TaxTMI 
TaxTMI 
2016 (6) TMI 1323
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....he facts and in the circumstances of the case, the Ld. CIT(a) erred in confirming the disallowance made by the Assessing Officer u/s. 40(a)(i) of the Act of Rs. 4,223,522/- paid to foreign parties towards sales promotion services rendered outside India for alleged non deduction of tax u/s. 195 from such payment without appreciating that no tax withholding was called for from such remittance." The revenue had raised the following ground no. 1:- "1. That the Ld. CIT(A) has erred on facts and circumstances of the case and in law by holding that provisions of section 40(a)(ia) do not apply on foreign payments on account of Advertisement, Professional & Consultancy Fees and Commission to foreign travel agents." The assessee had also raised the following sole ground in its cross objection :- "1. That on the facts and in the circumstances of the case, the Ld. CIT(A) erred in ignoring to consider the Publicity and Sales Promotion Expenses of Rs. 4,242/- and Rs. 7,88,126/- respectively incurred by The Oberoi Grand, Kolkata and Oberoi Hotels, Mumbai, the two units of the appellant while adjudicating Ground No. 1 and thereby not concluding that the aforesaid payments d....
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....on an estimated basis for alleged violation of provisions of section 40(a)(i) of the Act. Accordingly, he deleted the disallowance of Rs. 41,09,352/- (2,05,46,761*20%) made by the Learned AO. 3.2. Before the Learned CITA, the assessee claimed that a sum of Rs. 2,11,17,612/- incurred by the assessee pertains to Publicity and Sales Promotion Expenses. These payments were made to non-residents in connection with sales promotion and publicity matters in respect of services rendered abroad by the foreign parties, who do not have permanent establishment in India. It was argued that payments were made for publicity, sales promotion and reservation services and payments were not in the nature of royalty or fees for technical services either under the relevant provisions of DTAA or under the provisions of the Act and hence not taxable in India. Accordingly, it was argued that there was no obligation to deduct tax at source on the payments made thereon. The assessee also placed reliance on the decision of Hon'ble Delhi High Court in the case of Director of Income Tax vs Sheraton International Inc reported in (2009) 178 Taxman 84 (Delhi) wherein it has been held that income by way of adver....
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....be taxable in India as there was no making available of a technology from the perusal of the various services provided. The Learned CITA listed out the payments made to various parties in various tax jurisdictions amounting to Rs. 1,43,42,248/- where make available clause is provided in the treaty. The Learned CITA also listed out the payments made to various parties in various tax jurisdictions amounting to Rs. 59,82,996/- where make available clause was not provided in the tax treaty. However, he restricted the addition to Rs. 42,23,523/- being the remaining portion of the disallowance (i.e 83,32,875 - 41,09,352). 3.3. Aggrieved, the assessee as well as the revenue both are in appeals before us. 3.4. The Learned AR argued that the payments made to various parties in abroad does not fall under the ambit of FTS. He placed reliance on the decision of the Co-ordinate Bench of Mumbai Tribunal in the case of Rich Graviss Products P Ltd vs Addl CIT reported in (2014) 166 TTJ 329 . He argued that the services were not rendered by those parties in India. He also argued that the retrospective amendment to the provisions of section 9 of the Act in Explanation 2 would not confer the TD....
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.... the point of time when payments, from which taxes ought to have been withheld, were made. The tax deductor is not expected to know how the law will change in future. A retrospective amendment in law does change the tax liability in respect of an income, with retrospective effect, but it cannot change the tax withholding liability, with retrospective effect. The tax withholding obligations from payments to non-residents, as set out in section 195 of the Act, require that the person making the payment 'at the time of credit of such income to the account of the payee or at the time of payment thereof in cash or by the issue of a cheque or draft or by any other mode, whichever is earlier, deduct income tax thereon at the rates in force'. When these obligations are to be charged at the point of time when payment is made or credited, whichever is earlier, such obligations can only be discharged in the light of the law as it stands at that point of time." 3.5.2. While rendering the decision in assessee's own case for the Asst Year 2003-04 in ITA No. 57/Kol/2007 dated 9.12.2015, we had also relied on the aforesaid decision together with the decision of the Hon'ble Apex Court in the cas....
