2013 (11) TMI 474 - AT - Income Tax

Tribunal rules in favor of assessee, directing AO to delete disallowances, allow expenses as revenue.

The Tribunal allowed the assessee's appeals for AY 2007-08 and partly for AY 2008-09, while dismissing the Revenue's appeal for AY 2008-09. The Tribunal ... Rectification of mistake u/s 154 - Disallowance of expenditure u/s 40(a)(ia) of the Income Tax Act - Commission was paid to non-residents agents for rendering services in respect of procuring export orders from various countries - Assessee paid commission at 5% on FOB value of the shipment of the product to the foreign agents and is also not in dispute that the agent is not authorized to market the products to any third party and it does not have any business connection in India - Their services are also not utilized in India – Held that:- Following the decision in the case of CIT v. EON Technology[2011 (11) TMI 20 - DELHI HIGH COURT], and also the Coordinate bench decision in the case of Armayesh Global v. ACIT [2012 (5) TMI 124 - ITAT Mumbai], it has been held that the income of the non resident cannot be considered as accrued or arisen or deemed to accrue or arise in India as the services of the said agents were rendered/utilized outside India and the commission was also payable/paid outside India - In the absence of permanent establishment in India, the income of the said agents cannot be subjected to tax in India and hence assessee was not liable to deduct tax on payments made to the said agents. Therefore, provisions of section 40(a)(ia) have no application on the given facts. - Decided in favor of assessee. The ITAT, Mumbai in the case of DCIT vs. Ardeshi B. Cursetjee & Sons Ltd [2008 (3) TMI 500 - ITAT MUMBAI] has held that commission paid to nonresident agents outside India for services rendered outside India were not chargeable to tax in India. In the facts and circumstances, commission paid by appellant to the non resident commission agent was not chargeable under the provisions of I.T. Act. Disallowance of Ocean Freight Expenses paid by the assessee company to a non resident shipping company M/s Transmode Overseas Partners, Germany by invoking section 40(a)(ia) of the Act – Held that:- Section 194C deals with work contracts including carriage of goods and passengers by any mode of transport other than railways. This section applies to payments made by a person referred to in clauses (a) to (u) of sub-section (1) to any 'resident'. (termed as contractor). It is clear from the section that the area of operation of TDS is confined to payments made to any 'resident'. On the other hand, section 172 operates in the area of computation of profits from shipping business of non-resident ship-owner or characterer, he steps into the shoes of the principal. Accordingly, provisions of section 172 shall apply and those of Sections 194 C and 195 will not apply - Assessee company is not required to deduct tax at source from the ocean freight paid by it of Rs.58,82,475/- to M/s. Transmode Overseas Partners, Germany – Decided in favor of Assessee. Disallowance of an amount of Rs.6.00 lakhs claimed as legal expenses – Held that:- Reliance has been placed upon the judgment in the case of DCIT vs. Mahindra Realty & Inf. Developers Ltd [2013 (9) TMI 113 - ITAT MUMBAI], wherein it was held that even though the expenditure may be of enduring nature, the same cannot be considered as capital in nature always unless an asset was created. Expenditure incurred on website development is although enduring in nature, the intent and purposes behind the development is not to create an asset but only to provide a means for disseminating the information about the assessee among its clients – Similar views are expressed in the case of CIT vs. Indian Visit.com P. Ltd.[2008 (9) TMI 8 - DELHI HIGH COURT], wherein it has been held that Just because a particular expenditure may result in an enduring benefit would not make such an expenditure of a capital nature. What is to be seen is what is the real intent and purpose of the expenditure and as to whether there is any accretion to the fixed capital of the assessee - In the case of expenditure on a website, there is no change in the fixed capital of the assessee. Although the website may provide an enduring benefit to an assessee, the intent and purpose behind development of a website is not to create an asset but only to provide a means for disseminating the information about the assessee – In the instant case, it has been held the ratio of the above decisions that expenditure is correctly allowed as revenue expenditure – Decided in favor of Assessee. Disallowance of interest expenses of.3,18,600 - Assessee has paid interest and financial charges of Rs. 10,104,198/. It is also noticed that assessee has made investment amounting to Rs. 20,05,600/ and gave loan of Rs. 6,50,000/ to M/s Alpanso Netsecure Pvt. Ltd being associate company – Held that:- No