TaxTMI 
TaxTMI 
2014 (10) TMI 700
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....the Revenue for assessment year 2006-07 in I.T.A. No.32/Lkw/2010. 3. Ground No. 1 and the additional grounds being ground No. 9 to 13, raised by the Revenue are in connection with the same issue, which are as under: "1. That the Commissioner of Income Tax (Appeals)-II, Kanpur has erred in law and on facts in deleting the addition of Rs. 1,05,70,057/-, being the payment of commission to M/s Lohia Europe GmbH, Germany ignoring the fact that the payment is covered by the provisions of section 9(1)(vii)(b) read with section 40(a)(i)(A) of the Income Tax Act, 1961." 4. Additional grounds: "9. The CIT(A) has erred in law and on facts in deleting the disallowance of Rs. 1,05,70,057/- made by A. O., being the sales commission paid to M/s Lohia Europe GmbH, (LEG), without discussing the non-admissibility of this commission u/s 37 of the Income Tax Act whereas the A. O. while making such disallowance has given reasoned findings on non-admissibility of this expense u/s 37 of the Income Tax Act. 10. The CIT(A) has erred in law and on facts in failing to deal with or appreciate the alternative findings of the A. O. that impugned commission was not allowable u/s 37 or alternativel....
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....mmission to Assessee's subsidiary i.e. Lohia Europe GmBH is treated as an expense not allowed under the provisions of Income Tax Act, 1961. Assessee's income shall be enhanced to extent of this payment. @@@Without prejudice to the above deliberation, it is also brought on record that the payment for the alleged services rendered by LEG also qualify for deduction of tax at source u/s 195 of the I.T.Act, 1961. Even if by any stretch of imagination, the payments made to LEG be considered remunerations for the services rendered in supervising the operations conducted by the local area agents, the same shall fall within the ambit of section 9(1)(vii)(b), relevant portion of which reads as under..." "...Now when the agreement with LEG (Annexure-A, the part of assessment order) is read in the background of section 9, it is clear that the services are being rendered which are not consideration for any construction, assembly, mining or light project undertaken by the LEG. # The services rendered clearly fall in the category of managerial, technical or consultancy services. # In view of Apex Court judgment the services are rendered where they are received. As the services....
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....P. Ltd. in I.T.A. No.291/Vizag/2011 for assessment year 2006-07 (iii) National Thermal Power Co. Ltd. Vs. CIT [1998] 229 ITR 383 (S.C.) (iv) IVAX Paper Chemical ltd. vs. Addl. CIT [2014] 44 Taxman.com 173 (Hyd. Trib.) 9. We have considered the rival submissions, perused the material available on record, gone through the orders of the authorities below and the judgments cited by both the sides. First of all, we reproduce Para No. 4 from the order of CIT (A), which contains his decision. This Para is as under: "4. DECISION 4.1 The LEG and the appellant company have entered into an agreement dated 01/04/2006 which was basically renewal of the earlier agreement dated 01/04/2004. As per this agreement :- 1. LEG shall act as agent of LSL to negotiate order for supply of machinery mainly in the American (North and South), European, Middle Eastern and North African markets. 2. LEG would actively canvass and promote export of Machinery made by LSL. LEG would be provided technical assistance and other information required for the purpose by LSL. 3. In consideration of services to be rendered by LEG for procuring exports orders, LEG would be entitled to commission @ 5%....
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....hout any basis. It is evident from the agreement as well as various e-mails that the LEG'S services are those of sales representatives / sales coordinators for which they are being paid commission. Such Commission cannot be termed as fees for technical services. Accordingly, I hold that provisions of section 9(1)(vii) do not apply to the instant case. 4.4 The only thing that Department has to ascertain is whether the commission paid to LEG is at arms length ( since LEG and the appellant companies are associated enterprises). The commission payable to LEG is @ 5%. From the data made available by the assessee company, the A.O. has prepared a chart which shows that avg. commission paid to LSAs (Local Sales Agent) is 6.17% . These LSAs are local agents in the countries for which LEG also gets a commission @ 5% on sales made. Sales commission at an avg. rate of 5.07% is being paid to Independent Agents who are agents of the company in countries like Turkey, Thailand, Indonesia etc. Based on this chart, it has been held by the A.O. that the Arm's length rate of commission paid / payable of LEG should be Zero. The logic is that the commission payable to the independent agents i....
