Income Tax Appellate Tribunal - Mumbai
Sulphur Mills Ltd., Mumbai vs Addl. Cit Range - 8(3), Mumbai on 13 March, 2019
Sulphur Mills Ltd. Vs. Addl. CIT, Range - ITA 5349/Mum/2016 1
DCIT Vs. Sulphur Mills Ltd. - ITA 5778/Mum/2016
आयकर अपीऱीय अधिकरण "G" न्यायपीठ मुंबई में ।
IN THE INCOME TAX APPELLATE TRIBUNAL "G" BENCH, MUMBAI
BEFORE SHRI G.S PANNU, VICE-PRESIDENT
AND SHRI RAVISH SOOD, JUDICIAL MEMBER
आयकर अपीऱ सं./I.T.A. No.5349/Mum/2016
(नििाारण वर्ा / Assessment Year : 2011-12)
Sulphur Mills Ltd., बिाम/ Addl. CIT Range-8(3)
604/605, 349-Business Point, Mumbai
6 t h floor, Western Express v.
Highway, Andheri (W),
Mumbai 400069
स्थायी ऱेखा सं./ PAN: AABCS8736K
आयकर अपीऱ सं./I.T.A. No.5778/Mum/2016
(नििाारण वर्ा / Assessment Year : 20 11-12)
DCIT CIR 11(2)(2) बिाम/ Sulphur Mills Ltd.,
R.No. 421, 4 Floor,
t h 604/605, 349-Business Point,
Aayakar Bhawan, v. 6 t h floor, Western Express
Mumbai 400020 Highway, Andheri (W),
Mumbai 400069
स्थायी ऱेखा सं./ PAN: AABCS8736K
(अपीऱाथी /Appellant) .. (प्रत्यथी / Respondent)
Assessee by: S/shri. M.K Patel & K.S Chokshi
Revenue by : Shri. Abdul Hakeem
Shri. S.K Mishra
सन
ु वाई की तारीख /Date of Hearing : 21.12.2018
घोषणा की तारीख /Date of Pronouncement : 13.03.2019
आदे श / O R D E R
PER RAVISH SOOD, JUDICIAL MEMBER :
The present cross appeals filed by the assessee and the revenue are directed against the order passed by the CIT(A)-58, Mumbai, dated 26.06.2016, which in turn arises from the order passed by the A.O u/s. 143(3) of the Income Tax Act, 1961 (for short Sulphur Mills Ltd. Vs. Addl. CIT, Range - ITA 5349/Mum/2016 2 DCIT Vs. Sulphur Mills Ltd. - ITA 5778/Mum/2016 „I.T Act‟), dated 30.03.2014 for A.Y 2011-12. We shall first advert to the appeal filed by the assessee. The assessee assailing the order of the CIT(A) has raised before us the following grounds of appeal.
1) The Learned CIT(A) has erred in confirming the addition of Rs. 1,35,847/- on account of late payment of Employees's Contribution to PF / ESIC u/s 36(l)(va) of the Income Tax Act, 1961, beyond the grace period without considering the facts and circumstances of the case. The same be deleted.
2) The Learned CIT(A) has erred in confirming the addition of Rs.1,67,252/- on account of disallowance u/s40(a)(ia) of the Income Tax Act, 1961 towards advertisement and sales promotion expenses for non- deduction of TDS without considering the facts and circumstances of the case. The same be deleted.
3) The Learned CIT{A) has erred in considering payment amounting to Rs 2,22,395/- made to Chemical Abstract Services USA for subscribing to the online platform to access scientific --database i.e. the right to use the copyrighted material as royalty liable to TDS u/s 195 of the Income Tax Act, 1961 and not business income as claimed by the assessee. The Learned CIT(A) has erred in disallowing the said expenditure for non-deduction of TDS without considering the facts and circumstances of the case the same be allowed.
b) The Learned CIT(A) has erred in considering payment amounting to Rs 1,29,840/- made to TSGE DOO Solvenia for project work expenses for submission of Plant protection details as Fees for Technical Services liable to TDS u/s 195 of the Income Tax Act, 1961 and not business income as claimed by the assessee. The Learned CIT{A) has erred in disallowing the said expenditure for non-deduction of TDS without considering the facts and circumstances of the case. The same be allowed.
c) The Learned CIT(A) has erred in considering payment amounting to Rs 4,91,920/- made o Liteam Corporate Image Planning & Design, Shanghai for designing of seminar related material as Fees for Technical Services liable to TDS u/s 195 of the income Tax Act, 1961 and not business income as claimed by the assessee. The Learned CIT(A) has erred in disallowing the said expenditure for non-deduction of TDS without considering 2 Sulphur Mills Ltd. Vs. Addl. CIT, Range - ITA 5349/Mum/2016 3 DCIT Vs. Sulphur Mills Ltd. - ITA 5778/Mum/2016 the facts and circumstances of the case. The same be allowed
4) The Learned CIT(A) has erred in confirming the addition of Rs. 10,63,137/- on account of Interest income not accounted in financials on the basis of Form 26AS. The same be considered and the addition be deleted.