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....20% of Rs. 14,342,247/-, the aggregate sum which the Ld. CIT(A) already held as no taxable in India in view of favourable tax treaty provisions." In view of our aforesaid decision, the Ground No.2 raised by the assessee is dismissed as superfluous. 5. Disallowance of Professional and Consultancy Fees The Ld. AO has stated in the assessment order that the assessee incurred an amount of Rs. 2,80,38,329/- in foreign currency on account of "Professional and consultancy charges". During the assessment proceedings, the assessee provided the details of the payees and the respective amount of payments. However, no specific reason for non deduction of tax at source was provided. Since, the assessee did not provide the reasons for not withholding the tax and the applicability of DTAA in respect of each specific foreign remittance, the Ld. AO inflicted an ad hoc disallowance of Rs. 5,607,666/- u/s. 40(a)(i) of the Act, being 20% of the actual expenses of Rs. 2,80,38,329/-. The assessee, before the Learned CITA, submitted that party wise details of the relevant units were furnished to the AO during the assessment proceedings. As per the assessee, the contention of the Ld. AO that n....
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....ts were made. The assessee paid an aggregate amount of Rs. 45,99,014/ - to M/ s. Atanoskovic Hartnell, the Australia based firm of solicitors on account of legal consultancy charges. The assessee submitted that by virtue of Article XIV of DTAA with Australia, the payment was not subject to tax in India. The assessee also furnished the Australian tax residency certificates of the above party. In view of the above, the assessee contended that since the income was not taxable in India, there was no requirement to withhold tax while making the remittances. The assessee submitted that the similar principle should also apply for the payments to other legal consultants like Clifford Chance and Kurtz Ahlers & Associates. As regards the payments made to M/s. Deloitte & Touch, USA the assessee submitted that the payment was made to the above payee in relation to the review of market prospects in Dubai. The assessee contended that since the above services were provided outside India and was not utilized in any business in India, the same should not be taxable in India. In respect of consultation and professional fees amounting to Rs. 66,35,747/- for Trident Mumbai project, the assess....
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....as deleted by the Learned CITA. Aggrieved, the revenue is in appeal before us. 5.2. The Learned DR prayed for set aside of this issue to the file of the Learned AO for verification of the entire facts as according to him the details were filed by the assessee only before the Learned CITA . In response to this, the Learned AR objected to the same as the Learned CITA had duly called for a remand report from the Learned AO before disposing off the appeal. 5.3. We have heard the rival submissions and perused the materials available on record. With regard to the prayer of the Learned DR for setting aside of this issue to the file of the Learned AO, we find that the Learned AO had submitted his remand report vide letter dated 12.3.2010 and assessee had also duly filed its rejoinder to the remand report. The Learned CITA after taking into account the remand report and rejoinder filed by the assessee and on perusal of the entire details had deleted the addition. We also find that the Learned CITA had given categorical finding in respect of each and every payment by referring to relevant provisions of the Act and with specific reference to treaties of various countries. None of these ....
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.... taxable in India under the domestic law due to the recent amendments, that should not affect the case of the assessee since the assessee had claimed the favourable treaty provisions as applicable. The Learned CITA held that the payment of commission to foreign travel agents outside India would not fall under the ambit of interest, royalty or fees for technical services and accordingly the amendment in Explanation 2 to section 9 with retrospective effect from 1.6.1976 would not alter the situation. Accordingly he held that commission paid to foreign agents for sales outside India do not accrue or arise in India and thus is not taxable in India. Accordingly the provisions of section 40(a)(i) of the Act could not be made applicable in the facts of the instant case. Aggrieved, the revenue is in appeal before us. 6.1. We have heard the rival submissions and perused the materials available on record. With regard to the prayer of the Learned DR for setting aside of this issue to the file of the Learned AO, we find that the Learned AO had submitted his remand report vide letter dated 12.3.2010 and assessee had also duly filed its rejoinder to the remand report . The Learned CITA aft....
