Income Tax Appellate Tribunal - Mumbai
Datamatics Software P.Ltd, Mumbai vs Department Of Income Tax on 29 March, 2012
IN THE INCOME TAX APPELLATE TRIBUNAL
MUMBAI BENCH 'D' MUMBAI
BEFORE SHRI B.R. MITTAL (JUDICIAL MEMBER) AND
SHRI RAJENDRA SINGH (ACCOUNTANT MEMBER)
ITA No. 5433/Mum/2010
Assessment Year-2006-07
The ITO ((1)(4), M/s. Datamatics Software
Aayakar Bhavan, Pvt.ltd.,
Mumbai-400 020 Plot No. B/5, MIDC, Part-B,
Vs. Cross Lane, Marol,
Andheri(E),
Mumbai-400 093
PAN-AABCD 9259Q
(Appellant) (Respondent)
Appellant by: Ms. Rupinder Brar
Respondent by: Shri J.P. Bairagra
Date of Hearing :29.03.2012
Date of pronouncement: 4.4.2012
ORDER
PER B.R. MITTAL, JM :
The Department has filed this appeal for assessment year 2006-07 against order of Ld. CIT(A) dt. 30.4.2010.
2. Ground No. 1 of appeal is as under:
"On the facts and in the circumstances of the case and in law, the Ld. CIT(A) erred in deleting the addition of Rs. 79,51,827/- made by the AO on account of explained income, without appreciating the facts and circumstances of the case and in law."
2. The relevant facts are that assessee company was providing Facility Management Services to M/s. Knowledge Works Global Ltd (hereinafter to be referred in short KWGL). During the course of assessment proceedings, Assessing Officer observed from Profit & Loss account and TDS certificate 2 ITA No. 5433/M/2010 filed by assessee that assessee company was in receipt of management fee from KWGL. The AO has in para 3.5 of assessment order at page-4 has given details of the payment and the TDS deducted by KWGL, which is as under:
"Alongwith return of income, the assessee filed a TDS certificate received from M/s. Knowledge Works Global Pvt. Ltd. The contents of the certificates are reproduced below:
Date Amount TDS Surcharge Education Total Tax Cheque/ BSR Date of Challan paid/received (Rs.) (Rs) Cess(Rs) deposited DD/Cash Code of deposit No./Transfer (Rs) (Rs) the voucher No. branch 30.4.05 164,634.00 62,050 6,205/- 1,365.00 69,620/- 712379 220912 10.5.05 3 30.4.05 169,410.00 63,850 6,385/- 1,405.00 71,640/- 812434 220912 7.6.05 79 30.4.05 178,165.00 67,150 6,715/- 1,477.00 75,342/- 250938 220912 9.7.05 2 30.4.05 215,577.00 81,250 8,125/- 1,788.00 91,163/- 524404 220912 23.8.05 3 30.4.05 280,126.00 105,577 10,559 2,323.00 118,459 576100 220912 14.9.05 6 30.4.05 233,088.00 87,850 8,785/- 1,933.00 98,568/- 282358 220912 11.10.05 3 Total 1,241,000.00 467,727 46,774 10,291.00 524,792/ - - -- -
3. The AO called for information u/s. 133(6) of I.T. Act from various parties including KWGL. In response to notice u/s. 133(6), KWGL submitted that Facility Management Services are provided to assessee company for which fee charged but there was no formal agreement. The ledger account of assessee company in the books of KWGL was also submitted before AO. It is relevant to state that AO has made Annexure-A to the assessment order, the said ledger account of assessee-company in the books of KWGL. The AO observed on perusal of said ledger account that payment had been made through cheque on monthly basis from April to March, 2006 and TDS was deducted accordingly. In order to verify ledger account submitted by KWGL, AO called for books of account and bank statement of assessee company. In response thereto, assessee filed reply which is reproduced by AO in para 3.8 of assessment order which reads as under:
"Our client states that as per their record there has been no transaction amounting to Rs. 1,10,60,716/- towards Facility Management Services as stated by them. Our client has not made any payment to this effect and neither claimed any expenditure related to it. In case you need any clarifications in this regard, our client will need to cross examine the said Knowledge Works Global Ltd., so as to establish the facts in this regard."3 ITA No. 5433/M/2010
4. Further, AO has stated that on behalf of KWGL, M/s. Sudit Parekh & Co., Chartered Accountant vide their letter dt. 26.12.2008 stated that there was a typographical mistake in their letter dt. 5.10.2008. The contents of said letter dt. 26.12.2008 are stated by AO in para 3.9 at page-5 of assessment order which reads as under:
"In reply to the said notice, our client has furnished a detailed reply dt. 5th October filed in your office on 7th October.