5) The Learned CIT(A) has erred in confirming the addition to the Book Profit for computing MAT u/s 115JB of the Income Tax Act 1961, Rs. 9,45,010 towards disallowance u/s 14A of the Income Tax Act, 1961 and Rs. 43,61,278/- towards provision for doubtful debts without considering the facts and circumstances of the case. The same be deleted.
6) The appellant craves leave to add, alter or delete to the ground of appeal of the time of or before hearing.
2. Briefly stated, the assessee which is a public limited company engaged in the business of manufacturing and export of sulphur products and agro chemicals had filed it return of income for A.Y 2011-12 on 29.09.2011, declaring total income of Rs. 28,71,63,851/-. The return of income filed by the assessee was processed as such u/s. 143(1) of the I.T Act. Subsequently, the case of the assessee was selected for scrutiny assessment u/s. 143(2).
3. The A.O while framing the assessment inter alia made the following additions/disallowances:-
Sr. No. Particulars Amount
1. Disallowance of late payments of Rs. 9,74,625/-
employees contribution to PF/ESI under Sec. 2(24)(x) r.w.s 36(1)(va).
2. Disallowance of advertisement Rs. 1,67,652/-
and sales promotion expenses
u/s 40(a)(ia) for non-deduction of
TDS.
3. Disallowance of payment made to Rs. 2,22,395/-
3Sulphur Mills Ltd. Vs. Addl. CIT, Range - ITA 5349/Mum/2016 4 DCIT Vs. Sulphur Mills Ltd. - ITA 5778/Mum/2016 M/s. Chemical Abstracts Service, USA under Sec. 40(a)(i).
4. Disallowance of payment made to Rs. 1,29,840/-
M/s. TSGE-DOO, Slovenia under Sec. 40(a)(i).
5. Disallowance of payment made to Rs. 4,91,920/-
M/s. Liteam Corporate Image Planning and Design, Shanghai under Sec. 40(a)(i).
6. Addition on account of Rs. 10,63,137/-
suppressed interest income not accounted by the assessee in its return of income (as against the details gathered from Form no.
26AS).
7. Addition made u/s 14A of Rs.
9,45,010/- to the "book profit" for computing the tax liability as per -
the MAT provisions u/s. 115JB.
8. Addition of the disallowance of the provision for doubtful debts of Rs. 43,61,278/- to the "book -
profit" for computing the tax liability as per the MAT provisions u/s. 115JB.
On the basis of the aforesaid additions/disallowances the A.O assessed the income of the assessee at Rs. 30,21,48,860/- (under the normal provisions) and worked out its "book profit" u/s. 115JB at Rs. 29,00,40,776/-.
4Sulphur Mills Ltd. Vs. Addl. CIT, Range - ITA 5349/Mum/2016 5 DCIT Vs. Sulphur Mills Ltd. - ITA 5778/Mum/2016
4. Aggrieved, the assessee carried the matter in appeal before the CIT(A), who though partly allowed the appeal but upheld the aforesaid additions/disallowances made by the A.O.
5. The assessee being aggrieved with the order of the CIT(A) has carried the matter in appeal before us. The Ld. Authorised Representative (for short „A.R‟) for the assessee submitted that the CIT(A) has erred in upholding the addition of Rs. 9,74,625/- made by the A.O u/s 36(1)(va) r.w.s. 2(24)(x) of the I.T Act on account of late deposit of employees contribution to PF/ESI. It was submitted by the Ld. A.R that as the said respective amounts were deposited before the "due date" of filing of the return of income by the assessee, therefore, the same were not liable to be disallowed. It was further submitted by the ld. A.R that a similar addition/disallowance made in the assesses own case for the preceding years viz. A.Y 2007-08 and A.Y 2009-10 had been deleted by the Tribunal, vide a consolidate order passed while disposing off the assesses appeals in ITA no. 4631/Mum/2011 and ITA No. 107/Mum/2014; dated 05.05.2017. It was further submitted by the Ld. A.R that the issue involved in the present appeal was squarely covered by the judgment of the Hon‟ble High Court of Bombay in the case of CIT vs. Ghatge Patil Transport Ltd. (2014) 368 ITR 749 (Bom). It was thus the contention of the Ld. A.R that no disallowance in respect of the aforesaid amounts was liable to be made in the hands of the assessee. Insofar the addition of Rs. 1,67,252/- made by the A.O u/s. 40(a)(ia) in respect of the advertisement and sales promotion expenses was concerned, it was submitted by the Ld. A.R that the said payment was made to the supplier party i.e M/s. Iktek Communications for supply of designing art work as per the requirements and specifications of the assessee. It was submitted by the ld. A.R that the said designer art work was supplied by the aforesaid supplier party on a compact disc (for short „CD‟) and the same was subsequently used by the assessee for printing on the packaging items. Further, certain printed leaflets were 5 Sulphur Mills Ltd. Vs. Addl. CIT, Range - ITA 5349/Mum/2016 6 DCIT Vs. Sulphur Mills Ltd. - ITA 5778/Mum/2016 also supplied as per the requirements of the assessee. The Ld. A.R submitted that as the aforesaid supplier had procured the material from the market and after carrying out the necessary manufacturing/processing had supplied the resultant designer art work and leaflets to the assessee after charging VAT, therefore, the same was not a "works