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....ents. In respect of the other payments the assessee submitted that no tax was required to be deducted at source as the party rendered services from abroad and did not have any permanent establishment in India. It was further submitted by the assessee that services rendered towards securing guest reservation cannot be considered as technical fees and as such are not deemed to accrue or arise in India. In respect of the contention of the AO that the expenses represent monthly provisions, the assessee submitted that the expenditure represent actual expenses for different' months and the Ld. AO was merely guided by the narrations in the details filed and did not ask for any further clarification. The assessee further submitted that the disallowance inflicted by the Ld. AO was purely based on surmise and conjecture and thus, should be deleted. The Ld. CIT(A) perused the submissions made by the assessee as well as the relevant documents filed during the appellate proceedings. On examination of the relevant documents he found the details of payment under this head is as under: Oberoi Contact Centre 8,36,037.00 Trust International 68,782.13 The leading Hotels of the W....
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....t establishment in India. In respect of provision of expenses to the tune of Rs. 7,97,345/- , we feel that the same requires verification by the Learned AO that the liability had crystallized during the year under appeal and for verification of actual payments thereon. Accordingly, the Ground Nos. 3 & 4 raised by the assessee are allowed for statistical purposes. 8. Disallowance on account of provision for overriding commission The revenue has raised the following ground:- "2. That the Ld. CIT(A) has erred on facts and circumstances of the case and in law by overlooking the fact that provision for over-riding commission debited by the assessee and claimed as expenses are not allowable because these are mere 'provisions'." The Learned AO observed that the amount of Rs. 37,00,563/- represents provision and hence not allowable as a business expenditure. Before the Learned CITA, the assessee, on the other hand, submitted that, the overriding commission is paid to the travel agents who are able to generate additional business and the overriding commission is paid over and above the normal commission payments, The assessee submitted that the overriding commissions do....
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....mount represents a crystalised liability and thus the appellant should be eligible to deduction of the said amount. In view of the above discussion, this ground of the appellant is allowed." 8.2. We have heard the rival submissions. From the detailed observations made by the Learned CITA as reproduced hereinabove and in view of the fact that revenue was not able to produce the contrary evidence in this regard we find no infirmity in the order of the Learned CITA in this regard. Accordingly, the Ground No. 2 raised by the revenue is dismissed. 9. Disallowance on account of aircraft running and maintenance expenditure The Learned AO during the course of assessment proceedings observed that the assessee had debited a sum of Rs. 3,63,25,075/- towards aircraft maintenance expenses. The Learned AO disallowed 10% of the same on an ad hoc basis on account of alleged personal element of expenditure incurred thereon. The Learned CITA after making verification of the detailed break up of expenditure provided by the assessee which were also subjected to remand proceedings, and based on the order in the assessee's own case for the Asst Years 2004-05 and 2005-06 , upheld the disallowance m....
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....der appeal as in this year, the entire details were very much before the Learned AO. We also find lot of force in the arguments of the Learned AR that the assessee company being a non-natural person cannot have any personal element thereon and all the expenditure incurred thereon had to be construed only for business purposes . To this extent, the reliance on the Gujarat High Court decision in 253 ITR 749 is well placed and supports the case of the assessee. We also find lot of force in the arguments of the Learned AR that if at all there is any personal element involved in the aforesaid expenditure, the same have to be taxed as perquisite in the hands of the directors and it is only for the TDS officer to look into the violations, if any, on the same and hence on that ground also, no disallowance of expenditure could be appreciated. We find that the Learned AO had made the entire addition based on surmises and conjectures and made on adhoc basis . It is well founded proposition that what is apparent is real and the allegation to prove the contrary is on the person making such allegation. The following decisions support our view in this regard:- CIT vs Daulat Ram Rawatmull....
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.... adopted by the Ld. AO. The assessee filed a detailed submission on 15th November, 2010 in respect of the advances made to Balaji Hotels & Enterprises Ltd. In terms of the said submission, the party had a piece of land in Chennai where it proposed to start a hotel. For this purpose, the party took loan from IFCI and TFCI. The appellant entered in to a Technical Service Agreement and a Project Consultancy Agreement with the said party in respect of the proposed hotel. However, eventually the project went through financial crunch and the party could not arrange for funds. At this point, at the request of the party, the assessee provided an advance of Rs. 15.12 crores to the party for the completion of the hotel project. However, ultimately the project could not be succeeded and the financial institutions identified the loan provided to the party as NPA. Subsequently, IFCI took possession of the hotel and sold it to a third party. As per the assessee, it had business interest in providing advances to the party since it wanted an early completion of the project so that it can earn revenue from the project by virtue of Technical Services Agreement. Moreover, all the loans were provid....
