TaxTMI 
TaxTMI 
2022 (6) TMI 1433
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....cts in concluding that no specific tangible services have been rendered by the AE to the Appellant; 2.3 The learned AO/TPO further erred in law and on facts in concluding that the payment made towards Management Service Fee by the Appellant to the AE is not connected to any specific services rendered by the AE to the Appellant; 2.4 The learned AO/TPO has erred in law and on facts in making the TP adjustment on account of Management Service Fee ignoring the commercial and economic rationale and business expediency of the Appellant for receiving the Management Services from its AE; 2.5 The learned AO/TPO erred in law and on facts in making the TP adjustment on account of Management Service Fee without appreciating the fact that the Management Services have been rendered by the AE to the Appellant based on an agreement between AE and the Appellant; 2.6 The learned AO/TPO erred in law and on facts in making the TP adjustment on account of Management Service Fee ignoring the fact that the services rendered by the AE to the Appellant resulted in various tangible benefits and further erred in ignoring the submissions and evidence placed by the Appellant....
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....ternational level, intragroup services are quite challenging for tax authorities, as companies use these transactions (of course, also other transaction types as loans etc.) to optimize with taxes. Services are commonly used for shifting untaxed profit to a country, where lower income tax rate applies. Therefore, the intragroup transactions have caught the interest of the tax authorities and are being constantly monitored. 4. To justify the payment to HIBV as at arm's length, the assessee filed a Transfer Price [TP] study along with the report in Form 3CEB. It was submitted in its TP study by the Assessee, that there was an agreement between HIBV and the assessee dated 27.6.2012 whereby HIBV agreed to provide the following services to the assessee:- "Provision of Services and know how HIBV agrees to provide Services and know how to the Company through its Personnel. Such services and know how would be rendered by HIBV to the Company from the Netherlands. Heineken has accumulated substantive information, experience and unique knowledge either by developing such know-how itself or by adapting external know-how for specific use within the Heineken Group. It relate....
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....red. This also involves looking at sudden production bottle necks being addressed instantaneously and also analysing the Causes which resulted in production loss. This concept also ensures that. no such problem are repeated in future. d. Quality Analysis -A new perspective based on international model." 7. The assessee also furnished copy of emails and correspondence in connection with the services rendered. These documents are available at pages 198 to 424 of the assessee's PB. 8. The TPO, firstly, observed that there should be a commercial rationale for the arrangement and the agreement between assessee and HIBV lacked commercial rationality in the sense that a sum of Rs.6 crores was paid by the assessee as a lump sum consideration without reference to any nexus with the nature of services to be rendered. He observed that as per clause (7) of the agreement dated 23.7.2012, HIBV was not liable in any way, except for direct damage sustained as a result of gross negligence or willful misconduct in the performance of the services. According to the TPO, such clauses would not be present in the agreement between unrelated parties. Another peculiar feature noted by the TP....
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....PO examined the case of the assessee and came to the conclusion that the provision of services were generic in nature and no benefit was derived by the assessee and there was no material to prove rendering of any technical services. The TPO observed that because of the services, the assessee claims water consumption while manufacturing beer was reduced. However, the assessee could not file any evidence to prove the reduction of water consumption, according to him. On the aspect of brewery consumption system, the TPO observed that the assessee has filed only illustrative set of emails and this was purely a reporting system between the teams of groups which proved that this was stewardship services provided to shareholders of the group and there is no necessity to pay for shareholder activity. The TPO also observed that the assessee failed to establish the economic or commercial value that it derived by virtue of services rendered by HIBV. In conclusion, the TPO made the following observations and held that ALP should be treated as NIL and the entire payment of Rs.6 crores was to be added to the total income of the assessee on account of determination of ALP:- "The arguments....
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....anagement fee are independent of the nature and quantum of services, if any, rendered. * The payment is apportioned by different cost centres of the affiliate on an agreed percentage basis and not linked to the extent or type of services, if any, actually rendered by the individual unit. * Despite the high sounding words used, no specific tangible service is identified or its arms length price determined. * The payment made by United Breweries Limited apparently looks like a tribute payable by a subsidiary to its holding company. It is not relatable to any specific tangible service rendered by the holding company to the subsidiary. In view of the above it is concluded that the ALP is nil since an independent entity in a comparable situation would not pay any amount for the service. The entire payment of management fee Rs. 6 Crores is treated as an adjustment proposed U/s 92CA. Showcause why the same should not be done." 10. The TPO's suggestion was incorporated in the draft assessment order. The assessee filed objections before the DRP, which upheld the order of the TPO with the following observations:- "Panel: The assessee has furthe....
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....ions mentioned in the agreement. TPO has concluded that the assessee has neither proved the substantiality of the transaction, nor quantified the intra group services in terms of expenditure incurred and benefits derived. TPO has held that as no tangible service has been identified or specified by the assessee, the payment was more in nature of a tribute from the subsidiary to its holding company and determined the ALP as Nil as no independent party would make such payment. 6.3 We have gone through the Service Agreements and other evidence adduced by the assessee, TPO's order and the elaborate submissions made by the assessee. We agree with the TPO that the service agreement is unlike those exist between unrelated parties in the sense that: * It does not specify or quantify services to be rendered * It does not link payment schedule to milestones achieved in service delivery * It does not contain normal penal clauses to safeguard the interest of the payer * It is lopsided on account of the vast scope of indemnity and limitation of liability granted to service provider at the expenses of the recipient. 6.4 The submissions mad....
