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2016 (5) TMI 1253

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..... rom the amount in question paid to M/s. RBESL-UK towards reimbursement of salary paid to expatriate employees and the disallowance made by the Assessing Officer under section 40(a)(i) for the alleged failure of the assessee to deduct tax at source is not sustainable. See M/s. Nagase India Pvt. Limited (2014 (5) TMI 44 - ITAT MUMBAI) and Temasek Holdings Advisers India Pvt. Limited [2013 (9) TMI 48 - ITAT MUMBAI] - Decided in favour of assessee Disallowance on account of provision made for marketing expenses - Held that:- It is pertinent to note here that out of the total provision of ₹ 19.90 crores made by the assessee for marketing expenses, a sum of ₹ 18.20 crores was required to settle the obligation and only the balance amount of ₹ 1.69 crores, which is less than 10% of the total provision made by the assessee remained excess. Moreover, such excess provision was subsequently reversed by the assessee and offered to tax as the same rate as submitted by the ld. counsel for the assessee resulting into no loss with the Revenue. Having regard to all these facts of the case, it cannot be said that the estimate made by the assessee of the provisions for marketing e .....

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..... he segmental financials taken by the assessee to work out the OP/TC of its export with AEs at 7.96%. It is pertinent to note here that nothing has been brought on record either before the authorities below or before us to shows that the figures reported in the cost audit report showing the loss in the export of PCMX are not correct. In reply to a specific query raised by us, the ld. counsel for the assessee has not been able to explain the basis on which these segmental financials showing OP/TC of the export of the assessee-company to its AE at 7.96% are taken. In our opinion, the OP/TC of the relevant transactions worked out by the assessee, therefore, cannot be taken as basis for bench marking the relevant transactions by adopting TNMM and it would be more appropriate to take the OP/TC at the entity level by taking into consideration the entire transactions of the assessee. The entity level OP/TC thus taken is required to be compared with the OP/TC of the entities which are functionally similar by taking the financial data of only the relevant year and not on the basis of multiple year data as taken by the assesese in the Transfer Pricing Study Report, which is not permissible as .....

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..... tta High Court in the case of Benani Services Limited -vs.- CIT [2015 (3) TMI 849 - CALCUTTA], wherein it was held that expenditure incurred for construction/ acquisition of new facility, which was subsequently abandoned at work-in-progress stage is allowable in order to write off as incurred wholly and exclusively for the purpose of business. Respectfully following the said decision of the Hon'ble jurisdictional High Court, we direct the Assessing Officer to allow the loss claimed by the assessee on account of abandoned capital WIP. - Decided in favour of assessee Disallowance of writing off of deposit given for gas and electricity - Held that:- Deposits towards gas and electricity were paid by the assessee during the course of its normal business and the loss suffered as a result of non-recovery of the said deposits was a loss incidental to the business of the assessee. The ld. CIT(Appeals), in our opinion, therefore was fully justified in allowing the claim of the assessee for the said loss and we find no infirmity in the impugned order of the ld. CIT(Appeals) giving relief to the assessee on this issue - Decided in favour of assessee - I.T .A. No. 1671/KOL/ 2008, I.T .A. No .....

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..... /s. RBESL in UK, which was subsequently reimbursed by the assessee-company to M/s. RBESL-UK. It was also submitted that tax at source was deducted on the entire compensation paid to the said employees and the same was duly deposited. It was contended that the amount of ₹ 1.35 crores in question thus was paid by the assessee-company to M/s. RBESL-UK towards reimbursement of salary paid by the said company on behalf of the assessee-company and it could not be treated as fees for technical services. 5. The explanation offered by the assessee was not found acceptable by the Assessing Officer for the following reasons given in the assessment order:- As per the copies of Invoices submitted by the assessee company, the payment has been made for expat fees . The payments are made in Foreign currency. The assessee company is paying to RRESL as expat fees wherein M/s. RBESL has deputed two persons in India for carrying out the job. The assessee could not produce the copy of the agreement between the assessee company and RBESL. The assessee company has produced the copy of an agreement between Rcckitt Benckiser PLC, the holding company of the assessee and Jose Ernesto Blanch Bo .....