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.... Insurance claim Rs. 5,83,055 Advance Entertainment Tax & other statutory payments made by different units Rs.2,76,59,906 Payments made by different units Deferred Foreign Exchange Fluctuation Rs. 22,93,187 Advance to DPS Society Rs. 10,00,000 Amounts recoverable from group companies for Rs.1,39,45,733 services rendered/capital goods purchased on their behalf Sundries Rs.1,13,01,793 Total Rs.13,29,16,907 In respect of the above, the assessee submitted that during the assessment proceedings the AO did not ask for the details of "Other Miscellaneous Advances". Further, the assessee submitted that the perusal of the above details would reveal that in almost all cases the advances were given by the assessee due to commercial expediencies, In addition, the assessee submitted that the items like Debit balances in Sundry Creditors A/ c, advance to suppliers, Gratuity Receivable etc. having business advances did not represent any loan on which interest can be charged. On the other hand, as per the assessee, in case of staff loan, interest was charged by the assessee @12%. The assessee further submitted tha....
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....ce of notional interest on interest free advances given to associate companies without appreciating the fact that the advances were made wholly from the bank accounts, where the income from sales are deposited and thus the question of disallowance of notional interest on borrowed funds does not arise. 8. that without prejudice to the Ground Numbers 6 & 7 above, even assuming but not admitting that the advances were made out of the borrowed funds, the Ld. CIT(A) erred in sustaining the assumed rate of 12% p.a. for the purpose of computing the disallowance of notional interest." The revenue has raised the following ground:- "3. That the Ld. CIT(A) has erred on facts and circumstances of the case and in law by holding that the miscellaneous advances made are purely trade advances/deposits and not in the nature of loan when the assessee could not furnish any evidence to show that the advances given were trade advances/deposits and were made from its own surplus." 10.2. We have heard the rival submissions and perused the materials available on record. We find that this issue is covered in assessee's own case for the Asst Years 2003-04 , 2004-05 & 2005-06 in ITA N....
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....case of CIT vs Walchand and Co. (1967) 65 ITR 381 (SC) wherein it was held that in applying the test of commercial expediency whether the expenditure was excessively laid down for the purpose of business, reasonableness of the expenditure is to be judged from the point of view of a businessman and not that of the revenue. It is well decided that what is to be seen for the purpose of allowability of interest u/s 36(1)(iii) of the Act is as to whether the borrowed funds were utilized for the purpose of business. 7.4.2. From the above workings of availability of own funds, it could safely be concluded that the borrowed funds were not utilized for making the interest free advances by the assessee. This finding is given irrespective of the fact that the same were advanced as a measure of commercial expediency and for the purpose of business. We find that all the advances were made as Strategic Investments to pursue its further business interests and those companies were also using the brand of the assessee, rendering technical services and assessee's staff were used by the group companies and hence had to be construed as advances made during the course of assessee's business. ....
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....hat when borrowed funds and own funds were inextricably mixed in the same bank account and if the own funds are more than the amounts advanced interest free to sister concerns, then the presumption could be drawn in favour of the assessee that those advances were made only out of own funds of the assessee. - that from the aforesaid facts available on record, the assessee had advanced monies to various concerns during the course of its business to further strengthen its business interests with the said parties and as a measure of commercial expediency. - that in applying the test of commercial expediency whether the expenditure was excessively laid down for the purpose of business, reasonableness of the expenditure is to be judged from the point of view of a businessman and not that of the revenue. Accordingly we hold that the action of the Learned AO in disallowing a sum of Rs. 4,67,38,966/- and Learned CITA restricting the said disallowance to Rs. 3,73,32,024/- is not warranted and Ground Nos. 8 & 9 raised by the assessee are allowed. 10.3. It is not in dispute that the assessee had sufficient own funds to make these advances. The assessee had earned ....
