2019 (3) TMI 1882 - AT - Income Tax

Assessee's Appeal Partly Allowed with Disallowances Vacated and Payments to Foreign Entities Analyzed

Sulphur Mills Ltd. Versus Addl. CIT Range-8 (3) Mumbai, Vice Versa

The assessee's appeal was partly allowed, with the disallowance of late payment of employees' contribution to PF/ESIC and advertisement expenses being ... Late payment of Employees's Contribution to PF / ESIC u/s 36(l)(va) beyond the grace period - Addition u/s 36(1)(va) r.w.s. 2(24)(x) of the I.T Act on account of late deposit of employees contribution to PF/ESI - HELD THAT:- We find that though said payments were not made within the stipulated time period as envisaged in the respective acts, however, the same were admittedly deposited before the “due date” of filing of the return of income of the assessee for the year under consideration viz. A.Y 2011-12. As deliberated on the issue before us and are of the considered view that as held by the Hon'ble High Court of Bombay in the case of Commissioner of Incometax (Central), Pune Vs. Ghatge Patil Transports Ltd. [2014 (10) TMI 402 - BOMBAY HIGH COURT] and CIT Vs. Hindustan Organics Chemicals Ltd. [2014 (7) TMI 477 - BOMBAY HIGH COURT], both the employer and the employees contributions to the various employees welfare funds are covered under Section 43B of the I.T Act. In our considered view, as the employees contribution towards the Provident Fund and Employees State Insurance as is discernible from the assessment order, were deposited by the assessee prior to the 'due date' of filing of its return of income for the year under consideration, therefore, the same was not liable to be disallowed. We thus in terms of our aforesaid observations vacate the disallowance sustained by the CIT(A). The Ground of appeal No. 1 raised by the assessee is allowed. TDS u/s 194C - disallowance u/s 40(a)(ia) - payments of advertisement and sales promotion expenses - HELD THAT:- We find that though the supplier party i.e. M/s. Iktek Communication had provided the designed art-work and printed leaflets as per the specifications and requirements of the assessee, however, there is nothing borne from the records or had been averred before us, which would prove that the aforementioned party had supplied the product by using any material that was purchased from the assessee. Admittedly, the assessee had not provided any material to the said supplier party. Rather, the “Invoices‟ against which the aforesaid designed art-work was supplied on CD‟s to the assessee clearly reveals that the supplier had charged VAT on the full value of the aforesaid transactions. In our considered view as per the CBDT Circular No. 681, dated 08.03.1994 r.w Circular No. 715, dated 08.08.1995 and Circular No. 13 of 2006, dated 13.12.2006, it can safely be concluded that the aforesaid designed art-work and printed leaflets were supplied to the assessee pursuant to a contract for sale. Thus assessee was not obligated to deduct any tax at source in respect of the aforesaid transaction under consideration, therefore, the same could not have been disallowed under Sec. 40(a)(ia). TDS u/s 195 - sustainability of the disallowances made by the A.O/CIT(A) u/s. 40(a)(i) of the payments made by the assessee to various foreign concerns - HELD THAT:- We find that the assessee had admittedly made the payment to the aforementioned foreign entity for the services rendered by the latter for designing of seminar related material for an exhibition at Shanghai. In our considered view, the said payment clearly falls within sweep of FTS u/s. 9(i)(vii) of the I.T Act and Article 13 of the India-China DTAA. We thus are of the considered view that as the assessee who was liable for deduction of tax at source u/s. 195 on the aforementioned payment made to the foreign entity, had failed to do so, therefore, the said amount was rightly disallowed by the lower authorities u/s. 40(a)(i) of the I.T Act. We thus not finding any infirmity in the order of the CIT(A) who had sustained the disallowance made by the A.O u/s. 40(a)(i) of the I.T Act, uphold his order to the said extent. Addition on account of interest income not accounted in the financials of the assessee on the basis of Form 26AS - HELD THAT:- It is the claim of the assessee that in case the interest income from