Provisions of section 40(a)(i) are not attracted on Depreciation

By | December 11, 2015

Facts of the Case are

During assessment proceedings, the A.O. noticed that the assessee purchased “Foster’s Brand” and “Intellectual Property”, “Foster’s Brewing Intellectual Property” and Foster’s Trademarks from Foster’s Australia Ltd. for a consideration of Rs. 157,92,00,000/-. The assessee capitalized the said amount in its fixed assets schedule under the head “Trade Marks/Brands” and claimed depreciation thereon @ 25%. For the year under consideration, the assessee has claimed depreciation of Rs. 28,76,40,000/- in its return of income.

AO Contention

He disallowed the claim of depreciation u/s 40(a)(i) r.w.s. 195 and 200 of the Act on the grounds of non Deduction of TDS.

Held

In the case of Skol Breweries Ltd, We find that the Tribunal has considered an identical issue and decided the same in favour of the assessee by observing as under:—

“16.3 The deduction u/s 32 is not in respect of the amount paid or payable which is subjected to TDS; but is a statutory deduction on an asset which is otherwise eligible for deduction of depreciation. Depreciation is not an outgoing expenditure and therefore, the provisions of section 40(a)(i) of the Act are not attracted on such deduction. This view has been fortified by the decision of the Hon’ble Punjab & Haryana High Court in the case of M/s Mark Auto Industries Ltd(supra) in pars 5 & 6 as under . . . . . .”

IN THE ITAT MUMBAI BENCH ‘K’

SAB Miller India Ltd.

v.

Additional Commissioner of Income-tax, Range 8(3), Mumbai

B.R. BASKARAN, ACCOUNTANT MEMBER
AND AMIT SHUKLA, JUDICIAL MEMBER

IT APPEAL NO. 7123 (MUM.) OF 2012
[ASSESSMENT YEAR 2008-09]

JULY  3, 2015

R.R. Vora and Hemen Chandariya for the Appellant. G.M. Doss, CIT for the Respondent.

ORDER

B.R. Baskaran, Accountant Member – This appeal filed by the assessee is directed against the assessment order dated 28-9-2012 passed by the A.O. u/s 143(3) of the Act in conformity with the directions issued by the Dispute Resolution Panel -II, Mumbai (“DRP”).

2. The assessee is engaged in the business of manufacture and sale of beer under the brand names “Haywards & RCPL”. The assessee is aggrieved by the decision rendered by Ld. DRP on various issues. Grounds No. 1 to 3 are general in nature, hence no need of adjudication.

3. In ground No. 4, the assessee is aggrieved by the decision of Ld. DRP in confirming addition of Rs. 15,72,053/- relating to the claim of Club membership fee, which included entrance fees and subscriptions paid for acquiring membership in clubs. The A.O. disallowed the above amount on the ground that the admission fee gives benefit of enduring nature and hence the same is capital expense in nature. The A.O. has also relied on the decision of Hon’ble Bombay High Court in the cases of CIT v. W.I.A.A. Club Ltd [1982] 136 ITR 569 and also the decision rendered in the case ofCIT v. Diners Business Services (P.) Ltd. [2003] 263 ITR 1 (Bom.). The ld. DRP confirmed the same.

4. At the time of hearing before us, the ld. Representatives of both sides agreed that an identical issue was considered by the Co-ordinate bench in the case of Skol Breweries Ltd. v. Asstt. CIT [2013] 142 ITD 49  (Mum. – Trib.)and the same was decided in favour of the assessee as under:-

“We further note that similar disallowance made by the Assessing Officer for the AYs 2004-05 to 2006-07 has been deleted by the Commissioner of Income tax (Appeals) and the revenue has accepted the order of the Commissioner of Income Tax (Appeals). The Assessing Officer has not brought out on record that there is a change in the facts and circumstances with respect to the claim of the assessee for the Assessment Year under consideration to that of earlier years 2004-05 to 2006-07. Though, principle of res-judicata is not applicable in the matter of income tax, however, rule of consistency has to be followed as the facts are identical. Since there is no difference in the facts and circumstances with respect to the claim of the assessee for the Assessment Year under consideration vis-a-vis to the Assessment Years 2004-05 to 2006-07 and when the order of the Commissioner of Income Tax (Appeals) has been accepted by the revenue for the AYs 2004-05 to 2006-07, then the claim of the assessee cannot be disallowed for the Assessment Year under consideration.”

5. We also notice that the Hon’ble Delhi High Court has held in the case of CIT v. Samtel Color Ltd [2009] [IT Appeal No.1152 of 2008, dated 20-1-2009] has held that the admission fee paid to the Clubs is also revenue in nature. Accordingly, we direct the AO to allow the claim of the assessee.

6. The fifth ground urged by the assessee relates to the disallowance made under section 40(a)(i) of the Act in respect of discount given to distributors amounting to Rs. 24,52,65,057/- by way of credit notes, for non-deduction of tax at source.

