2025 (3) TMI 1263 - AT - Income Tax

Deduction u/s.37 - allowability of royalty payment for the use of intellectual property right and use of trademark IP - as argued assessee was not given a reasonable opportunity to present its case - scope of additional evidence - HELD THAT - The assessee in its submissions made before the First Appellate Authority (submissions dated 23.05.2024) had specifically requested that it may be granted an opportunity to represent its case through video conferencing or physical hearing before the order is passed. In spite of specific request made by the assessee the assessee was not given an opportunity to represent its case through video conferencing or physical hearing. Many of the documents / evidences filed in support of claim of deduction u/s.37 of the Act has not been properly appreciated / taken note of by the CIT(A). Given the nature of business involving toxic chemicals and having the confidentiality norms in the agreement these Standard Operating Procedures are critical and confidential in nature. Therefore approval from the executive management was required and obtained at the time of appellate proceedings before the Tribunal. These documents were not expressly requested during the course of assessment proceedings or before first appellate proceedings. The documents that are now submitted before the Tribunal goes to the root of the dispute. For substantial justice and for a proper adjudication of issues raised in this appeal we take the same on record. Since the additional evidences / documents are taken on record we deem it appropriate to restore the matter to the files of AO for him to examine these aspects and come to a conclusion whether the payments claimed as deduction u/s.37 were for the purpose of the business of the assessee and is an allowable deduction - Appeal filed by the assessee is allowed for statistical purposes.

Summary

ISSUES PRESENTED and CONSIDERED

The core legal questions considered in this judgment include:

• Whether the payments made by the assessee to its Associate Enterprise (AE) for shared services, use of technology IP, and use of trademark IP qualify as allowable deductions under Section 37(1) of the Income Tax Act, 1961.
• Whether the assessee was given a reasonable opportunity to present its case before the First Appellate Authority, and whether the additional evidence submitted should be admitted for consideration.
• Whether the procedural fairness was adhered to during the assessment and appellate proceedings.

ISSUE-WISE DETAILED ANALYSIS

1. Allowability of Deductions under Section 37(1) of the Income Tax Act, 1961

• Relevant Legal Framework and Precedents: Section 37(1) of the Income Tax Act allows for deductions of expenses incurred wholly and exclusively for the purposes of the business. The burden of proof lies on the assessee to demonstrate that the expenses meet these criteria.
• Court's Interpretation and Reasoning: The Tribunal noted that the assessee failed to provide sufficient evidence to substantiate that the services were indeed received and that the payments for royalties and shared services were justified as business expenses.
• Key Evidence and Findings: The AO observed that the agreements and documents provided were not conclusive proof of services received. The CIT(A) upheld this view, noting the lack of supporting evidence.
• Application of Law to Facts: The Tribunal found that the additional evidence submitted by the assessee, which was not previously available, could potentially substantiate the claims for deductions. The Tribunal emphasized the importance of procedural fairness and the need to consider all relevant evidence.
• Treatment of Competing Arguments: The Tribunal considered the assessee's argument that the evidence was not requested during the assessment and appellate proceedings and that confidentiality concerns delayed submission. The Tribunal found merit in these arguments, given the nature of the business and the confidentiality norms.
• Conclusions: The Tribunal concluded that the matter should be remanded to the AO for reconsideration of the additional evidence and a determination of whether the expenses qualify as allowable deductions under Section 37(1).

2. Procedural Fairness and Admission of Additional Evidence

• Relevant Legal Framework and Precedents: Procedural fairness requires that parties are given an opportunity to present their case and that relevant evidence is considered. Rule 29 of the Income Tax (Appellate Tribunal) Rules, 1963, allows for the admission of additional evidence under certain circumstances.
• Court's Interpretation and Reasoning: The Tribunal noted that the assessee was not provided an opportunity for a hearing, despite requests for virtual or physical representation. The Tribunal emphasized the importance of ensuring that all relevant evidence is considered to avoid a miscarriage of justice.
• Key Evidence and Findings: The Tribunal acknowledged the additional evidence submitted by the assessee, including Standard Operating Procedures, sales invoices, and documents related to shared services and trademark usage.
• Application of Law to Facts: The Tribunal found that the additional evidence was pertinent to the issues at hand and should be admitted to ensure a fair adjudication of the case.
• Treatment of Competing Arguments: The Tribunal considered the Department's position, which did not strongly object to the remand, and the assessee's argument for the necessity of considering the additional evidence.
• Conclusions: The Tribunal decided to admit the additional evidence and remand the case to the AO for a fresh examination, ensuring that the assessee is afforded a reasonable opportunity to present its case.

SIGNIFICANT HOLDINGS

• Preserve Verbatim Quotes of Crucial Legal Reasoning: The Tribunal stated, "For substantial justice and for a proper adjudication of issues raised in this appeal, we take the same on record."
• Core Principles Established: The judgment reinforces the principles of procedural fairness and the necessity of considering all relevant evidence in tax adjudications.
• Final Determinations on Each Issue: The Tribunal allowed the appeal for statistical purposes, remanding the case to the AO for reconsideration of the additional evidence and a fresh determination of the deductibility of the expenses under Section 37(1).