2017 (6) TMI 868 - AT - Income Tax

Assessee's Appeal Partly Allowed with Detailed Directions and Emphasis on Evidence and Statutory Provisions

The tribunal partly allowed the assessee's appeal, providing detailed directions for each issue, including restoring certain matters to the AO for further ... TDS u/s 195 - commission expenditure, allowed to non-resident agents - fee for technical services - DTAA - P.E. in India - nature of services - Held that:- The warehousing, logistic, inventory management, marketing and other support services being provided by the foreign agents cannot be described as ‘fee for included services’ or, as the case may be, ‘fee for technical services’, as defined under the relevant DTAAs, but only as business profits. We have also examined the impugned payments from the stand-point of the same qualifying as ‘royalty’, to find the same as not falling within the meaning of the term as defined under the relevant Articles. The foreign agents having no PE in India, the commission (remuneration) allowed to them for the said services, is not taxable in India. There is accordingly no liability to deduct tax at source u/s. 195 of the Act thereon. Section 40(a)(i) shall, therefore, not apply in respect of the impugned payments. There is no finding with regard to the foreign agents being tax residents of USA or, as the case may be, UK; the assessee not making it’s case with reference to the relevant DTAAs before the Revenue. Accordingly, subject to finding of it being so, we direct the deletion of the impugned disallowance. Disallowance of deduction u/s.10B - Held that:- he assessee’s undertaking ostensibly satisfies all the conditions of s. 10B, stands granted the approval by the Development Commissioner, to whom the power of approval has been delegated by the Board constituted u/s. 14 of the I(D&R) Act.We are thus not inclined to accept the reasons advanced by the ld. CIT(A) for not admitting the assessee’s evidence. So, however, to the extent that the matter would require being examined by the AO, we are in agreement with the ld. CIT(A). Accordingly, admitting the said letter, along with the other related documents, we restore the matter back to the file of the AO for necessary verification and adjudication afresh on merits. Deduction u/ss. 80G and 80-IB - Held that:- A ssessee’s income as per the returns filed is at a loss in fact endorses it’s stand of having not claimed the deductions in the absence of adequate GTI u/s. 80B(5) of the Act. Further, the particulars with regard to deductions stand furnished per the revised claim vide return dated 16.03.2011. We therefore find no reason for the Revenue for not entertaining the same. We may though clarify that our finding is limited to the right of the assessee in pressing its said claims. The AO shall consider the same on merits, deciding in accordance with the law. Computation of interest chargeable u/s. 234D - Held that:- The language of the section is unambiguously clear. The same refers to the amount of refund without breaking it into or defining it in terms of its’ elements. The interest chargeable there-under is compensatory in character, as in fact is the interest granted u/s. 244A. The Apex Court in CIT v. H.E.G. Ltd. [2009 (12) TMI 35 - SUPREME COURT] directed for grant of interest u/s. 244A for the period of delay in grant of interest u/s. 244A itself; having been not granted along with the grant of refund of tax, so that it had assumed the character of the principal. Thus no merit in the assessee’s claim of the interest u/s. 234D being restricted only to the tax component of the demand raised or the excess refund. Issues Involved:1. Disallowance under Section 14A.2. Disallowance of interest on borrowings under Section 36(1)(iii).3. Disallowance of software expenses as capital expenditure.4. Disallowance of commission expenditure under Section 40(a)(i).5. Disallowance of deduction under Section 10B.6. Disallowance of deductions under Sections 80G and 80-IB.7. Computation of interest chargeable under Section 234D.Analysis of Judgment:1. Disallowance under Section 14A:The first issue pertains to the disallowance under Section 14A of the Income Tax Act, 1961, which was confirmed by the first appellate authority. The assessee had invested in shares and assumed loans on which interest expenditure was incurred. The Assessing Officer (AO) disallowed the expenditure under Section 14A, applying Rule 8D, which was confirmed in appeal based on various decisions, including the case of Walfort Share & Stock Brokers (P.) Ltd. The assessee relied on the decision in Redington (India) Ltd., arguing that disallowance should be restricted to investments that yielded income during the relevant year. However, the tribunal concluded that Section 14A r/w Rule 8D cannot be applied in a vacuum, i.e., in the absence of exempt income. The tribunal restored the matter to the AO for re-evaluation, emphasizing that Rule 8D is constitutionally valid and applicable when there is exempt income.2. Disallowance of Interest on Borrowings under Section 36(1)(iii):The second issue involves the disallowance of interest on borrowings under Section 36(1)(iii) related to interest-free loans and advances to wholly-owned subsidiary companies. The assessee claimed that the investments were made from its own funds and were for promoting business interests. The tribunal noted that the loans were advanced during the relevant year and that the assessee's claims were unsubstantiated. The tribunal restored the matter to the AO for detailed verification, directing the AO to consider the financing pattern and the average interest rate applicable to the borrowings.3. Disallowance of Software Expenses as Capital Expenditure:The third issue was not pressed during the hearing and was accordingly dismissed.4. Disallowance of Commission Expenditure under Section 40(a)(i):The fourth issue concerns the disallowance of commission expenditure allowed to non-resident agents, which was disallowed under Section 40(a)(i) for not deducting tax at source. The tribunal examined the nature of services provided by the agents and concluded that the services did not qualify as 'fee for included services' or 'fee for technical services' under the relevant DTAAs. Consequently, the commission paid to the agents was not taxable in India, and there was no liability to deduct tax at source. The tribunal directed the deletion of the disallowance, subject to verification of the agents' tax residency in the USA or UK.5. Disallowance of Deduction under Section 10B:The fifth issue involves the disallowance of deduction under Section 10B due to the lack of approval by the Board. The assessee provided a communication from the Ministry of Commerce and Industry ratifying the earlier approval by the Development Commissioner. The tribunal admitted the additional evidence and restored the matter to the AO for verification and fresh adjudication.6. Disallowance of Deductions under Sections 80G and 80-IB:The sixth issue pertains to the disallowance of deductions under Sections 80G and 80-IB, which were not claimed in the original return due to insufficient profits. The tribunal found no reason for the Revenue to reject the claims and directed the AO to consider the deductions on merits.7. Computation of Interest Chargeable under Section 234D:The seventh issue relates to the computation of interest under Section 234D. The assessee argued that the interest should be restricted to the tax component of the demand. The tribunal, referring to the language of the section and relevant case law, concluded that the interest under Section 234D applies to the entire amount of excess refund, including the interest component. The tribunal found no merit in the assessee's claim and upheld the computation of interest as per the section.Conclusion:The tribunal partly allowed the assessee's appeal, providing detailed directions for each issue, including restoring certain matters to the AO for further verification and adjudication. The judgment emphasizes the importance of substantiating claims with proper evidence and the applicability of statutory provisions and rules in determining tax liabilities.