contract" but was a simpliciter purchase/sale transaction in the hands of the assessee/supplier party. In order to fortify her contention the Ld. A.R took us through certain sample invoices which were raised by the aforementioned supplier party viz. M/s. Iktek Communication on the assessee. In sum and substance, it was the claim of the Ld. A.R that as the aforesaid transaction did not fall within the realm of the definition of "works contract" as envisaged in Explanation (iv) to Sec. 194C, therefore, no liability was cast upon the assessee to deduct any tax at source at the time of credit/payment of the amount to the said party. In fact, it was the contention of the ld. A.R that as the supplier part had manufactured and supplied the products according to the specifications and requirements of the assessee by making purchases of the material from a third party, therefore, as per Sec. 194C(7) - Explanation (iv)(e) the said transaction stood clearly excluded from the sweep of the definition of "works" as envisaged in the said statutory provision. In support of her aforesaid contention the ld. A.R relied on the order of a coordinate bench of the Tribunal viz. ITAT, Chandigarh Bench "A" in the case of Punjab Tractors Ltd. Vs. ITO(TDS-II), Chandigarh (copy placed on record). As regards the disallowance under Sec. 40(a)(i) of the payment of Rs. 2,22,395/- made by the assessee to M/s. Chemical Abstracts Service, USA, it was submitted by the Ld A.R that as the said amount was paid for subscribing to the online platform to access the scientific database of the said concern i.e. for the right to use the copyrighted material and not for acquisition of any copyright, therefore, no obligation was cast upon the assessee to deduct tax at source under Sec. 195 by treating the same as a payment towards "royalty" to a non-resident party. Further, it was submitted by the Ld. AR that the lower 6 Sulphur Mills Ltd. Vs. Addl. CIT, Range - ITA 5349/Mum/2016 7 DCIT Vs. Sulphur Mills Ltd. - ITA 5778/Mum/2016 authorities had erred in disallowing under Sec. 40(a)(i) the payment of Rs. 1,29,840/-made by the assessee to TSGE-DOO, Slovenia. It was submitted by the Ld. A.R that as the aforesaid payment was made for project work expenses for submission of plant protection details in Slovenia, therefore, the same could not be held as „Fees for technical services‟ (for short „FTS‟), therein rendering it obligatory for the assessee to deduct tax at source on the said amount u/s. 195 of the I.T Act. Rather, it was the contention of the Ld. A.R that the aforesaid payment was in the nature of business income of the non-resident recipient, which in absence of the latters Permanent Establishment (for short „PE‟) in India could not be subjected to tax as per Article 7 of the India-Slovenia DTAA in India. The Ld. A.R further averred that insofar the amount of Rs.4,91,920/- paid to M/s Liteam Corporate Image Planning & Design, Shanghai was concerned, the same was made for the services that were rendered by the aforementioned non- resident concern for designing of material for a seminar in China. It was thus the claim of the Ld. A.R that as the said payment could not be characterised as FTS, therefore, no obligation was cast upon the assessee to deduct tax at source u/s. 195 of the I.T Act. The Ld A.R further submitted that the CIT(A) had erred in confirming the addition of Rs. 10,63,137/- on account of interest income not accounted by the assessee in its books of accounts on the basis of Form 26AS. It was submitted by the Ld. A.R that if the assessee has shown a lower interest income, then correspondingly it has also claimed lower TDS credit. In sum and substance, it was submitted by the Ld. A.R that the assessee had not taken any undue advantage of claiming entire TDS and offering less amount of interest for tax. It was the contention of the Ld. A.R that the lower authorities had misconceived the facts while drawing adverse inferences in the hands of the assessee on the said count. It was further submitted by the Ld. A.R that the lower authorities had erred in adding the amount of disallowance u/s. 14A for computing the "book profit" u/s. 115JB of the I.T Act. In support of her aforesaid contention the Ld. AR relied on the order of the ITAT, 7 Sulphur Mills Ltd. Vs. Addl. CIT, Range - ITA 5349/Mum/2016 8 DCIT Vs. Sulphur Mills Ltd. - ITA 5778/Mum/2016 Special bench in the case of ACIT & Anr. Vs. Vireet Investment Pvt. Ltd. & Anr. (2017) 165 ITD 27 (Del)(SB). Further, the Ld. A.R submitted that the A.O had also erred in adding the „Provision for doubtful debts‟ of Rs. 43,61,278/- while computing the "book profit" of the assessee for working out its tax liability u/s. 115JB of the I.T Act. In support of her contention that „Provision for bad and doubtful debts‟ were not to be added for working out the „book profit‟ under Sec. 115JB the ld. A.R relied on the judgment of the Hon‟ble High Court of Bombay in the case of CIT Vs. Salgaonkar Mining Industries (P) Ltd. (2015) 235 Taxman 96 (Bom), which was rendered in context of Sec. 115JA of the IT Act.
