2024 (7) TMI 1086 - AT - Income Tax

Disallowance u/s 14A - assessee argued no expenditure has been incurred for earning the aforesaid tax free income - HELD THAT - As per the judgment Godrej Boyce Mfg Co Ltd 2010 (8) TMI 77 - BOMBAY HIGH COURT the provisions of Rule 8D of the IT Rules are not applicable to Assessment Year 2005-06. Hon ble Bombay High Court had held that for prior years (to which provision contained in Rule 8D of the IT Rules did not apply), it is duty of the Assessing Officer to determine the quantum of disallowance on a reasonable basis.In view of the same, disallowance under Section 14A of the Act made by the authorities below is restricted to 2% of the exempt income. In terms of the aforesaid, Ground No. 1(a) to 1(e) raised by the Assessee are partly-allowed. TDS u/s 194C - Disallowance made u/s 40(a)(ia) on account of failure to withhold tax payments - Payment made to M/s Team Lease for providing secretarial and clerical staff on contractual basis - HELD THAT - We find merit in the contention advanced in behalf of the Revenue. In absence of a valid/proper Nil tax withholding certificate (containing the name of the Assessee) having been issued under Section 197(1) of the Act for the relevant previous year, the Assessee was under obligation to deduct tax at source from payments made to Team Lease as per provisions of Section 194C of the Act. We decline to interfere with the order passed by the CIT(A) confirming disallowance made u/s 40(a)(ia) - Decided against assesee. TDS u/s 195 - disallowance made u/s 40(a)(i)/(ia) - failure to withhold tax from the payments of Global Overhead Charges to Deutsche Securities Inc., New York, USA - HELD THAT - DTAA between India and Germany did not contain the make available clause in the definition of Fees for Technical Services as contained in Article 12(4) of the said DTAA. Therefore, disallowance was reported/made under Section 40(a)(i) in the Tax Audit Report and the computation of total income. Thus, the aforesaid payments of global overhead charges stood on a different footing as compared to the payments for global overhead charges to Deutsche Securities Inc. New York, USA, a tax resident of USA entitled to claim benefit of Article 12(4)(b) of the DTAA containing make available clause. We hold that the global overhead charges were not liable to tax in India as Fee for Included Services in terms of the provisions contained in Article 12(4)(b) of the DTAA; the Assessee was not under obligation to deduct tax from the same; and therefore, the provisions of Section 40(a)(i) were incorrectly invoked in respect of the same. Therefore, disallowance made under Section 40(a)(i) of the Act is deleted and Ground No.3 rasied by the Assessee is allowed. TP Additions - brokerage rates charged by the Assessee to AEs in respect of CH Trades - HELD THAT - We direct the TPO/AO to grant suitable Volume and Marketing Cost Adjustment after verifying the computation thereof placed on record by the Assessee. In terms of the aforesaid the TPO/Assessing Officer is directed to recomputed the ALP and determine the quantum of transfer pricing adjustment, if any. Deduction for education cess - HELD THAT - We note that the claim for deduction for education cess raised has been raised for the first time before the Tribunal. In view of retrospective amendment in Section 40(a)(ii) of the Act and the judgment of Joint Commissioner of Income Tax Vs. Chambal Fertilisers Chemicals Ltd. 2022 (12) TMI 1098 - SC ORDER deduction for education cess cannot be allowed. TDS u/s 195 - deduction on expenditure incurred on VSAT/Lease Line Charges - CIT(A) deleted the both the above disallowances holding that the Assessee was not under obligation to deduct tax from the payments towards VSAT/Leased Line Charges and Transaction Charges paid to stock exchanges since the same were not in the nature of fee for technical services as defined in Explanation 2 to Section 9(1)(vii) - HELD THAT - As regards VSAT/Leased line charges are concerned, the same are recovered by the stock exchanges from members for providing connectivity by way of VSAT/Leased Lines. In our view, as per the above judgment of Kotak Securities Limited 2016 (3) TMI 1026 - SUPREME COURT the VSAT/Leased Line Charges would also be regarded as payment for a facility provided by the stock exchanges and not fee for technical services . In view of the above, we do not find any infirmity in the conclusion drawn by the CIT(A) that VSAT/Leased Line Charges and Transaction Charges are not in the nature of fee for technical services. Accordingly, we decline to interfere with the order passed by the CIT(A) deleting the disallowance under Section 40(a)(ia) of the Act in respect of VSAT/Lease Line Charges and Transaction Charges. Claim of benefit of variation/reduction of 5 percent in terms of the provisions contained in proviso(s) to Section 92C(2) - HELD THAT - Special Bench of the Tribunal in the case of M/s IHG IT Services (India) Private Limited 2013 (5) TMI 309 - ITAT DELHI after taking into consideration the retrospective amendment to the second proviso to Section 92C(2) of the Act by the Finance Act, 2012, held that the benefit of tolerance margin of 5% would be available only if the variation is within the said tolerance margin. Once the variation exceeded the tolerance margin of 5%, then there would be no benefit even up to tolerance margin of 5%. Then, the ALP as worked out under Section 92C(1) would have to be taken as ALP without any benefit of tolerance margin. Accordingly, we overturn the decision of the CIT(A) and direct the TPO/Assessing Officer to re-compute the transfer pricing addition, if any, after taking into consideration the aforesaid judgment of the Special Bench.

