Transit insurance claims, provisions reversed, and non-resident

Transit insurance claims, provisions reversed, and non-resident fees qualify for section 80-IC deduction or exemption, whereas vendor penalties do not.

Issue

Issue 1: Whether transit insurance claim receipts for loss or damage to operational assets are profits derived from an eligible industrial undertaking qualifying for deduction under Section 80-IC.
Issue 2: Whether the reversal of provisions for doubtful debts and the write-back of trade liabilities/sundry creditors under Section 41(1) have a direct nexus with business activities so as to form part of eligible profits under Section 80-IC.
Issue 3: Whether penalties levied on vendors for contractual breaches are derived from direct manufacturing operations to qualify for Section 80-IC deduction.
Issue 4: Whether consultancy fees paid to non-residents in the UAE and Kenya without a Permanent Establishment (PE) in India are taxable in India, and whether disallowance under Section 40(a)(i) for non-deduction of tax under Section 195 is applicable.

Facts

General: The assessee-company, engaged in manufacturing cleanroom partitions, doors, and equipment, operated an eligible unit at Baddi and claimed a 30% deduction on eligible profits under Section 80-IC for AY 2014-15 (7th year of operation).
Transit Insurance: The assessee included receipts from transit insurance claims (reimbursements for lost/damaged operational assets) in its eligible profits. The Assessing Officer (AO) excluded these, holding that they were not derived from industrial activities.
Provisions & Write-backs: The assessee included the reversal of provision for doubtful debts and write-backs of trade liabilities/sundry creditors in its Section 80-IC profits. The AO excluded these amounts to restrict the deduction.
Vendor Penalties: The assessee included ₹5.13 lakhs received as “penalty on vendors” for contractual breaches in eligible profits, claiming it was integral to manufacturing operations. The AO excluded this amount.
Non-resident Payments: The assessee paid consultancy fees to non-residents in the UAE and Kenya without deducting tax at source under Section 195. The AO made a disallowance under Section 40(a)(i). The non-residents had no Permanent Establishment (PE) in India.

Decision

On Transit Insurance Claims (In favour of assessee): Held that transit insurance claim receipts represent reimbursements for loss or damage to operational assets and are directly derived from the industrial undertaking, thereby qualifying for Section 80-IC deduction. [Para 6]
On Provision Reversals & Write-backs (In favour of assessee): Held that since original trade debts and liabilities arose directly from manufacturing or sales operations, their recovery, reversal, or write-back under Section 41(1) retains its original character, maintains a direct first-degree nexus with business operations, and forms part of Section 80-IC eligible profits. [Para 7]
On Vendor Penalties (Partly in favour of revenue): Held that penalties levied on vendors for contractual breaches are completely unrelated to direct manufacturing or operational processes and do not qualify for deduction under Section 80-IC. [Para 8]
On Payments to Non-residents (In favour of assessee): Held that consultancy fees paid to UAE and Kenya non-residents constitute business profits under Article 7 of the respective DTAAs and are not chargeable to tax in India in the absence of a PE. Consequently, no tax was required to be deducted under Section 195, and disallowance under Section 40(a)(i) was unwarranted. [Paras 9 & 10]

Key Takeaways

Direct Nexus Test for Section 80-IC: Reimbursements replacing operational assets (insurance claims) and recoveries/write-backs of trading debts and liabilities retain their direct operational link to manufacturing activity, making them eligible for Section 80-IC deduction.
Ancillary Receipts Excluded: Penalties recovered from vendors are treated as incidental income rather than profits directly “derived from” core manufacturing activities under Section 80-IC.
DTAA Priority on Non-resident Payments: In the absence of a Permanent Establishment in India, business profits/consultancy fees paid to non-residents under India–UAE and India–Kenya DTAAs are non-taxable in India, negating TDS obligations under Section 195 and disallowances under Section 40(a)(i).

IN THE ITAT MUMBAI BENCH ‘G’

GMP Technical Solutions (P.) Ltd.

Deputy Commissioner of Income-tax

Pawan Singh, Judicial Member
and Om Prakash Kant, Accountant Member

IT APPEAL NO. 6155 (MUM) OF 2025
[Assessment year 2014-15]

SEPTEMBER 21, 2026

Rahul Charkha and Ms. Afrin Shaikh, CAs for the Appellant. Rajgopal Parthasarathi, Sr. DR for the Respondent.

