2020 (11) TMI 478 - AT - Income Tax

TDS u/s 195 - disallowance u/s 40(a)(i) - payment to a foreign entity as testing /certification fees outside India - whether testing/ certification fees paid outside India was not chargeable to tax under the provisions of the Act read with the overriding provisions of the applicable DTAA? - HELD THAT - Foreign entity was authorized for certification of products for export which is a mandatory requirement for selling products in Europe, Middle East Countries, and South African Countries. The explanation given by the assessee before the AO for not withhold tax at source on the aforesaid payment of ₹ 5,68,856/- made to the overseas entity, since the assessee bonafidely believed that such certification fee was not liable to tax in India, as the same was not covered within the meaning of Fee for Technical Services as provided u/s 9(1) (vii) of the Act and/or the overriding provisions of the Double Taxation Avoidance Agreements stands covered in favour of the assessee by the order of the Tribunal passed in the assessee s own case for Assessment Year 2006-07 2020 (9) TMI 31 - ITAT DELHI held that the payment made by the assessee to very same party i.e. M/s KEMA Quality BV Netherland cannot be brought to tax in India as Fees for Technical Services in accordance with India Netherland DTAA. Disallowance provisions made for sales incentive in respect of Shahenshah Sales Incentive Scheme - assessee made a provisions in respect of Shahenshah Scheme towards Sales Incentives payable to its dealers and distributors - HELD THAT - As during the previous year Assessment Year 2007-08, the assessee made a provisions in respect of Shahenshah Scheme towards Sales Incentives payable to its dealers and distributors. The said scheme was introduced to promote sales and ensure timely collection of payments from its customers. Out of the provisions made till date payment was made by the assessee during the Assessment Year under consideration. The Tribunal in A.Y. 2007-08 held that the provision made by the assessee in respect of Shahenshah Scheme was on a scientific basis and, therefore, allowable deduction. The facts in the present assessment year is identical, thus the issue is squarely covered in assessee s own case for Assessment Year 2007-08. 2020 (9) TMI 31 - ITAT DELHI Claim of deduction under Section 80-IA/IB - Losses of earlier years in respect of Baddi Unit and Hridwar Unit - same was not allowed to be set off against profits/income of the other units/business and, therefore, no part of losses remain to be set off against the profits of the eligible units as per the contention of the Ld. AR. - rejected the claim of the assessee on the ground that the gross total income of the assessee, before deductions under Chapter VI-A, was nil and, therefore the assessee was not entitled to the benefit of deductions under Sections 80HH and 80-I - HELD THAT - The loss of earlier Assessment Year(s) 2006-07 and 2007-08, pertaining to the eligible unit(s) viz., Baddi Unit- 2 and Haridwar Unit, stood actually set off against profits of non-eligible unit(s) of the assessee-company in the respective year(s). The entire loss was set off against profits of non-eligible units and there was no loss that was actually carried forward to Assessment Year 2008-09. But the Assessing Officer set-off notional losses of earlier years, for the purpose of computing deduction u/s 80-IC - the losses of earlier years already set off against income of previous year should not be reopened again for computing deduction under Section 80IC - The case laws relied by the Ld. AR laid down the same principle and thus, applicable in the present case as well - DR could not controvert the fact that the entire loss was set off against profits of non-eligible units and there was no loss that was actually carried forward to Assessment Year 2008-09. AO was not correct in setting off notional losses of earlier years, for the purpose of computing deduction under Section 80-IC Foreign exchange gain realized on remittance of amount received on redemption of shares in foreing subsidiary as taxable income - assessee s claim to treat the same as capital receipt not liable to tax - HELD THAT - In the present case, the net gain/loss on redemption of shares was Nil since the shares were redeemed at par value and thereby there was no capital gains taxable under Section 45 of the Act. From the perusal of Section 45 of the Act it can be seen that for taxation of any profits or gains arising from the transfer of a capital asset, only gains accruing as a result of transfer of the asset can be taxed. In the present case, there was no gain on transfer/redemption of the shares in so far as the shares were redeemed at par value. Thus, there was no gain which accrued to the assessee as a result of redemption of such shares, since the shares were redeemed at par value. AR submitted that gain arose to the assessee on account of repatriation of foreign currency to India, which is an event separate and distinct from the event of transfer of shares of the subsidiary company. The exchange gain was only a consequence of repatriation of the consideration received in Euro to INR and cannot be construed to be part of consideration received on redemption of shares. Thus, the applicability of Section 45 does not come in picture in the present case. Therefore, the Assessing Officer was not right in applying Section 45 for making the addition. Allowance of deduction in respect of Education Cess and Secondary Higher Education Cess - HELD THAT - Levy of education cess on Income tax is distinct from that of an income tax or surcharge since the letter to form part of part one of the First Schedule which defines income tax and provides rate of levy thereof. Unlike income tax and surcharge which are levied for general purpose, Government has explained an education cess and is admittedly levied for specific purpose that is to fulfill the commitment of the government to provide quality health services and finance universalized quality basic education and secondary and higher education. Unlike surcharge which was an exclusive component of income tax, education cess as introduced vide Finance Act, 2004 was also imposed an additional levy on indirect taxes namely Customs, Excise and Service Tax. Education cess does not part take the care of being a component of income tax per say as levied under the provisions of the Act.he claim of the assessee in respect of the education cess is allowable as deduction for the purpose of computation of taxable profits under the Act as held in the Hon ble Bombay High Court s decision in case of Sesa Goa Ltd. 2020 (3) TMI 347 - BOMBAY HIGH COURT . Deduction of excess provision of bad debts written back - HELD THAT - It is pertinent to note that the Assessing Officer has not verified the proper deduction of excess provisions of bad debts written back and the contentions of the assessee during the assessment proceedings were not verified. Therefore, it will be appropriate to remand back this issue to the file of the Assessing Officer for proper adjudication and verification.