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....interfere with the finding of the TPO. We uphold the order of the TPO computing ALP of Management Service Fee at NIL and dismiss the objections of the assessee as without merit. We direct the Assessing officer accordingly." 11. Aggrieved by the final order of assessment incorporating the directions of the DRP, the assessee has raised ground Nos.2.1 to 2.9 before the Tribunal. 12. We have heard the rival submissions. The ld. counsel for the assessee drew our attention to the list of services that the assessee received from HIBV and also the evidence filed regarding rendering of services. We have already referred to these documents while dealing with the manner in which the TPO determined the ALP. The ld. counsel for the assessee submitted that the evidence filed by the assessee regarding services rendered has been completely brushed aside by the TPO as well as the DRP. In this regard, he drew our attention to the order of the TPO for AYs 2017-18 and 2018-19 which are placed at pages 31 to 42 of assessee's PB and submitted that for those assessment years for the very same services, the TPO has accepted that payment to AE is at arm's length. His further submission was that the l....
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....6-07 order dated 7.9.2011, the Mumbai Tribunal had an occasion to examine as to what is the approach that has to be adopted for determining ALP in the case of cost contribution agreement which is akin to the arrangement in the present case between the Assessee and its parent company. The assessee in case of Dresser Rand (supra) entered into a 'cost contribution agreement' with its parent company pursuant to which it paid a sum of Rs. 10.55 crores as its share of the costs. The TPO, AO & DRP disallowed the expenditure on the ground that the ALP was 'Nil' as no real services had been availed by the assessee and the arrangement was not genuine. On further appeal by the Assessee, the Tribunal held as follows:- "8. We find that the basic reason of the Transfer Pricing Officer's determination of ALP of the services received under cost contribution arrangement as 'NIL' is his perception that the assessee did not need these services at all, as the assessee had sufficient experts of his own who were competent enough to do this work. For example, the Transfer Pricing Officer had pointed out that the assessee has qualified accounting staff which could have handled the audit work and ....
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.... plain words, requires that assessee's share of overall contribution to the costs is consistent with benefits expected to be received, as an independent enterprise would have assigned to the contribution in hypothetically similar situation. .." 16. The Hon'ble High Court of Delhi in the case of EKL Appliances Limited [(2012) 209 Taxman 200 as well as Cushman & Wakefield India Private Limited in ITA No.475/2012 dated 23.5.2014, 367 ITR 730 (Del), rendered similar ruling as was rendered in the case of Dresser Rand (supra). In the case of Cushman & Wakefield (supra), the Hon'ble Delhi High Court observed that whether a third party in an uncontrolled transaction with the Taxpayer would have charged amounts lower, equal to or greater than the amounts claimed by the AEs, has to perforce be tested under the various methods prescribed under the Indian TP provisions. In the context of cost sharing arrangement, the Hon'ble High Court opined that concept of base erosion is not a logical inference from the fact that the AEs have only asked for reimbursement of cost. This being a transaction between related parties, whether that cost itself is inflated or not only is a matter to be tested un....
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....h type of services rendered and it is necessary for the assessee to explain as to how these emails show that services were rendered by the AE. It is only on such analysis being provided by the assessee, can the TPO proceed to examine the rendering of services as well as benefit that the assessee might derive. In the matter of coming to the conclusion on the benefit that the assessee received, clear evidence cannot be insisted upon and the overall business scenario and type of services rendered have to be looked into. We also notice that similar payment made to the very same AE for similar services under the very same agreement, has been accepted to be at Arm's Length in AY 2017-18 & 2018-19. We are, therefore, of the view that it would be just and appropriate to set aside the issue with regard to determination of ALP to the AO/TPO for fresh consideration in the light of law as explained above and the other observations in this order. The AO/TPO will afford opportunity of being heard to the assessee in the set aside proceedings, before deciding the issue. 20. The next dispute is with regard to determination of ALP in respect of international transactions whereby assessee paid a s....
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....s paid to Force India Formula One Team Limited ignoring the submissions and various judicial precedents relied upon by the Appellant during the course of Transfer Pricing Proceedings and during the course of proceedings before DRP: and 2.17 The learned AO/TPO erred in law and on facts in making the TP adjustment on account of Management Service Fee adjustment inasmuch as the learned TPO/DRP has not undertaken any independent analysis of its own to determine the ALP and thus arbitrarily concluded that the ALP is NIL." 21. The first and foremost argument of the ld. counsel for the assessee on this issue is that FIFOTL is not an Associated Enterprise [AE] at all. In this regard, the submissions made by the assessee and the conclusions of the TPO are as follows:- "4.2 It is submitted that Force India Formula One Team Ltd is not an associated enterprise of United Breweries Ltd. By mistake it has been declared as an associated enterprise. In 3CEB and Transfer Pricing Study report the relationship has been described as "enterprise over which the shareholders have significant influence". It is submitted that this kind of relationship is relevant for the related party d....
