2013 (11) TMI 810 - AT - Income Tax

Disallowance u/s 40(a)(ia) - TDS u/s 194C - Work contract or manufacturing cum sale - Held that - Provisions of section 194C are not attracted merely because a product or thing is manufactured according to the specifications of a customer unless raw material has been purchased from the customer who ordered the product - so long as the agreement is on principal to principal basis and the manufacturer has own establishment where the product is manufactured, and obtained material from its own source for manufacturing the product, without depending on the ultimate purchaser, merely because the purchaser desired to get the product with certain specifications, it cannot be said that there is a contract of job work between the purchaser and the manufacturer - It is not in dispute that the assessee did not supply any material to the manufacturer and the supply of final product was on principal to principal basis in which event provisions of section 194C are not applicable and payments made to the above mentioned two concerns are not attracted by provisions of section of 40(a)(ia) - excise duty was charged on the goods sold by the above mentioned parties. The claim that the agreement of sale was on principal to principal basis is not controverted by the Revenue. - Decided against Revenue. Disallowance u/s 14A - Held that - It is well settled that the income need not be proportionate to the expenditure and vice-versa. In certain cases there may not be any income in the initial years though the assessee had incurred expenditure wholly and exclusively for the purpose of making or earning income on a particular head - merely because an assessee has not received dividend income in a particular year the expenditure laid out or expended wholly and exclusively for the purpose of making or earning such income should not be disallowed. By applying the same logic, in the instant case also the assessee having made huge investment it cannot be said that there is no expenditure indirectly attributable to the investment and for earning the dividend income. In fact the Legislature having noticed that it is difficult to determine the exact amount of expenditure, which is indirectly attributable to earning of dividend income, the formula was discussed under section 14A read with Rule 8D of IT Rules - Decided in favour of Revenue.

Summary

Issues Involved:
1. Disallowance under section 40(a)(ia) for non-deduction of tax at source.
2. Disallowance under section 14A read with Rule 8D for expenses related to exempt income.

Detailed Analysis:

Issue 1: Disallowance under section 40(a)(ia) for non-deduction of tax at source

Facts:
The Revenue challenged the deletion of disallowance under section 40(a)(ia) for payments made to M/s. Ashit Packaging Pvt. Ltd. and M/s. Liba Enterprise without deducting tax at source. The Assessing Officer (AO) treated these payments as job work under section 194C, necessitating tax deduction at source (TDS).

Assessee's Argument:
The assessee contended that the transactions were purchases of goods, not contracts for work, as evidenced by excise duty levied on the goods. The relationship was on a principal-to-principal basis, with suppliers having their own establishments and procuring raw materials independently.

CIT(A)'s Findings:
The CIT(A) agreed with the assessee, noting that the suppliers retained ownership of the goods until delivery, indicating a sale transaction. The CIT(A) cited the ITAT Delhi Bench decision in Reebok India and the Bombay High Court decision in Glenmark Pharmaceuticals Ltd., which held that TDS under section 194C is not applicable if the agreement is on a principal-to-principal basis and the manufacturer uses its own materials.

Tribunal's Decision:
The Tribunal upheld the CIT(A)'s decision, emphasizing that the materials were not supplied by the assessee and excise duty was charged, confirming the principal-to-principal nature of the transactions. Thus, provisions of section 194C and consequent disallowance under section 40(a)(ia) were not applicable.

Issue 2: Disallowance under section 14A read with Rule 8D for expenses related to exempt income

Facts:
The AO disallowed Rs. 3,87,319 under section 14A read with Rule 8D, attributing it to expenses incurred for earning exempt dividend income of Rs. 1,448. The assessee argued that interest-bearing funds were not used for investments and the disallowance should be limited to the dividend income.

CIT(A)'s Findings:
The CIT(A) noted that the assessee failed to provide day-to-day cash flow statements to prove that no interest-bearing funds were used for investments. The CIT(A) directed the AO to correct the calculation of average investment but upheld the application of Rule 8D, rejecting the assessee's reliance on the ITAT Mumbai decision in Yatish Trading Co. (P.) Ltd. as it pertained to a different assessment year.

Tribunal's Decision:
The Tribunal agreed with the CIT(A), stating that the expenditure need not be proportionate to the income. The Tribunal referenced the Supreme Court decision in CIT vs. Rajendra Prasad Mody, which held that expenditure incurred for earning income should not be disallowed even if no income is received. The Tribunal upheld the CIT(A)'s direction to recompute the disallowance under Rule 8D, finding no infirmity in the order.

Conclusion:
The Tribunal dismissed both the Revenue's appeal and the assessee's cross objections, affirming the CIT(A)'s decisions on both issues. The Tribunal confirmed that the transactions with M/s. Ashit Packaging Pvt. Ltd. and M/s. Liba Enterprise were sales and not job contracts, thus not attracting TDS under section 194C. Additionally, the Tribunal upheld the disallowance under section 14A read with Rule 8D, directing a recalculation based on correct average investment figures.