2014 (10) TMI 700 - AT - Income Tax

Tribunal Upholds CIT(A) Decisions, Rejects Revenue Appeals

The Tribunal upheld the CIT(A)'s decisions on all issues, rejecting the Revenue's appeals and allowing the assessee's appeal for statistical purposes. The ... Allowability of commission to non-resident associated enterprise under arm's length principle - taxability in India of export/foreign-agent commission and applicability of section 9(1)(vii) / 'fees for technical services' - obligation to deduct tax at source under section 195 and retrospective Explanation 2 to section 195(1) - deduction of keyman/'top-up' insurance premium as business expenditure under section 37 - treatment of payments through CENVAT/PLA for purpose of section 43B - allowability of commission on domestic sales and proof of services (section 37) - salary/commission to managing director - arm's length / Companies Act ceiling - distinction between revenue and capital expenditure for repairs and civil works - application of Rule 8D / section 14A disallowance and scope of retrospective operationAllowability of commission to non-resident associated enterprise under arm's length principle - taxability in India of export/foreign-agent commission and applicability of section 9(1)(vii) / 'fees for technical services' - obligation to deduct tax at source under section 195 and retrospective Explanation 2 to section 195(1) - Deletion of disallowance of commission paid to M/s Lohia Europe GmbH (LEG) upheld; no TDS obligation in view of facts and applicable circular/decisions. - HELD THAT: - The Tribunal agreed with the CIT(A) that LEG acted as sales representative/ coordinator and the agreement and contemporaneous e-mails evidenced real services. On arm's length, comparable rates (independent agents avg. 5.07% and local sales agents 6.17%) established that LEG's 5% commission was within ALP and AO's surcharge substitution was not justified. On taxability under section 9(1)(vii), the authorities found the services to be sales/representation and not managerial/FTS; the Board Circular No.786/2000 (reciting Circular No.23/1969) supports that where non resident agent operates outside India no part of his income arises in India and s.195 TDS is not attracted. The Tribunal held Explanation 2 to s.195(1) (retrospective) merely broadens the class of persons who are deductors but does not independently render non taxable receipts taxable; since LEG's commission was not taxable in India on these facts, no TDS was required and s.40(a)(ia) addition could not be sustained. Reliance by Revenue on veil lifting cases was rejected on facts. The same reasoning was applied consistently for assessment years 2006 07, 2007 08 and 2008 09. [Paras 4, 9, 10]Addition for commission to LEG deleted; no interference with CIT(A)'s order.Deduction of keyman/'top-up' insurance premium as business expenditure under section 37 - Top up premiums paid to increase sum assured under keyman policies paid before IRDA prohibition were allowable as business expenditure; addition disallowed. - HELD THAT: - Policies were issued on 28/02/2005 before IRDA's 27/04/2005 circular restricting keyman cover to term policies. The top up premium in question was paid and received on 31/12/2005, prior to IRDA communications of 30/01/2006 and 30/06/2006 which specifically barred increasing sum assured by top up. The Tribunal accepted CIT(A)'s finding that the IRDA circulars do not retrospectively invalidate payments or permit disallowance where top up was effected before the later prohibitory communications; therefore AO's disallowance was not sustainable. [Paras 5, 16, 17]Addition on account of top up keyman premium deleted.Treatment of payments through CENVAT/PLA for purpose of section 43B - Payment through CENVAT deposit account treated as actual payment for s.43B - disallowance deleted. - HELD THAT: - CIT(A) found and the Tribunal agreed that the amount was paid through the CENVAT deposit account before the due date of filing return, constituting actual payment. The AO's contention that CENVAT deposit is not an actual payment was not supported by consistent treatment of such payments and AO had not added all such payments; therefore the deletion was warranted. [Paras 18, 20]Disallowance under s.43B rejected and deduction allowed.Allowability of commission on domestic sales and proof of services (section 37) - Deletions of additions for commission on domestic sales (including payment to individual intermediary) upheld where contemporaneous confirmations and buyers' letters established services. - HELD THAT: - CIT(A) examined bills, correspondence and direct replies from the payee and purchasers under s.133(6); these demonstrated that services were rendered and that commission accrued in the year in which sales occurred. There is no statutory requirement for a written agreement and AO produced no contrary evidence; hence the Tribunal declined to disturb deletion of the addition. [Paras 8, 23]Additions for domestic commissions deleted.Salary/commission to managing director - arm's length / Companies Act ceiling - Deletion of addition on account of commission/salary to Managing Director sustained; no material to show excessiveness. - HELD THAT: - CIT(A) found that remuneration structure (fixed pay plus commission @1% of profit) was authorised by the shareholders' resolution and within Companies Act limits (11% ceiling). AO produced no comparable evidence to show excessiveness. Tribunal found no reason to interfere with CIT(A)'s conclusion. [Paras 26]Addition for MD's commission disallowed (i.e., deletion sustained).Distinction between revenue and capital expenditure for repairs and civil works - Expenditure on new aluminium partitions/doors and waterproofing held to be revenue (current repairs); disallowance deleted and depreciation withdrawn accordingly. - HELD THAT: - CIT(A) concluded and Tribunal upheld that works were partitions and waterproofing on existing structures and did not create a new asset or increase capacity or efficiency; therefore the amounts constituted revenue expenditure. Judicial authorities cited by AO were inapplicable on facts (no replacement of whole roof or machinery parts). [Paras 11, 29]Expenditure treated as revenue; addition rejected.Application of Rule 8D / section 14A disallowance and scope of retrospective operation - For AY 2007 08, Rule 8D not applicable as between the competing precedents; matter remitted to Assessing Officer for fresh computation of reasonable disallowance