7. During the course of assessment proceedings, the A.O. observed that the assessee has claimed a sum of Rs. 39,90,92,351/- as expenditure incurred under the head “Sales Scheme Expenses”. The A.O. asked the assessee to furnish the details of Sales Scheme Expenses, which was furnished as under:-

Sr. No. Particulars Amount (Rs.)
1 Volume/Bulk Discounts – Beer 7,82,01,645/-
2 Cash Discounts/COD 4,11,32,650/-
3 Sale Price Discounts 24,52,65,057/-
4 Special Discount 2,02,38,400/-
5 Commission of sales 1,42,54,598/-
Total 39,90,92,351/-

The AO asked the assessee as to why the “Sale Price discount” offered by the assessee should not be treated as ‘commission expense’ falling under section 194H of the Act. After considering the explanations given by the assessee, the A.O. held that the assessee had failed to deduct tax at source from the “Sale price discounts” referred in item no.3 in the table, u/s 194H r.w.s. 200 of the Act and accordingly disallowed the same under section 40(a)(i)of the Act. The ld. DRP also concurred with the view taken by the A.O. and held that relationship between the assessee and distributor is in the nature of ‘Principal to Agent’ and hence the assessee had to deduct taxes on the payments made to the distributors.

8. The ld. Representatives of both the sides agreed that an identical issue was considered by the Tribunal in the case of Skol Breweries Ltd. (supra), as modified in M.P. No.136/Mum/2013 dated 04-10-2013 and the Tribunal, after discussing the issue in detail, has set aside this issue to the file of the A.O. to re-examine the same afresh. It is pertinent to note that the Tribunal, vide paragraph 9.4 of the order has held that the relationship between the parties, as per the agreement, in relation to sale and purchase of the product is on principal to principal basis and to that extent the decision of Hon’ble Delhi High Court rendered in the case of CIT v. Mother Diary India Ltd. [2013] 358 ITR 218  is applicable. However, the Tribunal took the view that the scheme under which the impugned benefit/incentive is given needs to be examined in order to give a finding as to whether the impugned payment is commission or not. Hence, the matter was set aside to the file of the AO with a direction to verify and examine relevant record and decide the same as per law. Consistent with the view taken in earlier year, we set aside the order passed by AO on this issue and restore the same to his file with the direction to examine the same afresh after affording necessary opportunity of being heard to the assessee and take appropriate decision in accordance with the law. At the time of hearing, the ld A.R placed reliance on the decision rendered by Hon’ble Bombay High Court in the case of CIT v. Intervet India (P.) Ltd [2014] 364 ITR 238  wherein it was held that the sale promotion benefit availed by the dealers is not payment of Commission. In the set aside proceedings, the AO should decide the issue by considering the applicability of the above said decision of Hon’ble jurisdictional High Court.

9. The next issue urged by the assessee relates to the disallowance under section 40(a)(i) r.w.s. 195 and 200 of the Act in respect of depreciation on payment to Foster’s Australia amounting to Rs. 28,76,40,000/- made by the A.O. During assessment proceedings, the A.O. noticed that the assessee purchased “Foster’s Brand” and “Intellectual Property”, “Foster’s Brewing Intellectual Property” and Foster’s Trademarks from Foster’s Australia Ltd. for a consideration of Rs. 157,92,00,000/-. The assessee capitalized the said amount in its fixed assets schedule under the head “Trade Marks/Brands” and claimed depreciation thereon @ 25%. For the year under consideration, the assessee has claimed depreciation of Rs. 28,76,40,000/- in its return of income. The A.O. asked the assessee to explain as to why the depreciation claimed should not be disallowed, since the assessee has not deducted tax at source on the payment of Rs.157.92 crores made to Foster’s Australia. The assessee explained that the assessee has capitalized the purchase value of Foster’s Brand and it is not required under law to deduct tax at source in respect of payment made for capital asset. However, the A.O. was not satisfied with the explanation offered by the assessee and following his order passed in the earlier year, he disallowed the claim of depreciation u/s 40(a)(i) r.w.s. 195 and 200 of the Act. The ld. DRP also upheld the view of the AO.

10. At the time of hearing, the ld. Counsel for the assessee submitted that the above said issue is squarely covered in favour of the assessee by the decision of the Tribunal rendered in the case of Skol Breweries Ltd. (supra). We find that the Tribunal has considered an identical issue and decided the same in favour of the assessee by observing as under:—

“16.3 The deduction u/s 32 is not in respect of the amount paid or payable which is subjected to TDS; but is a statutory deduction on an asset which is otherwise eligible for deduction of depreciation. Depreciation is not an outgoing expenditure and therefore, the provisions of sec. 40(a) (i) of the Act are not attracted on such deduction. This view has been fortified by the decision of the Hon’ble Punjab & Haryana High Court in the case of M/s Mark Auto Industries Ltd(supra) in pars 5 & 6 as under . . . . . .”

In view of the above, we direct the A.O to delete this disallowance.