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..... that For the purposes of paragraph 2 of this Article, and subject to paragraph 5 of this Article, the term fees for technical services means payments of any kind to any person in consideration for the rendering of any technical or consultancy services (including the provision of services of technical or other personnel) which (a) are ancillary and subsidiary to the application or enjoyment of the right, properly or information for which a payment described in paragraph 3(a) of this Article is received: or (b) are ancillary and subsidiary to the enjoyment of the property for which a payment described in paragraph 3(b) of this Article is received: or (c) make available technical knowledge, experience, skill, know how or processes, or consist of the development and transfer of a technical plan or technical design. The services which were rendered by these two Executives clearly falls in clause (c ) of article ) 3 of the DTAA. These two Executives being the In-charge of Sales and Marketing function arc making available the technical knowledge, experience and skill. This clearly establishes beyond doubt that the same are taxable as fees for technical services. There is no fo .....

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..... ESL-UK. The employment agreement under which the two expartriate employees worked with the assessee-company was also produced by the assessee. It was also brought to the notice of the ld. CIT(Appeals) by the assesese-company that tax at source on the entire salaries paid to the said employees including that part which was paid by M/s. RBESL-UK and subsequently reimbursed was also duly made and deposited. It was contended that the amount in question paid to M/s. RBESL-UK thus was not in the nature of fees for technical services and the same being simply in the nature of reimbursement of salaries paid by M/s. RBESL-UK for and on behalf of the assessee-company to its expartriate employees, no tax at source was liable to be deducted and there was no question of disallowance under section 40(a)(i). This contention of the assessee was not found acceptable by the ld. CIT(Appeals) and keeping in view the reasons given by the Assessing Officer in the assessment order, he proceeded to confirm the disallowance made by the Assessing Officer under section 40(a)(i). 7. The ld. counsel for the assessee, at the outset, invited our attention to a copy of the employment agreement placed at page n .....

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..... d by the ld. CIT(Appeals) by invoking the said provisions is fully justified. 9. We have considered the rival submissions and also perused the relevant material available on record. The amount in question paid by the assessee-company to M/s. RBESL-UK is claimed to be reimbursement of salary paid by the said concern on behalf of the assessee-company to its employees. Although this claim of the assessee is duly supported by an employment agreement, the same has not been found to be reliable evidence by the authorities below on the basis of same infirmities and anomalies pointed out by them. At the time of hearing before us, the ld. D.R. has also taken the same stand. However, the fact, which is not in dispute, is that tax at source was duly deducted by the assessee from the entire salaries paid to the concerned two employees including that part, which was paid by M/s. RBESL-UK in foreign currency and subsequently claimed to be reimbursed by the assessee-company to M/s. RBESL-UK. This claim of the assessee of having paid and deducted tax at source from the amount in question as salary income is duly supported by TDS certificates issued in Form No. 16 and the same, in our opinion, i .....

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..... ssee had made a provision of ₹ 19.90 crores for marketing expenses. He, therefore, required the assessee to furnish the complete details showing the nature and basis of provision made for marketing expenses. In reply, the following submission was made by the assessee in writing:- During the previous year relevant to the AY 2003-04, RBIL has made a provision of ₹ 199,003,162/- in respect of marketing expenses. The said provision was required to be made by RBIL since it is following the mercantile system of accounting, provisions required to be made in respect of all expenses incurred during the accounting period irrespective at the time payment. Since RBIL is following mercantile system of accounting which is a permissible method of accounting as per section 145 of the Act and the accounts are audited and provision made as per the prescribed accounting policies should not be disallowed unless specifically provided in the provision of the Act. Further, out of the provision of ₹ 199,033,162/-, a substantial amount has been paid subsequently and balance is likely to be paid in due course. Hence, no disallowance is warranted on this account. With .....

