2023 (3) TMI 215 - HC - Income Tax

Addition u/s 40(a)(ia) - Non deduction of TDS on freight expense - assessee failed to bring any evidence on record to the effect that the payments made are covered under circular No.723 of 1995 and that the non-residents ship owners/charters had filed returns u/s 172 - HELD THAT - Shoes of the principal and hence, the provision of Section 172 would apply and not the provision of Sections 194C and 195 - Therefore, the action on the part of the CIT (Appeals) which had been confirmed by the ITAT of not having endorsed to the views of AO of adding the dis-allowance claimed under Section 41(a) would not deserve any interference as is quite clear the authority concerned has already taken the note of the fact that the assessee had deducted the tax at source on terminal handling charges, documentation charges, etc. however, when they acted as the principal for and on behalf of the assessee and paid the amount, it was essentially the reimbursement for which there cannot be any TDS required to be deducted. No reason as to why we should also not be followed the ratio laid down by this Court in 2014 (4) TMI 235 - GUJARAT HIGH COURT where the assessee had claimed the deduction u/s 40(a)(ia) towards the reimbursement of charges paid to C F agent and also the reimbursement of the expenses towards consignment agents, which were disallowed by the Assessing Officer solely on the ground that the assessee had not deducted TDS on the said amount. We found that the relation between the assessee and the agent was that of a principal and agent. The ITAT in that matter had held that there was an obligation to deduct the tax at source from the payment of transfer charges and other charges were concerned, which had been complied with by the agent. This Court had not interefered with when the CIT (Appeals) had quashed and set aside the order passed by the AO of deleting the dis-allowance claimed by the assessee under Section 40(a)(ia) and confirmed by the ITAT. Applying the same to the instant case also, it does not arise any substantial question of law and hence, question (A) is not entertained. Addition on account of the interest and of insurance expenses so also the depreciation, petrol and repair expenses - HELD THAT - This relates to the deletion of the disallowance made in respect of the interest and insurance expenses claimed on vehicle and part dis-allowance in respect of depreciation and incidental expenses claimed on vehicle. The car since has been reflected as an asset in the balance sheet of the company and the car loan also appeared as a liability in the company s balance sheet, which would have its dominion over the car although the resolution for registration of the said car was in the name of the director and the same was used wholly and exclusively for the business of the company, on the ground that the company was eligible for claiming the depreciation, the additions were made in respect of insurance interest, insurance, have been held to be rightly deleted by the ITAT. In respect of depreciation of Rs.1,36,000/- and the car expenses of Rs.28,995/- have been partly deleted to the extent of 75% and 25% had been continued being unambiguous taking into consideration the assesses books of accounts maintained in regard to the asset. It has also struck a good balance after looking at the entire set of facts and even otherwise the tax effect if is looked at then also, this does not require any interference nor any admission as the substantial question of law. Dis-allowance of expense of the web designing and development for the market survey and production of commercial films for broadcasting on T.V. channel and for the advertisement of the film - HELD THAT - This issue is also covered by the decision of this Court in case of Zydus Wellness Ltd 2017 (4) TMI 920 - GUJARAT HIGH COURT - We are in complete agreement with the findings of both the CIT(Appeals) and the ITAT that all these expenditures will not have any enduring benefits to the assessee to be termed as Capital Expenses as they are being used in connection with the running of business of the assessee and they will need to be essentially held to be revenue in nature. Under invoicing of the sales made to the sister concern - HELD THAT - AO failed to appreciate that difference in sales price could be on account of various factors such as strength of the product, terms of payment, the concerned country being the final destination, stability of political conditions in those countries, quantity supplied, quality supplied, creditworthiness of parties, market conditions, risk factor, etc. Under invoicing of the export since was by a huge sum almost 5.54 times of exports to the sister concern, it was held that the same is not possible as the under invoicing the Gross Profit rate and Net Profit rate by this method would work out to be 64.79% and 46.38%. Considering strongly acceptable reasonings of both the CIT(A) and the ITAT, it could be noticed that when the assessee s books of account had been duly audited and at no stage, the Tax Auditor had questioned its books of accounts or the method used by the assessee with the AO having not referred this to the Transfer Pricing Officer and instead having adopted a method which is alien to the statute, both authorities have rightly held this to be the method and act non-acceptable.