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....ven when provisions of section 14A of the Act were correctly applied in respect of management expenses which were incurred for earning exempt income." 11.2. We have heard the rival submissions. The relevant assessment year under appeal is 2006-07 at which point of time , the provisions of Rule 8D was not in force and the same was made applicable only from Asst Year 2008-09 as decided in the decision of Godrej & Boyce Manufacturing reported in 328 ITR 81 (Bom) . However, it is not in dispute that the assessee had derived taxable income as well as tax free income and incurred expenditure for deriving both the incomes and hence disallowance is definitely warranted in terms of section 14A which is brought in the statute book with retrospective effect from 1.4.1962. The disallowance had to be made only on an estimated basis with regard to the expenditure incurred for the purpose of earning tax free income. The Hon'ble Jurisdictional High Court in the case of CIT vs M/s R.R.Sen & Brothers P Ltd in GA No. 3019 of 2012 in ITAT NO. 243 of 2012 dated 4.1.2013 had held as under:- " The assessee did not show any expenditure incurred by him for the purpose of earning the money which....
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....the assessee be given one more opportunity to produce the TDS certificates and other evidences before the Learned AO with regard to the compliance to TDS obligations. In response to this, the Learned DR vehemently relied on the order of the Learned CITA. 12.3. We have heard the rival submissions and perused the material available on record. We find in the facts and circumstances, the assessee be given one more opportunity to furnish before the Learned AO TDS certificates or any other evidences in support of its compliance to TDS obligations with regard to commission payments made to Airports Authority of India. We direct the Learned AO accordingly. Hence the Ground No. 10 raised by the assessee is allowed for statistical purposes. 13. Disallowance on account of advance written off - Rs. 2,01,50,000/- The assessee, provided an advance of Rs. 90,150,000/ - to Nandi Hills Hotels & Resorts Limited towards equity participation of joint venture project with Jansons group of Bangalore. However, eventually the project was abandoned. The assessee received back an amount of Rs. 7,00,00,000 from Nandi Hills Hotels & Resorts Limited in pursuant to the order of Hon'ble Calcutta High C....
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....cer on account of advance written off, holding that the advance was of capital nature." 13.2. The Learned AR reiterated the factual submissions and the circumstances which led to the write off of the said amount. He stated that out of the amounts advanced in the sum of Rs. 9,01,50,000/- to Nandi Hills and Resorts Ltd, due to failure of joint venture, the assessee could recover only a sum of Rs. 7,00,00,000/- pursuant to the order of the Hon'ble Calcutta High Court. Hence the chances of recovery of the balance sum were completely and lost. Hence the assessee had no other option but to write off the remaining sum of Rs. 2,01,50,000/- and claim the same as deduction. He placed reliance on the decision of the Hon'ble Calcutta High Court in the case of Binani Cement Ltd vs CIT reported in (2016) 380 ITR 116 (Cal) in support of his contention. He argued that the advance was made during the course of business of the assessee and hence the same has to be construed as a regular business loss. In response to this, the Learned DR argued that this is a joint venture investment made by the assessee and the income had it been derived would have been taxed in the hands of the said joint ventur....
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.... abandoned at the work-in- progress stage, the expenditure did not result in an enduring advantage and such expenditure, when written off, had to be allowed under section 37 of the Income-tax Act, 1961. The Tribunal reversed the order of the Commissioner (Appeals) holding that the expenditure incurred in the earlier years could not be deducted in the year 2003-04. On appeal: Held, allowing the appeal, that there was no challenge on the finding of the Commissioner (Appeals) on the facts before the Tribunal or even the appeal. There would have been no occasion to claim the deduction if the work- in-progress had completed its course. Because the project was abandoned the work-in-progress did not proceed any further. The decision to abandon the project was the cause for claiming the deduction. The decision was taken in the relevant year. Thus, the expenditure arose in the relevant year." We find similar view has been taken in the following cases :- (a) Decision of Hon'ble Delhi High Court in the case of Indo Rama Synthetics (I) Ltd vs CIT reported in ( 2011) 333 ITR 18 (Del). (b) Unreported decision of Hon'ble Calcutta High Court in the case of CIT vs Alcove Industrie....
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....d by that time the matter can be remitted back to the file of AO for fresh adjudication in term of the decision of Hon'ble Supreme Court. On this, Ld. CIT DR has not objected to the same. Accordingly, we set aside this issue to the file of the AO to await the decision of Hon'ble Supreme Court and decide the issue accordingly. This issue of assessee's appeal is remitted back to the file of AO and accordingly the Ground No. 12 raised by the assessee is allowed for statistical purposes. 15. Disallowance of General Expenses on estimated basis As per the Ld. AO, the total expenditure of Rs. 1,88,75,300/- under this head includes some expenses in the nature of penalty, TDS etc. Thus, in the assessment order the Ld. AO has disallowed an estimated amount of 10% of the total expenditure. The assessee submitted that the details of expenses under this head was submitted to the Ld. AO during the course of assessment proceedings in the desired format. However, the Ld. AO has not inflicted disallowance in respect of any specific item but disallowed an estimated amount of 10% on an ad hoc basis. The assessee further submitted, that certain penalties are compensatory in nature and th....
