TaxTMI 
TaxTMI 
2017 (6) TMI 868
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....ailing to prove that no part of the loans had been utilized toward investment, it's claim that the investments had been financed from own capital could not be accepted. The Assessing Officer (AO), accordingly, relying on the decision in CIT v. Walfort Share & Stock Brokers (P.) Ltd. [2010] 326 ITR 1 (SC), effected disallowance u/s. 14A at Rs. .79,92,910/-, including indirect, administrative expenditure for Rs. . 68,92,485/-, applying r. 8D. The same stands confirmed in appeal following a number of decisions, including Walfort Share & Stock Brokers (P.) Ltd. (supra) and Beach Minerals Co. Ltd. (in TCA No.681/2013 dated 31.12.2013) by the Hon'ble jurisdictional High Court, quoting para 11 thereof in his order, so that, aggrieved, the assessee is in second appeal. 3. Before us, the assessee placed reliance, in the main, on the decision in Redington (India) Ltd. v. Addl. CIT (in TCA No.520/2016 dated 23.12.2016), claiming, on that basis, that the disallowance u/s. 14A is to be restricted w.r.t. to the investment only in those shares that had yielded income during the relevant year, earned at Rs. . 4.21 lacs, and for which therefore the matter may be restored to the file of the AO. The....
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....a particular year that could be assessed for that year. It is only where the income (not forming part of the total income) is earned during a particular year that it would be tax-exempt and, thus, only the expenditure incurred in connection therewith that has to be adjusted thereagainst, so that where no exempt income is earned, there cannot be a disallowance of expenditure in relation to such assumed income. The judgment, in sum, therefore, states that s. 14A r/w r. 8D cannot apply whether there is no exempt income, which would otherwise imply applying the provision in vacuum, i.e., against presumed or notional income that may arise in future. Rule 8D is only toward quantifying the disallowance u/s. 14A, i.e., where there is income not forming part of the total income and, further, the AO is not satisfied with the assessee's claim in respect of expenditure relatable to such income, which may include a claim as to nil expenditure, i.e., of having in fact not incurred any expenditure in relation thereto. There being admittedly exempt income in the present case, how then, we wonder, the said judgment becomes applicable? The argument advanced seeks to invoke the said decision in fact....
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....ch investment/s. The expenditure on its acquisition would though go to increase the value of such investment/s. The assessee, by seeking exclusion of some investments, i.e., that have not yielded dividend income, in computing the average value of the investment u/r. 8D, is questioning the propriety of the said rule, i.e., to that extent. The challenge fails at the threshold as rule 8D has been held by the Hon'ble Courts as constitutionally valid, implying it being based on relevant, intelligible and rational criteria, besides being reasonable. In fact, it is nobody's case that it is not so. Why, the assessee itself recognizes the primacy of the investments as a valid measure (for basing the disallowance of expenditure on) when it seeks retention of a part of the investments. In other words, the challenge to r. 8D, without showing any basis therefor, is not legally sustainable, more so considering that the said rule has been upheld as a valid basis for estimating disallowance u/s. 14A. Reference in this context be made to the decision in Godrej & Boyce Mfg. Co. Ltd. v. Dy. CIT [2010] 328 ITR 81 (Bom). A rule, even otherwise, has the statutory force of law (CIT v. Ajanta Electricals ....
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....curred may thus be lower, equal to, or even higher than the income that may finally arise, resulting in a surplus (gain), no net gain or, as the case may be, loss from the relevant activity. If incurring expenditure itself ensured income in a higher sum, all that would need to be done, to earn income, is to incur expenditure. Further, there would - in that case, never be a case of a loss being suffered. It is for this reason that 'income' includes 'loss'; there being no difference in their nature or character, but only in quantum. In fact, what is at play is a number of factors, both quantitative and qualitative, viz. business and market risks; the management input, including it's quality, etc., which have a bearing on the income that may arise, which is largely in a dynamic environment, so that the relevant variables and their values are both subject to change from time to time. Speaking in the context of our case, the entire expenditure is incurred on, or in relation to, investments, which yield dividend as income, the quantum of which is generally outside the domain of the investor, the person incurring the expenditure. The expenditure is incurred qua investments as a class or ....
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....gue that, in that case, disallowance u/s. 14A ought to be made even when no income not forming part of the total income is earned, and all the expenditure attributable to the relevant investments subject to disallowance, contradicting Redington (India) Ltd. (supra). This is as it is only a case where none, as against some, of the investments yield (tax-exempt) income for the relevant year. We do not think that there is scope for any such argument when the Hon'ble High Court has, on a reading of s. 14A, found that it does not admit of disallowance where income not forming part of total income is not actually earned. It nowhere states that no expenditure is presumed to have been incurred where no tax exempt income is earned. Rather, it discountenances any adjustment being made on the basis of a presumption, stating that applying sec. 14A in the absence of any tax-exempt income would imply a disallowance in respect of presumed income, and which surely cannot be, and which can be regarded as the ratio of the decision. Again, as explained by it with reference to Madras Industrial Investment Corporation Ltd. [1997] 225 ITR 802 (SC), it is only the tax-exempt income for the relevant y....