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....sment order reproduced by CIT(A) in his order and also by us above, we find that the first objection of the Assessing Officer is that the payment made by the assessee company to its subsidiary LEG is higher. He has also noted that the entire commission paid to LEG is not allowable. He has held that it is a sham transaction. The second objection of the Assessing Officer is that even if it is held that this payment of commission is allowable then the same is not allowable for this reason that the assessee has not deducted TDS and therefore, deduction is not allowable for this expenditure. In this regard, the additional grounds are also raised by the Revenue to further strengthen the case of the Assessing Officer in view of two retrospective amendments as stated in additional ground No. 11. 9.2 First of all, we examine the allowability of this payment with regard to the first objection of the Assessing Officer as to whether the expenditure is allowable or not as per the Arm's length price i.e. ALP. In this regard, we find that it is noted by the CIT(A) in his order that LEG has been paid commission @5% which is well under 5.07% and also under 6.17% paid to independent agents and lo....
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....he assessee to LEG. For the sake of ready reference, these explanations are reproduced herein below: Explanation 2 to section 9(1)(vii) inserted by Finance (No. 2) Act, 1977 with effect from 01/04/1977:- "Explanation 2.--For the purposes of this clause, "fees for technical services" means any consideration (including any lump sum consideration) for the rendering of any managerial, technical or consultancy services (including the provision of services of technical or other personnel) but does not include consideration for any construction, assembly, mining or like project undertaken by the recipient or consideration which would be income of the recipient chargeable under the head "Salaries". Explanation 2 to section 195(1) inserted by the Finance Act, 2012 with retrospective effect from 01/04/1962 "Explanation 2.- For the removal of doubts, it is hereby clarified that the obligation to comply with sub-section (1) and to make deduction there under applies and shall be deemed to have always applied and extends and shall be deemed to have always extended to all persons, resident or non-resident, whether or not the non-resident person has- (i) a residence or place of busi....
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.... 2 to section 195(1) broadens the definition of "any person responsible for paying to non-resident" appearing in sub section 1 of section 195 of the Act and as per explanation 2, that any person in section 195 (1) will include even non-resident not having any place of residence or business and business connection in India. Hence, in our considered opinion, this explanation 2 to section 195(1) has no relevance and therefore, it also does not render any help to the Revenue. We would also like to observe that the stand of the revenue is this that as per this explanation 2 to section 195 (1), TDS is to be deducted u/s 195 in all cases where payment is made to a non resident. But there is no force in this contention because this requirement has to satisfied that the amount being paid to the payee is liable to tax in India in the hands of the payee. As per this explanation, the amendment is this that if the payee is liable to tax in India in respect of the impugned payment than the payer cannot claim that he is not supposed to deduct TDS because the payer is neither a resident of India nor the payer has any place of business in India or business connection in India as it was in the much ....
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....w of the fact that agents had their offices situated in foreign country and they did not provide any managerial services to assessee. Hence, the first aspect regarding applicability of explanation added to section 9(1)(vii) by Finance Act 2010 is covered against the revenue by this judgment of Hon'ble Jurisdictional High Court and therefore, we do not examine the applicability of other three judgments cited by Learned A.R. of the assessee out of which two are Tribunal decisions and one is the judgment of Hon'ble Apex Court rendered in the case of National Thermal Power Co. Ltd. Vs. CIT (supra) which is in connection with admission of additional ground being legal issue. 9.9 We have already seen and discussed that the second amendment cited by Revenue being insertion of explanation 2 to section 195(1) of the Act, has no relevance because in the present case, payer is already resident of India and therefore, already within the purview of section 195 (1) and there is no need in the present case to extend or broaden the scope of the term "any person responsible for paying to a non-resident" appearing in sub section 1 to section 195 of the Act. But the requirement that the pa....
