2014 (4) TMI 1094 - AT - Income Tax

Tribunal Upholds Disallowance of Capital Loss & Other Claims, Emphasizing Statutory Compliance

The Tribunal upheld the Assessing Officer's and CIT(A)'s decisions to disallow the long-term capital loss claim due to the extinguishment of shares in a ... L.T capital loss on extinguishment in the value of asset - Held that:- U/s. 560(5) of the Companies Act, 1956, the final procedure for striking a company’s name off the registrar is to publish a notice thereof in the official gazette and on publication in the official gazette of notice referred to in section 560(3) of the Companies Act, 1956, the company shall stand dissolved. It is only on such publication that the assessee’s right in the shares get extinguished and prior to that point of time, it cannot be said that there was any transfer to invoke provisions of section 45 of the I.T. Act, 1961. In our view, reference to provisions of section 46(2) of the Act are not appropriate, as those provisions contemplate a situation of receipt of money or other assets in the process of liquidation of a company. Admittedly, there was no receipt of money or other assets on liquidation by the assessee and therefore provisions of section 46(2) of the Act were not applicable. We are therefore of the view that the revenue authorities were justified in rejecting the claim of the assessee under the head ‘long term capital loss’. - Decided against assessee. Disallowance of refurbishing / warranty claims - non deduction of tds - Was there an obligation on the part of the Assessee to reimburse the cost of refurbishing the products sold by Mantrra Inc.? - Held that:- Perusal of the refurbishing statement shows it refers to several heads of expenses but none of the head of expense is “value of the cooker returned by customer”. Besides the above it includes expenses on retrieving returned cookers to make them fit for sale again, rent for storing returned cookers, costs of shifting the returned cookers, travelling expenses, Apartment rent paid for workmen who visited from India to refurbish the returned cookers. It is clear from these bills that none of the above expenditure can be attributed to the Assessee as per any article in the agreement between Assessee and MI. These expenses are clearly that of MI for which the Assessee has procured a Product Liability Insurance cover at its cost in favour of MI. As we have already seen and as rightly held by the revenue authorities the only obligation of the Assessee was when cookers which are found to be defective and unacceptable and hence returned to the Assessee, to give credit or replace the defective cookers. This is the only legal liability of the Assessee as per the terms of the Agreement. The claim made by the Assessee for deduction on account of refurbishing warranty is therefore held to be not sustainable as it is not the liability of the Assessee. Addition made by way of imputed interest - Held that:- The contention of having actually not earned any income cannot come to the rescue of the assessee in this scenario. AO was well within his powers in making the impugned addition. The claim of the Assessee to adopt EURIBOR rate as stated before the TPO is reasonable and deserves to be accepted Deduction on account of provision for loss arising on account of foreign exchange rate fluctuation on restatement of liability allowed by CIT(A) - Held that:- In the statement of facts before CIT(A) the Assessee has categorically claimed that the transaction in question was on current account/revenue account and not capital account. The AO has allowed part of the claim of the Assessee clearly implying that the transaction in question was on account of revenue/current account and not capital account. The order of AO is silent on this aspect. It is no doubt true that in the order of CIT(A) there is no specific finding on this aspect. In our view that by itself will not be a ground for the revenue to demand a fresh look into this aspect. We are therefore of the view that the order of the CIT(A) on this issue has to be upheld. - Decided again revenue Deduction on account of liability on account of refurbishing warranty - Held that:- The CIT(A) in the impugned orders in appeal by the Revenue for AY 06-07 to 08-09 has not examined the terms of the agreement between the Assessee and MI and has proceeded on the basis that the Assessee was bound to reimburse the warranty claims of customers to whom MI sold Pressure cookers. For the reasons stated while deciding the appeal of the Revenue for AY 05-06, we allow the additional grounds raised by the Revenue in its appeal for AY 06-07 to 08- 09. We may also add that the liability on account of exchange rate fluctuation at the time of actual payment to MI of the alleged liability on account of warranty claims cannot also be allowed as the main claim for liability on account of warranty liability itself has been held to be not that of the Assessee. Addition on account of disallowance of interest on the ground that the interest expenses claimed as deduction were on borrowed funds which was given as interest free advances to MI - CIT(A) deleted the addition - Held that:- the plea with regard to commercial expediency has been accepted by the CIT(A) without any basis. There has been no investigation of facts with regard to how the interest free loan was given to MI to enable it to warehouse and sell