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....ly, or through one or more intermediaries, in the management or control or capital of the other enterprise. UB group and the Chairman of the UB group Mr. Vijay Mallya held close to 20% of shares in UBL and Mr. Vijay Mallya held close to 42% of shares in Fl Force India Private Limited. This clearly demonstrates the control of one over the another. This arrangement clearly falls under the domain of Sec. 92A (2)(j). The word 'control' meant in the said section can be interpreted to mean that the individual along with his companies and persons associated with him has the power to make crucial decisions regarding the management and running of two enterprises. This is very apparent in the case of the taxpayer. So Fl Force India Private ,Limited clearly is an "associated enterprise" as defined under section 92A" 22. Our attention was drawn to the fact that in AY 2016-17 the AO himself accepted that FIFOTL is not an AE. Further attention was drawn to the order of the TPO dated 30.10.2019 for AY 2016-17 wherein the TPO accepted the explanation of the assessee in its letter dated 27.9.2019 that FIFOTL is not an AE. 23. The ld. DR, on the other hand, pointed out that in....
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....one or more intermediaries, in its management or control or capital, are the same persons who participate, directly or indirectly, or through one or more intermediaries, in the management or control or capital of the other enterprise". Accordingly, we would like to submit that, UBL is a listed entity and is managed by its board of directors. It is the board's decision (comprising of 3 Directors from UBL, 3 Directors from Heineken and 6. Independent Directors) that over sees on all aspects of the management/operations of the company. Hence, no single person can take a decision with respect to put the capital at risk (or) take any other strategic decisions. Accordingly, no single promoter group has "control/influence" over decisions of the board. Based on the above facts, our tax auditors have also not considered Force India as an associated enterprise of UBL. Consequently, we request your good self not to consider Force India as an Associated Enterprise of United breweries Limited and to drop the proposal of making any adjustment under section 92CA of the Income Tax Act." 25. The above plea has been accepted by the AO/TPO and no separate bench marking was un....
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.... 2.23 The learned AO/TPO has made TP adjustment in respect of Sales Promotion expenses paid to East Bengal Football Team ignoring the submissions and various judicial precedents relied upon by the Appellant during the course of Transfer Pricing Proceedings and during the course of proceedings before DRP;" 27. The Finance Act, 2012 extended its scope to cover certain domestic transactions with related parties within India, defined as 'Specified Domestic Transaction' (SDT) with effect from AY 2013-14. The Finance Act, 2012 introduced Section 92BA giving the meaning of SDT and it provided as follows:- "SECTION 92BA: MEANING OF SPECIFIED DOMESTIC TRANSACTION. For the purposes of this section and sections 92, 92C, 92D and 92E, "specified domestic transaction" in case of an assessee means any of the following transactions, not being an international transaction, namely:- (i) any expenditure in respect of which payment has been made or is to be made to a person referred to in clause (b) of subsection (2) of section 40A. (ii) any transaction referred to in section 80A; (iii) any transfer of goods or services referred to in sub-section ....
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.... Assessee placed reliance on decision of ITAT Bangalore Bench in the case of Textport Overseas Pvt.Ltd. Vs. DCIT IT(TP)A No. 1772/Bang/ 2017 order dated 22.4.2021 wherein it was held that in the light of provisions of section 6 of the General Clauses Act, in such a case, the court is to look to the provisions in the rule which has been introduced after omission of the previous rule to determine whether a pending proceeding will continue or lapse. If there is a provision therein that pending proceedings shall continue and be disposed of under the old rule as if the rule has not been deleted or omitted then such a proceeding will continue. If the case is covered by Section 6 of the General Clauses Act or there is a pari materia provision in the statute under which the rule has been framed in that case also the pending proceeding will not be affected by omission of the rule. In the absence of any such provisions in the statute or in the rule, the pending proceeding will lapse under rule under which the notice was issued or proceeding being omitted or deleted. 31. We have carefully considered the rival submissions. The issue with regard to whether the transaction of payment of sale ....
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....In fact coordinate bench under similar circumstances had examined the effect of omission of sub-section (9) to Section 10B of the Act w.e.f. 01.04.2004 by Finance Act, 2003 and held that there was no saving clause or provision introduced by way of amendment by omitting sub-section (9) of Section 10B. In the matter of GENERAL FINANCE CO. vs. ACIT, which judgment has also been taken note of by the tribunal while repelling the contention raised by revenue with regard to retrospectivity of Section 92BA(i) of the Act. Thus, when clause (i) of Section 92BA having been omitted by the Finance Act, 2017, with effect from 01.07.2017 from the Statute the resultant effect is that it had never been passed and to be considered as a law never been existed. Hence, decision taken by the Assessing Officer under the effect of Section 92BI and reference made to the order of Transfer Pricing Officer-TOP under Section 92CA could be invalid and bad in law. 7. It is for this precise reason, Tribunal has rightly held that order passed by the TPO and. DRP is unsustainable in the eyes of law. The said finding is based on the authoritative principles enunciated by the Hon'ble Supreme Court in Kol....
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.... grounds raised by the assessee:- "Grounds relating to Depreciation on Goodwill: 3.1 The learned AO has erred in law and on facts in disallowing Depreciation of INR 2,80,41,441 on Goodwill arising on acquisition of Karnataka Breweries and Distilleries Limited and other subsidiaries; 3.2 The learned AO has erred in law and on facts in disallowing Depreciation by blindly relying on the earlier year order, without appreciating the appreciating the complete facts of the case. 3.3 The learned AO has erred in law and on facts in disallowing Depreciation ignoring the ruling of Hon'ble Supreme Court and other judicial precedents; and 3.4 The learned AO has erred in law and on facts by not appreciating the fact that Goodwill is an intangible asset thus entitled for depreciation under the provisions of the Act; 35. The assessee in the return of income has claimed a sum of Rs.2,30,41,441 as depreciation on goodwill @ 25% as per the provisions of the Act on the opening WDV of Rs.14,95,54,349. Before the AO, the assessee has submitted that it has acquired the brewery from Karnataka Breweries & Distilleries Ltd. through a process of demerger an....