6. Per contra, the Ld. Departmental Representative (for short „D.R‟) rebutting the contentions advanced by the counsel for the assessee relied on the order of the CIT(A) as regards the disallowance made by the A.O u/s. 36(1)(va) r.w.s 2(24)(x) of Rs. 9,74,625/- on account of late payment of employees contribution to PF/ESI. As regards the disallowance u/s. 40(a)(ia) of the advertisements and sales promotion expenses of Rs. 1,67,252/- the Ld. D.R took support of the observations of the lower authorities. Insofar the disallowance of the payments made in respect of royalty/FTS to various parties was concerned, the Ld. D.R again took support of the order of the CIT(A) and submitted that the latter had rightly upheld the same.
7. We have heard the authorised representatives for both the parties, perused the orders of the lower authorities and the material available on record. Insofar the disallowance u/s 36(1)(va) r.w.s 2(24)(x) of Rs. 9,74,625/- on account of late payment by the assessee of the employees share of contribution to PF/ESI u/s. 36 (i)(va) of the I.T Act is concerned, we find that though said payments were not made within the stipulated time period as envisaged in the respective acts, however, the same were admittedly deposited before the "due date" of filing of the return of income of the assessee for the year under consideration viz. A.Y 2011-12. We have deliberated on the 8 Sulphur Mills Ltd. Vs. Addl. CIT, Range - ITA 5349/Mum/2016 9 DCIT Vs. Sulphur Mills Ltd. - ITA 5778/Mum/2016 issue before us and are of the considered view that as held by the Hon'ble High Court of Bombay in the case of Commissioner of Income- tax (Central), Pune Vs. Ghatge Patil Transports Ltd. (2015) 368 1TR 749 (Bom) and CIT Vs. Hindustan Organics Chemicals Ltd. (2014) 366 ITR 1 (Bom), both the employer and the employees contributions to the various employees welfare funds are covered under Section 43B of the I.T Act. In our considered view, as the employees contribution towards the Provident Fund and Employees State Insurance aggregating to Rs. 9,74,625/-, as is discernible from the assessment order, were deposited by the assessee prior to the 'due date' of filing of its return of income for the year under consideration, therefore, the same was not liable to be disallowed. We thus in terms of our aforesaid observations vacate the disallowance of Rs. 9,74,625/- sustained by the CIT(A). The Ground of appeal No. 1 raised by the assessee is allowed.
8. We shall now advert to the disallowance u/s 40(a)(ia) of Rs. 1,67,252/- sustained by the CIT(A) for failure of the assessee to deduct tax at source u/s 194C on the payments of advertisement and sales promotion expenses. We have perused the „invoices‟ of the supplier party viz. M/s Iktek Communications to which our attention was drawn by the Ld. A.R during the course of hearing of the appeal. On a perusal of the details, it stands revealed that the aforementioned party had supplied the designed art-work and printed leaflets as per the specifications and the requirements of the assessee. It is the case of the assessee before the lower authorities that as the aforementioned products were manufactured by the supplier party after using the material procured from a third party and not from the assessee, therefore, the same did not fall within the realm of the definition of "work" as contemplated in Explanation (iv) to Sec. 194C of the IT Act. Rather, it is the case of the assessee that as the designed art-work and printed leaflets supplied by the aforementioned party as per the requirements and specifications of the assessee were not by using any 9 Sulphur Mills Ltd. Vs. Addl. CIT, Range - ITA 5349/Mum/2016 10 DCIT Vs. Sulphur Mills Ltd. - ITA 5778/Mum/2016 material purchased from the assessee, therefore, the same was clearly excluded from the definition of "work" as per Explanation (iv)(e) to Sec. 194C of the IT Act. Apart there from, we find that the aforesaid contention of the assessee that the designed art-work and printed leaflets supplied by the aforesaid party was not manufactured by using any material purchased from the assessee had neither been rebutted by the lower authorities, nor any material proving to the contrary has been placed on our record. In sum and substance, it is the claim of the assessee that as the simpliciter supply of the designed art-work and printed leaflets could not be brought within the meaning of "work" as defined in Sec. 194C, therefore, in the absence of any obligation cast on the assessee to deduct tax at source in respect of the said transaction, no disallowance could have been made u/s 40(a)(ia) of the I.T Act.
9. We have given a thoughtful consideration to the issue before us and are persuaded to accept the contention advanced by the ld. A.R that no obligation was cast upon the assessee to deduct tax at source u/s. 194C while crediting/making the payments in respect of the aforesaid transaction. We find that though the supplier party i.e. M/s. Iktek Communication had provided the designed art-work and printed leaflets as per the specifications and requirements of the assessee, however, there is nothing borne from the records or had been averred before us, which would prove that the aforementioned party had supplied the product by using any material that was purchased from the assessee. Admittedly, the assessee had not provided any material to the said supplier party. Rather, the „Invoices‟ against which the aforesaid designed art-work was supplied on CD‟s to the assessee clearly reveals that the supplier had charged VAT on the full value of the aforesaid transactions. In our considered view as per the CBDT Circular No. 681, dated 08.03.1994 r.w Circular No. 715, dated 08.08.1995 and Circular No. 13 of 2006, dated 13.12.2006, it can safely be concluded that the aforesaid designed art-work and printed 10 Sulphur Mills Ltd. Vs. Addl. CIT, Range - ITA 5349/Mum/2016 11 DCIT Vs. Sulphur Mills Ltd. - ITA 5778/Mum/2016 leaflets were supplied to the assessee pursuant to a contract for sale. Our aforesaid view is fortified by an order of a coordinate bench of the Tribunal viz. ITAT, Chandigarh Bench "A" in the case of Punjab Tractors Ltd. Vs. ITO (TDS-II), Chandigarh. We are of the considered view that as the assessee was not obligated to deduct any tax at source in respect of the aforesaid transaction under consideration, therefore, the same could not have been disallowed under Sec. 40(a)(ia) of the IT Act. We thus in terms of our aforesaid observations vacate the order of the CIT(A) in context of the issue under consideration and delete the addition of Rs.1,67,252/- sustained by him. The Ground of appeal no. 2 is allowed.
10. We shall now advert to the sustainability of the disallowances made by the A.O/CIT(A) u/s. 40(a)(i) of the payments made by the assessee to various foreign concerns, as under:-
i) M/s. Chemical Abstracts Service, USA : Rs. 2,22,395/- :
a). The assessee had made the payment to the aforementioned party for subscribing its online platform to access the scientific database on chemistry research. The A.O characterising the aforementioned payment as "royalty" had held the assessee as being in default for not deducting tax at source on the aforesaid amount u/s. 195 and resultantly disallowed the said amount u/s. 40(a)(i) of the IT Act. In sum and substance, the A.O holding a conviction that the payment made by the assessee to the aforementioned party was towards "royalty", thus concluded that the latter was liable for deduction tax at source in respect of the said payment u/s. 195 of the I.T Act. On appeal, the CIT(A) concurred with the A.O that the payment made towards subscription to specialized knowledge provided through computer access would constitute royalty.
b). We have given a thoughtful consideration to the issue before us and are of the considered view that a payment made for access 11 Sulphur Mills Ltd. Vs. Addl. CIT, Range - ITA 5349/Mum/2016 12 DCIT Vs. Sulphur Mills Ltd. - ITA 5778/Mum/2016 to database which is publicly available to any person interested in availing such information is not in the nature of "royalty".
The ITAT Ahmedabad in the case of Cadila Healthcare limited (ITA No. 486/Ahd/2016; dated 03.01.2017) had observed that the payment made by the assessee to Chemical Abstract Service, USA, for online access to database system „SciFinder‟ was simply a payment made towards copyrighted material and the same could not be treated as "royalty". The Tribunal while concluding as hereinabove had relied on the judgments of the Hon‟ble High Court of Bombay in the case of DIT Vs. Dun and Bradstreet Information Services India Pvt. Ltd. (2011) 318 ITR 95 (Bom) and the Hon‟ble High Court of Delhi in the case of DIT Vs. Nokia Networks OY (2013) 358 ITR 259 (Del). We thus respectfully following the aforesaid view of the coordinate bench of the Tribunal, therein conclude that as the payment made by the assessee to Chemical Abstract Services, USA, for online access to database system „SciFinder‟ was simply a payment made towards copyrighted material, therefore, the same could not be treated as "royalty". Insofar the aforesaid non-resident payee viz. Chemical Abstract Service did not have a PE in India during the year, therefore, the same as per Article 7 of the India-USA DTAA could not have been assessed as its „business income‟ in India. We thus are of the considered view that as the assessee was under no obligation to deduct tax at source on the aforesaid payment of Rs. 2,22,395/- to the aforesaid non- resident party viz. Chemical Abstract Service, therefore, the same could not have been disallowed u/s 40(a)(i) of the I.T Act. In terms of our aforesaid observations, we delete the disallowance of an amount of Rs. 2,22,395/- made by the A.O.
(ii) TSGE-DOO, Slovenia : Rs. 1,29,840/-
a) The assessee had made the payment to the aforesaid party for project work expenses for submission of plant protection details 12 Sulphur Mills Ltd. Vs. Addl. CIT, Range - ITA 5349/Mum/2016 13 DCIT Vs. Sulphur Mills Ltd. - ITA 5778/Mum/2016 in Slovenia. The A.O characterizing the payment as „Fees for technical Services‟ (for short „FTS‟) observed that as the assessee had failed to deduct tax at source as required u/s. 195, therefore, the said amount was liable to be disallowed u/s. 40(a)(i) of the I.T Act. It is the claim of the assessee that as the payment was made for services that were utilized for the purpose of export sales for its customers located outside India, therefore, the same cannot be deemed to have accrued or arisen in India as per the provision of section 9(1)(vii)(b) of I.T Act.
b) We have perused the definition of FTS in Explanation 2 to Sec. 9(1)(vii) of the IT Act. Further, as per Article 12 of the India- Slovenia tax treaty, the term "fees for technical services" means payments of any amount, other than those mentioned in Articles 14 and 15 of the convention in consideration for the services of managerial, technical or consultancy nature, including the provision of services of technical or other personnel. On a perusal of the correspondence between the assessee and the representative of the aforesaid concern viz. TSGE DOO, Slovenia, placed on record by the ld. A.R, it can safely be gathered that the assessee had availed the services of the said concern for providing assistance for the submission of an application to support the new registration of its product viz. Sulphur 80 WG (800 g/Kg Sulphur formulation) in Slovenia. In sum and substance, the aforesaid foreign entity had provided services towards assistance in documentation, guidance and liaison with various departments for assisting the assessee in registration of its product in Slovenia. In our considered view, the consideration paid by the assessee in lieu of the aforesaid liaison services of the foreign entity cannot be characterised as managerial, technical or consultancy services within the meaning of FTS under Explanation 2 to Sec. 9(1)(vii) of the I.T Act. Our aforesaid view that services rendered by a foreign 13 Sulphur Mills Ltd. Vs. Addl. CIT, Range - ITA 5349/Mum/2016 14 DCIT Vs. Sulphur Mills Ltd. - ITA 5778/Mum/2016 entity towards assistance in documentation, guidance and liaison with various departments for assisting the assessee in its work abroad would not fall within the realm of FTS is supported by the judgment of the Hon‟ble High Court of Delhi in the case of CIT-IV, Delhi Vs. M/s GRUP ISM P. Ltd (ITA No.325/2014 (Del); dt. 29.07.2015. In the aforementioned case, it was observed by the Hon‟ble High Court that the foreign entity was rendering guidance to the assessee about the procedural aspect of obtaining the payments and checking the format and documents of the invoices that were to be submitted for approval to the works department, Abu dhabi; to receive and periodically check the invoices of the assessee; to submit the invoices to the respective authorities and obtaining their approval; to follow up with various authorities and obtaining their approval; to follow up with various authorities in the works department, finance department, banks and other authorities for obtaining the approval of the invoices raised by the assessee etc. After deliberating on the nature of services rendered by the foreign entity, it was observed by the Hon‟ble High Court that the services provided could not be said to fall within the meaning of "consultancy services" as that would amount to expanding the scope of the term "consultancy". On the basis of its aforesaid observations the High court concluded that the consideration paid by the assessee for the services rendered by the foreign entity would not come within the scope of the phrase "fees for technical services" as employed in Sec. 9(1)(vii) of the IT Act. In our considered view as in the case in hand the foreign entity i.e TSG DOO, Slovenia was only providing its services towards assistance in documentation, guidance and liaison with various departments for assisting the assessee in registration of its product in Slovenia, therefore, the same would not fall within the sweep of FTS. As the said foreign entity viz. TSG DOO, Slovenia did not have a PE in India, therefore, the same could 14 Sulphur Mills Ltd. Vs. Addl. CIT, Range - ITA 5349/Mum/2016 15 DCIT Vs. Sulphur Mills Ltd. - ITA 5778/Mum/2016 not have been assessed as its „business income‟ under Article 7 in India. We thus being of the considered view that as the assessee was under no statutory obligation to deduct tax at source u/s 195 on the payment made to the aforesaid foreign entity, therefore, the same could not have been disallowed u/s 40(a)(i) of the I.T Act. We thus vacate the order of the CIT(A) to the extent he had upheld the disallowance u/s 40(a)(i) in context of the aforesaid transaction and delete the addition of Rs. 1,29,840/- made by the A.O. The Ground of appeal no. 3(b) raised by the assessee is allowed.
iii). M/s Liteam Corporate Image Planning & Design, Shanghai:
Rs. 4,91,920/-.
a). The assessee had made the payment to the aforementioned foreign entity for designing of seminar related material. The AO/CIT(A) being of the view that as the said payment was in the nature FTS, therefore, on the failure on the part of the assessee to deduct tax at source u/s. 195 on the said amount had disallowed the same u/s.40(a)(i) of the I.T Act.
b). We find that the assessee had admittedly made the payment to the aforementioned foreign entity for the services rendered by the latter for designing of seminar related material for an exhibition at Shanghai. In our considered view, the said payment clearly falls within sweep of FTS u/s. 9(i)(vii) of the I.T Act and Article 13 of the India-China DTAA. We thus are of the considered view that as the assessee who was liable for deduction of tax at source u/s. 195 on the aforementioned payment made to the foreign entity, had failed to do so, therefore, the said amount was rightly disallowed by the lower authorities u/s. 40(a)(i) of the I.T Act. We thus not finding any infirmity in the order of the CIT(A) who had sustained the disallowance made by the A.O u/s. 40(a)(i) of the I.T Act, uphold 15 Sulphur Mills Ltd. Vs. Addl. CIT, Range - ITA 5349/Mum/2016 16 DCIT Vs. Sulphur Mills Ltd. - ITA 5778/Mum/2016 his order to the said extent. The Ground of appeal no. 3(C) raised by the assessee is dismissed.
