ESAB India Ltd. Vs DCIT (ITAT Chennai)
The assessee and the Revenue filed cross appeals against the order of the CIT(A) for AY 2017-18. The principal issues related to the deductibility of one-time settlement payments made to contractors, disallowance under Section 14A read with Rule 8D, and an additional claim regarding the applicability of the Double Taxation Avoidance Agreement (DTAA) to Dividend Distribution Tax (DDT).
The Assessing Officer disallowed ₹5.43 crore paid as one-time settlement to contractors during restructuring of the assessee’s Kolkata operations, holding that there was no employer-employee relationship and that the expenditure was not revenue in nature. The CIT(A) held that the expenditure was incurred wholly and exclusively for business purposes and was revenue in nature but restricted the deduction to one-fifth by drawing an analogy with payments made to employees under Section 35DDA.
The Tribunal examined the agreements with the contractors and admitted additional evidence, including internal correspondence, which showed that the payments were made after deduction of tax at source under Section 194C and that responsibility for settlement with the workers rested with the contractors. The additional evidence indicated that the payments were made to avoid disruption of business operations and maintain industrial peace during restructuring. The Tribunal held that the payments were incurred wholly and exclusively for the purposes of business and were allowable under Section 37. It further held that the analogy with Section 35DDA was not applicable, as that provision governs payments under voluntary separation schemes to employees and not payments made to contractors. The direction of the CIT(A) to amortise the expenditure over five years was therefore held to be unsustainable, and the Assessing Officer was directed to delete the disallowance of the remaining four-fifths of the expenditure. Consequently, the assessee’s grounds on this issue were allowed and the Revenue’s challenge was rejected.