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....ch policy from Rs. 4,00,00,000/- to Rs. 10,00,00,000/-by accepting topups aggregating to Rs. 6,00,00,000/-. (v) the assessee company was already aware of the position regarding withdrawal of approval by IRDA.] (vi) thus, by way of collusion, this deduction was devised by the assessee and the insurer to take advantage of nomenclature of Keyman Insurance." 13. Being aggrieved, the assessee carried the matter in appeal before the CIT(A) who has decided the issue in favour of the assessee and now the Revenue is in further appeal before us. 14. Learned D.R. of the Revenue supported the assessment order. He also submitted certain additional evidence along with the letter dated 19^th May, 2014. This includes a letter dated 30/06/2006 from IRDA. It also includes Circular dated 30/01/2006 issued by IRDA. He submitted that as per these circular and clarifications issued by IRDA, only term insurance can be considered as Keyman Insurance and since in the present case, the insurance is not term insurance, the same cannot be considered as Keyman insurance. He also submitted that as per letter dated 30/06/2006, issued by IRDA, even top up premium is not allowable because it will amoun....
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....ing the insurers to issue only term insurance plans as keyman/partnership insurance policies. It may be noted that any alteration to increase the sum assured under the keyman/partnership insurance policy where the plan of policy issued was other than the term insurance plan would not be permissible, as it tantamount to issuing of a fresh insurance policy to the extent of the increased sum assured. All the life insurers are requested to comply with these instructions. Please acknowledge the receipt of this communication. Yours faithfully, Sd/. (C R Muralidharan)" "Ref:036/IRDA/LIFE/JAN-06 Date 30/01/2006 To All Life Insurers, Attention is invited to IRDA Circular No.IRDA/Life/006/2006 dated 27/04/2005 on the subject to keyman insurance. It has been reported that some insurers are disregarding the spirit behind that circular and are selling partnership insurance through endowment of unit-linked plans. Insurers should not lose sight of the basic principle that a person purchasing life insurance can only do so to the extent of his insurable interest in the life assured. An employer buying keyman insurance purportedly for his own benefit cannot prove insurable....
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....e policy cover should not be wider than the term insurance and there is no mention of any bar on top up premium. As per letter dated 30/06/2006, specific bar was placed by IRDA on increasing the insurance cover of existing policy by way of top up premium and it was specified that any alteration to sum assured under the keyman insurance policy where the plan of policy issued was other than the term insurance plan would not be permissible as it tantamount to issuing of a fresh insurance policy to the extent of the increased sum assured. Hence, in our considered opinion, if any top up premium is paid after 30/06/2006, the same will be hit by this circular of IRDA but in the present case, the top up premium has been paid by the assessee and received by insurance company on 31/12/2005 which is before the date of these last two circulars dated 3/01/2006 and 30/06/2006 in which such increase in sum assured in respect of earlier policy was barred. In our considered opinion, under these facts, no interference is called for in the order of CIT (A) on this issue. We hold accordingly. This ground of Revenue is rejected. 18. Ground No. 3 is as under: "3. The Commissioner of Income Tax (Ap....
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.... services were rendered by the parties to whom these payments were made." 22. Learned D.R. of the Revenue supported the assessment order whereas Learned A.R. of the assessee supported the order of CIT(A). He also submitted that letter was directly sent by Shri Siyaram Gupta on 22/10/2008 in reply to the notice issued by the Assessing Officer u/s 133(6) of the Act and the copy of this letter is available on page No. 170 of the paper book. He also drawn our attention to letter dated 16/09/2009 filed by the assessee before the CIT(A) as written submissions, copy of which is available on page No. 186 to 219 of the paper book and in particular, our attention was drawn to page No. 211 to 213 of the paper book. 23. We have considered the rival submissions, perused the material available on record and gone through the orders of the authorities below. We find that this issue has been decided by the CIT(A) as per Para 8.3 to 8.7 of his order which are reproduced below for the sake of ready reference: "8.3 I have perused the sale bills of machinery (amounting to Rs. 1 Crore) related to sales made by the appellant company to M/s Shiva Polymers Pvt. Ltd. All these bills have been raise....