In the aforesaid letter, there is a typographical mistake that has crept in inadvertently.
In the first paragraph, while giving the nature of transactions entered into with M/s. Datamatics Softworld Pvt. Ltd., it has been wrongly mentioned that the assessee provided facilities management services to M/s. Datamatics Softworld Pvt. Ltd., and for which fees are received by the assessee from the said company. The correct position is that it is M/s. Datamatics Softworld Pvt. Ltd., which provided the said facility management services to Knowledge Works Global Ltd. and for which fees were paid by Knowledge Works Global Ltd., to Datamatics Softworld Pvt. Ltd., You may note from the other details filed alongwith the said letter dt. 5th October that the facts bring out the correct position as given above. The error is deeply regretted."
5. The AO has stated that in order to verify as to whether there was a transaction of assessee with KWGL and also to verify payments made by KWGL to assessee-company, he called for books of account including bank statement of assessee, but assessee failed to submit the same. AO has stated that from the ledger account of KWGL, it is observed that assessee received a sum of Rs. 1,05,59,424/- including service tax of Rs. 9,80,847/- on account of fee towards Facility Management Services but assessee has only offered Rs. 16,26,750/-. Thus, there is a difference of Rs. 79,51,827/- which is received or accrued during the year from KWGL and assessee has not offered it for taxation. The AO has given a tabular chart at pages 5 & 6 of assessment order. The AO after considering said transactions, has stated that assessee provided Facility Management Services for which assessee was 4 ITA No. 5433/M/2010 to receive as fees to the tune of Rs. 85,04,134/-. The reversal entry as stated by assessee is vague and contrary to accounting standard. In propriety, it should have been credited as income and if at all any doubt about the certainty of income, same could have been claimed as bad debts. Thus, AO concluded that TDS claimed by assessee company amounting to Rs. 5,24,792/- is relating to income of Rs. 1,05,59,424/-, out of which only Rs. 16,26,750/- has been offered for taxation. Accordingly, AO added the difference of Rs. 79,51,827/- to the income of assessee. Being aggrieved, assessee filed appeal before First Appellate Authority.
6. The submissions made by assessee before Ld. CIT(A) have been stated by Ld. CIT(A) in para 5.3 of impugned order which is as under:
Before me the appellant has submitted as under:
The appellant company was providing Facility Management Services to M/s. Knowledge Works Global Ltd. Said services were discontinued from the month of October 2005. Accordingly, the appellant company has raised monthly bills in respect of Facility Management Services rendered for the months of April 2005 to September 2005. However, dispute arose about the Facility Management Services provided by the appellant company and accordingly, as agreed the appellant company had to cancel the bills for the months of May 2005 to September 2005, details of which are as under:
May 2005 Rs. 14,07,254
June 2005 Rs. 14,79,986
July 2005 Rs. 17,90,750
August 2005 Rs. 18,89,930
September 2005 Rs. 19,36,214
------------------
Total Rs. 85,04,134
=========
Therefore, the reversal entries were passed by the appellant company as well as by the M/s. Knowledge Works Global Ltd. as mutually agreed between both the parties, which is evident from the copy of account of the appellant company in the books of M/s. Knowledge Works Global Ltd. received by the Id. AO which is the Annexure 'A to the assessment order.5 ITA No. 5433/M/2010
Accordingly, in effect, the appellant company has received the following amounts which are included under the head "Other income '' in the hooks of the appellant company (1) Facility Management Services for April 2005 13,67,582 Less Service tax 1,26,582 12,41,000 (2) Payroll services for Oct. to Dec.2005 3,87,750 Total 16,28,750 ====== Since M/s. Knowledge Works Global Ltd. credit the account of the appellant company in respect of Facility Management Services on monthly basis on raising of the bill by the appellant company they have credited to the account of the appellant company for the months of May 2005 to September 2005 also and accordingly TDS is deducted and paid on these bills also which is evident from TDS certificate incorporated in para 3.5 of the order that though date of bill mentioned April 2005, but TDS is deposited on different dates in the month of.