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..... contended that since the assessee is following mercantile system of accounting, the provision for marketing expenses is required to be made for the relevant year on estimated basis and since such provision, if found to be excess, is being offered to tax in the subsequent years at virtually the same rate, the disallowance made in the year under consideration on account of such excess provision is not justified. 15. The ld. D.R., on the other hand, submitted that the provision made by the assessee for marketing expenses on estimated basis is always found to be on the higher side. He submitted that it is not clear as to why there should be difference between provision made and actual amount of expenses incurred. He contended that in the absence of any sound basis given by the assessee for making the estimate, the excess provision is liable to be disallowed as rightly held by the authorities below. 16. We have heard the arguments of both the sides and also perused the relevant material available on record. The question that arises for our consideration in the present context is whether the assessee following mercantile system of accounting is right in recognizing and making the p .....

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..... case, it cannot be said that the estimate made by the assessee of the provisions for marketing expenses was not reliable. In our opinion, the provision for marketing expenses was rightly recognized and made by the assessee being its liability for the expenses of its business and the disallowance made by the Assessing Officer and confirmed by the ld. CIT(Appeals) merely on the basis that such provision is found to be finally excessive is not sustainable. We, accordingly, delete the disallowance made on this issue and allow Ground No. 2 of the assessee's appeal. 18. The issue raised in Ground No. 3 relates to the disallowance of ₹ 1,76,50,483/- made by the Assessing Officer and confirmed by the ld. CIT(Appeals) on account of cost of films produced by the assessee for the purpose of business promotion. 19. In the advertisement expenses debited to the Profit Loss Account, the cost incurred on production of films was included by the assessee- company. In this regard, explanation offered by the assessee before the Assessing Officer was that the films produced for business promotion are generally concept or theme based and the same are changed quite often. It was submit .....

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..... ircumstances of the case. He accordingly confirmed the disallowance made by the Assessing Officer on this issue. 21. The ld. counsel for the assessee submitted that the life of Ad-films is generally above one year and on this basis alone, the Assessing Officer held that the expenses incurred on production of films at the end of the year under consideration will have its benefit even in the subsequent year. He contended that the Assessing Officer as well as ld. CIT(Appeals) however completely ignored the fact that the expenditure in question incurred by the assessee on production of films by itself is revenue in nature and the same cannot be disallowed on pro-rata basis and deferred to the next year as the concept of deferred revenue expenditure is not recognized by the Income Tax Act. He submitted that a similar expenditure incurred on production of films was allowed by the Assessing Officer himself in the earlier years and even in the immediately succeeding year, i.e. A.Y. 2004-05, the ld. CIT(Appeals) has allowed similar expenditure which is challenged by the Revenue in the appeal filed before the Tribunal. He also contended that the Assessing Officer himself has accepted the .....

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..... which is essentially revenue in nature but is written off over a period of time for various reasons like quantum and expected future benefit. It was held that for the purpose of allowability of any expenditure for the purpose of Income Tax Act, what is material is the classification between capital and revenue and the Income Tax Act does not recognize any concept of deferred revenue expenditure. In the said case, there was nothing brought on record to suggest that any asset, tangible or intangible, had been created by incurring the expenditure in question and it was held by the Tribunal that the deferred revenue expenditure was rightly claimed by the assessee as deduction in the year in which it was incurred. 24. In the case of Core Health Care Limited (supra) cited by the ld. counsel for the assessee, a similar issue was involved inasmuch as substantial expenditure was incurred by the assessee on a special advertisement campaign resulting into benefit for more than a year and while dealing with the issue of allowability of such expenditure, Hon'ble Gujarat High Court held that there is no such category of deferred revenue expenditure under the Income Tax Act. It was held t .....

