2022 (9) TMI 880 - AT - Income Tax

Tribunal Decision: Appeal partially allowed on export commission, warranty expenses; remand on professional fees & transfer pricing.

The Tribunal allowed the appeal in part, deleting disallowances related to export commission, commission expenditure, and warranty expenses provision due ... TDS u/s 195 - commission paid to associated enterprise for procurement of export orders - HELD THAT:- In the present case the associated enterprises do not carry on any business operation in India, they merely acted as selling agents of the assessee outside India. The issue is squarely covered by the decision in DIT v Wizcraft International entertainment private limited [2014 (5) TMI 149 - BOMBAY HIGH COURT] wherein it has been held that the non-resident agent did not perform any services in India but rendered services outside India and therefore the commission income to the agent is not liable to tax in India and therefore there was no obligation on part of the assessee to deduct tax at source at the time of making such payment - In the case of the assessee the identical issue has been accepted by the learned revenue authorities in earlier years. In view of this, we do not agree with the findings of the lower authorities that the assessee should have deducted tax at source on payment of commission to its associated enterprises in Foreign Countries that did not have any permanent establishment in India or were not carrying on any business in India but were rendering services outside India. Accordingly, ground number 1 of the appeal of the assessee is allowed and the learned assessing officer is directed to delete the disallowance because of commission paid to associated enterprise for procurement of export orders. Provision for commission incurred by the assessee to associated enterprise for procuring export orders - mere provision cannot and ascertained liability and therefore provisions are not deductible as an expenditure - HELD THAT:- We find that when the sales are concluded during the year, naturally the corresponding expenses of commission have also accrued to the assessee. For such commission, the amount of commission, recipients of commission as well as the basis of such commission payment are known to the assessee. The liability for payment of commission has already been incurred by the assessee as soon as sales are concluded for the reason that corresponding bills have not been received from the associated enterprises cannot come into the way of deduction claimed by the assessee. It is not the case of the revenue that subsequently also the assessee did not receive the bill or no export commission was required to be paid on such sales. Therefore, it is an ascertained liability of the assessee as soon as sales are made. TPO by determining the arm’s-length price of the commission expenses clearly proved that the services been rendered by those agents.It cannot be said that such provision is not allowable. In View of this, we do not find any reason to uphold disallowance made by AO holding that provision for commission payable to associated enterprises for procuring export order is merely a provision and not an ascertained liability. Hence, we direct the learned assessing Officer delete the disallowance on this account stop accordingly ground number 2 of the appeal is allowed. TDS u/s 195 - disallowance of provision of warranty expenditure provided by the assessee at the rate of 1.25% of the pumps sold on account of between charges that firstly it is merely a provision and not an ascertained liability and secondly even if it is deductible as an expenditure, assessee has failed to deduct tax at source - addition u/s 40(a)(ia) - HELD THAT:- As relying on ANGLO FRENCH TEXTILES LIMITED [1991 (6) TMI 11 - MADRAS HIGH COURT] we agree with the assessee that no tax is required to be deducted u/s 195 of the income tax act on the said sum of warranty expenditure paid to associated enterprises. Therefore , disallowance of warranty expenditure on this account is also not warranted. Accordingly, ground number 3 of the appeal of the assessee is allowed. Disallowance of professional fees paid to associated Enterprises and non associated enterprises for the reason that assessee has failed to deduct tax at source - HELD THAT:- As find that if the claim of the assessee is found to be correct that the assessee has already deducted tax at source on the above payment, no disallowance could have been made. Therefore, in the interest of justice, we set-aside this ground of the appeal to the file of the learned assessing officer with