Summary

Issues Involved:
1. Deletion of addition under Section 40(a)(ia) of the Income Tax Act.
2. Deletion of addition on account of interest and insurance expenses claimed on vehicle.
3. Deletion of addition on account of depreciation, petrol, and repair expenses claimed on vehicle.
4. Deletion of disallowance of expenses for web designing and development.
5. Deletion of disallowance of expenses for market survey and production of commercial film.
6. Deletion of disallowance of expenses for making advertisement film.
7. Deletion of addition on account of under-invoicing of sales to sister concern.
8. Ignoring crucial findings of the Assessing Officer (AO) regarding under-invoicing.
9. Comparison of net profit rates with other cases.

Issue-wise Detailed Analysis:

1. Deletion of Addition under Section 40(a)(ia):
The assessee was engaged in manufacturing cosmetic products and had shown sales of Rs.16,64,10,392/- with a net loss of Rs.1,22,01,754/-. The AO disallowed freight expenses of Rs.34,14,124/- under Section 40(a)(ia) due to non-deduction of TDS. The CIT(A) and ITAT found that the payments were to agents of foreign shipping companies, covered under Circular No.723, and thus no TDS was required. The court upheld this view, stating that the CBDT Circular No.723 clarifies that agents acting on behalf of non-resident ship-owners step into the shoes of the principal, and Section 172 applies, not Sections 194C and 195.

2. Deletion of Addition on Account of Interest and Insurance Expenses:
The AO disallowed interest and insurance expenses on the vehicle, but the CIT(A) allowed these expenses, recognizing the vehicle as an asset used for business purposes. The ITAT confirmed this, allowing 75% of depreciation and incidental expenses while disallowing 25% for personal use. The court found no reason to interfere with this balanced approach.

3. Deletion of Addition on Account of Depreciation, Petrol, and Repair Expenses:
The AO disallowed these expenses, but the CIT(A) and ITAT allowed 75% of the expenses, recognizing the vehicle's use for business purposes. The court upheld this, finding the rationale reasonable and the tax effect minimal.

4. Deletion of Disallowance of Expenses for Web Designing and Development:
The AO treated web designing and development expenses as capital in nature. However, the CIT(A) and ITAT held them as revenue expenses, necessary for the day-to-day running of the business. The court agreed, noting that websites require constant updating, making the expenses recurring and revenue in nature.

5. Deletion of Disallowance of Expenses for Market Survey and Production of Commercial Film:
The AO disallowed these expenses as capital expenditure. The CIT(A) and ITAT found them to be revenue expenses, necessary for marketing and sales. The court upheld this view, citing the recurring nature of these expenses in the business of manufacturing drugs and cosmetics.

6. Deletion of Disallowance of Expenses for Making Advertisement Film:
Similar to the market survey expenses, the AO disallowed these as capital expenditure. The CIT(A) and ITAT treated them as revenue expenses, necessary for business promotion. The court agreed, emphasizing the need for frequent promotional activities in the business.

7. Deletion of Addition on Account of Under-Invoicing of Sales to Sister Concern:
The AO added Rs.13,44,47,290/- for alleged under-invoicing of sales to a sister concern. The CIT(A) and ITAT found the AO's method unscientific and unjustifiable, noting that the books of accounts were audited without adverse comments. The court upheld this, emphasizing the need for a proper methodology and rejecting the AO's approach.

8. Ignoring Crucial Findings of the AO Regarding Under-Invoicing:
The AO's findings on under-invoicing were dismissed by the CIT(A) and ITAT, who found the AO's method flawed. The court upheld this, noting the lack of reference to the Transfer Pricing Officer and the unscientific approach of the AO.

9. Comparison of Net Profit Rates with Other Cases:
The AO compared the net profit rates with other cases, but the CIT(A) and ITAT found this irrelevant due to the unique circumstances of the assessee's business. The court agreed, emphasizing the need for context-specific analysis.

Conclusion:
The court dismissed the tax appeal, finding no substantial questions of law in the issues raised by the revenue. The decisions of the CIT(A) and ITAT were upheld across all issues, emphasizing the need for proper methodology and context-specific analysis in tax assessments.