SHEL MRPL AVIATION FULES AND SERVICES LIMITED ,BANGALORE vs. DEPUTY COMMISSIONER OF INCOME TAX CIRCLE-6(1)(1), BANGALORE

Disallowance of professional charges as pre- operative expenses- Rs.13,03,304 (Tax effect — Rs. 4,02,721) 6.1 The CIT(A) erred in disallowing the consulting fees paid for obtaining registration under various legislation as pre-operative expenses. 6.2 The learned CIT(A) has failed to appreciate that these expenses are incurred after the incorporation of the Appellant and hence, are not in the nature of pre-operative expenses.

Disallowance of Commission expenditure- Rs. 36,10,000 (Tax effect Rs. 11,15,490) 9.1 The learned CIT(A) erred in disallowing of commission on account of non-deduction tax at source. 9.2 The learned CIT(A) has erred in concluding that the payment of commission is chargeable to tax in India. 9.3 The learned CIT(A) failed to appreciate that the payee has carried on its activities outside India. 9.4 Notwithstanding and without prejudice to the above, the learned CIT(A) ought to have appreciated that the payments were not taxable in India by virtue of the provisions of the Double Taxation Avoidance Agreement between India and United Kingdom.

The facts of the case are that the assessee company is a joint venture between Mangalore Refinery and Petrochemicals Limited (‘MRPL’) (a PSU and subsidiary of ONGC Limited) and Shell Gas B.V., NL. The assessee is in the business of trading in Aviation Turbine Fuel (ATF) and supplies ATF to domestic as well as international airlines. It supplies ATF to its customers like Air India, etc. both at domestic as well as at international locations.

The ld. AR submitted that the issues involved in the appeal are as follows:-

Ground No.3 is with regard to disallowance of interest paid for delayed remittance of Service Tax of Rs.4,315. The assessee had paid interest of Rs.4,315 on account of late payment of service tax during the FY 2008-09 and claimed it as expenses allowable u/s. 37 of the Income-tax Act, 1961 [the Act], being compensatory in nature. The AO disallowed the same on the ground that the interest is penal in nature and not allowable u/s. 37 of the Act. The CIT(Appeals) confirmed the action of the AO. Against this, the assessee is in appeal before us.

We have heard both the parties and perused the material on record. The ld. AR submitted that in the issue is covered by the decision of Bangalore Tribunal in the case of Velankani Information Systems Ltd. v. DCIT, 97 taxmann.com 599 (Bangalore - Trib.) wherein it was held that interest on delayed remittance of service tax is an allowable expenditure in para 19 & 20 of the order, which is as follows:-

Ground No.4 is with regard to disallowance of expenses pertaining to earning of exempt income u/s. 14A. The AO disallowed a sum of Rs.1,44,74,249 u/s. 14A of the Act as the assessee had earned exempt income, but did not disallow the relatable expenditure u/s. 14A r.w. Rule 8D. The CIT(Appeals) confirmed the disallowance. Against this, the assessee is in appeal before us.

We have heard both the parties and perused the material on record. Similar issue came for consideration before the Tribunal in assessee’s own case in by order dated 16.11.2018 wherein it was held as under:-

As we have already observed in the written submission dated 23/8/2017, the assessee has specifically referred to the fact that the CIT(A) in the earlier hearing had directed the assessee to file the documents which were being filed along with the written submission. In terms of Rule 46A(4), the CIT(A) has power to call upon the assessee to produce certain documents with a view to enable him to dispose off the appeal or for any other substantial cause. Since the submissions have not taken cognizance of CIT(A), we are of the view that it would be just an appropriate to set aside the order of the CIT(A) and remand the issue of disallowance u/s 14A of the Act for fresh consideration by the CIT(A) after affording opportunity of being heard to the assessee on the admissibility of additional evidence filed by the assessee before the CIT(A) in accordance with law and thereafter adjudicate on the issue of disallowance u/s.14A of the Act. The grounds of appeal

The Ld. AR submitted that the AO has erred by disallowing the provision for signing incentive as unascertained liability. He failed to appreciate that the amount is to be allowed as discount on invoice raised on Jet Airways. Hence, the deduction of tax at source is not applicable. The AO also failed to appreciate that the said amount is an actual liability as per the agreement between the assessee and Jet Airways and not a provision for an unknown expenditure.

