TMI Blog2024 (1) TMI 1026X X X X Extracts X X X X X X X X Extracts X X X X ..... - 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 becau ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on-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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... idents. - SHRI V. DURGA RAO, HON BLE JUDICIAL MEMBER AND SHRI MANJUNATHA. G, HON BLE ACCOUNTANT MEMBER For the Appellant : Shri. Tushar Jarwal, Advocate Shri. Rahul Sateeja, Advocate For the Respondent : Shri. P. Divahar, CIT ORDER PER: MANJUNATHA. G, ACCOUNTANT MEMBER: This bunch of four cross appeals, two each by the assessee and two each by the revenue are directed against orders of the Commissioner of Income Tax (Appeals), Large Taxpayers Unit, Chennai, all dated 29.05.2014 and pertains to assessment year 2009-10. Since, facts are identical and issues are common, for the sake of convenience, the appeals filed by the assessee and the revenue are being heard together and disposed off, by this consolidated order. ITA Nos: 2082 2093/Chny/2014, AY 2009-10: 2. The brief facts of the case are that the assessee is a limited company, engaged in the business of manufacture of transmission and distribution equipment comprising of protection and control consisting relays and control panels, high voltage and medium voltage switch gears, transformers and electrical distribution system. It was also engaged in the business of execution of turnkey ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... king a provision at the end of the year and releasing said provision without actual utilization of said provision. Therefore, the ld. CIT(A) after considering relevant facts has rightly sustained additions made by the Assessing Officer and their order should be upheld. 3.2 We have heard both the parties, perused the material available on record and gone through the orders of the authorities below. The facts borne out from record indicates that the appellant is creating a provision for warranty expenses at the end of the year, but not utilizing said provision in total, which is evident from the historical provision created by the appellant and subsequent release after the warranty period. Further, the outstanding credit in provision for warranty account is much higher than the amount of provision utilized by the assessee. During the year, the appellant created provision of Rs. 6.61 crores and released Rs. 4.07 crores and closing balance as on 31.03.2009 was at Rs. 23.44 crores. 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 2004-05, but actual expenditure being difference between provision and release only to be added, however the Assessing Officer has made additions towards closing balance without appreciating fact that the assessee has already credited reversal of provision to the P L account and offered to tax. 5.2 The ld. DR, on the other hand submitted that, the issue may be set aside to the file of the Assessing Officer to verify the claim of the assessee and make additions towards difference between provision and reversal of contract losses. 5.3 We have heard both the parties, perused the material available on record and gone through the orders of the authorities below. This issue is covered against the assessee by the decision of ITAT, Chennai Benches for the assessment years 2003-04 2004-05 in ITA Nos. 799 800/Chny/2010, dated 21.06.2011, where it has been clearly held that provision for contract losses is unascertained liability and contingent in nature, cannot be allowed as deduction. In fact, the ld. Counsel for the assessee fairly agreed that this issue is covered against the assessee. But, his only argument is that the Assessing Officer has made addition of Rs. 4,93,06,000/- b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... td vs CIT, Bombay [1979] 118 ITR 261. 6.2 The ld. DR, on the other hand supporting order of the Ld. CIT(A) submitted that the TPO can only verify the price charged by an entity in comparison with a third party transactions under uncontrolled transactions. The commercial expediency has to be verified by the Assessing Officer. Just because the TPO has not made any adjustment u/s. 92CA of the Act, the powers of Assessing Officer cannot be curtained. Since, the appellant could not justify payment of trademark fee with necessary evidences, the Assessing Officer has rightly disallowed the amount paid to parent company and their order should be upheld. 6.3 We have heard both the parties, perused the material available on record and gone through the orders of the authorities below. We have also carefully considered reasons given by the Assessing Officer to disallow trademark fees paid to parent company. The Assessing Officer has disallowed trademark fees on two grounds; the first reason given by the Assessing Officer is that the appellant could not furnish any evidences to prove registration of trademark under any international or domestic law. The second reason given by the Assessin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fees for technical services. In so far payment to Henrich George GMBH, the services were rendered outside India and the non-resident is not having PE in India. In absence of PE, business profits cannot be taxed in India. Since, income of non-residents in not taxable in India, the question of deduction of TDS u/s. 195 of the Act, does not arise and consequently, payments made to said non-residents cannot be disallowed u/s 40(a)(i) of the Act. 7.1 We have heard both the parties, perused the material available on record and gone through the orders of the authorities below. Insofar as payment to Kema Netherlands towards testing fee, the issue is covered by the decision of ITAT, Chennai Benches in assessee s own case for assessment year 2007-08 in ITA No. 2090/Chny/2014, where the Tribunal held that in absence of make available technical knowledge, experience, skill, knowhow or process etc., any payment towards services rendered by non-residents cannot be considered as fees for technical services as per section 9(1)(vii) of the Act. Therefore, we are of the considered view that the Assessing Officer is erred in disallowing payment made to Kema Netherlands u/s. 40(a)(i) of the Act. T ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ternational Access Consultants Ltd, Hongkong and site engineer expenses paid to Ensys Company Ltd, Thailand are reimbursement of expenses. 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. 8. The nex ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... low depreciation on goodwill as claimed by the assessee. 