Bank of India is to be considered, then the credit for the corresponding TDS short claimed by the assessee in its return of income may also be allowed. The ld. A.R in order to fortify her aforesaid contention had taken us through the relevant extracts of Form 26AS and the TDS certificates (hard copies) issued by the bank. After giving a thoughtful consideration to the issue before us, we are of the considered view that the matter in all fairness requires to be restored to the file of the A.O. We thus set aside the matter to the file of the A.O, who shall during the course of the set aside proceeding afford an opportunity to the assessee to reconcile the income and TDS shown in the its return of income, as against that reflected in its Form 26AS. MAT computation u/s 115JB - working of the “book profit” by the A.O/CIT(A) for computing its tax liability under the MAT provisions envisaged u/s. 115JB - HELD THAT:- As per Explanation 1(i) to section 115JB, the “amount or amounts set aside as provision for diminution in the value of the any asset” if debited in the profit and loss account has to be added to the “net profit‟ shown in the profit & loss account for the year for the purposes of computing the “book profit” u/s. 115JB of the Act. As the provision for bad and doubtful debts debited by the assessee in its profit & loss account is in the nature of a provision leading to diminution in the value of an asset, therefore, the same has to be added to the “net profit‟ while computing the “book profit‟ u/s 115JB of the I.T Act. As pursuant to the amendment to Explanation 1(i) to Sec. 115JB by the Finance (no. 2) Act, 2009 with w.r.e.f. 01.04.2001 any provision leading to diminution in the value of any asset, has to be added to the “book profit‟. We thus finding no infirmity in the order of the CIT(A) who has rightly concluded that the provision for doubtful debts was liable to be added for computing the “book profit” u/s. 115JB of the I.T Act, uphold the same. The Ground of appeal no. 5 is partly allowed in terms of our aforesaid observations. TDS u/s 195 - payments towards legal and professional fees to foreign entities - HELD THAT:- We are persuaded to subscribe to the view taken by the CIT(A) that as the payments made by the assessee for the services rendered by the foreign entities for facilitating registration of the assesses products in their respective countries were in the nature independent personal services and not in the nature of FTS as contemplated in the various DTAA‟s, therefore, in the absence of any PE in India of the said foreign entities, the said respective amounts could not be taxed in India. We thus uphold the view taken by the CIT(A) and conclude that as no obligation was cast upon the assessee to deduct tax at source u/s. 195 while making the payments towards legal and professional fees to the aforementioned concerns, therefore, no disallowance of the said amount was called for u/s. 40(a)(i) of the I.T Act. Disallowance u/s. 40(a)(i) of the license and registration expenses - HELD THAT:- As perused the order of the CIT(A) and find ourselves to be in agreement with him that as the payments made to the services providers were not in lieu of any technical services provided by them, but were for the normal services rendered, therefore, the same did not cast any obligation on the assessee to deduct tax at source in respect of the said amounts under Sec. 195 of the I.T Act. As the payments in the hands of the respective foreign payees were in the nature of their normal business income, which as per Article 7 could not be taxed in India in the absence of their PE in India, therefore, the assessee remained under no obligation to deduct tax a source on the said amounts under Sec. 195 of the IT Act. In our considered view as no infirmity emerges from the order of the CIT(A), therefore, we uphold the same. Payments made by the assessee for the other services viz (i) miscellaneous export expenses and; (ii) advertisement and sales promotion expenses are concerned - HELD THAT:- We find that the CIT(A) had deleted the disallowance made by the A.O u/s. 40(a)(i) in respect of the said amounts by observing that as the said amounts were in the nature of business incomes in the hands of the foreign payees or in the nature of reimbursement of the