2014 (11) TMI 601 - AT - Income Tax

License fees/service charges accrued to assessee mercantile system of accounting followed Held that - The license fee is received by the assessee in a separate division known as M/s. Skul International India from January to December that is, on calendar year basis, whereas the books of accounts were maintain on financial year basis, that is, first of April of every year to 31st March of the next year - The assessee used to raise the bills for the license fee in the month of January and the license fee received from January to March was accounted as income of the year and license fee from April to December was taken under the head current liabilities that is, it does not recognizes the income of the year but as income of subsequent year - the license fee from the period April to December is not recognized as income, because bills are not raised and therefore income is not accrued to the assessee - When the bill are raised from the month of January, the assessee recognizes the income and accordingly account for in the books of accounts - only 3 months income is accounted and for an balance nine months income is taken to next financial year - since assessee is duly accounting the income in the manner consistently in all the years and therefore, there is no reason to deviate from such system of accounting, for recognizing the income which has been followed regularly in all the years the order of the CIT(A) is upheld Decided against revenue. Disallowance u/s 40(a)(ia) TDS not deducted Held that - As decided in assessee s own case doe the earlier assessment year, the assessee entered into an agreement with its holding company towards incurring of such expenses - A conjoint reading of sections 195 and 40(a)(ia) brings to the fore that the disallowance can be made only if the amount paid is chargeable to tax in the hands of the recipient - In other words, if the amount is not chargeable to tax in hands of the recipient, there cannot be any scope for deduction of tax at source - Once no deduction of tax at source is contemplated, the natural corollary which manifestly follows is that the provisions of section 40(a)(ia) cannot be triggered - Decided in favour of assessee.

Summary

Issues Involved:
1. Deletion of license fees/service charges added as income by the Assessing Officer (AO) across multiple assessment years.
2. Disallowance of administrative expenses at different rates.
3. Disallowance under Section 40(a)(ia) for non-deduction of tax on reimbursement payments.

Detailed Analysis:

1. Deletion of License Fees/Service Charges Added as Income:
The primary issue across multiple assessment years (A.Y. 2004-05, 2006-07, 2008-09, and 2009-10) was whether the license fees/service charges that had accrued to the assessee should be added as income for the respective years. The AO contended that since the assessee was following the mercantile system of accounting, the accrued income should be recognized in the same financial year. The assessee argued that the license fees were billed from January to December but accounted for on a financial year basis (April to March), leading to some fees being carried forward to the next year.

The Tribunal upheld the CIT(A)'s decision to delete the additions made by the AO, emphasizing that the assessee consistently followed this accounting method, and the income had already been offered for taxation in the subsequent year. The Tribunal found no reason to deviate from this consistent method of accounting.

2. Disallowance of Administrative Expenses:
In A.Y. 2006-07, the AO disallowed 20% of administrative expenses due to inadequate evidence proving that the entire expenditure was incurred exclusively for business purposes. The CIT(A) reduced this disallowance to 10%. However, the Tribunal confirmed the 20% disallowance based on the assessee's acceptance of a similar disallowance in A.Y. 2004-05.

For A.Y. 2008-09, the Tribunal applied the same rationale, confirming the 20% disallowance of administrative expenses as the assessee had not produced adequate evidence to prove the expenditure was wholly and exclusively for business purposes.

3. Disallowance under Section 40(a)(ia) for Non-Deduction of Tax:
In A.Y. 2009-10, the AO disallowed Rs. 38,88,621 under Section 40(a)(ia) for non-deduction of tax on reimbursement payments made to the holding company in the Netherlands. The CIT(A) confirmed this disallowance. However, the Tribunal referred to its earlier decision in A.Y. 2006-07, where it was established that the reimbursement did not include any profit element and, therefore, was not subject to tax deduction at source under Section 195.

The Tribunal reiterated that since the reimbursement was not chargeable to tax in the hands of the recipient, there was no requirement for tax deduction, and thus, the disallowance under Section 40(a)(ia) was not justified. Consequently, the Tribunal deleted the disallowance for A.Y. 2009-10.

Conclusion:
The Tribunal dismissed the departmental appeals for A.Y. 2004-05 and 2009-10, partly allowed the appeals for A.Y. 2006-07 and 2008-09, and allowed the assessee's appeal for A.Y. 2009-10. The consistent method of accounting for license fees was upheld, the 20% disallowance of administrative expenses was confirmed, and the disallowance under Section 40(a)(ia) for non-deduction of tax on reimbursements was deleted.