11. We shall now advert to the contention of the Ld. AR that the CIT(A) has erred in confirming the addition of Rs. 1,63,137/- on account of interest income not accounted in the financials of the assessee on the basis of Form 26AS. Succinctly stated, as per Form 26AS the assessee had interest income of Rs.4,03,86,721/- on its deposits with Bank of India on which TDS of Rs. 41,49,932/- was deducted. However, the assessee had shown interest income of Rs. 3,93,22,976/- and had claimed credit for TDS of Rs. 39,35,058/- in its return of income for the year under consideration. It is the contention of the ld. A.R that the assessee had claimed the credit of TDS in its return income as per its „books of accounts‟ and not as per Form 26AS. Apart there from, it is the claim of the assessee that in case the interest income from Bank of India of Rs. 4,03,86,721/- is to be considered, then the credit for the corresponding TDS of Rs. 2,14,874/-[(Rs.41,49,932/- (minus) Rs. 39,35,058/-)] short claimed by the assessee in its return of income may also be allowed. The ld. A.R in order to fortify her aforesaid contention had taken us through the relevant extracts of Form 26AS and the TDS certificates (hard copies) issued by the bank. After giving a thoughtful consideration to the issue before us, we are of the considered view that the matter in all fairness requires to be restored to the file of the A.O. We thus set aside the matter to the file of the A.O, who shall during the course of the set aside proceeding afford an opportunity to the assessee to reconcile the income and TDS shown in the its return of income, as against that reflected in its Form 26AS. The Ground of appeal no. 4 is allowed for statistical purposes.
12. We shall now advert to the contention advanced by the assessee as regards the working of the "book profit" by the A.O/CIT(A) for computing its tax liability under the MAT provisions envisaged u/s. 115JB of the I.T Act. We find substantial force in the contention 16 Sulphur Mills Ltd. Vs. Addl. CIT, Range - ITA 5349/Mum/2016 17 DCIT Vs. Sulphur Mills Ltd. - ITA 5778/Mum/2016 advanced by the Ld. A.R that the disallowance made u/s. 14A cannot be considered while computing the "book profit" for of the assessee u/s. 115JB of the I.T Act. Our aforesaid view is fortified by the order of the „Special bench‟ of the ITAT, Delhi in the case of ACIT & Anr. Vs. Vireet Investment Pvt. Ltd. & Anr. (2017) 165 ITD 27 (Del)(SB). We thus in terms of our aforesaid observation direct the AO to exclude the amount of disallowance computed under Sec. 14A for the purpose of computing the " book profit" u/s. 115JB in the hands of the assessee. Insofar the contention of the assessee that the lower authorities had erred in adding the provision for doubtful debts of Rs. 43,61,278/- while computing the "book profit" u/s. 115JB is concerned, we are unable to accept the same. In our considered view, as per Explanation 1(i) to section 115JB, the "amount or amounts set aside as provision for diminution in the value of the any asset" if debited in the profit and loss account has to be added to the „net profit‟ shown in the profit & loss account for the year for the purposes of computing the "book profit" u/s. 115JB of the Act. As the provision for bad and doubtful debts debited by the assessee in its profit & loss account is in the nature of a provision leading to diminution in the value of an asset, therefore, the same has to be added to the „net profit‟ while computing the „book profit‟ u/s 115JB of the I.T Act. Insofar the judgment of the Hon‟ble High Court of Bombay in the case of CIT Vs. Salgaonkar Mining Industries (P) Ltd. (2015) 235 Taxman 96 (Bom) is concerned, we are of the considered view that the same being distinguishable on facts would thus, not assist the case of the assessee as it was rendered in context of clause (c) of Explanation to Sec. 115JA(2) and prior to insertion of clause (g) of Explanation to Sec. 115JA(2) by the Finance (No.2) Act, 2009 w.r.e.f 01.04.1998 in the case of the assessee for A.Y 1997-98. We may herein reiterate that pursuant to the amendment to Explanation 1(i) to Sec. 115JB by the Finance (no. 2) Act, 2009 with w.r.e.f. 01.04.2001 any provision leading to diminution in the value of any asset, has to be added to the „book profit‟. We thus finding no infirmity in the order of the CIT(A) who has rightly 17 Sulphur Mills Ltd. Vs. Addl. CIT, Range - ITA 5349/Mum/2016 18 DCIT Vs. Sulphur Mills Ltd. - ITA 5778/Mum/2016 concluded that the provision for doubtful debts was liable to be added for computing the "book profit" u/s. 115JB of the I.T Act, uphold the same. The Ground of appeal no. 5 is partly allowed in terms of our aforesaid observations.
13. The appeal of the assessee is partly allowed in terms of our aforesaid observations.
ITA no. 5778/Mum/2016 A.Y 2011-12
14. We shall now advert to the appeal filed by the revenue. The revenue assailing the order of the CIT(A) has raised before us the following grounds of appeal.
(i) "Whether in law and on the facts and in the circumstances of the case, the Ld.CIT(A) erred in ignoring the fact that the payments made to various non-resident parties falls within the ambit of section 195 r.w.s. 9(1)(vii) and the explanation to section 9(2)of the Income Tax Act, 1961"
(ii) "Whether in law and on the facts and in the circumstances of the case, the Ld.CIT(A) was correct in ignoring the decision of Hon'ble ITAT in the case of DCIT LTU Vs DICGC Ltd. (33 taxmann.com 634)"
(iii) "The appellant prays that the order of the CIT(A) on the above grounds be set aside and that of the A.O. be restored"
(iv) "The appellant craves leave to amend or alter any grounds or add a new ground which may be necessary".
15. The revenue is aggrieved with the order of the CIT(A), to the extent he had set aside the order of the A.O and had vacated the additions/disallowances made by him u/s. 40(a)(i) of the I.T Act by observing that the said respective payments did not fall within the realm of section 195 r.w.s. 9(i)(vii) and the Explanation therein provided.