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....lant company. From the letter of Shri Siyaram Gupta dated 22.10.2008, it is evidently clear that he categorically mentioned efforts put in by him for procuring order from M/s. Patwari Plastics Pvt. Ltd. (to quote): We have very long association with Shri Rajesh S Gupta one of the directors of the aforesaid company and we enjoy utmost trust and confidence in many respect including critical decisions for growth and development of business. From time to time Shri Rajesh S Gupta came to me for strategic decisions. One of such matters came up for discussion amongst us regarding purchase of Circular Weaving Machines, Machinery for manufacturing of Woven Sacks. We have taken interest in reading technical and business profiles in print form as well as on internet. It was a matter of confidence by reading the technical profile of machines manufactured by M/s. Lohia Starlinger Limited, which had collaboration with Starlinger Group of Austria till few years back Therefore, I recommended to them to go for purchase of machinery from M/s. Lohia Starlinger Ltd. My job in the whole transaction was to motivate and convince Shri Rajesh S. Gupta in selection of machines, therefore, the....
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....find any reason to interfere in the order of CIT (A) because the expenditure is of this year because sale is effected in this year and hence, commission cannot be claimed and allowed in the preceding year. 23.2 The balance amount of commission of Rs. 5 lac paid to Shri Siyaram Gupta was disallowed by the Assessing Officer on the basis that mere admitting receipt of commission from the assessee and showing the same in its income, does not fulfill the parameters laid down u/s 37 of the Income Tax Act, 1961 which requires that expenditure be made wholly and exclusively for the purposes of the business of the assessee. On this aspect, this finding is given by CIT(A) in Para 8.6 of his order that there is no requirement under the Income Tax Law to have a written agreement. He has also noted that the Assessing Officer had made direct enquiry with the payee on two occasions and the reply was given by the payee directly to the Assessing Officer. It is also noted that the assessee has also submitted copy of the letter dated 22/10/2009 from the buyers who also have confirmed the services rendered by Shri Siyaram Gupta. These findings of CIT (A) could not be controverted by Learned D.R. of....
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....we do not find any reason to interfere in the order of CIT (A) on this issue. This ground of Revenue is also rejected. 27. Ground No. 6 is as under: "6. The Commissioner of Income Tax (Appeals)-II, Kanpur has erred in law and on facts in deleting the addition of Rs. 3,96,920/- and directing the Assessing Office to withdraw the depreciation allowed to the assessee and thereby the entire amount of Rs. 4,17,811/- as revenue expenditure, ignoring the fact that the same being expenditure on New Aluminum Structure and Water Proofing was capital expenditure." 28. Learned D.R. of the Revenue supported the assessment order. He placed reliance on the following judicial pronouncements: (i) Ramkishan Sunderlal Vs Commissioner of Income-tax [1951] 19 ITR 324 (All) (ii) L.H. Sugar Factories and Oil Mills Ltd., In re [1952] 21 ITR 325 (All) 29. Learned AR of the assessee supported the order of Learned CIT (A). We have considered the rival submissions, perused the material available on record, gone through the orders of the authorities below and the judgments cited by both the sides. We find that this issue was decided by CIT(A) vide Para No. 11 of his order, which is reproduced ....
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....urt rendered in the case of Ramkishan Sunderlal Vs Commissioner of Income-tax (supra). In this case, the issue in dispute was that as to whether when a part of machinery is replaced it is current repair or not within the meaning of Section 10(2)(v) of the Indian Income-tax Act, 1922. In the present case, no replacement of part of a machine is there and therefore, this judgment is not applicable in the facts of the present case. 29.4 The second judgment cited by Learned D.R. of the Revenue is the judgment of Hon'ble Allahabad High Court rendered in the case of L.H. Sugar Factories and Oil Mills Ltd. (supra). In this case, the dispute was as to whether changing of entire roof by using new khaprails (tiles) in place of old ones was in the nature of current repairs. Under these facts, it was held that the replacement of old roofs by using new tiles for old ones was not revenue expenditure because it cannot be classified as current repair. In the present case, the facts are different. There is no replacement of existing roof by new roof and only water proofing has been done and partition has been done on the existing shed. Hence, in our considered opinion, this judgment of Hon....