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....urpose of 115JB of the Act. 38. The brief facts on this issue are that during the year under consideration, the assessee disclosed a dividend income of Rs.8,57,655 and claimed the same as exempt u/s. 10(34) of the Act. The AO noticed that the assessee had made huge investments shares, mutual funds, bonds, etc. to the tune of Rs.2,547 Lakhs. Before the AO, the assessee submitted that the assessee has not incurred any expenditure towards earning tax-exempt income. However, the AO considering the huge quantum of investment and the fact that the assessee has debited a sum of Rs.7,725 lakhs towards interest charges, proceeded to invoke the provisions of section 14A of the Act r.w. Rule 8 of the Income-tax Rules [Rules] and disallowed the interest u/s. 14A as under:- "6.2.1 The assessee has disclosed dividend income of Rs. 8,57,655/-, as per Note 25 of the Financial Statements from various mutual funds / companies. Further, the assessee has claimed exemption u/s 10(34) in respect of the dividend income. On the other hand, the assessee had made huge amount of investment in shares and mutual funds with an intention to earn exempt income. As on 31.3.2013 relevant to AY 2013-14, ....
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....no expenditure has been incurred by him in relation to income which does not form part of the total income under this Act: Provided that nothing contained in this section shall empower the A.O. either to reassess under section 147 or pass an order enhancing the assessment or reducing a refund already made or otherwise .increasing the liability of the assessee under section 154 for any assessment year beginning on or before the 1st day of April, 2001. 6.2.4 Accordingly, it was proposed to the assessee that the disallowance u/s 14A will be made by invoking Rule 8D. In this connection, it may be noted that the assessee has been taking a similar stand for several previous assessment years and the department had not accepted the same and computed expenditure relatable to taxable income by invoking provisions of section 14A r.w.r 8D. The additions/disallowances made in earlier assessment years are before various appellate authorities for final decision on the issue. In view of this, I am constrained to invoke provisions of section 14A r.w.r. 8D to determine the disallowance u/s 14A. A detailed working in respect of disallowance of expenditure as envisaged under Rule 8D ....
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....by the assessee. The co-ordinate Bench of this Tribunal in the case of GMR Enterprises (supra) has held as under:- "3.4 We have heard rival submissions and perused the material on record. It is settled position of law that disallowance cannot exceed the amount of dividend income earned during the relevant assessment year. In this context, the following judicial pronouncements support the stand of the assessee:- (i) Joint Investments Pvt. Ltd. v. CIT (59 Taxmann.com 295) - it was held that disallowance u/s 14A of the Act is to be restricted to the tax exempt income. (ii) Daga Global Chemicals Pvt. Ltd. v. ACIT [2015-ITRVITAT-MUM-123) - has held that disallowance u/s 14A r.w. Rule 8D cannot exceed the exempt income. (iii) M/s.Pinnacle Brocom Pvt. Ltd. v. ACIT (ITA No.6247/M/2012) - has held that disallowance u/s 14A cannot exceed the exempt income. (iv) DCM Ltd. v. DCIT (ITA No.4567/Del/2012) - held that the disallowance u/s 14A of the Act cannot exceed the exempt income. 3.5 In view of the above settled position, the amount of disallowance u/s 14A of the I.T.Act needs to be restricted to the extent of exempted income earned durin....
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....dgments and again reiterated by us in this judgment, remains that the disallowance of expenditure incurred to earn exempted income cannot exceed exempted income itself and neither the Assessee nor the Revenue are entitled to take a deviated view of the matter. Because as already noted by us, the negative figure of disallowance cannot amount to hypothetical taxable income in the hands of the Assessee. The disallowance of expenditure incurred to earn exempted income has to be a smaller part of such income and should have a reasonable proportion to the exempted income earned by the Assessee in that year, which can be computed as per Rule 8D only after recording the satisfaction by the Assessing Authority that the apportionment of such disallowable expenditure under Section 14A made by the Assessee or his claim that no expenditure was incurred is validly rejected by the Assessing Authority by recording reasonable and cogent reasons conveyed to Assessee and after giving opportunity of hearing to the Assessee in this regard. 22. We, therefore, dispose of the present appeal by answering question of law in favour of the Assessee and against the Revenue and by holding that the disa....
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....reciating the rationale of the provisions of the Act and without appreciating that TDS is required only when the income is credited to identified party; 5.5 That the learned AO has erred in law and on facts in making the disallowance u/s 40(a)(i)/40(a)(ia) without appreciating the fact that the year end provisions made by the Appellant is reversed in the subsequent year and the TDS is deposited based on the actual credit given to the party; 5.6 That the learned AO has erred in law and on facts in not appreciating that TDS provision is not applicable on Del-credre Commission as it does not fall within the category of the commission as contemplated under section 194H of the Act; 5.7 That the learned AO has erred in law and on facts in not allowing INR 7,34,77,951 during the year under consideration i.e. AY 2013-14 which pertains to the AY 2012-13 which was disallowed during AY 2012-13, for which TDS was deducted and paid during AY 2013-14 in accordance with provisions of section 40(a)(i) and Ist proviso to section 40(a)(ia); and 5.8 That the learned AO has erred in law and on facts in making disallowance of Non-Resident payments u/s 40(a)(i) withou....
