ESAB India Ltd. vs DCIT: ITAT Chennai Rules One-Time Contractor Settlement Fully Deductible Under Section 37

Case Overview

Court: Income Tax Appellate Tribunal, Chennai
Case: ESAB India Ltd. Vs DCIT
Assessment Year: 2017-18
Order Date: 19th May 2026

The ITAT Chennai adjudicated cross appeals filed by both the assessee and the Revenue, challenging the order passed by the Commissioner of Income Tax (Appeals)/National Faceless Appeal Centre (NFAC), Delhi under Section 250 of the Income Tax Act, 1961 for AY 2017-18. The disputes centered around three distinct issues: (i) deductibility of one-time settlement payments made to contractors, (ii) disallowance under Section 14A read with Rule 8D, and (iii) the applicability of the Double Taxation Avoidance Agreement (DTAA) to Dividend Distribution Tax (DDT) levied under Section 115-O.

Background and Facts of the Case

ESAB India Ltd. is a company engaged in the manufacture of welding electrodes and related components. For AY 2017-18, the assessee filed its return of income on 21.11.2022, declaring total income of Rs. 32,64,25,800/-. The case was picked up for scrutiny, and statutory notices were duly served upon the assessee.

During the course of assessment proceedings, the Assessing Officer made the following additions:

  1. Disallowance of one-time settlement paid to contractors — Rs. 5,43,00,000/-
  2. Disallowance under Section 14A read with Rule 8D — Rs. 1,45,02,961/-

On appeal, the CIT(A) granted only partial relief to the assessee, permitting a deduction of Rs. 1,08,60,000/- (i.e., one-fifth of Rs. 5.43 crores) in respect of the contractor settlement. Both parties — the assessee and the Revenue — were aggrieved by different aspects of the CIT(A)'s order and preferred cross appeals before the Tribunal.

Issue 1: Deductibility of One-Time Settlement Payments to Contractors

Grounds Raised

The assessee challenged the CIT(A)'s direction to restrict the deduction to one-fifth of the total expenditure and amortise the balance over five years. The Revenue, on the other hand, argued that the expenditure itself was capital in nature and not deductible at all.

Assessing Officer's Position

The Assessing Officer observed that the assessee had made payments amounting to Rs. 5.43 crores to contractors as a one-time settlement in connection with the restructuring of its Kolkata operations at Taratala. The Assessing Officer refused the deduction on two grounds:

  • There was no employer-employee relationship between the assessee and the workers employed by those contractors.
  • The expenditure did not generate any corresponding revenue for the assessee, and therefore the payment was capital in nature.

CIT(A)'s Findings

The CIT(A) took a view contrary to the Assessing Officer on the nature of the expenditure. It accepted that the payments were revenue in nature and were made wholly and exclusively for business purposes. However, drawing an analogy with the treatment of payments made to the assessee's own employees under the Voluntary Separation Scheme — which were governed by Section 35DDA of the Income Tax Act, 1961 and therefore allowable at one-fifth per year — the CIT(A) directed that the contractor settlement should also be amortised over five years, permitting a deduction of only Rs. 1,08,60,000/- (one-fifth of Rs. 5.43 crores) in the year under consideration.

Arguments Before the Tribunal

On behalf of the assessee, it was contended that once the CIT(A) had conclusively held the expenditure to be revenue in nature and incurred for business purposes, there was no legal basis to restrict the deduction to one-fifth. The Authorised Representative drew the Tribunal's attention to: