2024 (1) TMI 1026 - AT - Income Tax

Warranty provision disallowance upheld, trademark payment remanded, TDS on non-resident payments allowed following retrospective amendment rules

ITAT Chennai upheld disallowance of warranty provision as it lacked scientific basis per SC precedent in Rotork Control India case. For contract ... Disallowance of provision for warranty - HELD THAT:- From the above, it is abundantly clear that provision created by the assessee for warranty expenses is not scientifically recognized considering past trend and future liability required to settle warranty claims. Therefore, we are of the considered view that provision created by the assessee for warranty expenses is not in line with the ratio laid down by the Supreme Court in the case of M/s. Rotork Control India Pvt Ltd [2009 (5) TMI 16 - SUPREME COURT] and thus, in our considered view, there is no error in the reasons given by the ld. CIT(A) to sustain additions made towards disallowance of provision for warranty expenses. Thus, we are inclined to uphold the findings of the ld. CIT(A) and reject grounds taken by the assessee. Alternative arguments of assessee that, at least the AO may be directed to allow actual expenditure incurred towards warranty - We find that the appellant could not give any detail as to whether actual expenditure incurred during the year is out of provision created for the impugned year or out of opening balance brought forward from earlier financial year. In absence of specific details with regard to utilization of warranty expenses, the claim of the assessee cannot be accepted. Thus, we reject the alternative arguments of assessee. Disallowance of provision made for contract contingencies - assessee company has claimed deduction towards provision for contract losses - AO disallowed sum being difference between reversal of provision minus opening balance on the ground that the liability is contingent in nature and appellant could not provide basis for estimation of contract losses - HELD THAT:- Assessee fairly agreed that this issue is covered against the assessee. But, his only argument is that the Assessing Officer has made addition being difference between amount released and opening balance instead of provision created minus amount released during the year. We find merit in arguments of assessee that addition can only be made towards net of provision minus amount released during the year because opening balance brought forward from earlier years cannot be added during the year. Therefore, we set aside the issue to the file of the Assessing Officer and direct the Assessing Officer to re-compute addition in accordance with our direction given herein above. Disallowance of payment made towards use of trademark to the parent company - AO disallowed trademark paid to parent company on the ground that the assessee could not establish nexus between trademark and business advantage derived by the appellant company in India - AO observed that the assessee could not file any details with regard to the registration of trademark under any international or domestic law - HELD THAT:- As regards first objection of the Assessing Officer, assessee filed necessary documents evidencing registration of trademark under Indian Law. The appellant has also explained how trademark helped the appellant company to generate business in India. Since, the AO has disallowed trademark fee, on the ground that no documents has been filed to substantiate the payment, contrary to evidences on record, in our considered view, the issue needs to go back to the file of the AO for further verification. Thus, we set aside the orders of the lower authorities on this issue and restore the issue back to the file of the AO and direct the Assessing Officer to reexamine the issue in light of various evidences that may be filed by the assessee to justify payment of trademark fees to parent company. TDS u/s 195 - disallowance of payment made to non- residents u/s. 40(a)(i) - payments are in the nature of fees for technical services covered under the provisions of section 9(1)(vii) of the Act and Explanation to section 9(2) of the Act - HELD THAT:- Payment made to Henrich George GMBH is fees for technical services as defined u/s. 9(1)(vii) of the Act. But, fact remains that the definition for fees for technical service has been amended by insertion of Explanation 2 to section 9(2) by Finance Act, 2010 with retrospective effect from 01.04.1976. Although, said payments are brought within the ambit of FTS as per section 9(1)(vii) of the Act by way of an amendment, but when said payment was made, there was no clarity in respect of certain payments made to non-residents. Therefore, it is impossible for the assessee to perform which is impossible to perform and deduct TDS on payment made to non-residents by considering subsequent amendment by way of Explanation 2 to 9(2) by Finance Act, 2010 with retrospective effect from 01.04.1976. Since, the payments are made prior to the amendment, it is impossible for the assessee to perform impossible things and deduct TDS. Therefore, we are of the considered view that payment made to Henrich George GMBH cannot be disallowed u/s 40(a)(i) of the Act, for non-deduction of TDS u/s. 195 of the Act. Thus, we direct the Assessing Officer to delete addition made towards payment to Henrich George GMBH, Germany. Payments made to Areva T&D, Switzerland towards warranty related repairs executed by them on behalf of the assessee are reimbursement of expenses, without any markup - HELD THAT:- It is an admitted fact that payment towards reimbursement of expenses to non-residents without any markup cannot be considered as fees for technical services. Further, even assuming for a moment, said payment are in the nature of business profits, those payments cannot be taxed in India in the hands of non-residents unless said