May 2005 to October 2005. However as submitted above these Facility Management Services bills for the months of May 2005 to September 2005 were subsequently cancelled but since TDS already deducted and paid cannot he corrected, they have issued the TDS certificate of Rs.524,792/- in which they have shown the amount payable of Rs. 12.41,000/- only which is towards Facility Management Services charges payable for the' month of April 2005. In other words , this TDS Certificate gives the clear picture of amount paid by them for the month of April 2005 of Rs. 12.41.000/-- only. However, since they have already deducted TDS in respect of the bills for the months of May 2005 to September 2005, they have mentioned the amount of TDS paid of Rs. 5,24,792/- in this certificate.
Further the appellant company has shown the income on account of Facility Management Services of Rs. 16,26, 750/-. The difference of Rs. 3,87,750/- is on account of income receivable for payroll services from October 2005 to December,2005."
7. Ld. CIT(A) after considering the submissions of assessee and order of AO as well as copy of agreement dt. 4th August, 2004 and copy of termination agreement entered into between assessee and KWGL dt. 31.3.2006 for providing Facility Management Services and also after seeking remand report from AO has deleted the said addition of Rs. 79,51,827/- vide para 5.4 of the impugned order which reads as under:
6 ITA No. 5433/M/2010I have considered the submission of the appellant, order of the AO and brief facts of the case are that the appellant company was provided facility management service to M/s. Knowledge Works Global Ltd. and the appellant company has raised monthly bills in respect of Facility Management Services rendered for the month of April 2005 to March 2006. The copy of agreement providing facility management services entered between M/s. Knowledge Works Global Ltd. and the copy of termination of agreement between the two companies were submitted. Copy of the ledger account of M/s. Knowledge Works Global Ltd. was also submitted which was submitted before the AO. From the perusal of these documents, it is noticed that the agreement of providing facility management services dated 4/8/2004 was terminated vide termination agreement dated 31/'03/2006. According to this agreement, the appellant has reversed the entries in the ledger account in the month of May 2005 to September 2005 which show the payment of Rs.85,04,134/-. The reversal entries were passed by the appellant company as well as M/s. Knowledge Works Global Ltd. has mutually agreed between both the parties. The ledger account of the appellant company in the books of accounts of M/s. Knowledge Works Global Ltd. which is made a part as annexure- A of the assessment order. These reversal entries are clearly_ shown on 31/03/2006. The argument of the AO is that the appellant cannot make reverse entries on the basis of termination agreement. He has of the view that if any claim is to be made, it should be a nature of bad debts in the next year and it cannot be claimed in the year under consideration. The AO has not disputed the ledger account of the appellant company in the books of M/s. Knowledge Works Global Ltd. nor there is any discrepancy noticed in the books of the appellant because the reversal of entries are made on the basis of termination agreement mutually agreed by both the companies. From these facts of the case, it is observed that there is no dispute regarding the reversal of entries books of account of both the companies but the objection of the AO is that the entries made are not as per the accounting standard, it should have been claimed as bad debts in the next year.
In totality of facts and circumstances, it is clear that both the companies has made reverse entries in the books of accounts on 31.3.2006 as per the termination agreement mutually agreed by them. Therefore, the claim of the AO that it should have been claimed as bad debts in the next year without any basis when both the companies have confirmed that entries of Rs.
85,04,134/- have been reversed and duly reflected in the books of accounts, then there is no question of any dispute. The AO 7 ITA No. 5433/M/2010 has no other information in his explanation that the entries made by both the companies are illegal or malafied. Keeping in view all these facts and circumstances, it is held that the AO has not properly appreciate the facts of the case, therefore, the addition made of Rs. 79,51,827/- is not sustainable, hence deleted."
Hence, Department is in appeal before the Tribunal.
8. The Ld. Departmental Representative submitted that assessee raised bills for providing Facility Management Services to KWGL from April to September, 2005 and the amount was also credited by KWGL in the name of assessee company after deducting TDS. He submitted that if there was a dispute between assessee and KWGL and agreement was terminated, amount which could not be recovered against the bills raised and already credited in the name of assessee should have been claimed as bad debts as per accounting standard instead of making contra entries and not to show the said amount as income. Ld. DR submitted that AO was justified to make the addition of difference of Rs. 79,51,827/- to the income of the assessee.