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....ctional High Court is, in any case, not binding on the tribunal (refer, inter alia, Suresh Desai & Asst. CIT [1998] 230 ITR 912 (Del); CIT v. Thane Electricity Supply Ltd. [1994] 206 ITR 797 (Bom)). The assessee further states that the tribunal has in Asst. CIT v. Sun Investments (P.) Ltd. [2011] 8 ITR (Trib) 33 (Del) held that the AO has to establish that specific expenditure has been incurred by the assessee for earning exempt income, in the absence of which no disallowance u/s. 14A could be made by him. The primary onus to establish it's return and the claims preferred thereby is on the assessee (see: CIT v. Calcutta Agency Ltd. [1951] 19 ITR 191 (SC); CIT v. R. Venakataswamy Naidu [1956] 29 ITR 529 (SC)). The reason is simple; it is the assessee who is in the intimate know of its affairs, and prefers claims thereby. Section 14A is a statutory disallowance, so that it follows where there is exempt income. The primary onus to show, with reference to it's accounts and other records, is on the assessee as to why the disallowance u/s. 14A should not be restricted to that worked out by him (which could be nil), and where so done the onus shifts to the AO to show as to why he is not s....
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....urpose may also be made to our decision qua an analogous issue, i.e., disallowance of interest toward the interest-free loans to subsidiary companies, which is the subject matter of Gd. 3 of the instant appeal. We decided accordingly. 5. The second issue, per Gd. 3, arising in the instant appeal is the disallowance of interest on borrowings u/s. 36(1)(iii), effected proportionately, in respect of interest-free loans and advances to wholly owned subsidiary (WOS) companies, being Sundaram Fasteners Investments Ltd. (SFIL) and Upasana Engineering Ltd. (UEL). The assessee's case, which did not find favour with the Revenue, and which continues to be the same before us, is twofold. Firstly, it is contended that investment is out of own funds, so that no interest is attributable to the said advances. Two, it is stated that the advances are for the promotion of the new companies and, thus, to further the business interests of the assessee-company. The same, it is added, are only applied for the business purposes of the loanee companies, establishing commercial expediency. The assessee has been successful for the preceding years, i.e., AY 2003-04 onwards, before the first appellate authori....
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....of disallowance of interest, the amounts lent/advanced during the preceding years which, depending on whether the opening balance continues to outstand - in full or in part, would therefore vary between Rs.. 2397.36 lacs and Rs.. 2466.78 lacs. Surely, the business purpose and commercial expediency, as claimed, would need to be examined only with reference to the loans/advances qua which the interest stands disallowed. No assistance on the basis of the application of the earlier loans to subsidiary companies, since returned, inasmuch as they outstand at a nominal figure of Rs.. 69.42 lacs, to a different concern/s, would therefore ensue. Coming to the merits of the case, the same has two aspects to it, i.e., in principle and on quantum. The law in the matter is clear, and toward which we have, while discussing the disallowance u/s. 14A, referred to the burden of proof, which is on the assessee. The assessee's claims are two-fold; one, that advances are out of commercial expediency. Two, that the advances are financed by 'own capital', so that no interest cost can be attributed thereto. We find no basis or any material/evidence led at any stage toward the same. For what purpose the ....
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....d. This aspect, clearly, has factual overtones. This would accordingly warrant examination of the assessee's cash flow statement for the year (which forms part of its balance-sheet as on 31/3/2009/ copy on record). The summarized cash flow statement for the year is as under: Table - I (Amount in Rs.. lacs) Sl. No. Particulars Amount Remarks a) Net cash flow from operations 8787.08 b) Cash flow from investment activities (9817.19) c) Short-fall (1030.11) (a - b) d) Cash flow from financing activities 89.25 e) Net shortfall (940.86) (c - d)(*) (amounts in brackets represent negative sums) (*) cash and cash equivalents as at 31/3/2009 are at Rs.. 940.86 lacs lower than that as on 31/3/2008. Clearly, it cannot be said that the assessee has 'surplus' funds, or that the monies lent/advanced are from it's own funds. The only ready inference is that the same have come from a mix of own funds and borrowed capital, which brings us to the question of the ratio of each component in the mix. Term loans (net of repayments during the year) availed during the year, are at Rs. 5494.50 lacs, i.e., in the financing activity. The same - at gross of....
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....ce utilized) can only be taken as financed in the same ratio as of the funds available for financing for the current year, taken as a whole, i.e., Rs.. 4785.53 lacs, which would enable applying the said ratio to that part of the financing (represented by the shortfall, or utilization of the firm's cash balance/s) as well. Or, else, the same could be considered to be in the ratio obtaining as at the beginning of the year, which would though require preparation, similarly, of the cash flow statement for the immediately preceding year (i.e., the year ending 31/3/2008), or could even be taken on the basis of the capital structure obtaining as at the beginning of the year, which would reflect as to how the working capital, of which the cash (and cash equivalents) is a part, stands financed thereat. The interest, if any, applicable to that part of the financing shall stand to be worked out accordingly. Coming to the balance financing of Rs. 4785.53 lacs, i.e., out of funds arising during the year, the data is, depending on the obtaining facts, subject to two interpretations. If the borrowings are general purpose borrowings, the same could be used for financing fixed assets as well. If an....