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....ovision for Bonus - Rs. 7,12,000/- The Ld. AO, in the assessment order has stated, that the assessee, during the assessment proceedings submitted certain documents along with its submission dated 5th November, 2008 .It was observed from the documents that the assessee had claimed Rs. 7,12,000/- as provisions for bonus in respect of Oberoi Airport Services, Mumbai. Since, provision is not allowable as deduction, the Ld. AO, in the assessment order disallowed Rs. 7,12,000/-. On the other hand, the assessee contended that provision for bonus was being claimed and allowed on payment basis as per the provisions of clause (c) of section 43B of the Act in the computation of income for the assessment year under appeal , the assessee offered an amount of Rs. 29,65,542/- as provision for bonus as per section 43B which is as per the Tax Audit Report of the assessee company for the relevant assessment year. It was contended by the assessee that the amount of Rs. 29,65,542/- includes the provisions for bonus of all the units of the assessee company which inter alia includes the provision in respect of "Oberoi Airport Services, Mumbai". Thus, as per the assessee, the sum of Rs. 29,65,542/- al....
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....ubmitted that the addition made by Ld. AO u/s. 41(1) on account of unclaimed salaries and wages was not based on correct appreciation of facts or law and thus liable to be deleted. As per the assessee, section 41(1) of the Act is applicable in a situation where deduction of any expenditure is claimed and allowed in any past year and subsequently the assessee gets any benefit or amount in respect of such expenditure. In such cases, the benefit is offered to tax in the subsequent year. As per Explanation 1 of section 4](1) remission or cessation of any trading liability by an unilateral act would be chargeable to tax only if such liability is written back in accounts. In view of the above, the assessee submitted that in cases of Oberoi Flight Services and Oberoi Airport Services no amount on account of unclaimed salary and wages was written back in the accounts and there was no cessation of liability. The assessee further submitted that employees who had left the organisation did not file any declaration that they had waived their dues from the Company. Thus, as per the assessee the liabilities as shown in the books exists and has not ceased. In view of the assessee, the left employe....
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....tise for installation. Hence, as per the Ld. AO, if certain imported machineries are received on 30th September, 2005 or 31st March, 2006 it is not possible that on the very same day the machineries are taken out of the store, installed and put to use. However, the assessee had shown the date of receipt of the machineries as the date of as addition and accordingly claimed depreciation. The Ld. AO contended that the depreciation had been claimed by the assessee on certain machineries on the basis of the date of receipt and not on the basis of the date on which the items were put to use. In view of the above, the Ld. AO disallowed the claim of depreciation on the selected items of additions to plant and machinery on the following grounds: - On examination of each invoices, the AO observed that the invoices were stamped showing the receipt of the goods in the store along with the sign of the store keeper. In spite of this, the assessee stated that no register is maintained. Thus, in view of the AO the reply of the appellant is not tenable. - In the metro cities there is a restriction of plying of the goods vehicle during 7.00 am to 10 pm. Thus, in view of the Ld. AO ....
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....ations. - It is possible that the goods have been received before 7 am of the respective dates and not after 10 pm of such dates as contended by AO. Moreover, the assessee mentioned that the entry restriction in the metro cities between 7 am and 10pm does not apply for all goods vehicle. The restriction is applicable only for full size trucks/lorries. In addition to the above submission, the assessee furnished specific submission in respect of certain items as under: - In respect of item no 1 of the list as provided by the AO in the assessment order, the assessee submitted that the item was purchased from Delhi and was not an imported item. The specific item is an UPS system which could be very easily installed by the technical personnel of the assessee company and the local supplier. - In respect of item no 2 of the list as provided by the AO in the assessment order, the assessee submitted that the AO had himself recorded the date of receipt as 27.3.2006. As per the assessee, there is no valid reason to presume why any asset acquired on 27.3.2006 could not be installed and put to use by 31.3.2006. - In respect of the machineries received on 3....