2024 (6) TMI 264 - AT - Income Tax

ITAT allows deduction for customer loyalty provisions, deletes TDS disallowance for foreign services under section 40(a)(i)

Titan Company Ltd., (Erstwhile known as Titan Industries Ltd.,) Versus The Assistant Commissioner of Income Tax, Circle III (2), Chennai, The Joint/Assistant Commissioner of Income Tax, Chennai.

The ITAT Chennai allowed the assessee's appeal on multiple grounds. The tribunal permitted deduction for customer loyalty program provisions, finding the ... Disallowance of provision made for customer loyalty program((CLP) - CIT(A) disallowing the provision made against future claims under the CLP on the ground that the Appellant has not adopted any scientific method for applying the rate of provision and moreover, the finding of fact given by the AO that the rate of redemption was at great variation viz-a-viz, the provision made is correct - HELD THAT:- We noted that the assessee has given comparative figures i.e., opening balance of provisions, provision created for the year under consideration, less utilization / redemption of the points and finally closing balance of the provisions. Thereby, net provision was also adopted. These figures were clear from the above chart reproduced in the argument of assessee - We noted that the provision is created based on estimated percentage of redemption after analyzing the trend of redemption cycle of the customers in the preceding four quarters on the total outstanding points available at the year end. This system adopted by the assessee is based on scientific method as propounded in the case of Rotork Controls India Pvt. Ltd. [2009 (5) TMI 16 - SUPREME COURT] Thus we are of the view that the assessee is consistently following the same method and even creation of provision created based on the remedy percentage of redemption is on scientific basis. As regards to excess provision is concerned, the difference between the provisions created for a particular year and the actual expenditure incurred in the subsequent year, the difference is offered to tax. In such situation, we cannot say that the provision created based on estimated percentage of redemption is not scientific. Hence, according to us, this is an allowable deduction and we allow accordingly. Decided in favour of assessee. Disallowance u/s 14A r.w.r. 8D - expenses relatable to exempt income - assessee has made suo-motto disallowance - Mandation to record satisfaction - HELD THAT:- As noted that the AO has not at all recorded satisfaction as regards to disallowance to be made or not. Once there is no satisfaction recorded, in our view, the decision of Maxopp Investments Ltd.,[2018 (3) TMI 805 - SUPREME COURT] squarely applies. This being a covered issue, we set aside the order of CIT(A) and that of the AO on this issue and allow this issue of assessee’s appeal. Accordingly, this issue raised by assessee allowed. TDS u/s 195 - Disallowance of professional and consultancy expenditure u/s 40(a) (i) - assessee has incurred expenditure in foreign currency under the head ‘professional and consultancy services’ but not deducted TDS for the reason that these services are rendered abroad for US operations and hence, the income has neither accrues or arises in India nor is deemed to accrue or arise in India - HELD THAT:- We are of the view that for the relevant assessment year 2009-10, assessee cannot be made liable for TDS and it is an impossible act to be performed is asked to be done by the assessee. It is a matter of impossibility of the act and hence, for assessment year 2009-10, no disallowance is to be made and we held so. As regards to assessment years 2011-12 & 2012- 13, the amendment brought out by Finance Act, whereby Explanation to section 9(2) of the Act is to be pressed and accordingly, facts are to be examined. Therefore, we set aside this issue for these two assessment years 2011-12 and 2012-13 to the file of the AO. Disallowance of loss on closure of Boutique in United States - Appellant has estimated the provision for slow moving inventory on the basis of technical evaluation and consumptions forecasts - AO made disallowance of expenses being lock in rent, slow moving / non-moving inventory and other winding up costs as expenditure in the nature of capital - Whether amount paid as other winding up cost does not give rise to any enduring benefit nor does it lead to creation of a capital asset - HELD THAT:- We noted that as argued by ld.CIT-DR that the very nature of slow moving / non-moving inventory and other winding up costs were not factually demonstrated before the AO and therefore, these needs verification. We agree with the argument of CIT-DR that principally these amounts i.e., slow moving and non-moving inventory and other winding up costs are in the nature of revenue but factual aspect, it needs to be verified. Hence, we remit this issue back to the file of the AO for verification purpose only by setting aside the order of the AO and that of the CIT(A). The AO will verify the facts in regard to these two heads and then after verification of facts, will consider allowance of expenses. Accordingly, this issue of assessee’s appeal is allowed for statistical purposes. Deduction u/s. 80IC - allocation of common expenses on the basis of turnover for the purpose of claim of deduction - HELD THAT:- As taking a consistent view, we confirm the disallowance of claim of