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....that the material brought on record indicated that commission to the aforesaid sister concern were shown to have been paid on the services for which commissions were also paid to other foreign concerns and there were no evidence of any services actually being rendered by the sister concern. 7. Without prejudice to the original grounds of appeal, the order of CIT(A)-II, Kanpur is also erroneous, unjust and bad in law in view of amended provisions of explanation to section 9 w.r.e. f. 01.06.1976 and explanation 2 to section 195(1) w.r.e.f. 01.04.1962. 8. The order of the CIT(A), Kanpur being erroneous, unjust and bad in law be vacated and the order of the A. O. be restored. 9. That the appellant craves leave to modify any of the grounds of appeal or take additional ground during the pendency of this appeal." 34. Both the sides agreed that ground No. 1 and additional grounds raised by the Revenue in the present year are similar to ground No. 1 and additional grounds of the Revenue's appeal in assessment year 2006-07. Both the sides also agreed that ground No. 2 is similar to ground No. 5 raised by the Revenue in assessment year 2006-07. Both the sides agreed that these iss....
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....is given by the Tribunal that no material was shown to prove that the commission payment was for the services rendered by the agents whereas in the present case, a clear finding is given by the CIT(A) that the services were rendered by the agents and the same could not be controverted by Learned D.R. of the Revenue. For this reason alone, this decision of the Tribunal is not applicable in the present case. We also find that the Assessing Officer has proceeded on the basis that DLW is government organization where there is no role to play for any middle man. But it is noted by CIT(A) that DLW is not government organization but it is Public Sector Undertaking which is making direct purchases from the open market from local suppliers as well as directly from the manufacturers and therefore, in order to promote the sales, the assessee company had to maintain a continuous information feedback and take the services of Industrial Marketing Corporation i.e. the agent. Considering all these facts, we do not find any reason to interfere in the order CIT(A) on this issue also. Ground No. 3 of the Revenue is rejected. 38. Regarding ground No. 4 of the Revenue's appeal, Learned D.R. of the R....
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....red to be given by the CIT(A). 41. Regarding the deletion of various specific disallowances made by the Assessing Officer, we find that CIT(A) has examined the whole things in detail. Regarding the disallowance made by the Assessing Officer of Rs. 20,77,073/- out of construction expenses, it is held by the CIT(A) that the assessee has allocated the total expenditure incurred on construction to various divisions based on the internal engineer's report. Thereafter, he has further held that in absence of anything to the contrary brought by the Assessing Officer on record, the said allocation cannot be disturbed. He deleted the disallowance on this basis. This finding of CIT(A) could not be controverted by Learned D.R. In respect of second disallowance of Rs. 10.46,954/- under the head "cement", this finding is given by CIT(A) that as per the contract, the material i.e. cement and steel was to be supplied by the assessee in addition to the labour and other costs for which the bills totaling to Rs. 63,77,073/- were raised by the contractor and therefore, there is no reason to disallow the said expenditure incurred on account of cement consumed on construction carried out in R&D Divis....
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....in the R&D building. On this aspect, he has given a clear finding that on perusal of the assessment order and the submissions made by the Assessing Officer in this regard, he is of the considered view that the assessee's allocation of expenditure incurred was based on scientific method. He has also noted the submissions of Learned A.R. of the assessee that the total area covered in the bill was approximately 17,000 sq. ft. out of which approximately 16,188 sq. ft. was used for R&D division and approximately 800 sq. ft. was earmarked for Excise office and, therefore, the ratio between R&D Unit and Excise office worked out to 95% and 5% respectively. He also noted that total expenditure incurred was Rs. 32,83,024/- and out of this, Rs. 3,00,000/- approximately 10% was allocated to the Excise office and Rs. 29,83,024/- approximately 95% was allocated to the R&D unit. Considering all these facts, we do not find any reason to interfere in the order of CIT(A). 47. The next disallowance deleted by CIT(A) is the disallowance of Rs. 3,04,765/- for civil work. This disallowance was deleted by CIT(A) on the basis that since the electronic wing is an integral part of R&D centre, the expendi....
