2015 (9) TMI 1175 - AT - Income Tax

Disallowance invoking section 40(a)(i) - non deduction of TDS on such payments made to its associated enterprise, UPSWWF USA - Held that - Similar issue had come up before the Tribunal in assessee s own case for A.Y.2008-09 2015 (6) TMI 383 - ITAT MUMBAI and the matter has been remanded back to the file of the Assessing Officer for a decision afresh. It was also a common point between the parties that in this year too, following the said precedent the matter be remanded back to the file of Assessing Officer for a decision afresh in accordance with law. - Decided in favour of assessee for statistical purposes. Disallowance of depreciation on fixed assets purchased from UPS-WWF in the previous year relevant to the assessment year 2008-09 - Held that - The claim of the Ld. Representative for the assessee was that the depreciation claimed by the assessee in this year deserves to be allowed since the depreciation on the same assets in the earlier assessment year stands allowed. The aforesaid factual matrix is not assailed by the Ld. Departmental Representative and the same is also borne out of the order of the Tribunal for A.Y.2008-09 2015 (6) TMI 383 - ITAT MUMBAI . As a consequence, we uphold the plea of the assessee and direct the Assessing Officer to allow the depreciation of ₹ 9,95,919/- claimed by the assessee and accordingly assessee succeeds on this ground. - Decided in favour of assessee. Addition u/ s. 40(a)(i) - whether assessee and RMS were in contractural relationship - Held that - Assessing Officer in the draft assessment order, we find that the decision of the DRP cannot be faulted. It is also noticed that the Assessing Officer has invoked section 40(a)(i) of the Act on the basis of his stand for earlier assessment year 2008-09 2015 (6) TMI 383 - ITAT MUMBAI . The Tribunal in its order for assessment year 2008-09 considered similar transaction and held that the payments made to RMS-USA for Debtor collection services did not fall for taxation in India and thus, there was no obligation on the part of the assessee to deduct tax at source on such payments, which were made as reimbursement to UPSWWFUSA. Be that as it may, in our considered opinion the finding of the DRP, which we have adverted to in the earlier paras is quite unexceptional and does not require any interference from our side. No cogent reasoning or material has been brought out by the Revenue to demonstrate as to in what manner amount received by RMS-USA, a non-resident, for Debtor management services abroad is liable to be taxable in India. Therefore, we hereby affirm the conclusion of the DRP on this aspect and Revenue fail in its Ground of appeal - Decided in favour of assessee. Direction of DRP to determine the quantum of Transfer Pricing (TP) adjustment while computing the arm s length price of the international transactions entered into by the assessee with its associated enterprise - Held that - the Ground of appeal raised by the Revenue. At the outset, one may observe that the Ground raised by the Revenue is quite misconceived in as much as it is based on a wrong perspective to the effect that the DRP has held the subvention income to be an operating income. As can be seen from the directions of the DRP, the subvention income has not been held to be considered as part of the operating income. Thus, this aspect of the controversy manifested in the Ground of Revenue is misconceived and liable to be dismissed. Even otherwise, we find that there is no scope for any intervention in the directions of the DRP, which we have extracted above, as the same are quite apt and the same are factually borne out of the record. The order of the DRP on this aspect is hereby affirmed and accordingly Revenue fails in its Ground - Decided against assessee.

Summary

Issues Involved:

1. Disallowance under section 40(a)(i) of the Income Tax Act.
2. Depreciation claim on fixed assets.
3. Disallowance of payment to RMS, USA.
4. Transfer Pricing adjustment and subvention income.

Detailed Analysis:

1. Disallowance under section 40(a)(i) of the Income Tax Act:
The first issue pertains to the disallowance of Rs. 19,66,297/- made by the Assessing Officer by invoking section 40(a)(i) of the Act. The payment was claimed as reimbursement to UPS-WWF for legal services provided by DT Exim Pvt. Ltd. (Titus). The Revenue contended that the payment was in the nature of Fees for Included Services under Article 12(4) of the Indo-US Tax Treaty and chargeable to tax in India. Since no tax was deducted at source, the amount was disallowed. The assessee argued that the payment was merely a reimbursement and not income chargeable to tax. Both parties agreed to remand the matter back to the Assessing Officer for a fresh decision, following a similar precedent in the assessee's case for A.Y. 2008-09. The Tribunal remanded the matter back to the Assessing Officer for a fresh decision in accordance with the law, allowing the assessee's appeal for statistical purposes.

2. Depreciation claim on fixed assets:
The second issue involves the disallowance of depreciation of Rs. 9,95,919/- on fixed assets purchased from UPS-WWF in the previous year relevant to A.Y. 2008-09. The assessee had claimed depreciation on assets imported from UPS-WWF, which was disallowed by the Assessing Officer due to lack of evidence such as Customs Clearance Certificate. The Tribunal had allowed the depreciation claim for A.Y. 2008-09. Given that the same assets were involved, the Tribunal upheld the assessee's plea and directed the Assessing Officer to allow the depreciation of Rs. 9,95,919/-, thereby partly allowing the assessee's appeal.

3. Disallowance of payment to RMS, USA:
The Revenue's appeal included the disallowance of Rs. 60,72,596/- made by the Assessing Officer by invoking section 40(a)(i) of the Act. The payment was made to UPS-WWF as reimbursement for engaging RMS, USA for Debtor Collection Services. The Assessing Officer argued that the payment was taxable in India and required tax deduction at source. The DRP held that the payment to RMS, USA was not taxable in India as it did not fall within the scope of 'Fees for Included Services' under Article 12(4) of the Indo-US Tax Treaty and was instead taxable as business profits. Since RMS, USA did not have a Permanent Establishment in India, the income was not taxable in India. The Tribunal affirmed the DRP's decision, dismissing the Revenue's appeal on this ground.

4. Transfer Pricing adjustment and subvention income:
The last issue raised by the Revenue involved the DRP's direction regarding the Transfer Pricing adjustment. The assessee had received a subvention amount of Rs. 27,30,92,364/- from UPS-WWF, USA due to adverse business conditions, which was recorded as Prior Period income and included in the return for A.Y. 2009-10. The Transfer Pricing Officer excluded this subvention income from the operating profit margin, resulting in a TP adjustment of Rs. 34,40,04,846/-. The DRP held that the subvention income, though not operating income, should be set off against the TP adjustment to the extent it was offered to tax. The Tribunal found the Revenue's ground of appeal misconceived and affirmed the DRP's directions, dismissing the Revenue's appeal on this issue as well.

Conclusion:
The Tribunal partly allowed the assessee's appeal, dismissed the Revenue's appeal, and rendered the assessee's cross objection academic and infructuous. The order was pronounced in the open court on 28th August 2015.