2017 (1) TMI 1751 - AT - Income Tax

Tribunal dismisses revenue's appeal, partially allows assessee's appeal, and directs re-adjudication on compensation issue.

Mahanagar Gas Ltd. Versus The Addl. Commissioner of Income-tax 10 (1), Mumbai AND The Asstt. Commissioner of Income-tax-14 (2) (1), Mumbai Versus Mahanagar Gas Ltd.

The Tribunal dismissed the revenue's appeal regarding the deletion of Rs. 1,68,49,000 under section 40(a)(ia) of the Income Tax Act, 1961. The second ... TDS u/s 194J - Addition u/s 40(a)(ia) - no TDS has been deduced on secondment charges under the head “Personnel cost” - HELD THAT:- As transaction charges paid by the assessee to the stock exchange constitute 'fees for technical services' covered under section 194J of the Act and, therefore, the assessee was liable to deduct tax at source while crediting the transaction charges to the account of the stock exchange. Since both the Revenue and the assessee were under the bona fide belief for nearly a decade that tax was not deductible at source on payment of transaction charges, no fault can be found with the assessee in not deducting the tax at source in the assessment year in question and consequently disallowance made by the Assessing Officer under section 40(a)(ia) of the Act in respect of the transaction charges cannot be sustained. We make it clear that we have arrived at the above conclusion in the peculiar facts of the present case, where both the Revenue and the assessee right from the insertion of section 194J in the year 1995 till 2005 proceeded on the footing that the assessee is not liable to deduct tax at source and in fact immediately after the assessment year in question, i.e., from the assessment year 2006-07 the assessee has been deducting tax at source while crediting the transaction charges to the account of the stock exchange. We also find that the issue is covered by the decision of ITAT, Bangalore bench in the case of IDS Software Solutions (India) (P) Ltd. [2009 (1) TMI 363 - ITAT BANGALORE-A] wherein the facts discussed as regards to where the assessee entered into a secondment agreement‘ with a US Company and obtained the services of an employee and the question arose whether the reimbursement by the assessee to the US Company of the salary paid by the US Company was chargeable to tax as - fees for technical services. As held that though the US Co was the employer in a legal sense but since the services of the employee had been seconded to the assessee and since the assessee was to reimburse the emoluments and it controlled the services of the employee, it was the assessee which for all practical purposes was the employer. Accordingly, the salary reimbursed to the US Co was not chargeable to tax. Though the person deputed by the US Co was a technical person, the consideration paid under the secondment agreement was not ―fees for technical services‖ because the fact that the seconded employee was responsible and subservient to the payer (assessee) and was required to also act as officer or authorized signatory or nominee of the assessee made it inconsistent with an agreement for providing technical services. Compensation from customers - assessee was following mercantile system of accounting, and hence, the compensation receivable from the customers was required to be accounted on accrual basis - HELD THAT:- Assessee stated that this issue has already been remitted back to the file of AO in the immediate preceding year exactly on identical facts by Tribunal in assessee‘s own case [2014 (1) TMI 536 - ITAT MUMBAI] for Asst. Year 2008-09 and on similar line if the issue is remitted back to the file of the AO that will suffice the matter. On query from the bench, ld. Sr. DR has not objected to the stand of the assessee. Hence, we direct the AO to decide the issue in term of the principles laid down. This issue of revenue‘s appeal is allowed for statistical purposes. Disallowance u/s 14A r.w.r.8D(2)(ii) - assessee‘s suo-mottu disallowance being expenditure for earning the exempt income by the assessee - As submitted before us by the ld.AR that the bank charges were deducted by the banks for the various transactions/collections of money entered into in the ordinary course of business and in no way constituted the part of interest expenses as per the provisions of section 2(28A) - HELD THAT:- We are of the opinion that the interest for the purpose of working out the disallowance under section 2(28A) includes only interest on the money borrowed and any fees or charges paid on the said borrowings which is availed by the assessee and not bank charges which are charged by the bank for rendering various services like making payments and collection on behalf of the assessee relating to business of the assessee wholly and exclusively. We are therefore, not inclined to accept the findings of the ld. CIT(A) in para 6.3 of its order and accordingly set aside the order of the ld. CIT(A) as being wrong and contrary to law. The AO is directed to delete the disallowance. Issues Involved:1. Deletion of Rs. 1,68,49,000/- under section 40(a)(ia) of the Income Tax Act, 1961.2. Deletion of Rs. 30 lakhs on account of compensation from customers.3. Disallowance under section 14A of the Income Tax Act, 1961.Issue-Wise Detailed Analysis:1. Deletion of Rs. 1,68,49,000/- under section 40(a)(ia) of the Income Tax Act, 1961:The first issue pertains to the deletion of Rs. 1,68,49,000/- by the CIT(A) under section 40(a)(ia) of the Income Tax Act, 1961, due to non-deduction of TDS by the assessee. The AO noted that the assessee charged Rs. 168.49 lakhs to the profit and loss account as secondment charges under 'Personnel cost' and failed to deduct TDS, leading to disallowance under section 40(a)(ia). However, the assessee argued that the secondment charges were paid to employees seconded by GAIL and British Gas, with taxes already deducted and paid to the government. The CIT(A) allowed the appeal, referencing previous decisions, including the case of IDS Software Solutions (India) Pvt Ltd. vs. ITO, where it was held that reimbursement of salary by the assessee to the US company need not suffer tax at source. The Tribunal upheld this view, dismissing the revenue's appeal, citing the precedent set in the assessee's own case and the decision in CIT Vs. Kotak Securities Ltd., where it was held that no fault could be found with the assessee for not deducting tax at source due to a bona fide belief.2. Deletion of Rs. 30 lakhs on account of compensation from customers:The second issue involves the deletion of Rs. 30 lakhs made by the AO on an estimated basis for compensation from customers, arguing that the assessee, following the mercantile system of accounting, should account for compensation receivable on an accrual basis. The Tribunal noted that a similar issue was remitted back to the AO in the assessee's own case for AY 2008-09, directing the AO to decide the issue in terms of the principles laid down in that order. Consequently, the Tribunal sent the issue back to the AO for fresh adjudication, allowing the ground for statistical purposes.3. Disallowance under section 14A of the Income Tax Act, 1961:The third issue concerns the upholding of the AO's order disallowing expenses under section 14A, calculated by including the entire financial expense, including bank charges. The assessee argued that only interest should be considered for disallowance, not bank charges. The CIT(A) dismissed the appeal, interpreting section 2(28A) to include bank charges as part of interest. However, the Tribunal found that bank charges, deducted by banks for various transactions, do not constitute part of interest expenses under section 2(28A), which includes only interest on borrowed money and related fees or charges. The Tribunal set aside the CIT(A)'s order, directing the AO to delete the disallowance, as the inclusion of bank charges was contrary to law.Conclusion:The Tribunal dismissed the revenue's appeal on the first issue, sent the second issue back to the AO for re-adjudication, and directed the AO to delete the disallowance on the third issue, partly allowing the assessee's appeal and dismissing the revenue's appeal. The order was pronounced in the open court on 16th Jan, 2017.