in light of binding High Court authority. - HELD THAT: - The Tribunal accepted that Rule 8D (inserted 24.03.2008) is held by the Bombay High Court in Godrej to be applicable from AY 2008 09; for AY 2007 08 a reasonable disallowance (if any) must be made. Since AO and CIT(A) applied Rule 8D mechanically, the Tribunal set aside CIT(A)'s order and remitted the issue to the AO to determine a fresh, reasoned disallowance consistent with the relevant precedent. [Paras 51, 53]Matter restored to Assessing Officer for fresh decision; assessee's appeal allowed for statistical purposes.Final Conclusion: The Tribunal dismissed all Revenue appeals for assessment years 2006 07 to 2010 11 and sustained the deletions made by the CIT(A) on the principal issues (commission to LEG and domestic agents, keyman top up premiums, CENVAT payments, MD commission and repair expenditures). The Rule 8D / s.14A issue for AY 2007 08 was remitted to the Assessing Officer for fresh adjudication; the assessee's appeal for AY 2007 08 was allowed for statistical purposes. Issues Involved:1. Deletion of addition related to commission payments to M/s Lohia Europe GmbH (LEG).2. Deletion of addition related to commission payments to the Managing Director.3. Deletion of addition related to commission payments to Industrial Marketing Corporation.4. Deletion of addition related to Keyman Insurance Premium.5. Deletion of addition related to disallowance under Section 43B.6. Deletion of addition related to disallowance of commission on domestic sales.7. Deletion of addition related to disallowance under Section 35(2) for R&D expenditure.8. Deletion of addition related to disallowance of exhibition expenses.9. Deletion of addition related to disallowance under Section 14A.10. Deletion of addition related to disallowance of staff welfare, telephone, and vehicle running expenses.Issue-wise Detailed Analysis:1. Deletion of Addition Related to Commission Payments to M/s Lohia Europe GmbH (LEG):The Revenue contended that the payment of Rs. 1,05,70,057 to LEG was disallowed due to non-deduction of TDS under Section 195 and that it was a sham transaction. The CIT(A) deleted the addition, referencing Board's Circular No. 786 and stating that the services rendered by LEG were not managerial services falling under 'Fees for Technical Services' as per Section 9(1)(vii). The Tribunal upheld the CIT(A)'s decision, noting that the commission was at arm's length and that the retrospective amendments to Section 9 and Section 195 did not apply as the services were rendered outside India.2. Deletion of Addition Related to Commission Payments to the Managing Director:The Revenue argued that the commission paid to the Managing Director was excessive. The CIT(A) found that the commission was in line with the resolution passed in the Annual General Meeting and within the limits prescribed by the Companies Act. The Tribunal agreed, noting that the Assessing Officer had not provided evidence to show that the payment was excessive.3. Deletion of Addition Related to Commission Payments to Industrial Marketing Corporation:The Revenue contended that the commission paid to Industrial Marketing Corporation was not justified as DLW Varanasi is a government organization where no middleman is required. The CIT(A) found that the services were rendered, as evidenced by direct confirmations from the payee and the purchaser. The Tribunal upheld this decision, noting that the Assessing Officer had not disproven the services rendered.4. Deletion of Addition Related to Keyman Insurance Premium:The Assessing Officer disallowed the top-up premium on Keyman Insurance policies, citing IRDA circulars. The CIT(A) found that the top-up premium was paid before the relevant IRDA circulars came into effect and hence was allowable. The Tribunal upheld this finding, noting that the payment was made before the circulars barring such top-ups were issued.5. Deletion of Addition Related to Disallowance Under Section 43B:The Revenue argued that the payment of Rs. 35,44,195 was not actual payment but an adjustment in the CENVAT account. The CIT(A) found that the payment was made through the CENVAT deposit account before the due date of filing the return. The Tribunal agreed, stating that payment through CENVAT is an actual payment.6. Deletion of Addition Related to Disallowance of Commission on Domestic Sales:The Assessing Officer disallowed Rs. 15,00,000 on the basis that there was no evidence of services rendered. The CIT(A) found that the services were rendered, as evidenced by direct confirmations from the payee and the purchaser. The Tribunal upheld this decision, noting that the Assessing Officer had not disproven the services rendered.7. Deletion of Addition Related to Disallowance Under Section 35(2) for R&D Expenditure:The Assessing Officer disallowed various expenditures related to R&D, alleging no new construction. The CIT(A) found that the expenditures were based on a scientific method of allocation and were justified. The Tribunal upheld this decision, noting that the Assessing Officer had not provided contrary evidence.8. Deletion of Addition Related to Disallowance of Exhibition Expenses:The Assessing Officer disallowed exhibition expenses, claiming they were not related to the relevant assessment year. The CIT(A) found that the expenses crystallized in the relevant year and were allowable. The Tribunal upheld this decision, noting that the TDS was deducted in the relevant year.9. Deletion of Addition Related to Disallowance Under Section 14A:The Assessing Officer made a disallowance under Section 14A read with Rule 8D. The CIT(A) found that investments in shares of foreign companies should not be included in the average value of investments for disallowance purposes. The Tribunal upheld this decision, noting that the dividend from foreign companies is taxable.10. Deletion of Addition Related to Disallowance of Staff Welfare, Telephone, and Vehicle Running Expenses:The Assessing Officer made ad hoc disallowances under these heads. The CIT(A) reduced the disallowances, finding them to be excessive. The Tribunal upheld this decision, noting that no specific instances of non-verifiable expenses were provided by the Assessing Officer.Conclusion:The Tribunal upheld the CIT(A)'s decisions on all issues, rejecting the Revenue's appeals and allowing the assessee's appeal for statistical purposes. The Tribunal emphasized the importance of evidence and reasonableness in making and justifying disallowances.