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....at the same time, as per the judgment of Hon'ble Bombay High Court, reasonable disallowance is to be made. Since disallowance was made by the Assessing Officer and confirmed by CIT(A) as per Rule 8D, we feel it proper that this matter should go back to the Assessing Officer for fresh decision. We set aside the order of CIT(A) on this issue and restore back the issue to the file of the Assessing Officer for fresh decision in the light of this judgment. 54. In the result, the appeal of the assessee stands allowed for statistical purposes. 55. Now we take up the appeal of the Revenue for assessment year 2008-09 i.e. I.T.A. No.632/Lkw/2011. 56. In this appeal, the Revenue has raised the following grounds: "1. The Ld. CIT(A) has erred in law and on facts in deleting the addition of Rs. 39,50,000/- being commission paid to its managing director ignoring the fact that the assessee could not prove the specific services rendered by the managing director in spite of sufficient opportunity given. 2. The Ld. CIT(A) has erred in law and on facts in deleting the disallowance of Rs. 3,30,516/- on account of commission paid for sale by Industrial marketing Co. to Diesel locomoti....
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....No. 2 raised by the Revenue in the present year is similar to ground No. 3 raised by the Revenue in assessment year 2007-08. They also agreed that ground No. 3 and all the additional grounds are identical to original ground No. 1 and additional grounds raised by the Revenue in assessment year 2006-07 and 2007 - 08. Both the sides agreed that these grounds can be decided on similar line as per decision in earlier two appeals of the Revenue for assessment year 2006-07 and 2007- 08. 59. In earlier two years i.e. assessment year 2006-07 & 2007-08, all these three issues were decided by us in favour of the assessee as per Para 9 to 10, 26, 34 and 37 of this order. Accordingly, in the present year also, these issues are decided in favour of the assessee. Accordingly ground No. 1,2 & 3 and all the additional grounds are rejected. 60. Regarding ground No. 4, Learned D.R. of the Revenue supported the assessment order whereas Learned A.R. of the assessee supported the order of CIT(A). 61. We have considered the rival submissions. We find that a clear finding is given by CIT(A) in Para 9.4 of his order that the liability to pay interest on the amount of advance received from Plast....
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.... the assessee and the AO in adopting average value of investment and expenditure relatable to the earning of exempted income. 5. That the order of the Ld. Commissioner of Income Tax (Appeals) being erroneous in law and on facts deserves to be vacated and the order of the Assessing Officer be restored. 6. That the appellant craves leave to modify any of the grounds of appeal or take additional ground during the pendency of this appeal." 66. Both the sides agreed that the issue raised by the Revenue as per ground No. 1 & 2 are same as has been raised by the Revenue in earlier years also i.e. regarding payment of commission to Managing Director and payment of commission to Industrial Marketing Corporation. Both the sides agreed that these grounds can be decided on similar line. In earlier years, both these grounds were decided in favour of the assessee and accordingly both the issues are decided in favour of the assessee. Accordingly ground No. 1 & 2 are rejected. 67. Regarding ground No. 3, Learned D.R. of the Revenue supported the order of the Assessing Officer whereas Learned A.R. of the assessee supported the order of CIT(A). He also submitted that admittedly, TDS was ....
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....oduced the working done by the Assessing Officer for making disallowance of Rs. 21,85,374/- as against disallowance of Rs. 18,45,447/- made by the assessee. In our considered opinion also, since the dividend from foreign company is taxable, this investment cannot be added in average investment for making disallowance u/s 14A. Considering all these facts, we do not find any reason to interfere in the order of learned CIT(A). Accordingly, ground No. 4 is rejected. 72. In the result, the appeal of the Revenue stands dismissed. 73. Now we take up the appeal of the Revenue for assessment year 2010-11 i.e. I.T.A. No.559/Lkw/2012. 74. In this appeal the Revenue has raised the following grounds: "1. That the Ld. Commissioner of Income Tax (Appeals) has erred, in law and on facts in deleting the disallowance of commission amounting to Rs. 62,40,000/- paid to Shri Raj Kumar Lohia, MD without appreciating the fact that it was not commercial expenditure relatable to business of the assessee especially considering the decreasing growth in the business of the assessee in successive years. 2. That the Ld. Commissioner of Income Tax (Appeals) has erred in law and on facts of the cas....