He submitted that as per clause 7 of the agreement between Jet Airways and the assessee dated 9th June, 2008, the Appellant shall provide for a one-time signing incentive of INR 1,00,00,000 to Jet Airways which will be adjustable in two tranches viz., 50% against the payments in the first billing cycle and the balance 50% against the payments in the fourth month billing cycle. By virtue of the aforesaid agreement, incentive of INR 50,00,000 was provided to Jet Airways by the assessee in FY 2008-09 itself against the initial billing cycle. The balance incentive of INR.

In light of the above, the ld. AR submitted that the provision for signing incentive is not in the nature of provision for unascertained liability. It is a liability created against a contractual obligation, under the agreement entered into with Jet Airways. The facts related to the transaction have not been appreciated properly by the lower authorities. Therefore the claim of the assessee has to be allowed.

The ld. DR submitted that the assessee was not able to substantiate the claim with evidence including bills, invoices, break-up of expenses and TDS thereof. Thus, the AO added back the same holding that it is a provisional liability.

We have heard both the parties and perused the material on record. In this case, the CIT(Appeals) observed that clause 7 of the agreement dated 9.6.2008 provides for offer of Rs.1 crore to Jet Airways as an one time signature bonus. The clause is reproduced below:-

Therefore, the CIT(Appeals) observed that there is no basis for or justification for the assessee to debit an amount of Rs.50 lakhs in its P&L account for the year. The claim of the assessee is contradictory to the terms of the agreement. The assessee did not bring any material on record to prove such a supposition. He therefore sustained the disallowance made by the AO.

We have heard both the parties on the issue. Before us also, the assessee was not able to demonstrate that the said amount was an ascertained liability in the assessment year under consideration so as to claim it as a deduction. The claim of the assessee is not coming from the agreement entered into by it with Jet Airways cited supra. For the year under consideration, it is only an unascertained liability which cannot be allowed as a deduction. Being so, we do not find any infirmity in the order of the CIT(Appeals) and confirm the same.

Ground No.6 is regarding disallowance of professional charges as - pre-operative expenses. The assessee had incurred expenses amounting to INR 16,29,130 towards professional fees in relation to the following:-

Copy of the invoices of professional charges incurred in this connection is placed at Page No. 113 to 122 of PB.

The CIT(A) confirmed the disallowance on the ground that these expenses are of such nature that they have enduring benefit and hence capital in nature. Against this, the assessee is in appeal before us.

He submitted that with respect to the balance professional fees of INR 15,89,130, it was submitted that the AO has erred in disallowing the consulting fees paid for obtaining registration under various Acts as pre- operative expenses. These expenses are incurred after the incorporation of the Company and also post its commencement of business and hence, are not pre-operative in nature.

The ld. AR further submitted that the AO has failed to appreciate that these expenses do not fall within the scope of section 35D and hence cannot be termed as preliminary expenditure. Pending the obtainment of PAN, TAN, indirect tax and other statutory registrations does not refrain the assessee from commencing its operations. The procedures for obtaining the aforesaid registrations were carried out after the operations of assessee’s business had commenced. Accordingly, these expenses are not, in principal, pre-operative expenses. In this regard, it is submitted that the assessee had entered into an “Aviation Commercial Services Agreement” with “Shell Aviation Limited” (SAV) on 16th April 2008. Under this agreement, SAV acts as a point of contact between Shell MRPL and overseas affiliates for selling and distribution of ATF, to customers of Shell MRPL in overseas; and to customers of foreign affiliates in India.

The assessee had obtained the registrations under various statues after the afore-mentioned date i.e., 16th April 2008, mainly in the month of May 2008. The AO has erred in holding that the professional fees incurred for obtaining the various statutory registrations is pre-operative in nature by not considering that such registrations were obtained after commencement of operations by the assessee. Obtaining such statutory registrations ensures smooth functioning of the business activities. Hence, the professional fees incurred for obtaining such registrations are incidental to the business of the assessee. In this regard, copies of the various statutory registration certificates are at placed in the Paper Book.

As explained above, the facts related to the transaction have not been appreciated properly by the lower authorities. An amount of Rs 40,000 has been already considered as pre-operative expense by the assessee and the balance amounts have been incurred only after commencement of business and hence are allowable expenses. Hence, these professional charges (of INR 15,89,130) are incurred wholly & exclusively for the business of the assessee and allowable as deduction u/s 37.

The ld. DR supported the orders of lower authorities.