18Sulphur Mills Ltd. Vs. Addl. CIT, Range - ITA 5349/Mum/2016 19 DCIT Vs. Sulphur Mills Ltd. - ITA 5778/Mum/2016
16. We find that the AO had disallowed the legal & professional fees paid by the assessee to the non-resident entities u/s. 40(a)(i) of the IT Act. On appeal, it was observed by the CIT(A) that the payments were made by the assessee for the services rendered by the non-resident entities in various countries in order to facilitate the registration of the chemical products of the assessee. The CIT(A) was of the view that as the services rendered by the respective concerns were in the nature of independent personal services and not in the nature FTS as contemplated under the various DTAA‟s, therefore, the consideration paid by the assessee in lieu of such services in absence of any PE of the aforementioned concerns in India were not liable to be taxed in India. In sum and substance, the CIT(A) finding favour with the contention advanced by the assessee that it was not obligatory on its part to deduct tax at source in respect of the payments made towards legal and professional fees to the various foreign concerns which had rendered their services in relation to registration of its products in the said respective countries concluded that the said amounts could not be disallowed u/s. 40(a)(i) of the I.T Act.
17. We have given thoughtful consideration to the issue before us and have perused the observations of the CIT(A) in context thereto. We are persuaded to subscribe to the view taken by the CIT(A) that as the payments made by the assessee for the services rendered by the foreign entities for facilitating registration of the assesses products in their respective countries were in the nature independent personal services and not in the nature of FTS as contemplated in the various DTAA‟s, therefore, in the absence of any PE in India of the said foreign entities, the said respective amounts could not be taxed in India. We thus uphold the view taken by the CIT(A) and conclude that as no obligation was cast upon the assessee to deduct tax at source u/s. 195 while making the payments towards legal and professional fees to the aforementioned concerns, therefore, no disallowance of the said amount was called for u/s. 40(a)(i) of the I.T Act.
19Sulphur Mills Ltd. Vs. Addl. CIT, Range - ITA 5349/Mum/2016 20 DCIT Vs. Sulphur Mills Ltd. - ITA 5778/Mum/2016
18. We shall now advert to the disallowance u/s. 40(a)(i) of the license and registration expenses made by the A.O, which thereafter had been vacated by the CIT(A). It is the contention of the Ld. A.R that no obligation was cast upon the assessee to deduct tax at source in respect of the license and registration expenses that were incurred in relation to registration of the products of the assessee in various countries. We have perused the order of the CIT(A) and find ourselves to be in agreement with him that as the payments made to the services providers were not in lieu of any technical services provided by them, but were for the normal services rendered, therefore, the same did not cast any obligation on the assessee to deduct tax at source in respect of the said amounts under Sec. 195 of the I.T Act. As the payments in the hands of the respective foreign payees were in the nature of their normal business income, which as per Article 7 could not be taxed in India in the absence of their PE in India, therefore, the assessee remained under no obligation to deduct tax a source on the said amounts under Sec. 195 of the IT Act. In our considered view as no infirmity emerges from the order of the CIT(A), therefore, we uphold the same.
19. Insofar the payments made by the assessee for the other services viz (i) miscellaneous export expenses and; (ii) advertisement and sales promotion expenses are concerned, we find that the CIT(A) had deleted the disallowance made by the A.O u/s. 40(a)(i) in respect of the said amounts by observing that as the said amounts were in the nature of business incomes in the hands of the foreign payees or in the nature of reimbursement of the expenses, therefore, no liability was cast upon the assessee to deduct tax at source in respect of the said amount. We are persuaded to subscribe to the aforesaid view taken by the CIT(A). As nothing has been canvassed before us by the Ld. D.R which could persuade us to conclude that the observations arrived at by the CIT(A) in context of the issue under consideration was either perverse or suffered from any infirmity, therefore, we 20 Sulphur Mills Ltd. Vs. Addl. CIT, Range - ITA 5349/Mum/2016 21 DCIT Vs. Sulphur Mills Ltd. - ITA 5778/Mum/2016 uphold the view taken by him that no obligation was cast upon the assessee to deduct at source in the respect of aforementioned payments made to the foreign payees.
20. The appeal filed by the revenue is dismissed.
21. The appeal of the assessee i.e. ITA no. 5349/Mum/2016 is partly allowed and the appeal of the revenue i.e. ITA No. 5778/Mum/2016 is dismissed.
Order pronounced in the open court on 13.03.2019.
आदे श की घोषणा खऱ
ु े न्यायाऱय में ददनांकः 13.03.2019 को की गई
Sd/- Sd/-
(G.S PANNU) (RAVISH SOOD)
VICE-PRESIDENT JUDICIAL MEMBER
Mumbai, dated: 13.03.2019
Nishant Verma
Sr. Private Secretary
copy to...
1. The appellant
2. The Respondent
3. The CIT(A) - Concerned, Mumbai
4. The CIT- Concerned, Mumbai
5. The DR Bench,
6. Master File
// Tue copy//
BY ORDER
DY/ASSTT. REGISTRAR
ITAT, MUMBAI.
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