2025 (2) TMI 976 - AT - Income Tax

Expenses incurred under the head Public Relation Expenses - expenditure was not allowable as business expense with the meaning of section 37 - HELD THAT - In the present case it is not even the plea of the AO that because the order passed by the Tribunal is under challenge before the Higher Courts therefore till there is finality on the issue the approach adopted by it in earlier years was followed. Thus we deprecate such an act of the AO who is not only a tax administrator but is also discharging the quasi-judicial functions under the Act while completing the assessment of the assessee and therefore is required to follow the principles of precedence and not simply follow the earlier years approach which has already been overruled by a higher judicial forum. DR could not show any reason to deviate from the aforesaid order and no change in facts and law was alleged in the relevant assessment year. The issue arising in the present appeal is recurring in nature and has been decided in favour of the assessee by the decision of the coordinate bench of the Tribunal for the preceding assessment years. Ground no.1 raised in Revenue s appeal is dismissed. TDS u/s 195 - Disallowance made u/s 40(a)(i) - share services expenses paid to BASC which is situated in Malaysia - HELD THAT - We find that while considering a similar issue in assessee s own case for the assessment year 2008-09 the coordinate bench of the Tribunal following the decision of the coordinate bench of the Tribunal in the case of the assessee s sister concern in DCIT v/s BASF Catalyst India Private Limited 2016 (11) TMI 1765 - ITAT CHENNAI held that the provisions of section 40(a)(i) of the Act are not applicable to the payment made to BASC for rendering Finance and Accounting and Human Resource services. Ground no.2 raised in Revenue s appeal is dismissed. Nature of expenses - Disallowance of expenditure incurred on Product Registration - AO following the approach adopted in preceding years disallowed the product registration expenditure after granting depreciation at the rate of 25% - HELD THAT - We find that the coordinate bench of the Tribunal while considering a similar issue in the assessee s own case for the assessment year 2008-09 dismissed the Revenue s appeal and held that the product registration expenditure though is a one-time expenditure in relation to a new product however cannot be categorised to be capital in nature. Ground no.3 raised in Revenue s appeal is dismissed. Dividend Distribution Tax on the dividend declared and paid - HELD THAT - The issue arising in the assessee s cross objection is covered in favour of the Revenue by the decision of the Special Bench of the Tribunal in Total Oil India Private Ltd. 2023 (4) TMI 988 - ITAT MUMBAI (SB) Accordingly respectfully following the aforesaid decision of the Special Bench of the Tribunal the ground raised in the cross objection is dismissed.

Summary

ISSUES PRESENTED and CONSIDERED

The core legal questions considered in the judgment were:

• Whether the expenses incurred under "Public Relation Expenses" qualify as allowable business expenses under section 37 of the Income-tax Act, 1961.
• Whether the payment made to BASF Asia Pacific Service Centre, Malaysia, without deducting TDS under section 195, is disallowable under section 40(a)(i) of the Income-tax Act, 1961.
• Whether the expenses incurred on "Product Registration" are capital in nature and thus not allowable as revenue expenditure.
• Whether Dividend Distribution Tax (DDT) should be subject to the rates prescribed under the India-Swiss and India-Germany Double Taxation Avoidance Agreements, and if excess DDT paid should be refunded.

ISSUE-WISE DETAILED ANALYSIS

1. Public Relation Expenses

• Relevant Legal Framework and Precedents: Section 37 of the Income-tax Act, 1961, allows deductions for expenses incurred wholly and exclusively for the purposes of business.
• Court's Interpretation and Reasoning: The Tribunal noted that similar expenses were allowed in previous years based on the Tribunal's decisions. The expenses were deemed to promote the corporate image and were not strictly charitable.
• Key Evidence and Findings: The expenses included advertisements, sponsoring events, community development, and other public relation activities.
• Application of Law to Facts: The Tribunal upheld the CIT(A)'s decision, allowing these expenses as they were consistent with prior Tribunal decisions and were not shown to be capital or personal in nature.
• Treatment of Competing Arguments: The Tribunal rejected the Revenue's argument that these were charitable expenses, emphasizing the business purpose behind them.
• Conclusions: The Tribunal dismissed the Revenue's appeal, affirming the CIT(A)'s allowance of these expenses.

2. Disallowance under Section 40(a)(i)

• Relevant Legal Framework and Precedents: Section 40(a)(i) disallows expenses for which TDS is not deducted under section 195.
• Court's Interpretation and Reasoning: The Tribunal referred to its earlier decision in the assessee's case and the case of its sister concern, concluding that the services provided did not constitute technical services requiring TDS.
• Key Evidence and Findings: The services from BASC included finance and accounting and human resources, not requiring technical expertise.
• Application of Law to Facts: The Tribunal found that the absence of a permanent establishment in India and the nature of services rendered did not attract TDS under section 195.
• Treatment of Competing Arguments: The Tribunal dismissed the Revenue's contention of technical services, aligning with previous Tribunal decisions.
• Conclusions: The Tribunal upheld the CIT(A)'s decision, dismissing the Revenue's appeal on this ground.

3. Product Registration Expenses

• Relevant Legal Framework and Precedents: The classification of expenses as capital or revenue affects their deductibility.
• Court's Interpretation and Reasoning: The Tribunal noted that the expenses were necessary for regulatory compliance and were not capital in nature.
• Key Evidence and Findings: The expenses included testing charges and staff travel for product registration.
• Application of Law to Facts: The Tribunal found these expenses to be recurring and necessary for business operations, thus allowable as revenue expenses.
• Treatment of Competing Arguments: The Tribunal rejected the Revenue's classification of these expenses as capital, citing lack of evidence for change in facts or law.
• Conclusions: The Tribunal upheld the CIT(A)'s decision, dismissing the Revenue's appeal on this issue.

4. Dividend Distribution Tax (DDT)

• Relevant Legal Framework and Precedents: The applicability of Double Taxation Avoidance Agreements to DDT.
• Court's Interpretation and Reasoning: The Tribunal relied on the Special Bench decision in Total Oil India Private Ltd, which held that DDT is not subject to treaty rates.
• Key Evidence and Findings: The cross-objection was based on the claim that DDT should be taxed at treaty rates.
• Application of Law to Facts: The Tribunal followed the Special Bench's decision, dismissing the cross-objection.
• Treatment of Competing Arguments: The Tribunal adhered to the binding precedent of the Special Bench.
• Conclusions: The cross-objection was dismissed, affirming the application of domestic law over treaty provisions for DDT.

SIGNIFICANT HOLDINGS

• Core Principles Established: The Tribunal reinforced the principle of precedence, emphasizing the need to follow established judicial decisions unless there is a change in facts or law.
• Final Determinations on Each Issue:
  • Public Relation Expenses were allowed as business expenses.
  • Payments to BASC were not disallowed under section 40(a)(i) due to the nature of services and absence of a PE in India.
  • Product Registration Expenses were considered revenue in nature and thus deductible.
  • The cross-objection regarding DDT was dismissed in line with the Special Bench's decision.