expenses, therefore, no liability was cast upon the assessee to deduct tax at source in respect of the said amount. We are persuaded to subscribe to the aforesaid view taken by the CIT(A). As nothing has been canvassed before us by the Ld. D.R which could persuade us to conclude that the observations arrived at by the CIT(A) in context of the issue under consideration was either perverse or suffered from any infirmity, therefore, we uphold the view taken by him that no obligation was cast upon the assessee to deduct at source in the respect of aforementioned payments made to the foreign payees. Issues Involved:1. Disallowance of late payment of employees' contribution to PF/ESIC.2. Disallowance of advertisement and sales promotion expenses for non-deduction of TDS.3. Disallowance of payments made to foreign entities under Sec. 40(a)(i).4. Addition on account of interest income not accounted in financials.5. Additions to the book profit for computing MAT under Sec. 115JB.6. Appeal by the revenue on the CIT(A)'s order regarding non-resident payments.Issue-wise Detailed Analysis:1. Disallowance of Late Payment of Employees' Contribution to PF/ESIC:The assessee argued that the payments were made before the due date of filing the return of income, hence not liable for disallowance. The Tribunal referenced the Bombay High Court's judgment in CIT vs. Ghatge Patil Transport Ltd., which held that both employer and employees' contributions are covered under Section 43B if deposited before the due date of filing the return. Consequently, the disallowance of Rs. 9,74,625/- was vacated.2. Disallowance of Advertisement and Sales Promotion Expenses:The assessee contended that payments made to M/s Iktek Communications were for the purchase of designed artwork and printed leaflets, which were not works contracts but purchase transactions. The Tribunal agreed, noting that the supplier charged VAT, indicating a sale transaction. Thus, no TDS was required, and the disallowance of Rs. 1,67,252/- was deleted.3. Disallowance of Payments Made to Foreign Entities Under Sec. 40(a)(i):- Chemical Abstracts Service, USA: The payment for database access was not royalty but for copyrighted material, not requiring TDS under Sec. 195. The Tribunal referenced ITAT Ahmedabad's decision in Cadila Healthcare Ltd. and deleted the disallowance of Rs. 2,22,395/-.- TSGE-DOO, Slovenia: The payment for project work expenses was not FTS but business income, not requiring TDS under Sec. 195. The Tribunal referenced the Delhi High Court's decision in CIT vs. GRUP ISM P. Ltd. and deleted the disallowance of Rs. 1,29,840/-.- Liteam Corporate Image Planning & Design, Shanghai: The payment for designing seminar material was FTS, requiring TDS under Sec. 195. The Tribunal upheld the disallowance of Rs. 4,91,920/-.4. Addition on Account of Interest Income Not Accounted in Financials:The Tribunal directed the AO to reconcile the interest income and TDS as per Form 26AS and the assessee's books. The matter was remanded to the AO for reconsideration.5. Additions to the Book Profit for Computing MAT Under Sec. 115JB:- Disallowance under Sec. 14A: The Tribunal agreed that disallowance under Sec. 14A should not be considered while computing book profit under Sec. 115JB, referencing ITAT Special Bench's decision in ACIT vs. Vireet Investment Pvt. Ltd.- Provision for Doubtful Debts: The Tribunal upheld the addition, noting that provisions for diminution in asset value must be added to book profit under Explanation 1(i) to Sec. 115JB, referencing the amendment by the Finance (No. 2) Act, 2009.6. Appeal by the Revenue on the CIT(A)'s Order Regarding Non-Resident Payments:The CIT(A) had vacated disallowances made by the AO under Sec. 40(a)(i) for payments to non-resident entities, concluding they were not FTS but business income, not requiring TDS under Sec. 195. The Tribunal upheld the CIT(A)'s decision, agreeing that the services were independent personal services or normal business income, not liable for TDS in the absence of a PE in India.Conclusion:The appeal of the assessee was partly allowed, and the appeal of the revenue was dismissed. The Tribunal provided relief on several counts, especially concerning the characterization of payments to foreign entities and the applicability of TDS provisions.