9. On the other hand, Ld. AR made his submissions on the lines of submissions made before authorities below. He further submitted that there was an agreement between assessee and KWGL for providing Facility Management Services and referred copy of agreement dt. 4th August, 2004 placed at pages 43 to 48 of Paper Book. He submitted that assessee raised bills for the month of April 2005 to September, 2005 and entered the amount of bills in its books of account. He submitted that KWGL also credited said bills in its books of account and deducted TDS on the basis of bills raised but actually no payment was made for bills raised for the months from May 2005 to Sept 2005. Therefore, reversal entry was passed by assessee-company as well as KWGL in their books of account as mutually agreed between the parties. He submitted that ultimately agreement was cancelled on 31.3.2006 and referred pages 49 to 52 of Paper Book at which copy of termination agreement is placed. Ld. AR submitted that as per said agreement, it was mutually agreed between assessee and KWGL to terminate the agreement of providing Facility Management Services with effect from 1st May, 2005 and all 8 ITA No. 5433/M/2010 rights and obligations of the parties under the Facility Management Agreement stood terminated in entirety without any liabilities and claims.
10. Ld. AR submitted that AO obtained copies of ledger account of assessee from KWGL and he has annexed said ledger account as annexure-A to assessment order. Ld. AR submitted that KWGL has also shown reversal of entries evidencing that no payments were made to assessee against bills raised for the month of May, 2005 to September, 2005. He submitted that AO concluded that payment was received merely because KWGL already deducted TDS on the basis of bills raised by assessee and paid TDS to Government. The Ld. AR referred to pages 4 of assessment order which contain details of TDS certificate received by assessee from KWGL and filed by assessee alongwith return and submitted that amount received by assessee was Rs. 12,41,000/- and whereas TDS deducted was of Rs. 5,24,792/- which is about 42.289% of amount received. Therefore, TDS certificate could not be considered to conclude that assessee received payment from KWGL for bills raised of aggregate sum of Rs. 85,04,134/-. He further submitted that AO has not doubted the contention of assessee that agreement entered into between assessee and KWGL was cancelled w.e.f. 1.5.2005 but considered the income only because there was reversal of entries which he considered was not in accordance with accounting standards. Ld. AR submitted that Ld. CIT(A) has rightly held that when both parties i.e. assessee and KWGL have confirmed termination of agreement and that no payment was made to assessee against bills raised from May 2005 to September 2005, AO was not justified to make addition of difference of amount. He submitted that when actually amount was not received by assessee and is also not doubted by AO, addition made by AO was not justified.
11. We have carefully considered orders of authorities below and submission of Ld. Representatives of parties. We have also considered copies of agreements and written submissions which was filed by assessee before 9 ITA No. 5433/M/2010 Ld. CIT(A) and copy of it is placed at page 1to16 of Paper Book (relevant pages are 6 to 10 of paper book). We observe that AO has made addition of difference of the amount by considering that as per ledger account, assessee provided Facility Management Services to KWGL but the assessee received the payment of bills for the month of April, 2005 of Rs. 12,41,000/-. However,KWGL on the basis of bills raised by assessee deducted TDS aggregating to Rs. 5,24,792/- but actually did not made payment to assessee. We observe that AO has not doubted the genuineness of ledger accounts of assessee in the books of KWGL which was obtained by him from KWGL and copy of it annexed as annexure-A to assessment order. The AO himself has given in the tabular form the details of payment and TDS in para 3.5 at page- 4 of assessment order and is also stated herein above in para-2. It is observed that assessee received payment of Rs. 12,41,000/-, but TDS deducted is at Rs. 5,24,792/-. Considering the amount of TDS deducted and the payment received by assessee, we find substance in the contention of Ld. AR that KWGL deducted TDS on the basis of bills raised by assessee but actual payment was not make for all the bills which were raised by assessee for the months of April, 2005 to September, 2005. We observe from the copy of agreement dt. 31.3.2006 placed at pages 49 to 52 of paper Book that both parties mutually agreed to terminate the agreement of providing Facility Management Services with effect from 1st May, 2005. Hence, it is evident that assessee did not receive payment for the services from May, 2005 onwards. In view of above facts, we are of the considered view that AO was not justified to make the addition of amount which assessee admittedly had not received and parties made contra entries in their books of account as per termination agreement. The action of AO to make addition by stating that assessee could claim the amount not received as bad debt as it is not in accordance with accounting standards is not justified.We observe that department has not disputed observation of Ld. CIT(A) that AO has no other information in his explanation that entries made by both parties i.e. assessee and KWGL are illegal or malafied. In view of above facts and the reasons as given by Ld. CIT(A) in his order, we uphold the order of Ld. CIT(A) to delete 10 ITA No. 5433/M/2010 addition of Rs. 79,51,827/- made by AO. Hence ground No. 1 of the appeal taken by department is rejected.