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..... plain and justify and the basis adopted by it for allocation of indirect expenses, the Assessing Officer proceeded to allocate the expenses in the ratio of sales of each unit and work out the profit of the eligible unit of the assessee at Hosur at ₹ 5,37,66,504/-. Accordingly, the claim of the assessee for deduction of ₹ 2,08,64,312/- was restricted by him to ₹ 1,61,29,951/-. On appeal, the ld. CIT(Appeals) upheld the action of the Assessing Officer on this issue for the same reasons as given by the Assessing Officer. 27. We have heard the arguments of both the sides and also perused the relevant material available on record. The ld. counsel for the assessee has very fairly and frankly admitted that the relevant details as required by the Assessing Officer to justify the allocation of indirect expenses are not available with the assessee and in the absence of the same, there is nothing to dispute the allocation of indirect expenses made by the Assessing Officer in the ratio of sales of each unit. We, therefore, find no justifiable reason to interfere with the impugned order of the ld. CIT(Appeals) confirming the disallowance made by the Assessing Officer on acc .....

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..... t of one product, i.e. PCMX. In this regard, he noted from the cost audit report prepared by the Cost Accountant that the assessee- company had incurred a loss on the export of PCMX in the calendar year 2002. He, therefore, required the assessee to show-cause as to why the loss shown in the cost audit report should not be taken as an actual result for the purpose of determining the ALP of the relevant international transactions by using TNMM. In reply, it was submitted by the assessee that the cost audit report was for the calendar year of 2002, while the working made by it of OP/TC of the relevant international transactions was for the financial year 01.04.2002 to 31.03.2003. The Assessing Officer, however, noted from the relevant details furnished by the assessee that all the relevant exports were made by the assessee- company till 31 s t December, 2002 except one invoice, which was raised on 31.03.2003. According to him, it was thus clear that the assesee-company had actually suffered loss in the export of PCMX as pointed out in the cost audit report. The said loss, therefore, was also taken for consideration by the Assessing Officer to re-compute the OP/TC of the relevant trans .....

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..... ed under section 143(3) vide an order dated 27.03.2006. On appeal, the ld. CIT(Appeals) confirmed the said addition made by the Assessing Officer. 31. The ld. counsel for the assessee took us through the Transfer Pricing Study Report submitted by the assessee to show the reasons for selectial TNMM as the most appropriate method to benchmark the transactions of the assessee-company with its AE involving export of intermediates and finished products as also the working made by the assessee of OP/TC of such transactions at 7.96%. He submitted that the TPO has neither disputed the method adopted by the assessee to benchmark these international transactions nor the working made by the assessee of OP/TC of such transactions. He submitted that the TPO, however, adjusted the OP/TC worked out by the assessee on the basis of cost audit report where the loss was shown in respect of export of one product, i.e. PCMX. He contended that the said cost audit report, however, was prepared for the calendar year of 2002 while the working made by the assesese of OP/TC of the relevant international transactions was for the financial year 2002-03. He also contended that the export of PCMX was only the .....

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..... in a loss as shown in the cost audit report clearly creates doubt about the reliability of the segmental financials taken by the assessee to work out the OP/TC of its export with AEs at 7.96%. It is pertinent to note here that nothing has been brought on record either before the authorities below or before us to shows that the figures reported in the cost audit report showing the loss in the export of PCMX are not correct. In reply to a specific query raised by us, the ld. counsel for the assessee has not been able to explain the basis on which these segmental financials showing OP/TC of the export of the assessee-company to its AE at 7.96% are taken. In our opinion, the OP/TC of the relevant transactions worked out by the assessee, therefore, cannot be taken as basis for bench marking the relevant transactions by adopting TNMM and it would be more appropriate to take the OP/TC at the entity level by taking into consideration the entire transactions of the assessee. The entity level OP/TC thus taken is required to be compared with the OP/TC of the entities which are functionally similar by taking the financial data of only the relevant year and not on the basis of multiple year da .....