Summary

Issues Involved:
1. Disallowance under section 40(a)(i) for payments to foreign entities.
2. Disallowance and enhancement of provision for sales incentive under the Shahenshah Sales Incentive Scheme.
3. Adjustment of earlier years' losses against eligible profits for deduction under section 80IC.
4. Taxability of foreign exchange gain on redemption of shares in a foreign subsidiary.
5. Deduction of education cess and secondary higher education cess.
6. Deduction of excess provision of bad debts written back.

Detailed Analysis:

1. Disallowance under section 40(a)(i) for payments to foreign entities:
The assessee paid ?5,68,856 to M/s KEMA Quality BV, Netherlands for certification of electrical products without withholding tax at source, believing it was not liable to tax in India. The Tribunal found that this issue was covered in favor of the assessee by its own case for AY 2006-07 and 2007-08, where similar payments were not considered taxable as "Fees for Technical Services" under the India-Netherlands DTAA. Hence, the Tribunal allowed the grounds related to this issue.

2. Disallowance and enhancement of provision for sales incentive under the Shahenshah Sales Incentive Scheme:
The assessee made a provision of ?5,01,73,763 for sales incentives, out of which ?1,04,82,408 was paid during the assessment year. The Assessing Officer disallowed ?3,96,91,355, considering it a contingent liability, and the CIT(A) further restricted the allowable provision to 15% on an ad-hoc basis, enhancing the disallowance by ?29,56,344 without issuing a notice of enhancement. The Tribunal noted that similar provisions were allowed in the assessee's case for AY 2006-07 and 2007-08, finding the provision to be on a scientific basis. The Tribunal also found the enhancement without notice to be improper and allowed the grounds related to this issue.

3. Adjustment of earlier years' losses against eligible profits for deduction under section 80IC:
The assessee claimed deduction under section 80IC for profits from Baddi Unit-2 and Haridwar Unit, which had earlier years' losses already set off against profits of non-eligible units. The Assessing Officer adjusted these notional losses against current year profits, reducing the deduction by ?4,67,99,123. The Tribunal held that the losses already set off in earlier years should not be reopened for computing deduction under section 80IC, as per the principles laid down in various case laws, including the Supreme Court's decision in Canara Workshops. The Tribunal allowed the grounds related to this issue.

4. Taxability of foreign exchange gain on redemption of shares in a foreign subsidiary:
The assessee realized a foreign exchange gain of ?2,55,82,186 on the redemption of shares in M/s Havells Holding Ltd., treating it as a capital receipt not liable to tax. The Assessing Officer and CIT(A) treated it as taxable income. The Tribunal found that the gain was due to exchange fluctuation on repatriation of proceeds and not on the transfer of shares, which were redeemed at par value. Hence, the Tribunal held that the gain was not taxable under section 45 and allowed the grounds related to this issue.

5. Deduction of education cess and secondary higher education cess:
The assessee claimed a deduction of ?54,21,514 for education cess and secondary higher education cess, which was not claimed in the original return but during assessment proceedings. The Assessing Officer and CIT(A) rejected the claim based on the Supreme Court decision in Goetz India. The Tribunal distinguished this case, noting that education cess is distinct from income tax and surcharge and is allowable as a deduction, as held by the Bombay High Court in Sesa Goa Ltd. The Tribunal allowed the grounds related to this issue.

6. Deduction of excess provision of bad debts written back:
The assessee claimed a deduction for excess provision of bad debts written back amounting to ?2,58,164, which was not fully excluded in the revised return. The Tribunal found that the Assessing Officer did not verify the claim properly and remanded the issue back for verification, allowing the grounds partly for statistical purposes.

Conclusion:
The appeal of the assessee was partly allowed for statistical purposes, with the Tribunal granting relief on most grounds except for the issue of excess provision of bad debts, which was remanded for further verification.