Order under section 254(1) of Income Tax Act

Pawan Singh, Judicial Member.- This appeal by assessee is directed against the order of ld. CIT(A)/NFAC dated 25.07.2025 for Assessment Year (AY) 2014-15. The assessee has raised following grounds of appeal:

Ground 1 – On the facts and in the circumstances of the case and in law, the Learned Commissioner of Income-tax (Appeals) [“Ld. CIT(A)”] erred in upholding the assessment order passed under Section 143(3) in toto without appreciating the detailed submissions, documentary evidences and legal positions placed on record. The impugned order is therefore bad in law and liable to be quashed.

Ground 2- On facts and circumstances of the case and in law, the Ld. CIT(A) erred in upholding the reduction of the eligible profits of the Baddi Unit by INR 87,22,463 (comprising of insurance claim INR 13,62,038; penalty on vendors INR 5,13,538; provision for doubtful debts INR 47,30,545; provision for advance to sundry creditors INR 21,16,342), and consequently restricting the deduction under Section 80-IC to INR 1,34,29,388 as against the claim of INR 1,60,46,127.

Ground 3- On facts and circumstances of the case and in law, the Ld. CIT(A) erred in treating insurance claim and loading/ unloading recovery which are pure pass-through reimbursements recovered from customers in the ordinary course of eligible manufacturing operations as “not derived from” the eligible undertaking, and in excluding the same from eligible profits.

Ground 4 – On facts and circumstances of the case and in law, the Ld. CIT(A) failed to appreciate that “Penalty on vendors/ customers” represented operational recoveries on account of delayed/ defective supplies intimately connected with the procurement and production cycle of the eligible unit and hence form part of business profits “derived from” the undertaking.

Ground 5 – On facts and circumstances of the case and in law, the Ld. CIT(A) erred in affirming the exclusion of “sundry balance write-back” and related provisioning adjustments without examining the Appellant’s unrebutted explanation that such write-backs represented reversal of duplicate/ double booked purchases pertaining to the eligible unit.

Ground 6 – On facts and circumstances of the case and in law, the Ld. CIT(A) erred in upholding the reduction of deduction for “provision for doubtful debts” and “provision for advance to sundry creditors” despite the Appellant’s categorical submission that corresponding disallowances were already made in the computation under the head “Profits and gains of business,” and therefore no “double benefit” was claimed for the purpose of deduction under Section 80IC.

Ground 7 – On facts and circumstances of the case and in law, the Ld. CIT(A) relied merely on alleged treatment in earlier years and pendency of appeals to sustain the present year’s exclusion, instead of independently adjudicating the Appellant’s year-specific facts and computations.

Ground 8- On facts and circumstances of the case and in law, the Ld. CIT(A) failed to consider material evidence and legal submissions placed on record, including prior appellate orders cited by the Appellant and computation evidence showing no double claim thereby violating principles of naturaljustice.

Ground 9-On facts and circumstances of the case and in law, the Ld. CIT(A) in confirming disallowance of INR 13,71,948 under Section 40(a)(ia) in respect of consultancy fees paid to non-residents (Kenya and Dubai), by presuming chargeability in India under Section 9(1) without examining the nature of services, situs of rendition/ utilization, and treaty protection.

Ground 10- On facts and circumstances of the case and in law, the Ld. CIT(A) wrongly presumed that the non-resident payees ees had Permanent Establishment (PE) in India despite no material on record evidencing PE.

Ground 11 – On facts and circumstances of the case and in law, the Ld. CIT(A) erred in confirming the disallowance under Section 40(a)(ia) in respect of consultancy fees paid to non-residents (Kenya and Dubai), without appreciating that Tax Residency Certificate is not a condition to grant treaty benefit.

The Appellant submits that each of the above grounds is independent and without prejudice to one another.

The Appellant craves leave to add, alter, amend, vary, omit or substitute any of the aforementioned grounds of appeal at any time before or at the time of hearing of the appeal, so as to enable the Ld. AO.”