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..... also instructed that such pending appeals below this specified tax limit of ₹ 10,00,000/- may be withdrawn/ not pressed. Keeping in view the instruction given by the CBDT vide Circular No. 21/2015 dated 10.12.2015, which is squarely applicable in the present case, the appeal filed by the Revenue for A.Y. 2003-04 is treated as withdrawn/not pressed and dismissed accordingly. 35. Now we shall take up the cross appeals for A.Y. 2004-05 being ITA No. 1024/KOL/2009 (assessee's appeal) and ITA No. 973/KOL/2009 (Revenue's appeal), which are directed against the order of ld. CIT(Appeals)-XII, Kolkata dated 30.03.2009. 36. As regards the Ground No. 1 raised in the appeal of the assessee for AY 2004-05, it is observed that the issue involved therein relating to the disallowance made by the Assessing Officer under section 40A(i) and confirmed by the ld. CIT(Appeals) on account of payment made by the assessee to RBESL-UK towards expatriate fees for non-deduction of tax at source by treating the same as in the nature of fees of technical services is similar to the one involved in Ground no. 1 of the assessee's appeal for AY 2003-04, which has already been decided by us .....

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..... e foregoing portion of this order. Following our conclusion drawn in AY 2003-04, we delete the disallowance made by the Assessing Officer and confirmed by the ld. CIT(Appeals) on this issue and allow Ground No. 3. 41. The issue involved in Ground No. 4 of the assessee's appeal for AY 2004-05 relates to the determination of rate of tax payable by the assesese on capital gain arising from the sale of flats. 42. In the year under consideration, flats owned by the assessee were sold and since the said flats were held by the assessee for more than 36 months, the capital gain arising from the sale thereof was offered to tax by the assesese at concessional rate applicable to long-term capital gain. Since the flats sold by the assessee were depreciable assets, the Assessing officer invoked the provision of section 50 and brought to tax the capital gain arising from the sale thereof at normal rate applicable to short-term capital gain. On appeal, the ld. CIT(Appeals) upheld the action of the Assessing Officer on this issue by observing that the provisions of section 50 were clearly applicable to the capital gains arising on account of sale of depreciable assets not only for comput .....

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..... cial Bench of ITAT in the case of Daga Capital Management Pvt. Ltd. (supra) has been subsequently overruled by the Hon'ble Bombay High Court in its decision rendered in the case of Godrej Boycee Manufacturing Co. Ltd. -vs.- DCIT reported in 328 ITR 81 by holding that Rule 8D is applicable only prospectively from AY 2008-09. As further held by the Hon'ble Bombay High Court in the case of Godrej Boycee Manufacturing Co. Limited (supra), disallowance under section 14A for the years prior to 2008-09 is required to be determined on some reasonable basis. In this regard, it is observed that the Coordinate Benches of this Tribunal has taken a consistent view by holding that disallowance under section 14A to the extent of 1% of the exempt income would be fair and reasonable. Following this consistent view taken by the Tribunal, we modify the impugned order of the ld. CIT(Appeals) on this issue and direct the Assessing Officer to restrict the disallowance under section 14A to the extent of 1% of the exempt income earned by the assessee. Ground No. 5 is thus partly allowed. 47. As regards Ground No. 6 of the assessee's appeal for AY 2004-05, it is observed that the issue i .....

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..... Ground No. 3 of the assessee's appeal for AY 2003-04, which has already been decided b y us in the foregoing portion of this order. Following our conclusion drawn for AY 2003-04, we uphold the impugned order of the ld. CIT(Appeals) allowing the claim of the assessee on this issue and dismiss Ground No. 1 of the revenue's appeal. 52. In Ground No.2 of its appeal, the revenue has challenged the action of the ld. CIT(Appals) in deleting the disallowance made by the Assessing officer on account of assessee's claim for writing off of deposit given for gas and electricity amounting to ₹ 55,000/-. 53. The amount of ₹ 55,000/- given towards gas and electricity deposit was written off by the assessee in the year under consideration and the same was claimed as deduction. According to the Assessing officer, the said amount of deposits having not been offered by the assesese for tax in the earlier years, deduction for the same as bad debts was not allowable. On appeal, the ld. CIT(Appeals) allowed the claim of the assesese on the ground that the loss suffered by the assesese as a result of non-recovery of deposits was incidental to the business of the assessee. .....

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