2023 (1) TMI 355 - AT - Income Tax

Tribunal upholds CIT(A)'s decisions favoring assessee on income accrual, foreign remittances, and waiver of interest.

The Tribunal upheld the CIT(A)'s decisions in favor of the assessee for the assessment years in question. The issues involved included the addition of fee ... Accrual of income - Fee received on accrual basis - Financial year/assessment year - HELD THAT:- Though the receipt is there in the last quarter of a financial year that relates to the period of instructions to be imparted by the assessee in the next quarter, which falls in the next financial year. It, therefore, goes without saying that though the receipt is there in the last quarter of a financial year, the corresponding service is rendered by the assessee in the next quarter which falls in a different financial year. Income accrues only when the right accrued by rendering of services and not by promise for services. Where the right to receive is anterior to the rendering of services, the income would accrue only on the rendering of services. As on the date of receipt of tuition fee, and for that matter in the quarter in which it was received, no service was rendered. Service was rendered in the following quarter which falls in a different financial year. It leaves no doubt in our mind that in this situation, the right to receive i.e., accrual happens only in the quarter in which the services were rendered, namely, in the following quarter. While respectfully following the decision of Dinesh Kumar Goes [2010 (10) TMI 287 - DELHI HIGH COURT] we are of the considered opinion that the assessee was right in recognizing the revenue in the financial year in which the corresponding service was rendered, because it is only on consideration of the expenses relating to the rendering of services, the correct picture of income emerges, and it is only such income is taxable and not every receipt. With this view of the matter, we uphold the findings of the CIT (A) and find the grounds relating to this issue are devoid of merits. Disallowance of foreign remittances are subject make - Assessee makes payment to two foreign universities/institutions in UK and Switzerland in connection with the schools run by it; that according to the assessee, these payments made by them are, firstly, towards payment of examination fee collected from the students, which are not exactly the payment made by the assessee but merely collected from students and remitted, secondly, as fees for syllabus, setting up of question papers, training of teachers, etc; and that in respect of these payments made, the assessee did not make any deduction of tax at source u/s. 195 before making the aforesaid payments taking the view that there was no income that accrued or arose to the aforesaid foreign universities and educational institutions in India - HELD THAT:- The finding of the CIT(A) that the assessee is only a pass through entity in the sense that they are collecting the exam fee on behalf of the foreign universities does not appear to be unreasonable or perverse. Article 13 (5)(c) of the DTA between India and the UK, and Article 12 (5)(a) of the DTAA between India and Switzerland clearly read that the definition of fee for technical services does not include any amount paid for teaching in or by educational institutions. CIT(A) took the view that in view of this provision contained in DTAAs, the amount paid to the above two universities do not come under the clutches of the technical services or the royalty services - CIT(A) made reference to the decisions reported in Mahindra Holidays and Resorts (I) Ltd [2010 (5) TMI 524 - ITAT, CHENNAI] and also DE Beers India Minerals P. Ltd.[2012 (5) TMI 191 - KARNATAKA HIGH COURT] to reach the conclusion that the activities conducted by the foreign universities in this case are out of technical/royalty services. The expression ‘teaching in or by educational institution’ cannot be confined to the activity of imparting the instructions alone, in a broader sense, teaching includes not only the imparting the instructions but also the verification of the extent of perception of such instruction by the pupil and thereby includes the activity of examinations also. In this sense, this particular activity falls in the ambit of the exemption clause in the DTAAs which exempt the amounts paid for teaching in or by the educational institutions. We are of the considered opinion that the findings of the CIT(A) on this aspect do not suffer any perversity, illegality or irregularity and they are in consonance with the spirit of the Act. We, therefore, do not find any merit in the contention of the Revenue and dismiss the grounds on this aspect. Waiver of interest - HELD THAT:- It is always open for the