Tribunal confirms allocation of expenses based on after-market sales and rules on tax treatment of reimbursements and royalty payments.
In a significant ruling, the Income Tax Appellate Tribunal (ITAT) Delhi Bench 'E' has upheld the tax deductions claimed by Mahle Filters Systems (India) Ltd. for the assessment year 2010-11, dismissing the Revenue's appeal against the company's tax treatment of certain deductions and reimbursements. The ITAT's decision, delivered by Vice President Shri Mahavir Singh and Accountant Member Shri Krinwant Sahay, centered on several key issues including the allocation of after-market (trading) expenses, treatment of reimbursed expenses, and royalty payments.
The tribunal reaffirmed that the allocation of after-market expenses should be based on the ratio of after-market trading sales rather than total sales, as these expenses were incurred specifically for after-market trading. This decision aligns with the precedent set in Mahle Filters' own case for a prior assessment year. Consequently, the Revenue's challenge to this allocation method was dismissed.
Furthermore, the ITAT ruled that reimbursements made to Mahle's group companies for expenses incurred on behalf of Mahle Filters are not subject to Tax Deducted at Source (TDS) under Section 40(a)(i) of the Income Tax Act, as these reimbursements do not constitute income chargeable to tax in India. This decision drew on the Supreme Court's ruling in the case of GE India Technology Centre (P) Ltd. v. CIT.
The tribunal also addressed the nature of royalty payments made by Mahle Filters for technical know-how, concluding that these payments are revenue expenditures and not capital in nature. The ruling was based on the understanding that the payments did not confer any enduring benefit in the capital field and were made for the limited use of technical information, as supported by previous judicial decisions including the Delhi High Court's judgment in a related case.
Additionally, the ITAT dismissed the Revenue's contention that the amalgamation of Mahle Filter Systems (India) Ltd. with another company was a sham transaction designed to unduly benefit from tax deductions under Section 80IC. The tribunal clarified that the manufacturing unit at Parwanoo, which was eligible for such deductions, continued to belong to the assessee post-amalgamation, thereby invalidating the Revenue's argument.
This ruling provides clarity on the tax treatment of specific expenditures and amalgamations, emphasizing adherence to established judicial precedents and reinforcing the principles governing deductions and reimbursements under the Income Tax Act.
Bottom Line:
Deduction under Section 80IC of the Income Tax Act - Allocation of after-market (trading) expenses should be based on the ratio of after-market trading sales and not total sales. Expenses reimbursed to group companies not subject to TDS if such payments are not in the nature of income chargeable to tax in India. Royalty payments for technical know-how usage treated as revenue expenditure and not capital in nature.
Statutory provision(s): Section 80IC, Section 40(a)(i), Section 80IA(12), Section 195, Section 9(1)(vi), Section 9(1)(vii) of the Income Tax Act, 1961.
DCIT v. Mahle Filters Systems (India) Ltd., (ITAT)(Delhi Bench 'E') : Law Finder Doc Id # 2822371