2. Rival submissions of both the parties have been heard and record perused. Ground No. 1 is general. Ground No. 2 to 8 relates exclusion of certain receipts from profit of eligible business receipts. The learned authorised representative (ld. AR) of the assessee submits that assessee is a Private Limited Company and engaged in the manufacturing of Cleanroom partitions doors, Cleanroom equipment and fire-rated doors. The assessee has its manufacturing unit at Baddi in Himachal Pradesh, which is eligible undertaking for claiming benefit of deduction under section 80IC. Assessment year (AY) 2014-15 is the 7^th year of claim under section 80IC. The assessee, while filing return of income claim deduction under section 80IC of eligible unit at Rs. 4.47 crore, 30% of which was Rs. 1.60 crore. The assessing officer (A) while passing the assessment order disallowed certain items of eligible income which includes of insurance claim of Rs. 13,62,038/-penalty on vendors of Rs. 5,13,538/-, provisions for doubtful debts of Rs. 47,30,545/-and provision for advance to sundry creditors of Rs. 21,16,342/- all aggregating of Rs. 87,22,463/-. The AO by disallowing (excluding) such receipt restricted the claim of section 80IC to Rs. 1.34 crore. The AO while passing the assessment order held that insurance claim and penalty on vendors were not derived from the industrial activities, the provisions for doubtful debts, advance to sundry creditors were not to be added to the Baddi unit division profit because similar reductions has been made in earlier years. The AO proceeded on the footing that assessee added provision for doubtful debts of Rs. 47,30,545/-and provision for advance to sundry creditors of Rs. 21,16,342/-to the Baddi units profit and thereby increase the claim of section 80 IC. The action of AO was confirmed by learned CIT(A).

3. The ld AR of the assessee submits that Central Board of Direct Taxes (CBDT) in it Circular No. 37 of 2016 dated 2^nd November 2016 clarifies that computational principal for Chapter VIA deduction, where a specific disallowances related to the business activities of the eligible undertaking and has profit of the eligible business, the Chapter VIA deduction is admissible to the enhanced profit, subject to satisfaction of the condition of the relevant section. The Circular accords with statutory scheme explained in the decision of Hon’ble Apex Court in Plastiblends India Ltd. v. Addl. CIT 398 ITR 568 (SC) and in CIT v. V.M. Salgaonkar & Brothers (P.) Ltd. [2014] 47 (Bombay)/(TS- 534-HC-2014 Bombay). Further, in AY 2012-13, the ld CIT(A) consider the same issue in assessee own case and after relying upon the Circular of CBDT-No-37/2016 held that the specific disallowances related to business activities against Chapter VIA deduction was claimed resulting in announcement of the profit of the eligible business, qualified for deduction under Chapter VIA on the enhanced profit. Therefore, the disallowance of section 80IC deduction on announced profit attributable to provisions for bad debt and advances to sundry creditors was deleted. No further appeal was filed by the revenue in AY 2012-13. Thus, as per the principle of consistency the assessee is eligible for similar relief. So far as insurance claim and receipt of penalty on vendors are concerned, same are operational receipt derived from eligible undertaken. The insurance claims and transit insurance claimed from the customers as per term of purchase order. Further, the vender’s penalty comprises charged to A.K Creative Outsourcing Service Private Limited for wrong work and performed at the site and the balance represent cheque bouncing/ recovery charges from the scrap vendor. The Hon’ble Supreme Court in Plasticblends India (P.) Ltd. (supra) and in CIT v. Meghalaya Steels Ltd. 383 ITR 217 (SC)held that where receipt reimburses or reduced operational cost connected with the manufacture or sale such receipt is to be included in the eligible profit. In case of assessee the insurance reimbursement is not an independent or incidental receipt. It is a transit insurance reimbursement charged on the supply value under purchase order terms for supplies of the Baddi Unit. Transit insurance is a part of manufacturing and supply chain by which cleanroom partition and doors manufactured at Baddi Unit. Similarly, vender’s penalty /recoveries are not received from external sources. They arose from wrong work performed at site, fault performance of obligation, incorrect material, late delivery, cheque bouncing and recovery charges connected with venders. These receipts compensate the operational default in the procurement supply, site performance and recovery cycle of the eligible undertaking. The learned AR of the assessee submits that all four receipts are eligible for business income.

4. Ground No. 9 to 11 relates to disallowance of foreign payments for the want of TDS. The ld AR of the assessee submits that the AO disallowed the consultancy fee paid to Kenya and UAE based consultant entities. The AO made disallowance under section 40(a)(ia). The ld AR of the assessee submits that obligation of withholding tax under section 195 arise only to sums changeable to tax in India. Such position has been settled by Hon’ble Apex Court in GE India Technology Cen. (P.) Ltd. v. CIT 234 (SC). It was further explained that the assessee paid consultancy charges of Rs. 8,98,245/- to Mississippi Star Trading LLC, UAE, who do not have permanent establishment in India. Further, India-UAE DTAA does not have separate Article taxing for technical service. In absence of specific Article in treaty, thus it may fall under business profit under Artcle-7. Business profit is taxable in India only where the enterprises has permanent establishment in India. For Kenya based entity i.e AL-Kemia (EA) the assessee paid Rs. 4,73,703/-, who do not have permanent establishment in India. Further, Article -7 of India-Kenya DTAA permits India to tax such profit only where the Kenyan enterprises carries on business in India through PE situated in India and only to that extent attributable to that PE. In absence of PE in India, payment to Kenya based entity is not chargeable to tax in India.

