MATRIX CELLULAR INTERNATIONAL SERVICES LTD.,NEW DELHI vs. JCIT, SPECIAL RANGE- 6, NEW DELHI

This is an appeal by the assessee against the order dated 28.06.2019 of learned Commissioner of Income Tax (Appeals)- 37, New Delhi pertaining to Assessment Year 2016-17.

In ground no. 1, the assessee has challenged disallowance of Rs.3,09,195/- under section 40(a)(i) of the Income Tax Act, 1961.

Briefly the facts are, the assessee a resident corporate entity, is stated to be engaged in the business of providing mobile phone services for international use. For the Assessment year under dispute, the assessee filed its return of income on 30.11.2016 declaring total income of Rs.3,18,77,680/-. In course of scrutiny assessment proceedings, the Assessing

We have considered rival submissions and perused the material on record. As could be seen from the facts and material available on record, the assessee paid the disputed amount to a Malaysian entity for incorporation of a company in Malaysia. In other words, the fee paid to the Malaysian entity was to facilitate incorporation of the company. Of course, as submitted before us by learned Counsel, the company ultimately was not incorporated. Be that as it may, the issue arising for consideration is, whether the payment made by the assessee to the Malaysian entity is chargeable to tax at the hands of that entity in India. As could be seen from Article 7 of India- Malaysia DTAA, income in the nature of business profit earned by a resident of Malaysia can be taxed in India only if the Malaysian entity carries on business in India through a Permanent Establishment (PE). In the facts of the present

Having held so, it is necessary to examine whether the payment made would qualify as Fees for Technical Services (FTS) under Article 13 of the India-Malaysia DTAA. On a reading of Article 13, it is evident, the source country has the power to tax the income in the nature of FTS at beneficial rate of 10%. However, the service rendered must be managerial, technical or consultancy services. In the facts of the present appeal, the departmental authorities have failed to demonstrate that the payment made was towards rendering of managerial, technical or consultancy services.

That being the case, we hold that the assessee was not required to deduct tax at source under section 195 of the Act while making the disputed payment. Accordingly, we delete the disallowance made. This ground is allowed.

In ground No. 2, the assessee has challenged disallowance of Rs.2,54,160/- under section 40(a)(i) of the Act. As could be seen from the facts on record, the disputed payment was made to an entity in Bangladesh for rendering legal services. The Assessing Officer disallowed the payment made by applying Section 40(a)(i) of the Act on the ground that the payment made required withholding of tax under section 195 of the Act.

In this case also, the reasoning of the Assessing Officer is vague and too general in nature. Neither the Assessing Officer nor learned Commissioner (Appeals) have made any discussion regarding the exact nature of payment made by the assessee to Bangladesh entity. On a perusal of the India-Bangladesh DTAA, it is to be seen that income in the nature of business profit can be taxable in the source country only if the resident of the other country carries on business in the source country through a Permanent Establishment situated therein. In the facts of the present appeal, admittedly, the Bangladesh entity has no PE in India. Therefore, income, if considered to be business profit is not taxable in India. As per Article 13 of the DTAA, the payment made by the assessee cannot be treated as royalty. If at all, the payment can be considered to be towards rendering of independent professional services as per Article 15 of the DTAA. However, the payment made towards independent professional services is taxable in the country of residence of recipient, unless, the recipient has a faxed base regularly available to him in the source country for the purpose of performing his activity. In the facts of the present appeal, there is nothing on record to 5 Matrix Cellular International Services Ltd. demonstrate that the Bangladesh entity had any fixed base in India from which it is carrying on its activities in India.

Thus, in our view, the departmental authorities have failed to establish on record that the payment made by the assessee is taxable at the hands Bangladesh entity in India. That being the case, there was no requirement for withholding tax under section 195 of the Act. Accordingly, we delete the disallowance made under section 40(a)(i) of the Act.

In ground No. 3, the assessee has challenged disallowance of Rs.1,20,986/- claimed as deduction under section 35D of the Act.

Briefly the facts are, in course of assessment proceedings, the Assessing Officer noticed that the assessee had claimed deduction of Rs.1,20,986/- under section 35D of the Act. When called upon to justify the claim, the assessee submitted that the assessee was proposing to issue Initial Public Offering (IPOs). It was submitted, for such purposes, the assessee had paid the amount in dispute to IIFL Holdings Ltd., which is one of the merchant bankers to the issue. It was submitted, these are in the nature of preliminary expenses for business expansion. Hence, has to be allowed. The Assessing Officer, however, did not accept the claim of the assessee on the reasoning that such expenses are not covered within the ambit of Section 35D of the Act. Accordingly, he disallowed the deduction. The disallowance so made was upheld by learned Commissioner (Appeals).

Before us, learned Counsel submitted that the assessee had paid fee of Rs.12,09,862/- to IIFL Holdings Ltd. towards

He submitted, the proposed IPO was ultimately dropped because of adverse market condition. Since, the expenditure was incurred for the business of the assessee, it is otherwise allowable under section 37 of the Act. In support of such contention, he relied upon the following decision:

Learned Departmental Representative relied upon the observation of the Assessing Officer and learned Commissioner (Appeals).

We have considered rival submissions and perused material on record. There is no dispute regarding the fact that the assessee has incurred the expenditure under consideration towards issue of IPO. The only reasoning on which assessee’s claim has been rejected is, the expenditure does not fall within the ambit of Section 35D of the Act.

Before us, the assessee has made an alternative claim that since the expenditure has been incurred for expansion of its business, it is allowable under section 37 of the Act.

Having taken note of the factual position and the nature of expenses, we are of the view that the expenditure is allowable u/s 35D of the Act as it is for the purpose of expansion of its 7 Matrix Cellular International Services Ltd. business. The ratio laid down by the Hon’ble Kerala High Court in the decision cited before us by ld. Counsel for the assessee supports this view. Therefore, we allow the deduction. This ground is allowed.

In ground No. 4, the assessee has challenged disallowance of Rs.13,64,357/- representing ESOP expenses. While examining assessee’s claim in this regard in course of assessment proceedings, the Assessing Officer took a view that they are in the nature of provision, hence, unascertained liability. In this regard, he referred to Note 39 of the audited financial statement and observed that the assessee failed to explain the method of valuation. Thus, ultimately he disallowed the amount.

Learned Commissioner (Appeals) upheld the disallowance.

We have considered rival submissions and perused material on record. Undisputedly, the assessee had granted ESOP to its employee and during the year has booked the expenses in dispute.

On perusal of the balance sheet and profit and loss account of the assessee, it is observed that the assessee offered the ESOP to the employees at discounted value and the difference between the actual value and the discounted value was debited to the profit and loss account. It is also observed, the assessee has reversed a part of the expenses booked on ESOP and offered the same for tax in subsequent Assessment Years. Thus, in our view, the deduction claimed by the assessee is allowable. Accordingly, we delete the disallowance.

We have considered rival submissions and perused material on record. As could be seen, the amount written off represents Swachh Bharat Cess receivable by the assessee. The assessee has failed to demonstrate that the amount was actually paid during the year in terms of section 43B(a) of the Act. Therefore we uphold the disallowance. This ground is dismissed.

In the result, the appeal is partly allowed. Order Pronounced in the Open Court on 18/01/2023.