Provision for obsolete stock disallowed without proper substantiation, TDS required on technical service payments under section 9(1)(vii)

ITAT Bangalore dismissed the assessee's appeal on two grounds. First, regarding provision for non-moving/obsolete stock disallowed by AO, the tribunal found the assessee failed to substantiate the nature of obsolete goods, their cost, and net realizable value despite claiming compliance with AS 2. The matter was restored to AO for verification of accounting treatment and examination of filed statements. Second, on non-deduction of TDS on payments to non-residents, the tribunal upheld CIT(A)'s decision that payments constituted fee for technical services under section 9(1)(vii) as non-resident agents required technical expertise to check product quality, rejecting the assessee's claim of mere commission payments.

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Issues Involved:
1. Disallowance of provision for non-moving/obsolescence stock.
2. Disallowance of commission paid to non-residents under section 40(a)(i).

Analysis:

Issue 1: Disallowance of provision for non-moving/obsolescence stock
The appellant contested the disallowance of provision for non-moving obsolete stock amounting to Rs. 19,11,000 by the CIT(A). The appellant argued that the provision was made as per Accounting Standard 2 and Accountant Standard 1, and it is allowable as a deduction in computing taxable profits under section 28(i). The appellant emphasized their consistent valuation method for inventory and cited various decisions supporting the allowance of such provisions. However, the Assessing Officer disallowed the claim, stating that the appellant failed to provide sufficient reasons for the provision. The Tribunal found that the appellant did not substantiate the nature of the goods considered obsolete or non-moving, and no detailed working or listed items were produced. As a result, the Tribunal restored the issue to the Assessing Officer for further examination, emphasizing the need for cooperation from the appellant.

Issue 2: Disallowance of commission paid to non-residents under section 40(a)(i)
The second issue revolved around the disallowance of commission paid to non-resident agents for non-deduction of tax at source under section 40(a)(i). The appellant argued that the payments were not for technical services outside India, and the non-resident agents were not engaged in providing such services. The appellant contended that the payments were for procuring orders and conducting business outside India, falling outside the scope of section 9(1)(vii) of the Act. However, the CIT(A) upheld the disallowance, considering the agreements with non-residents and concluding that the payments were for technical services related to checking product quality and promoting the appellant's products. The Tribunal agreed with the CIT(A)'s findings, stating that the non-residents needed technical expertise to check product quality, and the appellant failed to prove otherwise. Therefore, the Tribunal upheld the CIT(A)'s decision and dismissed the appellant's appeal on this ground.

In conclusion, the Tribunal partly allowed the appeal for statistical purposes, restoring the first issue to the Assessing Officer for further examination while upholding the CIT(A)'s decision on the second issue regarding the disallowance of commission paid to non-residents.

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