a direction to the assessee to show that on these payments the assessee has deducted tax at source u/s 195 of the income tax act, the learned assessing officer way verify the same and decide the issue in accordance with the law. Accordingly, ground number 4 of the appeal is allowed. Issues Involved:1. Disallowance of export commission for non-deduction of tax.2. Disallowance of commission expenditure as unascertained liability.3. Disallowance of warranty expenses provision.4. Disallowance of professional fees for non-deduction of tax.5. Discrepancy in receipts as per books and Form 26AS.6. Transfer Pricing Adjustments for trademark fees.7. Transfer Pricing Adjustments for SAP support services.8. Transfer Pricing Adjustments for Microsoft licensing charges.9. Transfer Pricing Adjustments for ASP management fees.10. Transfer Pricing Adjustments for professional fees.11. Levy of interest under Sections 234B and 234C.Detailed Analysis:1. Disallowance of Export Commission for Non-Deduction of Tax:The lower authorities disallowed Rs. 35,424,361/- for export commission paid to associated enterprises due to non-deduction of tax at source. The Tribunal found that the commission was paid to non-resident agents who rendered services outside India. Citing the Bombay High Court decision in DIT v. Wizcraft International Entertainment Pvt. Ltd., it was held that the commission income of the non-resident agents was not liable to tax in India, thus no tax deduction was required. The disallowance was deleted.2. Disallowance of Commission Expenditure as Unascertained Liability:The assessee's provision for commission expenditure of Rs. 1,70,99,895/- was disallowed by the lower authorities as an unascertained liability. The Tribunal held that the commission liability arose as soon as the sales were concluded, making it an ascertained liability. The disallowance was deleted.3. Disallowance of Warranty Expenses Provision:The provision for warranty expenses of Rs. 3,73,10,658/- was disallowed on two grounds: it was considered a mere provision and the assessee failed to deduct tax at source. The Tribunal found that the provision was based on a scientific method aligned with past trends and was an ascertained liability. Additionally, it was held that no tax was required to be deducted under Section 195 as the services were utilized for business conducted outside India, referencing the Gujarat High Court decision in Motive India InfoTech Pvt. Ltd. The disallowance was deleted.4. Disallowance of Professional Fees for Non-Deduction of Tax:The disallowance of Rs. 9,44,719/- was based on non-deduction of tax at source. The Tribunal remanded the matter to the Assessing Officer to verify if taxes were deducted. If verified, the disallowance should be deleted.5. Discrepancy in Receipts as per Books and Form 26AS:This ground was not pressed by the assessee and was dismissed.6. Transfer Pricing Adjustments for Trademark Fees:The adjustment of Rs. 7,05,39,108/- for trademark fees was contested. The Tribunal referred to its earlier decisions in the assessee's case and remanded the matter to the Transfer Pricing Officer (TPO) to re-examine the benchmarking analysis and determine the Arm's Length Price (ALP).7. Transfer Pricing Adjustments for SAP Support Services:The adjustment of Rs. 3,92,66,987/- for SAP support services was contested. The Tribunal referred to its earlier decisions and remanded the matter to the TPO for re-examination of the benchmarking analysis and determination of the ALP.8. Transfer Pricing Adjustments for Microsoft Licensing Charges:The adjustment of Rs. 1,01,08,087/- for Microsoft licensing charges was contested. The Tribunal remanded the matter to the TPO for re-examination of the benchmarking analysis and determination of the ALP.9. Transfer Pricing Adjustments for ASP Management Fees:The adjustment of Rs. 6,06,85,073/- for ASP management fees was contested. The Tribunal remanded the matter to the TPO for re-examination of the benchmarking analysis and determination of the ALP.10. Transfer Pricing Adjustments for Professional Fees:The adjustment of Rs. 4,34,858/- for professional fees was not pressed by the assessee and was dismissed.11. Levy of Interest under Sections 234B and 234C:This issue was not specifically detailed in the judgment summary provided.Conclusion:The Tribunal allowed the appeal in part, deleting several disallowances and remanding transfer pricing issues back to the TPO for re-examination. The Tribunal's decisions were heavily influenced by past judgments and the need for proper benchmarking analysis for transfer pricing adjustments.