Tribunal upholds CIT(A)'s decisions, rejects Revenue's appeals on foreign currency expenses and net profit reduction.

The Tribunal dismissed the Revenue's appeals in ITA No. 1228/Ahd/2017 for A.Y. 2012-13 and ITA No. 2025/Ahd/2017 for A.Y. 2013-14, upholding the CIT(A)'s decisions. The disallowance of expenses in foreign currency and the reduction in net profit of eligible business made by the AO were both deleted. The Tribunal found no merit in the Revenue's arguments, affirming that the payments were not taxable in India and that the reduction in net profit was unjustified without evidence of any arrangement to inflate profits.

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Issues Involved:

1. Deletion of disallowance of Rs. 11,92,955 on account of expenses in foreign currency.
2. Deletion of reduction in net profit of eligible business made by the AO.

Issue-wise Detailed Analysis:

1. Deletion of Disallowance of Rs. 11,92,955 on Account of Expenses in Foreign Currency:

The Revenue challenged the CIT(A)'s order, which deleted the disallowance of Rs. 11,92,955 made by the AO on account of expenses in foreign currency. The AO observed that the assessee made payments in foreign currency without deducting TDS, which was deemed taxable in India as per section 9(1)(i) and respective Double Tax Avoidance Agreement. The AO disallowed the expenses citing section 195. The assessee argued that the payments were for business promotion outside India, and the payee did not have a permanent establishment in India, thus not taxable under Indian law, referencing the GE India Technology Center Pvt. Ltd. case (327 ITR 456 SC).

The CIT(A) agreed with the assessee, stating that the payments were for advertisement and sponsorship fees to a UK party without a permanent establishment in India. The CIT(A) relied on the Supreme Court judgments in GE India Technology Center Pvt. Ltd. and Toshoku Ltd. vs. CIT (1981 AIR 148 SC), concluding that the income in relation to such payments cannot be deemed to have accrued or arisen in India. The Tribunal upheld the CIT(A)'s decision, confirming that the disallowance was rightly deleted as the payments were not taxable in India.

2. Deletion of Reduction in Net Profit of Eligible Business Made by the AO:

The Revenue contested the CIT(A)'s deletion of the reduction in net profit of eligible business made by the AO. The AO compared the net profit ratio of the assessee with a group company, M/s IWI Cryogenic Vaporisation Systems India Pvt. Ltd., and found the assessee's net profit ratio significantly higher. The AO deemed the higher profit unreasonable and restricted the net profit to 5% for computing exemption under section 10AA.

The CIT(A) deleted the reduction, referencing a Co-ordinate Bench judgment in Pramukh International, stating that there was no business transaction between the assessee and the sister concern to justify the AO's action. The Tribunal upheld the CIT(A)'s decision, agreeing that the AO wrongly invoked section 10AA(9) r.w.s. 80IA(10) without evidence of any arrangement to inflate profits. The Tribunal also noted that similar cases had not resulted in such disallowances in previous assessments.

Conclusion:

In ITA No. 1228/Ahd/2017 for A.Y. 2012-13 and ITA No. 2025/Ahd/2017 for A.Y. 2013-14, the Tribunal dismissed the Revenue's appeals, upholding the CIT(A)'s decisions on both issues. The Tribunal found no merit in the Revenue's grounds of appeal and confirmed the CIT(A)'s orders, stating that the disallowances and reductions made by the AO were not justified.

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