2018 (10) TMI 1168 - AT - Income Tax

Tribunal affirms CIT(A)'s decision on TDS, expenses, & treaty provision interpretation. Disallowances by AO unjustified.

The Tribunal upheld the CIT(A)'s decision to delete additions related to non-deduction of TDS on salary and operating contract expenses, travel and ... TDS u/s 195 - expenses incurred for the purpose of business of the PE - no TDS has been deducted on the salary paid to the employees - reason given by the AO for making disallowance was that the assessee could not substantiate, whether these expenses were related to the business of the PE or were incurred wholly and exclusively for the purpose of business - India Mauritius DTAA - Held that:- Para 3 of Article 7 provides the determination of profits of PE by allowing the deduction of expenses which are incurred for the purpose of business of the PE including executive and general administrative expenses so incurred in which the PE is situated. Accordingly, all the expenses incurred for the purpose of the business of the PE are to be allowed. There is no restriction on the allowability of such expenses subject to any limitation of the taxation laws of the contracting state (India). The phraseology used in Article 7 (3) is different from other treaties, for instance Article 7(3) of Indo US Treaty DTAA provides that deduction of expenses which are incurred for the purpose of business of the PE would be in accordance with provisions subject to the limitation of the taxation laws of that State. Similar phraseology has been used in India UAE DTAA after the protocol. Once in a treaty no such restriction has been provided for applying the limitation of the domestic taxation laws, then such limitation given under the Indian Income Tax cannot be imported in such an Article. If the expenditure has been incurred on the payment of salary or reimbursement of salary of the employees, then same has to be allowed while computing the profit and loss of the PE in full and without any restriction of deductibility as per the provision of Income Tax Act. No infirmity in the order of the Ld. CIT(A) that restriction in allowing the expenditure invoking provision of section 40(a)(i) of the Income Tax Act cannot be read Indo Mauritius DTAA and accordingly, disallowance by invoking the provision of section 40(a)(i) cannot be made. Hence disallowance of salary paid to the employees has rightly been deleted by the Ld. CIT(A). Consequently ground No. 1 as raised by the revenue is dismissed. Operating contract expenditure with the payment made to the non resident - TDS has not been deducted and therefore same are to be disallowed u/s 40(a)(i) - Held that:- Nowhere it has been brought on record that the payment made to these non-residents were income in the hands of such non-residents which is to be taxed in terms of section 195(2); secondly, the provision of section 40(a)(i) cannot be invoked while allowing the expenditure in terms of Article 7(3) in Indo Mauritius DTAA as held in the earlier part of the order. Thus, there is no infirmity in the order of the CIT(A) while deleting the said disallowance. Disallowance of expenditure relating to travel and entertainment - Held that:- Once AO has not disputed the fact that assessee has been carrying out its various activities through various projects in India, then any such expenditure relating to the project cannot be disallowed. One of the allegations of the CIT DR that assessee has filed additional evidence before the Ld. CIT(A) and therefore, same cannot be entertained, but we are unable to appreciate such a contention raised because apparently there is no additional evidence which has been filed during the course of first appellate proceedings and all the requisite details have been filed before the AO alongwith letters addressed to him, the copies of which have been placed on the paper book. Once the details of expenditure have been given and no defect or error has been pointed out by the AO, then same is to be held as allowable expenditure. Accordingly, the order of the Ld. CIT(A) in deleting the said addition is upheld. Revenue appeal dismissed. Issues Involved:1. Deletion of addition for non-deduction of TDS on salary paid to employees.2. Deletion of addition for non-deduction of TDS on operating contract expenses.3. Interpretation of Article 7 of Indo-Mauritius DTTA concerning the application of domestic tax laws.4. Deletion of addition out of travel and entertainment expenses.5. Allegation of violation of Rule 46A by admitting