learned Assessing Officer to ascertain the rate of interest payable by the assessee during this particular financial year, the interest paid by the assessee and if there is any waiver of such interest or a part thereof by the banker to bring the same to tax. All through the proceedings before the Ld. CIT(A), the assessee maintained that the mentioning of Rs.15.02 Crores in the notes to the audit report does not represent the interest, if any, waived by the bankers but it is only the estimate made by the assessee as to their probable liability contingent upon the default, if any, committed by the assessee in respect of the CDR guidelines or the bankers revoking the reduction of interest for any reason. As against this contention, AO did not demonstrate from the financial statements of the assessee that, as a matter of fact, an interest to the magnitude of Rs.15.02 Crores was in fact waived by the bankers. It goes undisputed that before making this addition,AO did not seek any clarification from the assessee before proceeding to assume anything in respect of the mentioning of Rs.15.02 Crores as contingent liability in the notes to audit report by the assessee. Had the learned Assessing Officer obtained any such clarification, it would have obviated the addition. In the absence of any proof as to the waiver of interest by the bankers, addition on that score basing on assumptions cannot be maintained. Ld. CIT(A) is perfectly right in deleting the same and we hold such finding. All the appeals of Revenue are dismissed. Issues Involved:1. Addition of fee received on an accrual basis.2. Disallowance of foreign remittances.3. Addition on the ground of waiver of interest.Detailed Analysis:1. Addition of Fee Received on Accrual Basis:The assessee, M/s. Hyderabad Educational Institutions Pvt. Ltd., collects tuition fees quarterly for the entire academic year but recognizes revenue only for the period relevant to the financial year as per the mercantile system of accounting. The Assessing Officer added the tuition fee received in the fourth quarter to the income, arguing that the fee amounts to accrual since there is no further liability on the assessee. The assessee contended that recognizing revenue in the financial year when the corresponding expenditure occurs gives a proper picture of income. The CIT(A) accepted the assessee's argument, relying on the decision in ACIT Vs. M/s. Mahindra Holidays & Resorts (I) Limited and the Supreme Court's decision in Madras Industrial Investment Corporation Ltd Vs. CIT, holding that including receipts for periods beyond the financial year would distort income. The Tribunal upheld the CIT(A)'s findings, emphasizing that income accrues only when services are rendered, not when fees are received.2. Disallowance of Foreign Remittances:The assessee made payments to foreign universities for examination fees, syllabus fees, and teacher training without deducting tax at source under Section 195 of the Income Tax Act, arguing that these payments did not result in income accruing to the foreign entities in India. The Assessing Officer considered these payments as fees for technical services (FTS) and disallowed them. The CIT(A) found that the assessee acted as a pass-through entity for examination fees and did not claim these as expenses. Furthermore, under the Double Taxation Agreements (DTAA) with the UK and Switzerland, payments for teaching in or by educational institutions are excluded from FTS. The Tribunal agreed with the CIT(A), noting that the payments were for educational activities and not technical services, and upheld the deletion of the disallowance.3. Addition on the Ground of Waiver of Interest:The assessee had borrowed funds for school construction and faced financial difficulties, leading to a restructuring of loans with reduced interest rates. The Assessing Officer added an estimated liability of Rs.15.02 Crores, mentioned in the financial statements as a contingent liability, assuming it reflected waived interest. The assessee clarified that this amount was an estimate of potential liability if the loan concessions were revoked. The CIT(A) found that the actual interest charged and paid was at the reduced rate, and no waiver occurred. The Tribunal upheld the CIT(A)'s findings, stating that the addition was based on assumptions without evidence of actual waiver.Appeals for AYs 2012-13, 2013-14, 2014-15 & 2016-17:For these assessment years, the issues were identical to those in AY 2015-16. The Tribunal upheld the CIT(A)'s findings in favor of the assessee for these years as well, dismissing the Revenue's appeals.Conclusion:The Tribunal dismissed all the appeals of the Revenue, upholding the CIT(A)'s decisions on all three issues for the relevant assessment years.