12. Ground No. 2 of the appeal is as under:
"On the facts and in the circumstances of the case and in law, the Ld. CIT(A) erred in deleting the addition of Rs. 1,34,68,702/- u/s. 40(a)(ia) without appreciating the fact that the assessee has failed to deduct the TDS on Facility Management Services, without appreciating the facts and circumstances of the case and in law."
13. During the course of assessment proceeding, AO has stated that assessee made payment of Rs. 1,34,68,702/- to its group concern namely M/s. Datamatics Technologies Ltd. (herein after to be referred in short DTL). The break-up of said payment is given by AO at page-8 as under:
(i) Salary expenses - Rs. 13077210
(ii) Local Travel, Staff Welfare etc. Rs. 391492
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Total Rs. 13468702
=========
14. The AO has stated that assessee has not deducted TDS on said
payment of Rs. 1,34,68,702/- made to DTL which is covered in the ambit of Section 194J of I.T. Act. The AO did not accept the contention of assessee that all the above payments were made on account of their routine transaction and reimbursement to DTL. The AO has also stated that assessee has not furnished copy of agreement with DTL, sister concern of assessee company for reimbursement. The AO has stated that the said payment has been made by assessee directly to sister concern DTL and not to the employees of DTL and therefore this payment is nothing but contract for availing professional manpower from its sister concern and hence assessee was required to deduct TDS u/s. 194J of I.T. Act. Since assessee has not deducted TDS on the said payment, AO as per provisions of Sec. 40(a)(ia) of I.T. Act disallowed said claim of assessee of Rs. 1,34,68,702/-. Being aggrieved, assessee filed appeal before First Appellate Authority.
11 ITA No. 5433/M/201015. On behalf of assessee, submissions made before Ld. CIT(A) are stated in para 6.3 of impugned order, which reads as under:
Before me, the appellant has submitted as under:
"The appellant company is having on its payroll only two employees to whom salary is paid totaling to Rs. 19.50.455/-. Further, to render these services, the appellant company has taken help of some of the employee's of M/s. Datamatics Technologies Ltd. (DTL) and reimbursed a sum of Rs. 1,30,77,210/-- to M/s. DTL towards part of salary which is paid by them to all the employee's, but since they have rendered part of their services to the appellant company, this amount is recovered from the appellant company. M/s. DTL is having approximately 1500 employees. The appellant company has taken the services of some of these employees only. The appellant company has supplied the full details in respect of employees, part of the whose salary is reimbursed by the appellant company to DTL, vide their letter dt. 16.12.2008.
DTL has deducted the TDS on the salary paid to these employees and these details were also given to the Ld. AO vide the letter dated 16-12-2008. In the said letter, on a separate sheet, details are also given that only part salary of these employees is reimbursed by the appellant company. On taking help of these employees, the appellant company have booked sales of Rs. 1,65,90,468/-.
The Id. AO has disallowed deduction of payment made to DTL on account of salary of Rs. 1,34,68,702/-- u/s. 40(a) (ia) after giving a finding that these services so availed from DTLis passed on by the appellant company to another sister concern M/s. Knowledge Works Global Ltd which is not correct. The facts of services rendered by the appellant company to M/s. Knowledge Works Global Ltd are already explained in Ground No. 6 above. The services of employees of DTL is taken for providing the IT enabled services and BPO services to 15 companies from whom the appellant the appellant company has earned sales consideration of Rs. 1,65,90,468/- (details of which are given to the Ld. AO vide letter dated 10-11-2008. Further the Ld. AO has never asked for explanation in respect of disallowance u/s. 40A(2)(b). Therefore, disallowance made thereof by the Ld. AO is not correct. The appellant has relied upon the following decisions:
1. ITO Vs Dr. Willman Schwabe India (P) Ltd. 3 SOT 71 (Del) 12 ITA No. 5433/M/2010
2. Assocated Cement Co. Ltd. Vs CIT and Another 201 ITR 435 (SC)
3. Hon. Supreme Court in the case of Upper India Publishing House (P) Ltd Vs. CIT 117 ITR 569.
16. Ld. CIT(A) after considering the order of AO and submissions of assessee and also after seeking remand report from AO and the copy of agreement entered into between assessee and DTL dt. 15.4.2004 filed by assessee before Ld. CIT(A), Ld. CIT(A) vide paras 6.4 to 6.6 of impugned order deleted the said disallowance of Rs. 1,34,68,702/- made by AO which read as under:
6.4. 1 have considered the submission of the appellant, order of the AO and facts of the case are that the assessee company and M/s. Datamatics Technologies Ltd.(DTL) has entered into an agreement dated 15/4/2004 in which the appellant company was entitled to use the manpower of DTL as and when required for their assignment. As per clause VII of the agreement, the assessee company has to reimburse the salary for the services of software course to DTL. It was also agreed that the assessee company will only reimburse the cost the only profit element.