the Assessee’s products in US. As we have already seen the distributor agreement is silent on all these aspects and the basis on which CIT(A) has given relief to the Assessee in our view cannot be accepted. We however are of the view that the plea of the Assessee both with regard to its claim that interest free advance was given out of surplus funds of the Assessee as well as the plea with regard to commercial expediency in giving interest free loan to subsidiary requires fresh examination by the AO and accordingly the order of CIT(A) on this issue is set aside and the issue remanded to the AO for fresh examination - Decided in favour of revenue allowed for statistical purpose. Disallowance of expenses claimed under the head “Royalties” paid to a non-resident in view of the provisions of Sec.40(a)(i) - non deduction of tds - Held that:- we hold that the Assessee, in the present case, cannot be said to be obliged to deduct tax at source on payments made to the non-residents as on the date when the payments were made on the basis of the decision of the Hon’ble Madras High Court in the case of COMMISSIONER OF INCOME TAX vs. AKTIENGESELLSCHAFT KUHNLE KOPP AND KAUSCH W. GERMANY BY BHEL (2002 (11) TMI 50 - MADRAS High Court ). It is only consequent to the retrospective amendment to the law which happened after the dates on which the Assessee made payments to the non-resident that the liability of the Assessee to deduct tax at source arises. Therefore no disallowance can be made u/s.40(a)(i) of the Act - Decided in favour of assessee Issues Involved:1. Disallowance of Long-Term Capital Loss on Extinguishment of Asset Value.2. Disallowance of Refurbishing/Warranty Claims.3. Addition of Imputed Interest on Interest-Free Loan to Subsidiary.4. Disallowance of Foreign Exchange Loss on Restatement of Liability.5. Disallowance of Royalty Expenses for Non-Deduction of Tax at Source.Detailed Analysis:1. Disallowance of Long-Term Capital Loss on Extinguishment of Asset Value:The assessee claimed a long-term capital loss of Rs. 50,40,000 due to the extinguishment of the value of shares in TT Kitchenware Ltd. (TTK), a defunct company. The Assessing Officer (AO) disallowed the claim, stating there was no transfer of shares as per Section 2(47) of the Income-tax Act, 1961. The CIT(A) upheld this view, noting that the dissolution of TTK occurred in a different assessment year. The Tribunal confirmed the AO's and CIT(A)'s decisions, stating that the extinguishment of rights occurred only upon the company's dissolution, which was not within the relevant assessment year.2. Disallowance of Refurbishing/Warranty Claims:The assessee claimed Rs. 2,61,20,735 for refurbishing/warranty expenses related to exports to the USA through its subsidiary, Manttra Inc. (MI). The AO disallowed the claim due to lack of evidence, non-deduction of tax at source, and the nature of the sale being absolute. The CIT(A) upheld the AO's decision, noting inconsistencies in the documentation and the absence of a provision for such expenses in earlier years. The Tribunal agreed, emphasizing that the agreement with MI did not obligate the assessee to incur such expenses and that the claims were not substantiated with evidence.3. Addition of Imputed Interest on Interest-Free Loan to Subsidiary:The AO added Rs. 39,59,000 as notional interest on an interest-free loan of Rs. 3,05,90,000 given to MI, based on the prime lending rate of SBI. The CIT(A) upheld this addition, citing the TPO's determination of arm's length price. The Tribunal affirmed the addition, referencing the Mumbai ITAT's decision in Tata Autocomp Systems Ltd., which upheld the application of transfer pricing provisions to interest-free loans to associated enterprises. However, the Tribunal directed the AO to recompute the adjustment based on LIBOR rates, aligning with international standards.4. Disallowance of Foreign Exchange Loss on Restatement of Liability:The AO disallowed Rs. 24,85,227 of the total foreign exchange loss claimed by the assessee, stating it was notional and not related to actual payment. The CIT(A) allowed the claim, following the Supreme Court's decision in Woodward Governor's case, which permits recognizing such losses. The Tribunal upheld the CIT(A)'s decision, confirming that the loss pertained to revenue transactions and was allowable.5. Disallowance of Royalty Expenses for Non-Deduction of Tax at Source:The AO disallowed royalty payments for non-deduction of tax at source, treating them as income deemed to accrue in India. The CIT(A) allowed the deduction, stating the payments were for exploiting intangible assets abroad and not taxable in India. The Tribunal, however, noted the retrospective amendment to Section 9(1) of the Act, which deems such income to accrue in India irrespective of the location of service rendering. Despite this, the Tribunal upheld the CIT(A)'s decision, referencing the principle that retrospective amendments should not impose TDS obligations on payments made before the amendment.Conclusion:The Tribunal provided a comprehensive analysis of each issue, affirming the disallowances and additions made by the AO and CIT(A) in most cases while providing specific directions for recalculating certain adjustments in line with international standards. The decisions reflect adherence to statutory provisions and judicial precedents, ensuring a fair and consistent application of tax laws.