additional evidence.Detailed Analysis:1. Deletion of Addition for Non-Deduction of TDS on Salary Paid to Employees:The CIT(A) deleted the addition of Rs. 4,57,82,240/- by holding that in the absence of any restrictive clause in Article 7 of Indo-Mauritius DTTA, no disallowance could be made for non-deduction of TDS on salary paid to employees. The CIT(A) emphasized that Article 7(3) of the DTAA does not impose restrictions on the claim of expenses, and thus, Section 40(a)(i) of the Income Tax Act has no application. The AO had disallowed the employee cost due to the absence of details regarding TDS deduction and the filing of income tax returns by the employees in India. However, the CIT(A) found that the assessee had provided detailed information about the employees, including their names, amounts paid, and duration of stay in India. The Tribunal upheld the CIT(A)’s decision, agreeing that the restriction under the Income Tax Act cannot be read into the treaty, and thus, the disallowance by invoking Section 40(a)(i) was not justified.2. Deletion of Addition for Non-Deduction of TDS on Operating Contract Expenses:The CIT(A) deleted the addition of Rs. 3,33,01,861/- by holding that in the absence of any restrictive clause in Article 7 of Indo-Mauritius DTTA, no disallowance could be made for non-deduction of TDS on operating contract expenses. The AO had disallowed the expenses on the grounds that no tax was withheld on payments made to non-residents. The CIT(A) relied on the Supreme Court judgment in Transmission Corporation vs. CIT and the ITAT Mumbai Bench decision in State Bank of Mauritius Limited, which stated that there is no restriction on the allowability of expenses under Article 7(3) of the Indo-Mauritius DTTA. The Tribunal upheld the CIT(A)’s decision, stating that the provision of Section 40(a)(i) cannot be invoked while allowing the expenditure in terms of Article 7(3) of the Indo-Mauritius DTTA.3. Interpretation of Article 7 of Indo-Mauritius DTTA Concerning the Application of Domestic Tax Laws:The CIT(A) and the Tribunal both emphasized that Article 7(3) of the Indo-Mauritius DTTA allows for the deduction of expenses incurred for the purpose of the business of the permanent establishment (PE) without any restriction subject to the limitations of the domestic taxation laws. The Tribunal noted that the phraseology used in Article 7(3) of the Indo-Mauritius DTTA is different from other treaties, such as the Indo-US DTAA, which includes specific provisions subject to the limitations of the taxation laws of the contracting state. Therefore, the Tribunal concluded that the limitations under the Indian Income Tax Act could not be imported into Article 7(3) of the Indo-Mauritius DTTA.4. Deletion of Addition Out of Travel and Entertainment Expenses:The CIT(A) deleted the addition of Rs. 5,51,65,341/- related to travel and entertainment expenses. The AO had disallowed the expenses due to the lack of evidence indicating that the expenses were incurred wholly and exclusively for the business. The CIT(A) found that the assessee had submitted detailed expense reimbursement claim forms, supporting documents, and a ProjectWise break-up of expenses. The Tribunal upheld the CIT(A)’s decision, noting that the AO had not pointed out any specific error or omission in the details provided by the assessee. The Tribunal also rejected the revenue’s contention that additional evidence was admitted in violation of Rule 46A, as all requisite details were filed before the AO.5. Allegation of Violation of Rule 46A by Admitting Additional Evidence:The revenue contended that the CIT(A) admitted additional evidence in violation of Rule 46A. However, the Tribunal found no merit in this contention, as the assessee had submitted all relevant details and documents before the AO. The Tribunal noted that the revenue did not specify the nature of the additional evidence allegedly filed before the CIT(A). Therefore, the Tribunal rejected the revenue’s contention and upheld the CIT(A)’s order.Conclusion:The Tribunal dismissed the revenue’s appeal, upholding the CIT(A)’s decision to delete the additions related to non-deduction of TDS on salary and operating contract expenses, travel and entertainment expenses, and the interpretation of Article 7 of the Indo-Mauritius DTTA. The Tribunal found that the CIT(A) had rightly concluded that the restrictions under the Income Tax Act could not be imported into the treaty provisions, and the disallowances made by the AO were not justified.