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....e earlier years i.e., AYs 2008-09, 2009-10 & 2010-11, the AO accepted the contention of the assessee that tax has been subsequently deducted and paid on receipt of bills/invoices including the year under consideration and no TDS proceedings were initiated. (iv) If the assessee is not 'in default' as per proviso to section 40(a)(ia) of the Act, no disallowance could be made. 49. The ld. DR supported the orders of the lower authorities. We have heard the rival submissions and perused the material on record. Similar issue was considered by this Tribunal in the case of Biocon Ltd. v. DCIT in ITA No.1248/Bang/2014 where the Tribunal by order dated 21.3.2022 has held as under:- "6. We heard the parties and perused the record. Before addressing the issues contested before us, we feel it necessary to discuss about the accounting practice relating to making yearend provisions, its impact on profits and the legal effects. The accounts of a business concern can follow either "cash system of accounting" or "mercantile system of accounting". Under mercantile system of accounting, "revenue cost matching principle" is followed, i.e., all the expenses incurred to earn the corr....
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....ucceeding year, when payment is made. We explain the same by way of illustrations:- Let us assume that provision for expenses is made for Rs.1000/- towards a particular expense as on 31.3.2012 and the above said amount was determined on estimated basis. (a) Situation I:- In the subsequent year, the assessee receives bill for Rs.1000/-. Accordingly, when the payment is made "Provision for expenses" account shall be debited with Rs.1000/-. In this situation, the Provision for expenses a/c will show NIL balance after the payment. There will not be any impact on the Profit and Loss account of the succeeding year. (b) Situation II:- In the subsequent year, the assessee receives bill for Rs.1,200/-, meaning thereby, the provision created was short by Rs.200/-. When the payment is made, the Provision for expenses account shall be debited with Rs.1000/- and the concerned expenses account shall be debited with remaining amount ofRs.200/-. In this situation also, the Provision for expenses a/c will show NIL balance after the payment. There will be impact on the Profit and Loss account of the succeeding year by way of increase in expenses by Rs.200/-. ....
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....nd loss' of the year in which provision for expenses was created and also on the 'profit and loss' of the succeeding year would be the same as discussed in the preceding paragraph, if the actual payment is made before the closure of the succeeding year. There will be a difficulty/risk in this modern days practice if the actual payment is not made before the closure of accounting year of the succeeding year against an acknowledged liability. In that kind of situation, the assessee should provide for the same again as at the year end of the succeeding year, which may sometimes lead to tax complications. 6.3 An argument was advanced that there will be no liability to deduct tax at source on the yearend provisions made as on 31.3.2012, since the same is reversed on 01.04.2012. From the discussions made in the preceding paragraphs with regard to the impact of the accounting entries relating to Provision for expenses, it would be clear that this argument is fallacious and devoid of merits. We also noticed that, it is only for the sake of convenience, the modern days practice of reversing the yearend "Provision for expenses" as at the beginning of succeeding year is followed. We ....
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....was decided as under:- "29. Sec. 194C applies when payment is made to contractor. The point of time at which tax had to be deducted at source is at the time of credit to the Account of contractor or payment in cash or cheque, whoever is earlier. Sub-section (2) of Sec. 194-C lays down that where any sum referred to in sub-section (1) is credited to any account, whether called "Suspense account" or by any other name, in the books of account of the person liable to pay such income, such crediting shall be deemed to be credit of such income to the account of the payee and the provisions of this section shall apply accordingly. Similar provision such as Sec. 194(2) exists in Sec. 194H Explanation (ii) of the Act which applies when the payment made is in the nature of commission or brokerage, in sec. 194J Explanation(c) when payment made is Fees for Technical Service and Sec. 195 Expln.-1 when payment is made to non-resident. The reason for introduction of provisions such as Sec. 194(2) of the Act has been explained in CBDT circular No.550 dated 1.1.1990 as follows:- "26.3 Under the existing provisions of section 193 of the Income-tax Act, tax has to be deducted at sou....
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....ponding liability definitely arises for payment of such expenditure. The amount of expenditure incurred can be determined only if, there is a recipient identified of the sum, there is a methodology available for working out the amount payable by the assessee to the recipient, there is a corresponding liability arising out of the existing contract or customs by the assessee with the recipient. If generally these ingredients are not satisfied assessee cannot be said to have incurred the expenditure. In absence of one of one of these criteria, if provision is made, it is not an ascertained liability but an unascertained liability, which does not satisfied the concept of accrual of expenditure. There may be reasons for receiving the bills by the service providers after certain time lag but that does not absolve the assessee from the liability of deduction of tax at source. In the present case the provision is made under the specified head, provision is also made to on certain basis thereby ascertaining the amount. It is not the case of the assessee that it has made an ad hoc provision. Thus it cannot be said that the payee is not identified. Therefore, according to us, the tax is requi....