At the time of hearing, the ld. AR submitted that out of the above expenditure, certain expenditure is incurred after incorporation of the assessee company which are incurred in the ordinary course of business activities of the assessee and cannot be termed as pre-operative expenses and should be allowed in its entirety. In our opinion, the assessee has to furnish details with regard to its expenditure and thereafter the AO has to examine it whether it is incurred after incorporation of the company. Accordingly, the issue is remitted to the file of AO fresh consideration.

Ground No.7 is regarding non-deduction of tax on salary of Rs.19,02,048. The assessee had entered into a service agreement with Shell India, whereby two employees viz, Mr. Sanjay Samuel Varkey and Mr. Kaul of Shell India were deputed to Shell MRPL (assessee), during the FY 2008-09, to render the services as per the agreement. During the FY 2008-09, assessee had accounted the expenses of INR 95,00,000 towards the aforesaid services in terms of the agreement with Shell India. However, Shell MRPL, inadvertently, did not withhold tax on such expenses in FY 2008-09 at the time of crediting such sums to the account of Shell India in its books. However, assessee subsequently withheld the applicable taxes, on such amount payable to Shell India in FY 2010-11 i.e., in the year of making the payment of service fees to Shell India. Further, the assessee had also remitted the interest on late deduction of tax at source on such service fees, along with the remittance of tax. The assessee had not added back the amount of such expenses while computing taxable profits for FY 2008-09. Further, no deduction for such expenses was claimed by the assessee while computing the taxable profits for FY 2010-11, i.e., the year in which tax on such expenses was deducted at source and actually remitted to the Government.

The AO while determining the total income has disallowed INR 19,02,048 out of the abovementioned service fee of INR 95,00,000, on the ground that tax has not been deducted at source by assessee on the payment of such amount.

The ld. AR submitted that the assessee was required to deduct tax at source on the total expense of INR 95,00,000 incurred by it being in the nature of service fees payable to Shell India under the service agreement. It is submitted that assessee had subsequently withheld the applicable taxes on the total amount of service fee of INR 95,00,000 accrued in AY 2009-10; and had remitted the same to the Government along with the applicable interest for delay in withholding of taxes. As explained above, the facts related to the transaction have not been appreciated properly by the lower authorities. No deduction for such expenses has been claimed by the assessee in the year under consideration. Since the assessee had complied with the provisions of TDS subsequently and in such subsequent year of complying with the provisions, no further deduction towards such expenses was claimed, it was submitted that the deduction claimed (INR 95,00,000) should be allowed from the total income for the AY 2009-10.

The ld. DR relied on the orders of lower authorities.

At the time of hearing, the ld. AR further made a submission that the CIT(Appeals) enhanced the assessment to Rs.95 lakhs without giving a notice of enhancement, though AO disallowed a sum of Rs.19,02,048. In our opinion, whether the assessee deducted TDS or not is to be verified by the AO after going through the documents relating to the issue of non- deduction of TDS and to the extent salary is subject to TDS, it has to be allowed as deduction. Accordingly, the issue is remitted to the AO for fresh consideration.

Ground NO.9 is with regard to disallowance for non-deduction of TDS on Sponsorship towards Airport and Airline Expo event of Rs.4,20,600.

The assessee received an invoice dated 10.3.2009 for Rs.4,41,200 for sponsorship towards Airport and Airline Expo Event. Out of the above only 50% i.e., Rs. 2,20,600 was due upto 31st March 2009 for which assessee paid an amount of Rs. 2,18,101, after deducting tax at source of Rs. 2,499 u/s. 194C (i.e., at the rate of 1% plus applicable surcharge and cess). The balance 50% amount of Rs. 2,20,600was not due for payment as on 31st March, 2009 and hence, the same was shown as a liability in the books of assessee as on that date. However, tax of Rs.2,500 was deducted at source on such amount during March 2009 on accrual basis.

However, subsequently the total fees were waived off and the event organizers had refunded the above amount paid by assessee (i.e., INR 2,18,101), in April 2009. Based on this, the Company had reversed the whole amount of sponsorship expenses during FY 2009-10, as accounted in FY 2008-09. Hence, effectively no expense was accounted in the books towards such sponsorship expenses.

The due date for remittance of TDS for the month of March 2009 was 30th April 2009. As stated above, since the deal for such sponsorship got cancelled in April 2009, the TDS on such sponsorship expense was also reversed in April 2009.

The AO, while determining the total income, has disallowed Rs.4,20,600 on the ground that tax has not been deducted at source by assessee on such amount. The CIT(Appeals) confirmed the action of the AO.

