers and ought to be reasonably allocated to the eligible undertakings. We also note that allocating the expenses on proportionate basis of turnover is reasonable. We are, therefore, of the considered opinion that the AO is justified in allocating such expenses in the nature of commission to the Directors, Audit fees and bank and loan processing charges to the MEPZ units. We are supported in our view of apportionment of expense by the decision of the hon ble Delhi High Court in the case of EHPT India P ltd 2011 (12) TMI 49 - DELHI HIGH COURT which accepted, in principle, the concept of allocation of expense to the eligible units held that here alternative methods of apportionment of the expenses are recognized and there is no statutory or fixed formula, the endeavour can only be towards approximation without any great precision or exactness. If such is the endeavour, it can hardly be said that there is an attempt to distort the profits - decided against assessee. Income attributed to the MEPZ unit on account of Goods transferred to 'MPEZ' unit - HELD THAT - As we find that the CIT(A) has not recorded a finding that such goods are transferred at the Fair Market Value. Respectfully following the decision of Wipro Ltd 2012 (12) TMI 592 - ITAT BANGALORE relied upon by the assessee, we remit this issue back to the AO for ascertaining the fair market value of such goods transferred to and from the MEPZ unit to arrive at the profit of the eligible unit. The ground no 3 is decided accordingly. Disallowance on account of prior period expenses - AO observed that the assessee has not been able to substantiate with concrete documentary evidence that the prior period expenses are crystallized in the year under consideration - HELD THAT - The assessee, before us, has argued that the prior period expenses quantified during the year is allowed in the year of booking. The assessee however, has not controverted the findings of the CIT(A) that assessee did not furnish any detail explanation with respect to misc. expense, repair and maintenance expense and legal and profession fees. As the assessee has not been able to substantiate its claim of such expense being crystalised in the current year, the findings of the CIT(A) is sustained. The ground no 4 is dismissed. Income deemed to accrue or arise in India - Fees for Technical Services FTS - TDS u/s 195 - AR argued that the payment made to ESG International, USA is not an income accrued or arise in India as per section 4,5 9(1)(vii)(b) r.w. Article 12 of the India - USA DTAA - HELD THAT - From the readings of the provisions of section 9(1)(vii)(b), we find that it provides an exception to the taxability of Fees for technical service(FTS) paid by a resident, wherein FTS payable is in respect of services utilized for the purpose of making or earning any income from any source outside India . In the instant case, the assessee made payment made to ESG International USA for the space utilization of warehouse, outside India, for the international operation and for the delivery of material through the warehouse to the overseas customers of the assessee. The ESG International, USA has no business activity in India. We therefore are of the considered opinion that the payment made by the assessee to ESG International, USA is not an income within the ambit of section 9 of the Act. On the issue of application of Article 12 of the Indo-USA DTAA, we find that the condition of managerial services do not find any mention in the Article 12 of the said DTAA. There is a restrictive definition of FTS provided in DTAA and it will, on account of the provision of section 90(2) of the Act, have precedence over the wider definition provided in Explanation 2 of section 9(1)(vii) which includes managerial, technical or consultancy services . We are therefore with the assessee s contention that even if the warehouse charges paid by the assessee are treated as managerial services under the Income Tax Act, the payment received by the ESG International cannot be considered as deemed income that has accrued or arisen in India as DTAA incorporates only the technical or consultancy services and does not prescribes the managerial services as FTS. We also note that the definition of FTS in Article 13(4) of Indo- France is similarly worded as in Article 12 of the Indo-USA DTAA. We therefore are of the considered view that the payment made to ESGI is outside the ambit of fees for technical services as the USA-India DTAA do not provide for managerial services as FTS. We therefore hold that there did not deemed to accrue or arise in India any income for ESGI and hence there is no requirement of tax deduction u/s 195 of the Act on such payment. We also find force in the assessee argument that the Make Available conditions, as per USA-DTAA, are not fulfilled for treating the payment made for warehouse charges as fees for technical services. We find that the assessee is paying the warehousing charges on yearly basis to ESG International which indicates no technology has been transferred and hence the 'make available conditions are not complied with. Therefore, the decision of Bio-Rad Lab (Singapore) Pte Ltd 2023 (10) TMI 1039 - DELHI HIGH COURT squarely applies that the continued provisioning and rendering of services over a substantial period of time would clearly detract from an assumption that technical or consultancy services had been made available . - Decided in favour of assessee. Disallowance of Foreign Travelling Expenditure - CIT(A) held that as the expense related to prior period, sustained the addition - HELD THAT - Having heard the rival submissions, we find in the factual matrix of the instant case, there is no reason to interfere with the order of the CIT(A). Ground is therefore dismissed. Disallowance of Foreign Travelling Expenditure of director - HELD THAT - CIT(A) has admitted that the said expense has been incurred for subsidiary company and the joint venture. We find that the ld DR has not controverted the claim that the directors of the assessee undertook foreign travel for the selling the products of the JV and the subsidiary. This would, in our opinion, naturally advance the business interest of the assessee and there is commercial expediency in undertaking such travel. In view of this and following the decision of the Supreme Court in S.A.BuildeRs 2006 (12) TMI 82 - SUPREME COURT we direct the AO to delete this addition of foreign travel of the directors. Disallowance towards irrecoverable taxes - HELD THAT - We note that the assessee has paid the excise duty on the raw materials for the goods manufactured at the time of manufacturing. When the goods are returned, the assessee does not get back the excise duty paid on the raw materials. Such a payment on account of excise duty has to be allowed as a deduction u/s 37(1) as the same is incurred for the business purpose. This proposition was allowed in the case of Samtel India 2013 (10) TMI 18 - DELHI HIGH COURT AO s method of adding back the non-reversed excise duty to WIP once the sales return takes place, is not correct as when the goods are received back on return, excise duties are not reversed by the Excise Department. Following the decision of Samtel India 2013 (10) TMI 18 - DELHI HIGH COURT we therefore direct the AO to delete the addition on account of irrecoverable taxes. Addition of travelling expenses - HELD THAT - We are of the considered view that where the expense incurred is not under doubt and the same is incurred for the business purposes, the same is required to be allowed. We accordingly direct the AO to delete the ad hoc addition on account of travelling expenditure. Disallowance on account of Gift and presents - as per AO gift and personal expenses have no relation to business activity - HELD THAT - We find considerable force in the assessee argument. We are of the considered view that where the expense incurred is not under doubt and the same is incurred for the business purposes, the same is required to be allowed. We accordingly direct the AO to delete the addition on account of Gift and presents. Allowability of garden expenses - HELD THAT - We are of the considered view that where the expense incurred is not under doubt and the same is incurred for the business purposes, the same is required to be allowed. We accordingly direct the AO to delete the addition on account of Garden expense. Penalty imposed u/s 271(1)(c) - addition on account of payment made to ESGI as FTS - HELD THAT - As addition has been deleted by us in AY 2012-13 hereinabove. Considering the facts of the case, we take recourse in the legal dictum of sublatofundamento, cadit opus , meaning thereby, that in case the foundation is removed, the super structure falls. Since the foundation assessment has been removed, the super structure i.e. penalty must fall. Once the basis of a proceeding is gone, all consequential acts, actions, and orders would fall to the ground automatically. We, therefore hold that the decision of the CIT(A), confirming the penalty on account of payment made to ESGI as FTS is unsustainable and direct the Assessing Officer to delete the penalty u/s 271(1)(c).