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....able account" or "Suspense account" or by any other name, in the books of account of the person liable to pay such income, such crediting shall be deemed to be credit of such income to the account of payee and the provisions of this section shall apply accordingly." A plain reading of above provision clearly shows that the person responsible to pay the interest is liable to deduct tax at source at the time of credit or payment, whichever is earlier. It is pertinent to note that the section uses the term "any income by way of interest". The interest payment may constitute expenditure in the hands of the person making the payment, while it may constitute income in the hands of the payee/recipient. Since the section uses the term "any income by way of interest", in our view, it should be viewed from the angle of the recipient/payee and not from the angle of the person making the payment. Accordingly, the accounting/tax treatment given by the payer in respect of interest paid by him may not be relevant at all for the purposes of sec. 194A of the Act. So long as the interest amount constitutes "income" in the hands of recipient, the payer shall be liable to deduct tax at source....
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....ed to the credit of the Central Government or as the Board directs. Sec.201(1) of the Act is triggered when if any such person referred to in section 200 does not deduct the whole or any part of the tax or after deducting fails to pay the tax as required by or under this Act, he or it shall, without prejudice to any other consequences which he or it may incur, be deemed to be an assessee in default in respect of the tax. The contention of the learned DR that the assessee having admitted its default u/s 40(a)(i) & 40(a)(ia) of the Act, cannot in proceedings u/s 201(1) of the Act, be heard to say that there was no default under Chapter XVII-B of the Act is therefore correct. The disability u/s 40(a)(i) & 40(a)(ia) of the Act and the liability u/s 201(1) of the Act cannot be different and they arise out of the same default. Once there is disallowance u/s 40(a)(i) & 40(a)(ia) of the Act, it is not possible to argue that there was no liability under Chapter XVII-B of the Act and therefore the provisions of Sec.201(1) of the Act will not be attracted." 8.3 It can be noticed that the co-ordinate benches have, in the case of Agreenco Fibre Foam (P) Ltd (supra) and also in the case....
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....of section 201, in respect of such tax. In view of the above said explanation given under sec.191 of the Act, the provisions of sec.201 are triggered when the assessee is "deemed to be an assessee in default". Further this explanation makes it very clear that this liability is "without prejudice to any other consequences which he may incur". The assessee can escape from the disallowance to be made u/s 40(a)(i)/40(a)(ia), if he is not treated as an "assessee in default". In our considered view, the converse is not true, i.e., if the assessee makes disallowance u/s 40(a)(i)/40(a)(ia), he will not be exonerated from the liability u/s 201 of the Act. 8.5 Another pertinent point to be noted is that the disallowance required to be made u/s 40(a)(i)/40(a)(ia); penalty to be levied u/s 271C/271CA are the direct liabilities, i.e., liabilities which are directly imposed upon the assessee due to his failure. On the contrary, the demand raised u/s 201(1)/201(1A) is vicarious liability imposed upon an assessee. The tax is deducted at source from the amount payable to the payee, i.e., it is not paid in discharge of assessee's own liability. The role of an assessee is that of "P....
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.... in deduction/remittance of TDS amount. Following the above said decision, we also hold so. 9.1 The Ld A.R expressed the view that there are certain practical difficulties involved in complying with the provisions of TDS. He prayed that the Tribunal may clarify the law on the practical difficulties. We shall address them one by one. The first difficulty pointed out by him is that the payees are not identifiable in respect of certain expenses, even though the same has been included in the yearend provisions. We have noticed earlier that the provision for expenses have been created by the assessee for the liability towards (a) Contract expenses covered by sec. 194C (b) Professional fees covered by sec. 194J (c) Rent expenses covered by sec. 194I (d) Commission expenses covered by sec.194H (e) Payments to non-residents covered by sec. 195 The Ld CIT(A) rejected this submission of the assessee with the following observations:- "4.2 With regard to the appellant's claim that the identity of the recipients was not known and, hence, it could not have deducted tax on the provisioned amounts, I find that the facts and pr....
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....erely a custodian of the funds on behalf of the High Court and the Registrar General per se was neither an assessee nor he was beneficiary entitled to receive any interest on the fixed deposits. Under these facts, the Hon'ble Delhi High Court held that if TDS is deducted that would amount to recovery of tax without corresponding income being assessed in the hands of any assessee. In the absence of ascertainable assessee, the machinery of recovering tax by deduction of tax at source breaks down because it does not aid the charge of tax u/s 4 of the Act, but takes a form of a separate levy, independent of other provisions of the Act, which is not permissible. Therefore, it can be seen that the decision of the Hon'ble Delhi High Court has been rendered in the peculiar facts prevailing in that case. (b) The next decision is of Hon'ble Karnataka High Court in the case of Karnataka Power Transmission Corporation Ltd (383 ITR 59). In this case, the assessee before Hon'ble High Court of Karnataka made provision towards interest payable on delayed payments. However, subsequently assessee noticed that interest is not payable in view of understanding reached between the parti....
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.... who could be the recipients of 'interest due but not payable' in respect of 'regular return bonds' because while assessee's liability to pay interest @ 16 per cent is certain and is to be made as on 31st March, i.e., on the end of the relevant accounting year, the bonds in question being freely transferable, it cannot ascertain as to who will be the registered bondholder as on 15th May of that year. The assessee cannot be expected to have clairvoyance of knowing, as on 31st March, as to who will own the bonds on 15th May of that year. Therefore, in such a situation while the assessee certainly has the liability to pay the interest for the period till the end of the relevant accounting year, the assessee certainly does not know for sure as to who will be entitled to receive this interest ...... In our humble understanding, conceptually, liability of TDS is in the nature of a vicarious or substitutionary liability which presupposes existence of a principal or primary liability. Chapter XVII-B is titled 'Collection and recovery of tax-- Deduction of tax at source" and this title also indicates that the nature of TDS obligations are obligations for col....
