Tribunal decision: Partial win for assessee, remittance for Microsoft payment, upheld disallowance.

The Tribunal partially allowed the assessee's appeal, directing the Assessing Officer to delete the addition for corporate guarantee provided to Associate Enterprises and allow deductions for trade mark license fee and depreciation on temporary structure. The Tribunal remitted the issue of payment made to Microsoft Corporation back to the Assessing Officer for further examination. It upheld the disallowance of bad debts written off and expenditure for earning exempt income under Section 14A. The order was pronounced on 26.6.2015.

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Issues Involved:
1. Adjustment of Rs. 1,84,17,371/- for corporate guarantee provided to Associate Enterprises.
2. Disallowance of trade mark license fee.
3. Disallowance of depreciation on temporary structure.
4. Disallowance of payment made to Microsoft Corporation under Section 40(a)(i) of the Act.
5. Disallowance of bad debts written off.
6. Disallowance of expenditure for earning exempt income under Section 14A.

Issue-wise Detailed Analysis:

1. Adjustment of Rs. 1,84,17,371/- for Corporate Guarantee Provided to Associate Enterprises:

The assessee provided a corporate guarantee to its overseas subsidiaries. The Transfer Pricing Officer (TPO) benchmarked the corporate guarantee at 1.5%, and the Dispute Resolution Panel (DRP) confirmed this view, arguing that the close relationship justification is self-defeating to the Arm's Length Price (ALP) concept. However, the Tribunal, relying on its previous decision in the assessee's own case for the assessment year 2009-10 and the Delhi Bench decision in Bharti Airtel Ltd vs Addl. CIT, found that the corporate guarantee does not involve any cost to the assessee and does not affect the profits, income, loss, or assets of the assessee. Consequently, it is outside the ambit of an international transaction requiring ALP adjustment. The Tribunal directed the Assessing Officer to delete the addition of Rs. 1,84,17,371/-.

2. Disallowance of Trade Mark License Fee:

The Assessing Officer disallowed Rs. 1,80,98,708/- towards the trade mark license fee. The Tribunal, referring to its decision in the assessee's own case for the assessment year 2009-10 and the judgment of the Apex Court in S.A Builders vs CIT, found that the payment for the use of the trademark 'REDINGTON' is a common business practice and an allowable business expenditure. Therefore, the Tribunal confirmed the deletion of the addition made by the Assessing Officer.

3. Disallowance of Depreciation on Temporary Structure:

The assessee claimed a deduction of Rs. 1,18,69,510/- for expenses on temporary structures like office cabins, wooden partitions, etc. The DRP disallowed this, considering it an enduring benefit. The Tribunal opined that these expenses were for making the building suitable for business use and should be allowed as revenue expenditure. The Tribunal directed the Assessing Officer to allow the deduction of Rs. 1,18,69,510/- as revenue expenditure.

4. Disallowance of Payment Made to Microsoft Corporation under Section 40(a)(i) of the Act:

The Assessing Officer disallowed Rs. 40,60,298/- on the ground of non-deduction of tax. The Tribunal found that the details regarding the credit given to Microsoft Corporation and the returns made were unclear. Therefore, the Tribunal set aside the orders of the lower authorities and remitted the issue back to the Assessing Officer for a fresh examination, directing him to consider the details and decide the issue in accordance with the law after giving the assessee a reasonable opportunity of hearing.

5. Disallowance of Bad Debts Written Off:

The assessee wrote off Rs. 2,06,03,544/- as bad debt. The lower authorities disallowed this, stating the assessee had not established the debt as bad. The Tribunal, referring to the amended Section 36(1)(vii) of the Act, clarified that it is not necessary to establish the debt as bad once it is written off in the books of account. The Tribunal directed the Assessing Officer to allow the claim of the assessee, provided the conditions under Section 36(2) are met.

6. Disallowance of Expenditure for Earning Exempt Income under Section 14A:

The Assessing Officer disallowed Rs. 1,88,245/- under Section 14A. The Tribunal noted that the expenditure incurred for earning exempt income (like dividends, agricultural income, or partnership firm profits) cannot be allowed as a deduction while computing taxable income. The Tribunal confirmed the disallowance made by the lower authority.

Conclusion:

The appeal of the assessee was partly allowed, with specific directions to the Assessing Officer for certain issues and confirmations of the lower authorities' decisions for others. The order was pronounced in the open court on 26.6.2015.

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