Summary

Issues Involved:

1. Allocation of head office expenses and bank/loan processing charges to the MEPZ unit.
2. Income attribution to the MEPZ unit on account of goods transferred.
3. Disallowance of prior period expenses.
4. Charging of interest under sections 234B and 234C.
5. Fees for Technical Services (FTS) and TDS obligations.
6. Disallowance of foreign traveling expenditure.
7. Disallowance of irrecoverable taxes.
8. Disallowance of garden expenses.
9. Penalty under section 271(1)(c).

Issue-wise Detailed Analysis:

1. Allocation of Head Office Expenses and Bank/Loan Processing Charges:
The Tribunal upheld the allocation of head office expenses and bank/loan processing charges to the MEPZ unit. It was reasoned that the expenses related to strategic, managerial, and regulatory activities, having a direct nexus with the MEPZ unit's activities. The allocation was deemed reasonable on a turnover basis, aligning with the principle that the head office expenses should be distributed among all units of the business.

2. Income Attribution to MEPZ Unit on Account of Goods Transferred:
The Tribunal remitted the issue back to the Assessing Officer (AO) to ascertain the fair market value of goods transferred to the MEPZ unit. The CIT(A) had not confirmed if the goods were transferred at fair market value. The Tribunal referred to the decision in Wipro Ltd, emphasizing the need to determine the fair market value for accurate profit computation.

3. Disallowance of Prior Period Expenses:
The Tribunal upheld the CIT(A)'s decision to disallow Rs. 5,05,156/- as prior period expenses, as the assessee failed to substantiate that the liability crystallized in the current year. The Tribunal found no detailed explanation or evidence supporting the claim for the expenses, thus sustaining the CIT(A)'s findings.

4. Charging of Interest under Sections 234B and 234C:
The Tribunal noted that the issue of charging interest under sections 234B and 234C was consequential in nature and did not require separate adjudication.

5. Fees for Technical Services (FTS) and TDS Obligations:
The Tribunal ruled in favor of the assessee, stating that the payment made to ESG International for warehousing services did not constitute FTS under the India-USA DTAA. The Tribunal emphasized that the services did not "make available" any technical knowledge, and the DTAA's definition of FTS did not include managerial services. Consequently, there was no requirement for TDS deduction under section 195.

6. Disallowance of Foreign Traveling Expenditure:
The Tribunal allowed the foreign traveling expenses related to the subsidiary and joint venture, recognizing the commercial expediency and business interest in such travel. The decision was supported by the principle of advancing business interests, as established in the case of S.A. Builders.

7. Disallowance of Irrecoverable Taxes:
The Tribunal directed the AO to delete the disallowance of irrecoverable taxes related to excise duty on sales returns. It held that the excise duty paid on raw materials should be allowed as a deduction under section 37(1) since it was incurred for business purposes, aligning with the decision in Samtel India.

8. Disallowance of Garden Expenses:
The Tribunal directed the AO to delete the disallowance of garden expenses, considering them incurred for business purposes. The Tribunal emphasized that expenses incurred for business purposes should be allowed if not under doubt.

9. Penalty under Section 271(1)(c):
The Tribunal deleted the penalty imposed under section 271(1)(c) related to the FTS addition, as the substantive addition was deleted. The Tribunal applied the legal principle that if the foundation of an assessment is removed, the penalty must also fall.

Overall, the Tribunal provided a detailed analysis of each issue, considering legal precedents and the specific facts of the case, resulting in a mix of decisions favoring both the assessee and the revenue.