9. The next issue that came up for our consideration from ground no. 8 of assessee s appeal is disallowance of depreciation on non-compete fee. The ld. Counsel for the assessee, submitted that this issue is covered in favour of the assessee by the decision of Hon ble High Court of Madras in assessee s own case for assessment year 2006-07 in TCA No. 194/2021, wherein the Hon ble High Court held that the assessee is eligible for depreciation on non-compete fee. The ld. DR, on the other hand fairly agreed that the issue is covered by the decision of Jurisdictional High Court of Madras and thus, may be decided in accordance with law. 9.1 We have heard both the parties, perused the material available on record and gone through the orders of the authorities below. We find that the Jurisdictional High Court of Madras in TCA No. 194/2021, dated 25.03.2021, in assessee s own case held that the assessee is entitled for depreciation for non-compete fee. The relevant findings of the Hon ble High Court are as under: 5. The next issue related to disallowance of depreciation claimed under Section 32(1) of the Act in respect of &# ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ase ( supra) wherein, this Court pointed out that since there was a payment of consideration in exchange of the property, it could not be held that the assessee would be entitled to the depreciation of the property obtained. Thus this Court reversed the order of the Tribunal. 7. As far as the present case is concerned, we must point out to the agreement with the landlord, which showed the payment of consideration for the surrender of tenancy rights. The Revenue does not dispute the existence of such an agreement. It is also not disputed by the Revenue that the purchase of the premises by the assessee was from M/s. Harsaran Singh Constructions Pvt. Ltd., which had nothing to do with the landlord. Given the fact that tenancy right is a capital asset, as held by the Apex Court in the decision reported in CIT v. D.P. Sandu Bros. Chembur (P.) Ltd. [2005] 273 ITR 1/142 Taxman 713 (SC) that the surrender of tenancy rights amounted to transfer and hence, being a capital receipt, on the facts thus placed before this Court that the amount paid on account of surrender of tenancy rights being given by the assessee to the builder, there is no exchange of one property for the other. Hence, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t in paragraph 5 of the judgment. This is pointed out because, the Court has discussed the decision in Blaze Central (P.) Ltd. (supra), which was distinguished in G.D. Naidu. We find that in paragraph 9 of the judgment, the Court after referring to Empire Jute Co. Ltd. (supra) and Alembic Chemical Works Co. Ltd. (supra), has pointed out that the single test, that is, whether the payment results in an enduring benefit cannot be conclusive in a decision as to whether an expenditure qualifies as one falling or in the capital field and that the decisions have emphasized the need to shift from a narrower field to a broader one, to ascertain the real nature of the advantage, which the taxpayer would derive. 38. Thus, the test to be applied following Empire Jute Co. Ltd. (supra) is to see as to whether it added to the capital of the assessee, whether a new asset was created and whether there was an addition or expansion of the profit making apparatus of the assessee and whether the assessee acquired source of profit or income when such investment was made. However, the Court in our respectful view, applied the test, which does not flow from the test laid down in Empire Jute Co. Lt ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oted by the Tribunal in paragraph 11 of the impugned order. The Tribunal also took note of the fact that in the assessee's own case, the High Court of Delhi decided the issue in favour of the assessee. 16. Before us, a chart has been filed showing the issue relating to depreciation on non compete fee. From the chart, we find that for the assessment year 2001-02, the Assessing Officer himself allowed it, which was confirmed by the CIT(A) and the decision of the CIT(A) was accepted by the Department. For the assessment year 2002-03, no scrutiny assessment had been carried out. For the assessment year 2003-04, the CIT(A) allowed it and the Assessing Officer gave effect to the order passed by the CIT(A). For the assessment year 2004-05, no scrutiny assessment was carried out and for the assessment year 2005-06, the claim was allowed by the CIT(A) and it was given effect to by the Assessing Officer. Thus, the Assessing Officer was bound to be consistent with the earlier decisions. 17. Therefore, we find that the Tribunal rightly granted relief to the assessee. Accordingly, substantial question of law No.2 is answered against the Revenue. 9.2 In this view of the mat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... additional depreciation and the balance additional depreciation was claimed during the year under consideration. On a query from the Bench, the Ld.counsel submitted that the copy of assessment order for assessment year 2006-07 is not readily available even with the assessee. This Tribunal is of the considered opinion that for claiming additional depreciation, the assessee has to establish that the machinery was purchased and installed. If the depreciation could be allowed in the earlier assessment year, the balance depreciation can be claimed in the subsequent year. This Tribunal is of the considered opinion that the matter needs to be re-examined by the Assessing Officer. Accordingly, orders of both the authorities below are set aside and the issue of additional depreciation is remitted back to the file of the Assessing Officer. The Assessing Officer shall re-examine the matter and find out whether the assessee, in fact, purchased and installed the machinery in the assessment year 2006-07 and whether the additional depreciation was claimed and allowed at the rate of 10% and thereafter decide the issue afresh in accordance with law, after giving a reasonable opportunity to the ass ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he ld. DR, on the other hand submitted that the ld. CIT(A) erred in directing the Assessing Officer to restrict demand only to the extent of interest charged u/s. 201(1A) of the Act in respect of two payments wherever he has confirmed additions u/s. 40(a)(i) of the Act and deleted total demand wherever he has deleted disallowances u/s. 40(a)(i) of the Act, without appreciating fact that order u/s. 201(1) 201(1A) of the Act holding the assessee as an assessee in default and disallowance u/s. 40(a)(i) of the Act, in the order u/s. 143(3) of the Act stands on different coatings. He further submitted the ld. CIT(A) ought to have relied on the decision of Hon ble Madras High Court in the case of Tube Investments of India Ltd vs ACIT 325 ITR 610, wherein, it was held that provisions of Chapter XVIIB are forms of recovery of tax by way of TDS at the point where the payment is made or credited to a third party in the event of failure to deduct tax at source, section 201 automatically comes into play. The ld. DR, further submitted that the ld. CIT(A) erred in deleting the demand without appreciating fact that said payments are in the nature of fees for technical services u/s. 9(1)(vii) of ..... X X X X Extracts X X X X X X X X Extracts X X X X
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