For this purpose, the assessee company had made a payment of Rs.l.34.68.702/- to M/s DTL. The AO has raised objection that why TDS as per provisions of section 194J has not been deducted on this payment. Accordingly, by invoking the section 40(a)(ia), the AO has made addition of Rs.l,34,68,702/-. The objection raised by the AO are that the copy of agreement was not furnished before him and the payment was covered u/s. 194J of the I.T. Act. Finally, the AO has concluded that the agreement nothing but the contract for availing professional man power to the sister concern to be used with other parties.
6.5 On the other hand, the appellant has argued that the case of the appellant is only reimbursement of salary paid to the employees of M/s. DTL for using their services. The appellant has also filed the copies of TDS certificates to prove that actually these were employees of DTL and they have deducted tax on it. The appellant has only reimbursed the expenditure incurred on salary of these employees. The appellant has also relied on the decision in the case of ITO Vs. Dr. Willmar Schwabe India Pvt. Ltd. 95 TTJ 53 (Del), where it is held that reimbursement of conveyance expenses to consultants for which bill was separately raised by the consultant did not attract section 194J. The reliance was also made on the decision of United Hotel Ltd Vs ITO 93 TTJ 822, where it is held that reimbursement of salary of personal of IHC to IHC who were 13 ITA No. 5433/M/2010 deputed by IHC with the assessee was not fees for technical services and therefore, the assessee was not liable to deduct tax at source u/s. 194J or to pay interests u/s. 201(1A). Reliance was also placed on the decision of Mumbai Tribunal Special Bench in case of Mahindra and Mahindra Ltd. Vs. DCIT 30 SOT 374 (Mum), where it is held as under:
The Assessing Officer had not disputed that the sum of Rs. 1.68 crores was in the nature of expenses reimbursed by the assessee to the lead managers. When a particular amount of expenditure is incurred and that sum is reimbursed as such that cannot be considered as having any part of it in the nature of income. Any payment, in order to be brought within the scope of income by way of fees for technical services under section 9(1)(vii) should be or have at least some element of income in it. Such payment should involve some compensation for the rendering of any services, which can he described as income in the hands of recipient. In other words, the component of income must be present in the total amount of fees paid for technical services to constitute as an item falling under section 9(1)(vii). Where the expenditure incurred is reimbursed as such without having any element of income in the hands of the recipient, it cannot assume the character of income deemed to accrue or arise in India. Therefore, the amount of 'management commission in respect of FCCB issue amounting to Ps. 1.62 crores and the selling commission' of Rs. 6.07 crores fell within the scope of income by way of fees for technical services in terms of section 9(1)(viij. However, the other two amounts, namely, the 'underwriting commission' at Rs. 2.43 crores and the expenses reimbursed at Rs. 1.68 crores were not income by way of fees for technical services.' 6.6 The objection of the AO that copy of agreement was not produced during the assessment proceedings, therefore, a remand report was called for from the AO to examine the agreement and specifically clause VII which relates the payment of reimbursement of salary to the employees of M/s DTL. The AO submitted its remand report. Copy of the same was also provided to the appellant for his comments. The appellant has argued that the AO has not given its comment on clause VII which provides that appellant company will reimburse the cost incurred for services of software professionals to M/s DTL without any profit element. Secondly, the AO has relied on the circular on 715 dated 8/8/1995. To counter this, the appellant has relied on the Willmar Schwabe (supra) in which the Hon'ble 14 ITA No. 5433/M/2010 Tribunal has held that this circular is applicable only in the case where the bills are raised for gross amount inclusive of professional fees as well as reimbursement of actual expense which is not applicable to the facts of this case. The decision of Mumbai Tribunal Special Bench in case of Mahindra & Mahindra is squarely covered to the facts of this case. Keeping in view all these facts and circumstances that the employees of M/s DTL who has paid salary and deducted TDS, the appellant company has only reimbursed the salary paid to these employees for the utilization of their services. Therefore, in totality of facts and circumstances, the case of the appellant is only reimbursement of expenditure and provisions of Sec. 194J are not applicable.
Therefore, the disallowance made by the AO u/s. 40(a)(ia) is not sustainable, hence deleted."
