2016 (3) TMI 274 - AT - Income Tax

Transfer pricing adjustment - whether international transaction being royalty payment of the assessee to its associated enterprises is held to be within the arms length price - A.O. was of the opinion that the assessee has not proved the necessity of Royalty payment - Held that - We do not see any merits in the contention of the A.O. for the reason that, the assessee has furnished copies of invoices and bank remittance challans. The payment was made through banking channel and which was supported by bills and agreements. The TPO as well as AO has accepted the payment of Royalty as genuine and not sham transaction in the previous assessment year. The fact remains same for the assessment year under consideration. The revenue has failed to substantiate its arguments with any evidences to show that the royalty payment is not genuine. Therefore, we are of the opinion that the A.O. was not right in disallowing the Royalty payment. The CIT(A) has rightly deleted the additions and his order does not require any interference. Hence, we inclined to upheld the order of the CIT(A) and reject the ground raised by the revenue. - Decided in favour of assessee Disallowance of royalty payment u/s 40(a)(i) - non deduction of TDS on royalty payment as per section 195 - Held that - A careful study of the provisions of section 40(a)(i) of the Act, it was clear that any payments referred to in the said section, which is payable outside India or in India to a non-resident on which tax is deductible under chapter XVIIB and such tax is not deducted or, after deduction has not been paid within the due dates under sec. 200(1) of the Act, then such payment is not allowed in computing the income from Business or Profession. In the present case on hand, though assessee deducted tax at source, it has deducted tax in subsequent year, but failed to deposit the same within the due date specified under sec. 200(1) of the Act. Therefore, we are of the opinion that the A.O. has rightly disallowed the Royalty payment under sec. 40(a)(i) of the Act. Eligibility for deduction towards Royalty - Held that - A careful study of provisions of section 40(a)(i) of the Act and proviso provided therein, it is clear that where in respect of any such sum, tax has been deducted in any subsequent year or has been deducted in the previous year but paid in any subsequent year after the expiry of the time prescribed under sub section 1 of section 200, such sum shall be allowed as a deduction in computing the income of the previous year in which such tax has been paid. In the present case on hand, the assessee has deducted TDS on royalty payment and paid the amount into the Government account in the financial year 2007-08, relevant to the assessment year 2008-09. Therefore, we are of the opinion that the assessee is eligible for deduction towards Royalty payment, in the year in which the TDS is deducted and remitted into to the Govt. account, i.e. for the assessment year 2008-09. Accordingly, we direct the A.O. to allow the deduction for the assessment year 2008-09.

Summary

Issues Involved:
1. Disallowance of royalty payment to associated enterprises.
2. Disallowance under Section 40(a)(i) of the Income-Tax Act due to non-deduction of TDS.

Issue-Wise Detailed Analysis:

1. Disallowance of Royalty Payment to Associated Enterprises:

The case involves the assessee, a company engaged in the manufacture of polystyrene and expandable polystyrene, which paid royalty to its associated enterprise, L.G. Chem Limited, Korea. The Assessing Officer (A.O.) disallowed the royalty payment of Rs. 1,43,95,374/- on the grounds that the assessee did not prove the necessity of the payment and the benefits accrued from using the brand name. Additionally, the A.O. noted that no TDS was deducted on the royalty payment, thus considering disallowance under Section 40(a)(i) of the Income-Tax Act.

The assessee appealed to the Commissioner of Income-Tax (Appeals) [CIT(A)], arguing that the royalty payment was within the norms prescribed by the Government of India and had previously been accepted by the Transfer Pricing Officer (TPO) as being at arm's length price (ALP) for the assessment year 2006-07. The CIT(A) directed the A.O. to refer the matter to the TPO to determine the ALP of the international transaction and modify the additions based on the TPO's findings. However, the CIT(A) upheld the disallowance under Section 40(a)(i) for non-deduction of TDS.

The revenue and the assessee both appealed to the ITAT. The revenue contended that the CIT(A) was incorrect in deleting the additions based on previous assessment years, arguing that the transaction was a sham intended to shift profits out of India. The assessee maintained that the royalty payment was genuine and within the prescribed limits, supported by invoices, bank remittance challans, and agreements.

The ITAT found that the TPO had previously determined the royalty payment to be within ALP and that there was no change in facts for the current assessment year. The ITAT upheld the CIT(A)'s decision to delete the additions, confirming that the royalty payment was genuine and not a sham transaction.

2. Disallowance Under Section 40(a)(i) of the Income-Tax Act Due to Non-Deduction of TDS:

The A.O. disallowed the royalty payment under Section 40(a)(i) of the Act, asserting that the assessee failed to deduct TDS on the payment as required by Section 195. The assessee argued that it had deducted TDS and remitted it to the government account within the due date specified under Section 139(1) of the Act. The assessee further contended that the provisions of Section 40(a)(i) and 40(a)(ia) are similar regarding the allowability of expenditure and cited judicial precedents suggesting that amendments to Section 40(a)(ia) are retrospective.

The ITAT examined the provisions of Section 40(a)(i) and found that the assessee had deducted TDS in the subsequent year but failed to deposit it within the due date specified under Section 200(1). Therefore, the A.O. was justified in disallowing the royalty payment under Section 40(a)(i).

However, the ITAT accepted the assessee's alternative plea that the royalty payment should be allowed in the year in which the TDS was deducted and remitted to the government account. The ITAT directed the A.O. to allow the deduction for the assessment year 2008-09, as the TDS was remitted in the financial year 2007-08.

Conclusion:

The ITAT dismissed the revenue's appeals and partly allowed the assessee's cross-objections. The ITAT upheld the deletion of additions towards royalty payment but confirmed the disallowance under Section 40(a)(i) for the assessment year 2007-08. The ITAT directed the A.O. to allow the deduction for the assessment year 2008-09, based on the remittance of TDS in the subsequent year.