2010 (11) TMI 840 - AT - Income Tax

Tax Tribunal affirms business income treatment, rejects technical services tax, and dismisses revenue appeals.

Deputy Director of Income-tax (IT), 2 (1), Mumbai Versus Samsung Engg. Co. Ltd.

The Tribunal upheld the CIT(A)'s decisions on all grounds, confirming that interest and insurance income should be treated as business income, employee ... Interest income - taxable under the head ''income from business''- HELD THAT:- We find that it is not in dispute that the assessee had to invest funds in fixed deposits and offered them as margin towards obtaining the letters of credit and other guarantees for various projects. In the case of Lok Holdings[2008 (1) TMI 365 - BOMBAY HIGH COURT] held that money received by a property developer from prospective purchases during the progress of construction and where such funds were deposited by an assessee with the bank, interest earned on such deposits was held to have arisen out of business activity and, therefore, the same had to be construed as income from business. In view of this, we are of the view that the order of CIT(A) holding that the interest income is income from business has to be upheld and dismiss ground in the appeals. claims in respect of general administrative expenses incurred by the foreign head office and foreign companies operating through branches in India - HELD THAT:- In this regard the assessee had field time sheet, on daily basis for each employee in the organization and have recorded the man hours on daily basis through ERP software.The time spent on the Indian Projects are properly segregated. The same have been-verified by the auditors and certified. In the remand report the AO has not found fault with the same. In such circumstances we are of the view that the findings of the CIT(A) have to be accepted. Once it is held that the disputed expenses are directly related to the Indian Project then the provisions of section 44C will not come into operation. In this view of the matter, we do not find any infirmity in the order of the CIT(A) and Ground No. 2 of the revenue in both the appeals are dismissed. services provided by Samsung Corporation is not technical in nature and hence, the fees received cannot be taxed in India in absence of PE in India - HELD THAT:- Admittedly the payments were made by the assessee to Samsung Engineers through the head office outside India and since the services were also rendered outside India no income cart be said to accrue or arise in India and, therefore, the payments in question are not chargeable to tax in India. In these circumstances’ there was no obligation on the part of the assessee to deduct tax at source. Consequently, the provision of section 40(a)( i) were not applicable. In the circumstances the disallowance made by the AO was rightly deleted by the CIT(A). We do not find any ground to interfere in the findings of the CIT(A). Consequently, the ground raised in both the appeals are dismissed. Barauni is a well established township - clauses of Rule 6 DD are not applicable - HELD THAT:- The CBDT in Circular No. 220 dated 31-5-1977, has clarified that certain cash payments made in certain circumstances will not be hit by the provisions of section 40-A(3). Therefore, we are of the view that the disallowance u/s 40A(3) deleted by the CIT(A) was right and deserves to be confirmed and the Department’s appeal on this point also is dismissed. Issues Involved:1. Classification of interest income and insurance income.2. Applicability of Section 44C for employee remuneration and welfare expenses.3. Taxability of fees paid to Samsung Corporation for procurement services.4. Disallowance under Section 40A(3) for cash payments exceeding Rs. 20,000.Issue-wise Analysis:1. Classification of Interest Income and Insurance Income:The core issue was whether the interest income and insurance income should be classified as 'business income' or 'income from other sources.' The assessee, a company incorporated in Korea, engaged in turnkey projects in India, argued that the interest income was directly related to the business operations in India, as it was earned from fixed deposits used as margins for obtaining letters of credit and guarantees for various projects. The CIT(A) upheld this view, stating that the income was inextricably connected with the Project Office in India and should be treated as business income. The Tribunal supported this by referencing judicial precedents, including CIT v. Indo Swiss Jewels Ltd. and CIT v. Koshika Telecom Ltd., which held that interest income arising from business activities should be classified as business income. Consequently, the Tribunal dismissed the revenue's appeal on this ground.2. Applicability of Section 44C for Employee Remuneration and Welfare Expenses:The dispute here was whether the expenses on employee remuneration and welfare incurred in Korea should be restricted under Section 44C of the Income-tax Act, 1961. The assessee claimed these expenses as directly related to the Indian project and not as general administrative overheads. The CIT(A) accepted this view, supported by detailed time sheets and auditor certifications. The Tribunal upheld this decision, noting that Section 44C applies only to general administrative expenses and not to expenses incurred exclusively for the Indian project. The Tribunal referenced the Bombay High Court's decision in CIT v. Emirates Commercial Bank Ltd. and ITAT Mumbai's decision in Bank of America v. Dy. CIT, confirming that the restrictions of Section 44C do not apply to direct project expenses. Thus, the Tribunal dismissed the revenue's appeal on this ground as well.3. Taxability of Fees Paid to Samsung Corporation for Procurement Services:The issue was whether the fees paid to Samsung Corporation for procurement services should be taxed as fees for technical services in India. The assessee argued that the services were purely commercial and involved no technical, managerial, or consultancy services. The CIT(A) agreed, citing the ITAT Mumbai's decision in Linde AG v. ITO, which held that procurement services do not constitute technical services. Additionally, since Samsung Corporation did not have a PE in India and the services were rendered outside India, the payments were not chargeable to tax in India. The Tribunal upheld this view, dismissing the revenue's appeal on this ground.4. Disallowance under Section 40A(3) for Cash Payments Exceeding Rs. 20,000:The issue was whether cash payments exceeding Rs. 20,000 made by the assessee should be disallowed under Section 40A(3). The assessee argued that the payments were made in remote areas with no banking facilities, and the employees were temporarily posted without access to bank accounts. The CIT(A) accepted this explanation, applying clauses (h) and (j) of Rule 6DD, which provide exceptions for such circumstances. The Tribunal upheld this decision, referencing CBDT Circular No. 220 and various judicial precedents, including CIT v. Brij Mohan Singh Co. and Goenka Agencies v. CIT, which clarified that the objective of Section 40A(3) is to curb black money, not to impede legitimate business transactions. Consequently, the Tribunal dismissed the revenue's appeal on this ground.Conclusion:In conclusion, the Tribunal upheld the CIT(A)'s decisions on all grounds, confirming that the interest and insurance income should be treated as business income, the expenses on employee remuneration and welfare are not restricted by Section 44C, the fees paid to Samsung Corporation are not taxable as technical services, and the cash payments exceeding Rs. 20,000 are not disallowable under Section 40A(3). All appeals by the revenue were dismissed.