deduction u/s. 80IC of the Act, as regards to apportionment of head office expenses. Since facts are identical in other three assessment years, taking a consistent view, this issue raised by the assessee in all these assessment years is dismissed. Deduction u/s. 80IC on allocation of expenditure on trade mark qua the units - HELD THAT:-Depreciation on trademark has been set aside by the Tribunal in assessee’s own case in assessment year [2022 (10) TMI 251 - ITAT CHENNAI], whereby the Tribunal considering the earlier decision of Tribunal in assessment year 2007- 08 [2022 (10) TMI 182 - ITAT CHENNAI] has remitted the issue back to the file of the AO. Taking a consistent view, we also set aside this issue to the file of the AO for re-adjudicating the issue as directed by Tribunal in assessment year 2008-09. This issue of assessee’s appeal is allowed for statistical purposes. Disallowing marked to market loss arising on ECB loans and loss arising due to hedging exposures related to commitments on sales and purchases - assessee argued that the claim of assessee in regard to marked to market loss is on account of forward contract relating to gold price hedging and accordingly, assessee has made some gain on restatement of ECB loans - assessee claimed loss as deduction since it pertains to its export transactions and did not offer the gain to tax since it pertained to capital transaction - HELD THAT:- As the assessee has disclosed the gain as and when it is gain and claimed the loss as and when loss arises. Hence, we are of the view that this is allowable loss and we direct the AO accordingly. Disallowance of excess depreciation claimed on UPS - at the rate of 60% as against which, the AO & CIT(A) allowed only 50% - HELD THAT:- We noted that the assessee company has claimed depreciation on UPS which was for exclusive use of computers @ 60% being integral part of computer. This issue now remains no res-integra and covered by the order of Hon’ble Madras High Court in the case of CIT vs. Cactus Imaging India (P.) Ltd., [2018 (5) TMI 636 - MADRAS HIGH COURT] thus we direct the AO to allow depreciation on UPS at 60%. This issue of assessee’s appeal is allowed. Issues Involved:1. Disallowance of provision made for customer loyalty programs.2. Disallowance of expenses relatable to exempt income u/s 14A.3. Disallowance of professional and consultancy expenditure u/s 40(a)(i).4. Disallowance of loss on closure of boutique in the United States.5. Allocation of common expenses for purposes of deduction u/s 80IC.6. Allocation of depreciation on trademarks to units claiming deduction u/s 80IC.7. Disallowance of marked to market losses.8. Disallowance of excess depreciation claimed on UPS.Summary of Judgment:1. Disallowance of Provision Made for Customer Loyalty Programs:The assessee's provision for customer loyalty programs was initially disallowed by the AO and upheld by the CIT(A) on grounds of lack of a scientific method. The Tribunal, however, found that the provision was based on a scientific method consistent with the Supreme Court's ruling in Rotork Controls India Pvt. Ltd., and allowed the deduction.2. Disallowance of Expenses Relatable to Exempt Income u/s 14A:The AO disallowed expenses under Rule 8D(2) without recording satisfaction. The Tribunal, following the Supreme Court's decision in Maxopp Investments Ltd., set aside the disallowance due to lack of satisfaction recorded by the AO.3. Disallowance of Professional and Consultancy Expenditure u/s 40(a)(i):For AY 2009-10, the Tribunal held that the assessee could not be made liable for TDS on payments to foreign consultants as the services were rendered abroad. For AYs 2011-12 and 2012-13, the issue was remanded to the AO to examine the facts in light of the amended Explanation to Section 9(2).4. Disallowance of Loss on Closure of Boutique in the United States:The AO disallowed expenses related to the closure of boutiques, treating them as capital in nature. The CIT(A) allowed the lock-in rent but upheld the disallowance of slow-moving inventory and other winding-up costs. The Tribunal remanded the issue to the AO for verification, recognizing these expenses as revenue in nature.5. Allocation of Common Expenses for Purposes of Deduction u/s 80IC:The AO and CIT(A) allocated common expenses based on turnover rather than the number of watches produced. The Tribunal upheld this method, consistent with its earlier decisions.6. Allocation of Depreciation on Trademarks to Units Claiming Deduction u/s 80IC:The AO allocated depreciation on trademarks to units claiming deduction u/s 80IC based on turnover. The Tribunal remanded the issue to the AO for re-adjudication, following its earlier decision.7. Disallowance of Marked to Market Losses:The AO disallowed marked to market losses as notional and speculative. The Tribunal allowed the loss, following the Supreme Court's decision in Woodward Governor India (P.) Ltd., recognizing it as a legitimate business expense.8. Disallowance of Excess Depreciation Claimed on UPS:The AO and CIT(A) restricted depreciation on UPS to 15%. The Tribunal allowed depreciation at 60%, following the Madras High Court's decision in CIT vs. Cactus Imaging India (P.) Ltd., recognizing UPS as an integral part of the computer system.Conclusion:The appeals were partly allowed for statistical purposes, with specific issues remanded for further verification and re-adjudication.