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....on the tax deductor knows the name of person to whom the credit is to be given though whether by way of credit to the account of such person or by way of credit to some other account. This again shows that TDS liability is a vicarious liability to pay tax on behalf of the person who is to be beneficiary of the payment or credit, with a corresponding right to recover such tax payable from the person to whom credit is afforded or payment is made. It would be thus seen that the whole scheme of TDS proceeds on the assumption that the person whose liability is to pay an income knows the identity of the beneficiary or the recipient of the income. It is a sine qua non for a vicarious tax deduction liability that there has to be a principal tax liability in respect of the relevant income first, and a principal tax liability can come into existence when it can be ascertained as to who will receive or earn that income because the tax on the income and in the hands of the person who earns that income. In this view of the matter, TDS mechanism cannot be put into practice until identity of the person in whose hands, it is includible as income can be ascertained. 18. It is indeed correc....
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....credit to the payee's account. In our considered view, fiction embodied in the Explanation is only applicable in situations in which tax deduction liability is sought to be escaped by crediting interest to some other account other than that of recipient of interest. In our considered view, Explanation to Section. 193 cannot be invoked in a case where the person who is to receive the interest cannot be identified at the stage at which the provision for interest accrued but not due is made. This position is also accepted by the CBDT, as evident from its letter dt. 5th July, 1996 addressed to the Tata Iron and Steel Co. Ltd. (Letter No. 275/126/96 IT (B)], which, inter alia, states as follows: I am directed to refer to your letter ref. 3A 13- 21/1460 dt. 23rd May, 1996, on the above subject, and to say that difference between the issue price of Rs. 5,000 and face value of Rs. 25,500 is in the nature of interest subject to provisions of Sections 193/193A. Although the company would be making provisions for interest on year to year basis in their books of account, there will be no deduction of tax at source in each such year as the payee is not known. (Emphasis, it....
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....the payees could not be identified in respect of particular expenses, then the mechanism provided under Chapter XVII-B would fail and hence the AO is not entitled to demand tax u/s 201(1) and interest u/s 201(1A) in respect of those expenses. 10. The second practical difficulty expressed by Ld A.R is that the yearend provisions are made on estimated basis and hence there might be difference between the estimate so made and the actual payments finally made. Under these circumstances, the question that arises is how the provisions of sec.201 could be applied. In our view, the Ld A.R has raised a valid point. Since the yearend provisions are made on estimated basis, following five scenarios may emerge at the time of making actual payments in the succeeding year:- (a) The actual payment made in the succeeding year is more than the provision amount. (b) The actual payment made in the succeeding year is less than the provision amount (c) No payment is required to be made, since it was ascertained that there is no liability to pay the Amount. Accordingly, entire amount of provision is reversed in the succeeding year. (d) Payment has no....
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.... India (supra), wherein it was held that "It is a sine qua non for a vicarious tax deduction liability that there has to be a principal tax liability in respect of the relevant income first." In this scenario, the principal tax liability upon the recipient will be on the amount of Rs.800/- only. Accordingly, the TDS liability will also on the above said amount actually paid and consequently, the interest u/s 201(1A) shall be leviable on Rs.800/-. 10.3 The third scenario is that no payment was required to be made in the succeeding year, since it was ascertained that there was no liability to pay the Amount. Accordingly, entire amount of provision was reversed in the succeeding year. In this scenario, there will no liability to deduct tax at source from the amount of provision created as on 31.3.2012, as it was found that the said amount is not payable at all to anyone. Hence this provision amount cannot be linked to any payee, in which case, there will not be any liability to deduct tax at source from the provision amount. Hence, in our view, the provisions of sec.201 will not be applicable in this scenario. 10.4 The fourth scenario is that the payment was not yet ....
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....vernment account on or before the due date for filing the return of income. The assessee may be given a reasonable opportunity of being heard. 51. Grounds relating to disallowance under section 43B by the assessee are as follows:- 6.1. That the learned AO has erred in law and on facts in disallowing (i) provision of service tax on sponsorship services - INR 1,90,88,602 and (ii) penalty on service tax - INR 1,06,33,176 - amounting to INR 2,97,21,778 which has already been disallowed by the Appellant in the computation of income; 6.2. That the learned AO has erred in law and on facts in considering the disallowance of INR 3,51,30,965 instead of INR 3,15,30,965; 52. During the course of assessment, the AO noticed from the tax audit report that the auditor has mentioned that the assessee has not remitted certain statutory dues before the due date for filing the return of income to the tune of Rs.17,86,33,977. The AO observed that the assessee has disallowed only a sum of Rs.14,71,03,012 and hence proceeded to disallow the balance amount u/s. 43B. The DRP confirmed the disallowance. 53. The ld. AR submitted before us that there is an arithmetical error in the ....