non-residents have had permanent establishment in India. Since, payment made to above non-residents are neither fee for technical services which can be taxed u/s. 9(1)(vii) of the Act, nor business profits which can be taxed in India, in our considered view, the assessee need not to deduct TDS u/s. 195 of the Act on said payments. Since, the assessee need not to deduct TDS on payments made to non-residents, the Assessing Officer is erred in disallowing said payments u/s. 40(a)(i) of the Act. The ld. CIT(A) after considering relevant facts has rightly deleted additions made by the Assessing Officer and thus, we are inclined to uphold the findings of the ld. CIT(A) and dismiss the grounds taken by the revenue. Disallowance of depreciation on goodwill - HELD THAT:- As in assessee’s own case for assessment year 2007-08 [2018 (3) TMI 2023 - ITAT CHENNAI] wherein under identical facts, decided the issue in favour of the assessee. Disallowance of depreciation on non-compete fee - HELD THAT:- We find that the Jurisdictional High Court of Madras in [2021 (4) TMI 32 - MADRAS HIGH COURT] in assessee’s own case held that the assessee is entitled for depreciation for non-compete fee. Eligible for deduction towards remaining 50% of additional depreciation, if the assessee establishes the fact that conditions prescribed for claiming additional depreciation was satisfied in the preceding assessment year. Short deduction of TDS u/s. 201(1) of the Act & interest thereon u/s. 201(1A) of the Act in respect of payments made to non-residents - HELD THAT:- Tribunal supra has considered the issue of disallowances of payments made to non-residents u/s. 40(a)(i) of the Act for non-deduction of TDS u/s. 195 of the Act, and held that payments made to non-residents as considered by the Assessing Officer in the order passed u/s. 143(3) of the Act and 201(1) & 201(1A) of the Act are not liable for TDS u/s. 195 of the Act and consequently, disallowances cannot be made u/s. 40(a)(i) of the Act. Since, those payments have already been considered and held that said payments are not liable for TDS u/s. 195 of the Act, in our considered view, the demand raised by the AO u/s. 201(1) and 201(1A) of the Act, in respect of short deduction of TDS and interest thereon cannot survive under the law. Therefore, we direct the Assessing Officer to delete demand raised towards short deduction of TDS u/s. 201(1) of the Act & interest thereon u/s. 201(1A) of the Act in respect of payments made to non-residents. Issues Involved:1. Disallowance of provision for warranty expenses.2. Deduction towards release/utilization for provision for warranty created during earlier years.3. Disallowance of provision made for contract contingencies.4. Disallowance of payment made towards use of trademark to the parent company.5. Disallowance of payment made to non-residents under section 40(a)(i) for non-deduction of tax at source under section 195.6. Disallowance of depreciation on goodwill.7. Disallowance of depreciation on non-compete fee.8. Rejection of additional depreciation in respect of additions made to plant and machinery in the second half of the assessment year.Summary of Judgment:1. Disallowance of Provision for Warranty Expenses:The Tribunal upheld the CIT(A)'s decision to sustain the disallowance of the provision for warranty expenses amounting to Rs. 6,61,04,000/-. It was noted that the provision created by the assessee was not scientifically recognized considering past trends and future liabilities, thus not in line with the Supreme Court's ratio in M/s. Rotork Controls India Pvt Ltd vs CIT.2. Deduction Towards Release/Utilization for Provision for Warranty Created During Earlier Years:The assessee did not press this ground, and thus, it was dismissed as not pressed.3. Disallowance of Provision Made for Contract Contingencies:The Tribunal set aside the issue to the Assessing Officer to re-compute the addition towards the provision for contract contingencies, directing that only the net of provision minus the amount released during the year should be added.4. Disallowance of Payment Made Towards Use of Trademark to the Parent Company:The Tribunal remanded the issue back to the Assessing Officer for further verification, noting that the assessee provided necessary documents evidencing registration of the trademark and its business advantage.5. Disallowance of Payment Made to Non-Residents under Section 40(a)(i) for Non-Deduction of Tax at Source under Section 195:The Tribunal held that payments made to Kema Netherlands and Henrich George GMBH were not liable for TDS under section 195, directing the deletion of the disallowance. It also upheld the CIT(A)'s decision to delete disallowances for other payments made to non-residents, considering them as reimbursements without any markup.6. Disallowance of Depreciation on Goodwill:The Tribunal directed the Assessing Officer to allow depreciation on goodwill, following the decision of the ITAT in the assessee's own case for the assessment year 2007-08.7. Disallowance of Depreciation on Non-Compete Fee:The Tribunal directed the Assessing Officer to allow depreciation on non-compete fee, following the decision of the Jurisdictional High Court of Madras in the assessee's own case.8. Rejection of Additional Depreciation in Respect of Additions Made to Plant and Machinery in the Second Half of the Assessment Year:The Tribunal set aside the issue to the Assessing Officer for verification, directing to allow the remaining 50% of additional depreciation if the conditions prescribed for claiming additional depreciation were satisfied in the preceding assessment year.Conclusion:The appeals filed by the assessee were partly allowed for statistical purposes, and the appeals filed by the revenue were dismissed. The Tribunal directed the Assessing Officer to re-examine and verify specific issues as per the Tribunal's directions.