2018 (12) TMI 182 - AT - Income Tax

ITAT rulings clarify tax provisions for non-resident transactions, emphasize accounting consistency.

Gujarat Apollo Industries Ltd. Versus The Jt. CIT, Range-4, Ahmedabad And The DCIT, Circle-2 (1) (1), Ahmedabad Versus Gujarat Apollo Industries Ltd.

Gujarat Apollo Industries Ltd. Versus The Jt. CIT, Range-4, Ahmedabad And The DCIT, Circle-2 (1) (1), Ahmedabad Versus Gujarat Apollo Industries Ltd. - TMI Issues Involved:1. Addition on account of unrealized sales.2. Deletion of addition on account of late delivery charges.3. Disallowance under section 40(a)(ia) for non-deduction of tax at source on commission payments.4. Disallowance under section 14A for expenditure incurred to earn exempt income.Issue-Wise Detailed Analysis:1. Addition on Account of Unrealized Sales:The Assessing Officer (AO) added Rs. 47,22,523/- to the assessee's income for unrealized sales, arguing that the amount had accrued to the assessee in the financial year 2009-10. The assessee contended that this portion of the sales was retained by customers as security and had not accrued during the year under consideration. The CIT(A) deleted the addition, referencing previous ITAT and High Court rulings that supported the assessee's consistent method of accounting for retention money. The ITAT upheld the CIT(A)'s decision, noting that similar additions had been dismissed in past assessments and the method of accounting had been consistently accepted by the department.2. Deletion of Addition on Account of Late Delivery Charges:The AO disallowed Rs. 31,22,445/- claimed as late delivery charges, considering it non-business expenditure under section 37 of the Act. The assessee explained that these charges were deducted by government organizations as per contractual terms. The CIT(A) allowed the appeal, stating that the expenses were incurred under business contracts. The ITAT upheld the CIT(A)'s decision, citing that such expenditures were directly related to the business activity and were not penalties for legal infractions but contractual obligations.3. Disallowance under Section 40(a)(ia) for Non-Deduction of Tax at Source on Commission Payments:The AO disallowed Rs. 1,89,56,798/- for commission payments to non-residents without TDS, arguing that the income was chargeable to tax in India. The assessee argued that the services were rendered outside India, and no income accrued or arose in India. The CIT(A) deleted the disallowance, referencing Supreme Court and High Court rulings that commission earned by non-residents for services rendered outside India is not taxable in India. The ITAT upheld the CIT(A)'s decision, noting that the services were rendered entirely outside India, and there was no business connection or permanent establishment in India.4. Disallowance under Section 14A for Expenditure Incurred to Earn Exempt Income:The AO made a disallowance of Rs. 18,03,630/- under section 14A read with Rule 8D, arguing that the assessee failed to prove that investments were made from non-interest-bearing funds. The CIT(A) partly allowed the appeal, directing the AO to exclude investments in the German subsidiary from the disallowance calculation, as dividends from the subsidiary would be taxable in India. The ITAT further restricted the disallowance to the extent of exempt income earned by the assessee, aligning with precedents where disallowances under section 14A were limited to the actual exempt income.Conclusion:The ITAT dismissed the appeals filed by the revenue and partly allowed the appeals filed by the assessee. The decisions were based on consistent judicial precedents, factual analysis, and adherence to the principles of accounting and tax law. The judgments emphasized the importance of consistency in accounting methods, the nature of business expenditures, and the applicability of tax provisions to non-resident transactions.