Hence, department is in appeal before the Tribunal.
17. During the course of hearing, Ld. Departmental Representative relied on the order of AO. He submitted that assessee made payment to its sister concern DTL and not to employees of DTL. He submitted that assessee availed services of professional employees of its sister concerns and therefore assessee was required to deduct TDS as per Sec. 194J of I.T. Act. Since assessee failed to deduct TDS, AO was justified to disallow claim of assessee as per Sec. 40(a)(ia) of I.T. Act.
18. On the other hand, Ld. AR supported order of Ld. CIT(A). He submitted that assessee company is having on its payroll only two employees. That assessee company is engaged in the business of IT Enabled Services and BPO services in the domestic market. He submitted that to render these services, assessee company has taken help of some employees of DTL and against that assessee reimbursed towards part of salary which was paid by DTL to its employees aggregating Rs. 1,30,77,210/- and full details were also furnished by assessee to AO. He submitted that DTL deducted TDS on the salary paid to those employees and their details were also furnished to AO. He submitted that DTL is having approximately 1500 employees. He submitted that assessee by taking the help of those employees of DTL booked sales of Rs. 1,65,90,468/-. Ld. AR submitted that assessee reimbursed to DTL on account of salary and local travel and staff welfare expenses on actual 15 ITA No. 5433/M/2010 basis amounting to Rs. 3,91,492/- aggregating to Rs. 1,34,68,702/-, on which no TDS was required to be deducted. Ld. AR submitted that there were no profit element involved in the said reimbursement of expenses and hence TDS was not required to be deducted. Ld. AR referred to agreement dt. 15.5.2004 entered into between assessee and DTL, copy placed at page 34 to 41 of Paper Book and submitted that as per para-7 of it, assessee was to reimburse DTL the cost incurred for the actual services rendered. The Ld. AR submitted that no TDS is required to be deducted on reimbursement of expenses and to substantiate his submission relied on the following cases.
1) M/s. Utility Powertech Ltd. Vs ACIT (2010-TIOL-545-ITAT-Mum)
2) M/s. Stratcap Securities (I) Pvt. Ltd. Vs ACIT (2011-TIOL-163-ITAT- Mum
3) Emersons Process Management India(P) Ltd. Vs ACIT (2011) 47 SOT 157
4) Special Bench ITAT Mumbai in the case of Mahindra & Mahindra Ltd Vs DCIT-30 SOT 374(Mum)(SB)
5) ITO Vs Dr. Willmar Schwabe India (P) Ltd. 3 SOT 71 (Del)
6) United Hotels Ltd. Vs ITO 2 SOT 267 (Del) and
7) Decision of Jurisdictional High Court in the case of CIT Vs Siemens Aktiongesellschaft ( 310 ITR 320)(Bom) He submitted that if there is a reimbursement of salary of personnel deputed with assessee by sister concern and also reimbursement of expenses on travel etc, no element of income is involved and assessee is not required to deduct tax on the reimbursement amount and accordingly provisions of Sec. 40(a)(ia) cannot be applied to make disallowance of expenses claimed.
He submitted that order of Ld. CIT(A) be confirmed.
19. We have considered the orders of authorities below and submissions of Ld. Representative of parties. We have also carefully considered the cases cited before us (supra) and have also gone through agreement dt. 15.4.2004 entered into between assessee company and DTL by virtue of it assessee availed services of manpower of DTL, copy placed at pages 34 to 40 of Paper Book.
16 ITA No. 5433/M/201020. We observe that assessee made payment of Rs. 1,34,68,702/- to DTL and the break-up of it is as under:
(i) Salary expenses - Rs. 13077210
(ii) Local Travel, Staff Welfare etc. Rs. 391492
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Total Rs. 13468702
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21. The AO, during the course of assessment proceedings stated that said payment was made by assessee to DTL towards fee for profession services and assessee was required to deduct TDS u/s. 194J of I.T. Act. The AO did not accept the contention of assessee that said payment aggregating to Rs. 1,34,68,702/- was towards reimbursement on account of routine transaction and not for fee for professional services. However Ld. CIT(A) has held that assessee made payment to DTL to reimburse salary for availing services of employees of DTL as per agreement dt. 15.4.2004 entered into between assessee and DTL.
22. In order to decide the issue before us, we consider it prudent to state clause 7 of the agreement which reads as under:
"Clause - 7 - Payment 7.1 DSPL shall reimburse DTL the cost incurred for the services of the Software Professionals without and profit element as specified in a Statement of Work.