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....ewcastle India Pvt Ltd [SINIPL] into the company with effect from 01.04.2012. SNIPL was incorporated to provide technical consultancy for the manufacture, marketing and distribution of beer and allied products. The amalgamation was approved by Hon'ble High Court of Karnataka and Hon'ble High Court of Maharashtra vide their orders on 17.01.2013 and 02.11.2012. Under the scheme of amalgamation, 84,89,270 fully paid up equity share of Rs.1 each of the company was issued and allotted to the shareholders of SNIPL as against 3,22,23,912 equity shares of Rs. 10 each held by them in SNIPL. 57. As on date of amalgamation, the per share price of assessee company as per Bombay Stock Exchange (ESE) was Rs. 545/-. The networth of SNIPL and the share allocation was reworked as under: Reserves & Surplus 198,48,78,326/- Equity shares 32,22,39,110/- Bonus shares 2,27,90,000/- Less: Capital reduction 1,33,56,088/- 231,65,51,348/- Less: Investments 226,83,30,000/- 4,82,21,348/- Add: Investments in UBL @ Rs.545/- 462,66,52,150/- A 467,48,73,498/- Share price of SNIPL is Rs.145/- per share. 84,89,270 x 545 B 462,66,52,150/-....
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....ny person being a resident, any consideration for issue of shares that exceeds the face value of such shares, the aggregate consideration received for such shares as exceeds the fair market value of the shares: Provided that this clause shall not apply where the consideration for issue of shares is received- (i) by a venture capital undertaking from a venture capital company or a venture capital fund; or (ii) by a company from a class or classes of persons as may be notified by the Central Government in this behalf, Explanation.-For the purposes of this clause,- (a) the fair market value of the shares shall be the value- (i) as may be determined in accordance with such method as may be prescribed; or (ii) as may be substantiated by the company to the satisfaction of the Assessing Officer, based on the value, on the date of issue of shares, of its assets, including intangible assets being goodwill, know-how, patents, copyrights, trademarks, licences, franchises or any other business or commercial rights of similar nature, whichever is higher; (b) "venture capital company", "venture capital fund" and "venture capital unde....
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....nded on giving schematic interpretation to the language employed. The revenue on the other hand seeks to support the action of AO and essentially contends that newly inserted S. 56(2)(viib) was introduced with an object to inter alia plug the present situation where consideration received in kind (by way of vesting of assets of amalgamated co.) is far higher than the face value of corresponding shares issued in lieu of such excess value of assets vested. 10.5 The interpretation of S. 56(viib) qua the facts of the present case is in controversy. S. 56(2) deems certain income chargeable to income tax under the head 'income from other sources'. Finance Act 2012 has, understandably, inserted clause (viib) with effect from 1-4-2013 (assessment year 2013-14) to include consideration received in excess of face value of shares issued i.e. 'share premium' received by an issuing company as it exceeds the fair market value of shares as its income chargeable under the head 'income from other sources'. On a plain reading, two things immediately emerges from the newly inserted provision (i) consideration which is taxable is the one which exceeds face value of sha....
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....o be quoted to understand the object behind the insertion. I propose a series of measures to deter the generation and use of unaccounted money. To this end, I propose ♦ -------- ♦ Increasing the onus of proof on closely held companies for funds received from shareholders as well as taxing share premium in excess of fair market value 10.8 The Circular of the Department being a contemporaneous exposition may also serve as useful guide to understand the true intent of S. 56(2)(viib) of the Act. The relevant text of CBDT circular no, 3/2012 dated 12-6-2012 in this regard is reproduced hereunder: Share premium in excess of fair market value to be treated as income In the Finance Bill, 2012, it had been proposed [section 56(2), as sub-clause [(viib)] that in case of a company, not being a company in which the public are substantially interested, which receives, in any previous year, from any person being a resident, any consideration for issue of shares and the consideration received for issue of such shares exceeds the face value of such shares, then the aggregate consideration received for such shares as exceeds the fair....
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....n'ble Supreme Court has held that the legal fictions are only for a definite purpose and they are limited to the purpose for which they are created and should not be extended beyond the legitimate field. Thus, a deeming fiction cannot be stretched beyond its purpose and import another fiction in it. 10.11 In the light of understanding developed on object and purpose of the deeming clause, as discussed above, the provisions of section 56(viib), would not come to motion where the Assessee company as admittedly not charged any premium at all and the shares were issued at face value. 11. However, We have examined the issue from yet another perspective discussed below. 11.1 It may be possibly argued that section 56(2)(viib) does not oust its applicability in the event of shares issued pursuant to amalgamation. The amalgamation is a compromise or arrangement between the parties, which inter alia includes the amalgamated company issuing the shares and the shareholders of the amalgamating company, which is supervised by the Court, in terms of the Companies Act. In other words, there is an agreement or arrangement between the amalgamated company issuing the sh....
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....en venture capital undertakings, the provision would possibly apply inconsistent with the intent of the legislature to exclude VCUs etc. If the shareholders are regarded as the persons providing consideration in the context, they could include VCC or VCF or even notified persons or non-residents along with other resident persons. Such a situation contradicts in the intent of the legislature expressed in the clause. Hence, in terms of proviso, the clause cannot apply in the case of amalgamation etc. 11.4 We may also look at the scheme of the Act in totality for contextual understanding of the issue. The Legislature has contemplated that there arises 'transfer' of shares by the shareholders of amalgamating company in consideration of the allotment of shares by the amalgamated company and consequently with a view to neutralize tax effect, the Act provides for suitable exclusion/exemption, from the ambit of expression 'transfer', under section 47(vii) which is also of deeming nature. In other words, as per the provisions of the Act, the consideration for issue of shares by the amalgamated company, in so far as the shareholder is concerned, is the shares held in....