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....ly dismissed as not pressed. 8. The fifth ground of appeal is in respect of disallowance of commission expenditure, allowed to non-resident agents, effected under section 40(a)(i) in the sum of Rs. 130.47 lacs. The assessee claims that the services by the agents are rendered outside India and, therefore, no part of the export commission allowed to them accrues or arises in India, for sections 5(2)(b) or 9(1) to apply thereto. Further, no doubt the services include updating the assessee of the changes, market trends, etc. in the respective markets, and examination of the accreditation and the financial standing of the buyers, the same is only in the nature of marketing information and not technical knowledge and, accordingly, only business income. The same would accordingly be taxable in India only where, in terms of Indo-US and Indo-UK Double Tax Avoidance Agreements (DTAAs), the non-resident payees have a permanent establishment (PE) in India, which they undisputedly do not. In the view of the Revenue, on the other hand, the same is in the nature of 'fee for technical services', as defined u/s. 9(1)(vii) of the Act, and which corresponds to the definition of the said term as prov....
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....consideration for the rendering of any technical or consultancy services (including through the provision of services of technical or other personnel) if such services: (a) are ancillary and subsidiary to the application or enjoyment of the right, property or information for which a payment described in paragraph 3 is received; or (b) make available technical knowledge, experience, skill, know-how, or processes, or consist of the development and transfer of a technical plan or technical design. 5. Notwithstanding paragraph 4, "fees for included services" does not include amounts paid: (a) for services that are ancillary and subsidiary, as well as inextricably and essentially linked to the sale of property other than a sale described in paragraph 3(a) ; (b) for services that are ancillary and subsidiary to the rental of ships, aircraft, containers or other equipment used in connection with the operation of ships or aircraft in international traffic; (c) for teaching in or by educational institutions; (d) for services for the personal use of the individual or individuals making the payments; or (e) to an employee of the person making the payments or to any individual....
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....pany. Example 7 Facts: The Indian vegetable oil manufacturing firm has mastered the science of producing cholesterol-free oil and wishes to market the product worldwide. It hires an American marketing consulting firm to do a computer simulation of the world market for such oil and to adverse it on marketing strategies. Are the fees paid to the U.S. company for included services? Analysis: The fees would not be for included services. The American company is providing a consultancy service which involves the use of substantial technical skill and expertise. It is not, however, making available to the Indian company any technical experience, knowledge or skill, etc., nor is it transferring a technical plan or design. What is transferred to the Indian company through the service contract is commercial information. The fact that technical skills were required by the performer of the service in order to perform the commercial information service does not make the service a technical service within the meaning of paragraph 4(b).' Article 13 of the Indo-UK DTAA, in its relevant part, reads as under: Article 13 '3. For the purposes of this Article, the term "royalties" me....
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....f this Convention.' It is patently clear from the foregoing that the warehousing, logistic, inventory management, marketing and other support services being provided by the foreign agents cannot be described as 'fee for included services' or, as the case may be, 'fee for technical services', as defined under the relevant DTAAs, but only as business profits. We have also examined the impugned payments from the stand-point of the same qualifying as 'royalty', to find the same as not falling within the meaning of the term as defined under the relevant Articles. The foreign agents having no PE in India, the commission (remuneration) allowed to them for the said services, is not taxable in India. There is accordingly no liability to deduct tax at source u/s. 195 of the Act thereon. Section 40(a)(i) shall, therefore, not apply in respect of the impugned payments. There is no finding with regard to the foreign agents being tax residents of USA or, as the case may be, UK; the assessee not making it's case with reference to the relevant DTAAs before the Revenue. Accordingly, subject to finding of it being so, we direct the deletion of the impugned disallowance. We decide accordingly. 10. ....
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....for admission of additional evidence u/r. 46A of the Rules does not in any manner affect the power of the first appellate authority to direct production of any evidence which he considers necessary to dispose an appeal before him (r. 46A(4)). Though this is trite law, reliance in this regard may be placed on the decision in the case of Prabhavati S. Shah v. CIT [1998] 231 ITR 1 (Bom). We are thus not inclined to accept the reasons advanced by the ld. CIT(A) for not admitting the assessee's evidence. So, however, to the extent that the matter would require being examined by the AO, we are in agreement with the ld. CIT(A). Accordingly, admitting the said letter, along with the other related documents, we restore the matter back to the file of the AO for necessary verification and adjudication afresh on merits. Needless to add, the assessee shall be allowed a reasonable opportunity to state it's case in the matter, addressing the AO's concerns in-as-much as it is he who is to be satisfied with the correctness of the assessee's claim. The AO shall decide per a speaking order. We decide accordingly. 12. Vide Ground 7 of it's appeal, the assessee prays for being allowed, subject to ....