Summary

Issues Involved:
1. Disallowance under Section 14A of the Income Tax Act.
2. Disallowance under Section 40(a)(ia) for payments to M/s Team Lease.
3. Disallowance under Section 40(a)(i) for global overhead charges to Deutsche Securities Inc.
4. Transfer pricing adjustments related to equity broking services.
5. Disallowance under Section 40(a)(ia) for VSAT/Leased Line and Transaction Charges.
6. Benefit of variation/reduction of 5% from the arithmetic mean as per Section 92C(2).

Issue-wise Detailed Analysis:

1. Disallowance under Section 14A of the Income Tax Act:
The Assessee challenged the disallowance of INR 502,967 under Section 14A, arguing that the CIT(A) indirectly applied Rule 8D, which is not applicable for the Assessment Year 2005-06 as per the Bombay High Court's decision in Godrej Boyce Mfg. Co. Ltd (328 ITR 81). The Tribunal agreed, noting that for the years prior to Rule 8D, the disallowance should be determined on a reasonable basis. The Tribunal restricted the disallowance to 2% of the exempt income, partially allowing the Assessee's appeal.

2. Disallowance under Section 40(a)(ia) for payments to M/s Team Lease:
The Assessee failed to deduct tax on payments made to M/s Team Lease for providing secretarial and clerical staff. The Assessee argued that a procedural lapse excluded their name from the tax withholding certificate under Section 197 for the relevant year. The Tribunal upheld the CIT(A)'s decision, confirming that the Assessee was obligated to deduct tax in the absence of a valid certificate, thus dismissing the Assessee's appeal.

3. Disallowance under Section 40(a)(i) for global overhead charges to Deutsche Securities Inc.:
The Assessee contended that the payments were not 'Fees for Included Services' under Article 12 of the India-USA DTAA as they did not 'make available' technical knowledge, skill, etc. The Tribunal found that the Assessing Officer failed to provide a factual basis for concluding that technical knowledge was made available. The Tribunal held that the global overhead charges were not taxable in India under the DTAA and deleted the disallowance, allowing the Assessee's appeal.

4. Transfer pricing adjustments related to equity broking services:
The TPO had selected the brokerage rates charged to the top 10 FIIs as comparable uncontrolled transactions, rejecting the Assessee's benchmarking analysis. The Assessee sought adjustments for volume, marketing, and research costs. The Tribunal directed the TPO to grant suitable adjustments for volume and marketing costs, following precedents set by cases like Morgan Stanley India Company Private Ltd. The Tribunal allowed the Assessee's appeal for statistical purposes and directed the TPO to recompute the ALP.

5. Disallowance under Section 40(a)(ia) for VSAT/Leased Line and Transaction Charges:
The CIT(A) had deleted the disallowance, holding that these charges were not 'fees for technical services' under Section 9(1)(vii) of the Act. The Tribunal upheld this decision, referencing the Supreme Court's judgment in Kotak Securities Limited, which concluded that such charges are for facilities provided by the stock exchange and not technical services. The Tribunal dismissed the Revenue's appeal on this issue.

6. Benefit of variation/reduction of 5% from the arithmetic mean as per Section 92C(2):
The CIT(A) had allowed a 5% standard deduction from the ALP determined by the TPO. The Tribunal referenced the Special Bench decision in IHG IT Services (India) Private Limited, which held that the 5% tolerance margin applies only if the variation is within the margin. The Tribunal directed the TPO to recompute the transfer pricing addition without the 5% benefit if the variation exceeded the tolerance margin, thus allowing the Revenue's appeal and dismissing the Assessee's cross-objection.

Conclusion:
The Tribunal partly allowed both the Assessee's and the Revenue's appeals, while dismissing the Assessee's cross-objection. The Tribunal provided specific directions for recomputation and adjustments, adhering to legal precedents and the applicable provisions of the Income Tax Act.