7.2. Unless otherwise provided in this Agreement or a Statement of work, each party shall be responsible for the payment of taxes assessed against it.
7.3 DTL shall raise invoices for the services of Software Professionals provided to DSPL in terms of this Agreement DTL will in turn also reimburse expenses."17 ITA No. 5433/M/2010
23. We observe that as per said agreement, assessee availed services of employees of DTL and assessee reimbursed salary of those employees aggregating to Rs. 1,30,77,210/- besides payments of Rs. 3,91,492/- towards local travel, staff welfare etc. to DTL. We observe that assessee also furnished details to AO as well as before Ld. CIT(A) in respect of employees. The above facts have not been disputed by department at the time of hearing of appeal. Now the question arises as to whether on the reimbursement of expenses by assessee to DTL, assessee was required to deduct TDS or not.
24. The Special Bench of ITAT Mumbai in the case of Mahindra & Mahindra Ltd Vs DCIT (supra) has held that reimbursement of expenses does not have income element and hence it cannot assume character of income deemed to accrue or arise. The Delhi Bench of ITAT in the case of ITO Vs Dr. Willmar Schwabe India (P) Ltd.(supra) has held that when the bills are raised for reimbursement of actual expenses, the reimbursement of such expenses do not attract provisions of Sec. 194J of the Act and assessee company is not liable to deduct at source from such reimbursement. Further facts of the case of United Hotels Ltd. Vs ITO (supra) are akin to the facts of the case before us. In the said case, assessee company availed services of the personnel like accounts executive, engineer, chef. Etc. of its group hotels employed by Indian Hotels Co. Ltd. (IHC) pursuant to an agreement entered into by assessee and IHC and assessee reimbursed salary of the personnel to its group hotel viz IHC. The question arose as to whether assessee was required to deduct TDS u/s. 194J of the Act on the amount of reimbursement of salary of personnel deputed by IHC Ltd. with assessee or not. It was held by ITAT, Delhi Bench that reimbursement of salary of personnel of IHC Ltd who were deputed by IHC with assessee, was not fee for technical services, therefore assessee was not liable to deduct tax at source u/s. 194J of I.T.Act. ITAT Mumbai Bench in the case of M/s. Utility Powertech Ltd. Vs ACIT (supra) has also held by following the decision of Hon'ble Delhi High Court in the case of CIT Vs Siemens Aktiongesellschaft (supra) that 18 ITA No. 5433/M/2010 reimbursement of expenses cannot be regarded as Revenue in the hands of payee and therefore no TDS was required to be deducted. Accordingly, it was held that no disallowance could be made u/s. 40(a)(ia) of I.T. Act. Similar view has also been taken by Mumbai Bench ITAT in the case of M/s. Stratcap Securities (I) Pvt. Ltd. Vs ACIT (supra) and in the case of Emersons Process Management India(P) Ltd. Vs ACIT (supra). In these cases it was held that when there was reimbursement of expenses by assessee to a group concern under a cost sharing arrangement , assessee was not required to deduct TDS while making said payments and therefore no disallowance u/s. 40(a)(ia) of I.T. Act is to be made.
25. Considering the above decisions and the facts of the case before us, we hold that on reimbursement of expenses by assessee to DTL on account of availing services of employees of DTL as per agreement dt. 15.4.2004, assessee was not required to deduct TDS and accordingly AO was not justified to make disallowance u/s. 40(a)(ia) of Act, particularly, when DTL actually paid the salary to its employees and deducted TDS on the amount paid by it to its employees. The assessee only reimbursed the expenses towards part of salary and conveyance expenses etc. to DTL and therefore provisions of Sec. 194J does not apply to it. Therefore Ld. CIT(A) has rightly held that disallowance made by AO u/s. 40(a)(ia) is not sustainable. Accordingly, we uphold the order of Ld. CIT(A) by rejecting ground No. 2 of appeal taken by department.
26. In the result, appeal of department is dismissed.
Order pronounced on 4th April , 2012
Sd/- Sd/-
(RAJENDRA SINGH) (B.R. MITTAL )
Accountant Member Judicial Member
Mumbai, Dated 4th April, 2012
Rj
19 ITA No. 5433/M/2010
Copy to :
1. The Appellant
2. The Respondent
3. The CIT-concerned
4. The CIT(A)-concerned
5. The DR 'D' Bench
True Copy
By Order
Asstt. Registrar, I.T.A.T, Mumbai