part of the interest could be disallowed on the reason that assessee had advanced interest free advances to its sister concern. It is also a fact that assessee has invested money in a sister concern and if any disallowance is required the same has to be considered under section 14A which is the case not here as assessee has not earned any exempt income. Since assessee’s available capital is more than the borrowed funds, presumption as decided by the Hon'ble jurisdictional High Court in the case of Reliance Utilities and Power Ltd [2009 (1) TMI 4 - HIGH COURT BOMBAY] equally apply - Amount of Rs.3,18,600 cannot be disallowed as it has no nexus to the other finance charges claimed by assessee as business expenditure – Decided in favor of Assessee. Issues Involved:1. Rectification under section 154 of the Income Tax Act.2. Disallowance of commission payments under section 40(a)(i).3. Disallowance of Ocean Freight expenses under section 40(a)(i).4. Disallowance of legal and professional expenses.5. Disallowance of interest expenses.6. Application of section 14A.Issue-wise Detailed Analysis:1. Rectification under section 154 of the Income Tax Act:The assessee's grounds related to rectification under section 154 were not pressed as the Assessing Officer (AO) had already rectified the order. Therefore, Ground Nos. 1, 2, 7, and 8 were not considered further.2. Disallowance of commission payments under section 40(a)(i):The assessee paid commission to non-resident agents for services provided outside India without deducting tax at source. The AO disallowed these payments under section 40(a)(i). However, the Tribunal held that since the non-resident agents did not have any business connection or permanent establishment in India, and their services were rendered and utilized outside India, the income was not taxable in India. Consequently, the provisions of section 195 did not apply, and the disallowance under section 40(a)(i) was not warranted. The Tribunal relied on the Bombay High Court's decision in BASF (India) Ltd. and the Delhi High Court's decision in CIT vs. EON Technologies. The Tribunal upheld the CIT(A)'s decision for AY 2008-09 and allowed the assessee's appeal for AY 2007-08, directing the AO to delete the addition.3. Disallowance of Ocean Freight expenses under section 40(a)(i):The AO disallowed Ocean Freight expenses paid to non-resident shipping companies under section 40(a)(i) for non-deduction of tax at source. The Tribunal noted that section 172, a self-contained code for the levy and recovery of tax on shipping business of non-residents, applied to these payments. According to CBDT Circular No. 723, the provisions of sections 194C and 195 do not apply to such payments. The Tribunal upheld the CIT(A)'s decision for AY 2008-09, which followed the Board Circular and allowed the assessee's contentions. The Tribunal allowed the assessee's ground for AY 2007-08, directing the AO to delete the disallowance.4. Disallowance of legal and professional expenses:The AO disallowed legal and professional expenses, considering them capital in nature. The Tribunal examined the nature of the expenses and concluded that they were revenue in nature, as they did not result in the creation of an asset. The Tribunal relied on the decision in DCIT vs. Mahindra Realty & Inf. Developers Ltd and CIT vs. Raychem RPG Ltd. The Tribunal directed the AO to allow the expenditure as revenue in nature and withdraw any depreciation allowed.5. Disallowance of interest expenses:The AO disallowed proportionate interest expenses related to investments and loans given to an associate company. The Tribunal noted that the assessee had sufficient interest-free funds in the form of capital and reserves, which were more than the borrowed funds. Relying on the Bombay High Court's decision in Reliance Utilities and Power Ltd., the Tribunal held that no part of the interest could be disallowed. The Tribunal allowed the assessee's ground and directed the AO to delete the disallowance.6. Application of section 14A:The CIT(A) directed the AO to invoke Rule 8D and make a suitable disallowance under section 14A without examining the facts. The Tribunal noted that the AO had not invoked section 14A, nor was there any evidence of exempt income claimed by the assessee. The Tribunal restored the issue to the AO for fresh adjudication, directing the AO to examine the facts, give the assessee an opportunity to present its case, and determine any disallowance under section 14A if warranted.Conclusion:The Tribunal allowed the assessee's appeals for AY 2007-08 and partly for AY 2008-09, while dismissing the Revenue's appeal for AY 2008-09. The Tribunal directed the AO to delete the disallowances made under sections 40(a)(i) and 14A, and to allow the legal and professional expenses as revenue in nature. The Tribunal also directed the AO to re-examine the application of section 14A and make a fresh determination.