11. The next issue urged by the assessee relates to the disallowance made u/s 40(a)(i) of the Act of software charges amounting to Rs. 33,60,435/- for non-deduction of tax at source. During scrutiny assessment, the A.O. observed that the assessee has paid a sum of Rs. 33,60,435/- to SABMiller A & A (Pty) Ltd. towards the expenditure incurred on account of Syspro license fees, Report Generation charges in Syspro, customizing Syspro so as to enable Electronic Fund Transfer facility etc. These were claimed to be reimbursement of expenses, which were supported by third party invoices. The A.O. held that these payments are in the nature of royalty falling within the purview of sec. 9(1)(vi) of the Act and hence the assessee should have deducted Tax at source on the above said payment. In reply, the assessee submitted that the reimbursement represents a pure recovery of third party costs incurred by the overseas group entity for the benefit of the assessee. It was submitted that the payment of IT cost is not liable to income tax and thus there was no liability on the assessee to deduct any TDS while making the payment. It was also submitted that even if the payments received by it is termed as royalty under the Act, no disallowance u/s 40(a)(i) of the Act can be made as the same would fall underExplanation 4 and not under Explanation 2 of section 9(1)(vi) of the Act. The A.O. after considering the submissions of the assessee held that the assessee has made payment for “Syspro license” which is for a right to use intellectual property embedded in it. Accordingly he disallowed the expenditure u/s 40(a)(i) of the Act for non-deduction of tax at source. The ld. DRP held that the software is an intellectual property right and the periodical payments made to the group company for sharing the rights for its use and maintenance collectively payable to the owner of the rights and accordingly upheld the view taken by the A.O.

12. During the hearing before us, the ld. Representatives of both the sides agreed that an identical issue was considered in the assessee’s own case in (2013) 142 ITD 49 (Mum) and this issue has already been decided by the Tribunal in favour of the assessee. On perusal of the order of the Tribunal, we find that the Tribunal has held that the impugned expenditure does not fall under Explanation 2 to section 9(1)(vi); but the same falls under Explanation 4 to sec. 9(1)(vi). Since sec. 40(a)(i) refers to only Explanation to sec. 9(1)(vi) of the Act, the same cannot be disallowed u/s 40(a)(i) of the Act.

13. When it was pointed out that the Explanation 4 is only a clarificatory amendment inserted by Finance Act, 2012 w.r.e.f. 1.6.1976 and hence Explanation 2 may encompass the same under its fold, the Ld A.R submitted that the assessee could not have visualized the amendment that is going to be brought in by Finance Act, 2012, when the impugned payment was made in Financial year 2007-08 and hence the provisions of sec. 40(a)(i) should not be applied on the payments that were hit by prospective amendment. We agree with this contention of the assessee and accordingly direct the AO to delete this disallowance.

14. The next issue urged by the assessee relates to the disallowance of interest on advances given to group entities u/s 36(1)(iii) of the Act amounting to Rs. 36,56,856/-.

15. During the course of assessment proceedings, the A.O. observed that the assessee had paid advances to two group companies viz: MBL Investments Ltd, and SABMiller India Limited (Now SKOL Beer Manufacturing Co. Ltd.). The A.O. also observed that the assessee had borrowed loans from various banks at a higher rate of interest ie. @ 12% whereas it has charged interest @ 6% from its group companies. Accordingly, the A.O. required the assessee to explain as to why the proportionate amount of interest should not be disallowed. The A.O. after considering the submissions made by the assessee, disallowed the proportionate amount of interest @ 6% on the sum of Rs. 11,79,47,601/- which worked out to Rs. 36,56,856/-. The Ld DRP also agreed with the view taken by the A.O. and held that borrowed funds should have been used for the purpose of business of the assessee and not for the purpose of its associates. It was also held that the funds advanced were not on account of commercial expediency.

16. At the time of hearing, the ld. Representatives of both sides agreed that an identical issue was considered by the Co-ordinate bench in the case of Skol Breweries Ltd. (supra) and restored the matter to the file of the AO to verify the contentions of the assessee that the advances were given out of own funds and not borrowed funds. Consistent with the view taken in the earlier year, we restore this issue to the file of A.O. for fresh examination by duly considering the contentions of the assessee.

17. The next ground relates to the transfer pricing adjustment in respect of royalty payment to Associated Enterprises (AE) amounting to Rs. 12,26,22,853/-. The Ld A.R submitted that the assessee has undertaken fresh Transfer pricing study by taking fresh set of comparables, by following the directions given by the Tribunal in AY 2007-08 with regard to the approach to be followed for benchmarking royalty transaction. He further submitted that the TPO has recently passed the order for AY 2007-08 in the set aside proceedings and has accepted the fresh set of comparables furnished by the assessee. Accordingly, he prayed that the assessee may be given one more opportunity in this matter to represent its case in the current year also.

18. The Ld D.R did not object to the plea put forth by Ld A.R. Accordingly we set aside the order of the AO on this issue and restore the same to his file with the direction to examine this issue afresh by making reference to the TPO and decide the same in accordance with the law.

19. In the result, the appeal filed by the assessee is treated as allowed for statistical purposes.

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