2017 (3) TMI 1377 - AT - Income Tax

Disallowance of proportionate interest on unsecured loans - Held that - We find that the A.O has simply computed the disallowance of interest in proportion to the amount of interest bearing unsecured loans obtained amounting to ₹ 502.69 crore and interest free advances given amounting to ₹ 172.59 crore. The fact that the assessee did pay interest on such unsecured loans has not been disputed. In view of the fact that the assessee paid interest on unsecured loans and did not earn any interest on advances given, we cannot disallow proportionate interest genuinely paid on unsecured loans taken for business purpose. Section 36(1)(iii) simply provides that deduction is allowable for the amount of interest paid in respect of capital borrowed for the purpose of business. As the assessee paid interest on capital borrowed for the business purpose and it is not the case of the AO that the assessee diverted such unsecured loans for a nonbusiness purpose, the disallowance of interest cannot be countenanced. We, therefore, allow deduction of ₹ 23.60 crore. TDS u/s 195 - Disallowance u/s 40(a)(i) - assessee paid the sum to ICC without deducting tax at source - AO formed a view that such payment is in the nature of Royalty or Fees for technical services requiring deduction of tax at source - DRP held that the benefits availed by the assessee from ICC did not fall within the ambit of Royalty or FTS and accordingly no disallowance was called for - Held that - Disallowance u/s 40(a)(i) is made when the assessee fails to deduct tax at source etc. in terms of section 195 before making payment to a non-resident. This section, in turn, provides that no payment should be made to non-resident without deduction of tax at source which is chargeable to tax in his hands. Thus, chargeability of income to tax in the hands of a non-resident is a condition precedent. In other words, if such receipt is not chargeable to tax in the hands of the non-resident, there will be no liability on the part of the payer to withhold tax and consequently, there can be no question of disallowance u/s 40(a)(i). We have noted from Appendix 2 that the assessee was to pay Rights fee to ICC even during the preceding year. Taking this factor into consideration, the ld. DR was directed to inform the Bench if the payment by the assessee to ICC during the instant year or in earlier years was subjected to tax in the hands of the latter. Despite allowing time, the ld. DR failed to point out if the amount in question has been subjected to tax in the assessment of ICC. Obligation to deduct tax at source u/s 195 in the hands of a payer is a natural consequence of chargeability to tax of the receipt in the hands of payee. Failure of the Revenue to bring on record any evidence of such payment having been subjected to tax in the hands of ICC also casts shadow on the liability of the assessee to deduct tax at source. We, ergo, hold that the payment made by the assessee to ICC amounting to ₹ 4.56 crore as Rights fee is not in the nature of Royalty or Fees for technical services covered u/s 9(1)(vi) or 9(1(vii) of the Act and as such the assessee was not obliged to deduct tax at source on this payment. Ex consequenti, the provisions of section 40(a)(i) are not attracted. This ground of revenue is not allowed - Decided in favour of assessee

Issues Involved:
1. Transfer Pricing Adjustment of AMP Expenses
2. Addition on Account of Suppressed Sales
3. Disallowance of Store Closure Expenses
4. Disallowance of Legal and Professional Expenses
5. Disallowance of Proportionate Interest on Unsecured Loans
6. Deletion of Disallowance under Section 40(a)(i)

Detailed Analysis:

1. Transfer Pricing Adjustment of AMP Expenses:
The first issue raised by the assessee concerns the addition of ?80,48,09,781 by the AO due to transfer pricing adjustment of AMP expenses. The assessee argued that AMP expenses are not an international transaction and cited judgments from the Delhi High Court in Maruti Suzuki India Ltd. and Whirlpool of India Ltd. The tribunal noted that the AO did not consider recent judgments and decided to remit the matter back to the TPO/AO for fresh determination, following the predominant view in several Tribunal orders.

2. Addition on Account of Suppressed Sales:
The assessee contested the addition of ?22,53,91,889 due to suppressed sales. The AO based this on discrepancies found during a survey operation. The assessee claimed these differences were due to unaccepted claims by customers, which were settled later. The tribunal emphasized the necessity of providing the assessee with complete copies of accounts to reconcile differences before making any addition. The matter was remitted back to the AO for verification and reconciliation.

3. Disallowance of Store Closure Expenses:
The assessee claimed ?8,27,00,000 as store closure expenses, which the AO disallowed, and the DRP considered it capital expenditure. The tribunal found the expenses to be revenue in nature, meant to close loss-incurring stores, and directed the AO to verify the details and allow the deduction to the extent the expenditure was actually incurred.

4. Disallowance of Legal and Professional Expenses:
The AO disallowed ?28.90 lakh out of ?5,75,66,299 claimed under legal and professional expenses, citing unrelated charges. The tribunal directed the AO to examine the deductibility of each item as per law, irrespective of the classification under legal and professional charges. Additionally, the AO disallowed ?24.02 lakh for store audit expenses due to lack of evidence. The tribunal allowed the assessee to produce the bill for verification.

5. Disallowance of Proportionate Interest on Unsecured Loans:
The AO disallowed ?23,60,71,053 in interest on unsecured loans due to interest-free advances given by the assessee. The tribunal noted that the advances were slightly reduced from the previous year and no disallowance was made earlier. Since the interest was genuinely paid for business purposes, the tribunal allowed the deduction of ?23.60 crore.

6. Deletion of Disallowance under Section 40(a)(i):
The Revenue challenged the deletion of ?4,56,58,787 disallowed under Section 40(a)(i) for non-deduction of tax at source on payments to ICC. The AO considered the payment as royalty or fees for technical services. The tribunal examined the agreement between the assessee and ICC, concluding that the payment was for promotional, advertising, and marketing rights, not royalty or fees for technical services. The tribunal upheld the DRP's direction to delete the disallowance, noting the absence of tax chargeability on the payment in the hands of ICC.

Conclusion:
The appeals were partly allowed for both the assessee and the Revenue, with several matters remitted back to the AO for fresh determination and verification. The tribunal provided detailed guidelines for reassessment, ensuring adherence to legal principles and proper consideration of all relevant judgments.

← Previous Next →