The ld. AR submitted that the AO failed to appreciate the fact that as per invoice dated March 10, 2009 only INR 2,20,600 (i.e., 50%) was due upto March 31, 2009. The balance amount of INR 2,20,600 had not accrued for the FY 2008-09. The assessee had deducted tax at source of Rs.4,999 on such sponsorship expenses accounted in the books. The assessee had paid only INR 2,18,101 (being 50%) to the party and the balance amount of INR 2,18,100 was shown as payable in the books as on 31st March, 2009. Copy of the bank payment voucher and the details of creditors as on 31stMarch 2009 is at Annexure 6B of Paper Book.

Without prejudice to the above, the AO has failed to appreciate the fact that, in principle, no expense in the nature of sponsorship was actually incurred by the assessee as 50%of the sponsorship fees paid was refunded to the assessee and the balance 50% of the sponsorship expense was reversed in the books on cancellation of the contract. Copy of the ledger accounts of sponsorship expenses and TDS on sponsorship expenses for the period March 2009 to March 2010 is at Annexure 6C of Paper Book. Thus, it was submitted that effectively no expense was accounted in the books towards such sponsorship expenses and hence the question of disallowance does not arise.

The ld. DR relied on the orders of lower authorities.

We have heard both the parties on this issue and perused the material on record. The contention of the ld. AR is that the said amount has not been paid in the assessment year under consideration. Being so, there is no question of deduction of TDS. In our opinion, this has to be examined at the end of the AO. Accordingly, this issue is remitted to the AO to verify whether any expenditure was incurred towards sponsorship fees and on cancellation of the contract balance 50% was reversed in the books of the assessee as claimed by the assessee. If the amount is paid towards sponsorship without TDS, then only it has to be disallowed. With these observations, the issue is remitted to the file of the AO.

Ground No.9 is regarding disallowance of commission expenditure. The assessee had incurred INR 36,10,000 as commission expenses as per the agreement with Shell Aviation ventures. The AO while computing the total income, disallowed such commission expenses on the ground that these are not genuine expenses. The CIT(Appeals) confirmed the same.

The Ld. AR submitted that the commission is paid as per the agreement between the Appellant and Shell Aviation Ventures (UK). The assessee was itself in receipt of commission as per the agreement and the same was offered to tax. The AO erred in holding that no tax was withheld at source for the commission payment. As per Article 7 of India UK Taxation Avoidance Agreement (DTAA), such commission, payable by the Delivering Company to the Contracting Company located outside India on supply of aviation products, was in the nature of business profits in the hands of recipient. As the entire operations of the recipient were carried out outside India and there was no business connection of the recipient in India as contemplated in Section 9(1)(i) of the Income Tax Act, 1961 no income accrued or arose in India to the payee. As per section 195 of the Act, tax is required to be withheld at source only when the income is chargeable to tax in India. Since there was no taxable income, no tax was withheld at source. The agreement between assessee and Shell Aviation Ventures for such commission expenses is at Annexure 4B of the paper book. Copy of the ledger account of Delco commission for the FY 2008-09, credit notes for such Delco commission and bank payment vouchers/bank payment advice are at Annexure 8 of the Paper Book. It is submitted that the entire operations of the recipient were carried out outside India and hence the source of income is outside India has not been examined by the lower authorities. In light of the above, the ld. AR submitted that such commission expenses are genuine expenditure which is actually incurred by the assessee and therefore, be allowed as a deduction.

The ld. DR submitted that the source of income is in India and sale of aviation fuel is in India, therefore the same is liable for TDS which is not done by the assessee. Being so, it is disallowed.

We have heard both the parties on the issue. This expenditure was disallowed on two reasons i.e., genuineness of expenditure and non- deduction of tax at source. Firstly, the assessee has to prove the genuineness of expenditure, then only the question of TDS arises. In the present case, the assessee has not been able to show the genuineness of expenditure. In view of this, we remit this issue to the file of AO to examine the genuineness of expenditure. Once the assessee proves the genuineness of expenditure, then the AO has to examine whether the said amount is liable for TDS or not. With these observations, the issue is remitted to the AO for fresh decision.

The first ground is with regard to non-admission of additional evidence furnished by the assessee before the CIT(Appeals). The ld. AR submitted that assessee filed certain additional evidence which was not considered by the CIT(Appeals). Since we have remitted the connected issues to the file of Assessing Officer for fresh consideration, the assessee is at liberty to place all the additional evidence before him to support its claim.

In the result, the appeal by the assessee is partly allowed for statistical purposes.