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

The ITAT Chennai allowed the assessee's appeal on multiple grounds. The tribunal permitted deduction for customer loyalty program provisions, finding the assessee followed a scientific method based on redemption trends. Section 14A disallowance was set aside as the AO failed to record satisfaction. For assessment year 2009-10, TDS disallowance under section 40(a)(i) was deleted as services were rendered abroad, but the matter was remanded for subsequent years. Issues regarding boutique closure losses and trademark depreciation were remitted to AO for verification. The tribunal allowed marked-to-market losses on ECB loans and directed 60% depreciation on UPS following HC precedent.

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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.

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