Tribunal dismisses revenue's appeal, partially allows assessee's appeal, and directs re-adjudication on compensation issue.

The Tribunal dismissed the revenue's appeal regarding the deletion of Rs. 1,68,49,000 under section 40(a)(ia) of the Income Tax Act, 1961. The second issue of deletion of Rs. 30 lakhs on account of compensation from customers was sent back to the AO for re-adjudication. The Tribunal directed the AO to delete the disallowance under section 14A of the Income Tax Act, 1961, as bank charges were found not to constitute part of interest expenses. The Tribunal partly allowed the assessee's appeal and dismissed the revenue's appeal, with the order pronounced on 16th Jan 2017.

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Issues Involved:
1. Deletion of Rs. 1,68,49,000/- under section 40(a)(ia) of the Income Tax Act, 1961.
2. Deletion of Rs. 30 lakhs on account of compensation from customers.
3. Disallowance under section 14A of the Income Tax Act, 1961.

Issue-Wise Detailed Analysis:

1. Deletion of Rs. 1,68,49,000/- under section 40(a)(ia) of the Income Tax Act, 1961:
The first issue pertains to the deletion of Rs. 1,68,49,000/- by the CIT(A) under section 40(a)(ia) of the Income Tax Act, 1961, due to non-deduction of TDS by the assessee. The AO noted that the assessee charged Rs. 168.49 lakhs to the profit and loss account as secondment charges under "Personnel cost" and failed to deduct TDS, leading to disallowance under section 40(a)(ia). However, the assessee argued that the secondment charges were paid to employees seconded by GAIL and British Gas, with taxes already deducted and paid to the government. The CIT(A) allowed the appeal, referencing previous decisions, including the case of IDS Software Solutions (India) Pvt Ltd. vs. ITO, where it was held that reimbursement of salary by the assessee to the US company need not suffer tax at source. The Tribunal upheld this view, dismissing the revenue's appeal, citing the precedent set in the assessee's own case and the decision in CIT Vs. Kotak Securities Ltd., where it was held that no fault could be found with the assessee for not deducting tax at source due to a bona fide belief.

2. Deletion of Rs. 30 lakhs on account of compensation from customers:
The second issue involves the deletion of Rs. 30 lakhs made by the AO on an estimated basis for compensation from customers, arguing that the assessee, following the mercantile system of accounting, should account for compensation receivable on an accrual basis. The Tribunal noted that a similar issue was remitted back to the AO in the assessee's own case for AY 2008-09, directing the AO to decide the issue in terms of the principles laid down in that order. Consequently, the Tribunal sent the issue back to the AO for fresh adjudication, allowing the ground for statistical purposes.

3. Disallowance under section 14A of the Income Tax Act, 1961:
The third issue concerns the upholding of the AO's order disallowing expenses under section 14A, calculated by including the entire financial expense, including bank charges. The assessee argued that only interest should be considered for disallowance, not bank charges. The CIT(A) dismissed the appeal, interpreting section 2(28A) to include bank charges as part of interest. However, the Tribunal found that bank charges, deducted by banks for various transactions, do not constitute part of interest expenses under section 2(28A), which includes only interest on borrowed money and related fees or charges. The Tribunal set aside the CIT(A)'s order, directing the AO to delete the disallowance, as the inclusion of bank charges was contrary to law.

Conclusion:
The Tribunal dismissed the revenue's appeal on the first issue, sent the second issue back to the AO for re-adjudication, and directed the AO to delete the disallowance on the third issue, partly allowing the assessee's appeal and dismissing the revenue's appeal. The order was pronounced in the open court on 16th Jan, 2017.

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