5. On the other hand, the learned senior departmental representative (DR) for the revenue supported the order of law authorities. The ld Sr DR for the revenue submits that as per findings of AO the assessee has not furnished details with regard to various receipt for strengthening its claim for inclusion of various receipts. Similarly, with the regards to consultant charges paid to Kenya and UEA based entity the assessee has not furnished their tax residency certificate. The matter may be restored to the file of AO to consider various contention of the assessee as raised before Tribunal and to pass order afresh.

6. We have considered the submissions of both the parties and have gone through the orders of lower authorities. We find that Ground No.1 is general and needs no adjudication and is dismissed. Ground No. 2 to 8 relates to exclusions of various receipts from the income of eligible business. We find that before us, the assessee has claimed benefits of four receipts, which includes Insurance receipts, penalty on vendors, provisions for doubtful debts and provision for advance to sundry creditors. The AO disallowed the claim of assessee that similar receipts were not included in the eligible profit of section 80IC in earlier years. The ld CIT(A) confirmed the action of AO. We find that the assessee claimed that Insurance claim represents transit insurance claimed from the customers as per purchase order. We find that such proceeds are received against the loss or damage of operational assets and directly related with the manufacturing process, which is eligible for Section 80-IC deduction, as has been held in the landmark decision of Supreme Court in Meghalaya Steels Ltd. (supra), that operational subsidies (including insurance, power, interest, and transport subsidies) serve to reimburse the cost of manufacturing/selling. Thus, they directly reduce manufacturing costs and form part of the “profits and gains derived from” the industrial undertaking. Hence, this receipt is allowed to be include in the eligible receipt. So far as provisions for doubtful debts and sundry creditors are concern, we find that similar receipts were allowed by ld CIT(A) in appeal for AY 2012-13.

7. Otherwise on considering the contention of the parties, we are of the view that in case a provision for doubtful debts made in an earlier year is credited back, or if a bad debt previously written off (which reduced profits of the 80-IC unit in the past) is recovered, it retains its original character. Because the original trade debt arose directly from the manufacturing/sales operations of the eligible undertaking, the recovery/reversal has a first-degree direct nexus with the business activities and forms part of eligible profits under Section 80-IC.Similarly, sundry creditors or trade liabilities written back under Section 41(1) as income are eligible for deduction under Section 80IC. As the sundry creditors represent unpaid trade liabilities incurred directly for raw materials, operational expenses, or manufacturing costs of the eligible unit. When these liabilities are written back, they represent a reduction in operational expenses previously claimed by the eligible undertaking.

8. As far as penalties levied on vendors for contractual breaches are concerned, in our view it is completely unrelated to the direct manufacturing or operational process and is not eligible for deduction under section 80IC. Thus, these grounds of appeal are partly allowed.

9. Ground No. 9 to 11 relates to disallowance consultancy fee paid to foreign entity for the want of TDS. We find that AO disallowed such consultancy fee on the ground that the assessee filed to produce tax residence certificate of the receipt companies. The ld CIT(A) confirmed the action of AO. Before us, the ld AR of the assessee vehemently argued that obligation of withholding tax under section 195 arise only to sums changeable to tax in India and relied on the decision of Hon’ble Apex Court in G.E Technology Centre (P.) Ltd. (supra). It was also contention of the ld AR of the assessee Mississippi Star Trading LLC, UAE, do not have permanent establishment in India. Further, India-UAE DTAA does not have separate Article taxing for technical service. In absence of specific Article in treaty, thus it may fall under business profit under Artcle-7 and that business profit is taxable in India only where the enterprises has permanent establishment in India. We find merit in the submissions of ld AR of the assessee that business profit of receipt is taxable in India under Artcle-7 of India UAE only where the enterprises has permanent establishment in India, hence, the assessee has no obligation to make TDS on consultancy fee paid to Mississippi Star Trading LLC, UAE.

10. Similarly, for Kenya based entity i.e AL-Kemia (EA) the ld AR of the assessee also contended that as per Article -7 of India-Kenya DTAA only such profit where the Kenyan enterprises carries on business in India through PE situated in India and only to that extent attributable to that PE and in absence of PE in India, payment to Kenya bases entity is not chargeable to tax in India, hence, the assessee has no obligation to make TDS. Thus, in view of the above factual and legal position, the assessee succeeded on ground No. 9 to 11.

11. In the result, the appeal of the assessee is partly allowed.