M/S. INTERCONTINENTAL HOTELS GROUP INDIA PVT. LTD.,GURGAON vs. DCIT, NEW DELHI

1 ITA No. 2188/Del/2017

IN THE INCOME TAX APPELLATE TRIBUNAL DELHI BENCH: ‘C’ NEW DELHI

BEFORE SHRI N. K. BILLAIYA, ACCOUNTANT MEMBER AND MS SUCHITRA KAMBLE, JUDICIAL MEMBER

I.T.A. No. 2188/DEL/2017 (A.Y 2007-08)

(THROUGH VIDEO CONFERENCING)

Intercontinental Hotels Group Vs DCIT India Pvt. Ltd. Circle7(1) 11th Floor, Building No. 10, New Delhi Tower-C, DLF Cyber City, DLF Phase-II Gurgaon, (RESPONDENT) AAGCS7613G (APPELLANT)

Appellant by Sh. S. K. Aggarwal, CA & Sh. Piyush Gupta, CA Respondent by Sh. Mahesh Thakur, Sr. DR

Date of Hearing 22.03.2021 Date of Pronouncement 22.03.2021

ORDER PER SUCHITRA KAMBLE, JM

This appeal is filed by the assessee against order dated 01/02/2017 passed by CIT(A)-22, New Delhi for assessment year 2007-08.

2 ITA No. 2188/Del/2017

respect of the disallowances made under section 40(a)(i) of the Act for alleged non-deduction of tax at source from payments made to professionals for due diligence reports and relocation expenses of employees outside India, without appreciating that the same were not chargeable to tax in India in the hands of non-residents and no tax was required to be deducted under section 195 of the Act. 3. That on the facts and in the circumstances of the case and in law, the CIT(A) has erred in confirming the penalty levied by the Ld. AO on the Appellant on the basis that the Appellant did not file an appeal against the order passed by the CIT(A) before the higher the ITAT against appeal filed by tax department. The C1T(A) failed to appreciate that the appeal filed by the tax department was dismissed by Hon’ble ITAT vide order dated 8 February 2013. 4. That on the facts and in the circumstances of the case and in law, the CIT(A) has erred in alleging that the Appellant has accepted its liability to withhold tax while making payment to non-residents outside India in relation to professional fee for due diligence reports and relocation expenses of employees outside India, merely because the Appellant has not filed appeal against the order of CIT(A) in quantum proceedings. 5. That on the facts and in the circumstances of the case and in law, that the CIT(A) has failed to appreciate that a mere disallowance of a claim does not automatically result in levy of penalty. 6. That on the facts and in the circumstances of the case and in law, the CIT(A) has failed to appreciate that the provisions of section 271(l)(c) of the Act are not applicable in this case as the Appellant has furnished complete and relevant facts in the return of income and offered a bonafide explanation during the course of assessment proceedings. The disallowances made in the assessment order is merely due to difference of opinion. The CIT(A) further erred in observing that the fact of non-deduction of TDS on the payments made to non-residents was not disclosed in the return of income filed electronically. 7. That on the facts and circumstances of the case and in law the CIT (A) has failed to appreciate that the disallowance made by the Id. AO were debatable question of law and were subject matter of judicial interpretation. The CIT(A) failed to appreciate that the penalty cannot be levied in the case involving question of law in the light of decision of the Apex Court in the case of CIT vs Reliance Petroproducts Pvt. Ltd. [2010] 322 ITR 158 (SC). 8. That on the facts and in the circumstances of the case and in law, the CIT(A) has failed to take cognizance of the decision of jurisdictional High Court in the case of Commissioner of Income-tax v. AT & T Communication Services

3 ITA No. 2188/Del/2017

India (P.) Ltd (18 taxmann.com 144 (Delhi) wherein it has been held that a mere disallowance under section 40(a)(i) of the Act will not result in levy of penalty. 9. The above grounds of appeal are independent and without prejudice to one another.”

Sr. No. Disallowance Amount (In Rs.)

1 Ad-hoc disallowance at the rate of 80 percent of the 4,611,658/- total expenditure incurred as under: • Professional fee of Rs. 4,887,931 for due-diligence services paid to M/s Control Risks Group (S) Pte Ltd. (‘Control Risk); and • Consultancy fee of Rs. 876,642 for office space paid to AST Invescap Consultancy.

2 Expenditure incurred on Advertisement and Sales 2,013,366/- Promotion

3 Depreciation on UPS 193,541/-

4 Recruitment and training expenses 3,547,953/-

4 ITA No. 2188/Del/2017

TOTAL 10,366,518/-

Aggrieved by the Assessment Order, the Assessee filed an appeal before CIT(A) and the CIT(A) granted substantial reliefs to the assessee vide order dated 27 April 2012. However, the following additions made by the Assessing Officer were upheld by CIT(A): Sr. Particulars Disallowance upheld No 1 Disallowance' under section 40(a)(1) of the 1,718,119 Act on account of payment made for due- diligence services to Control Risk 2 Disallowance under section 40(a)(i) of the 1,401,295 Act on account of recruitment and training expenses Total 3,119,414 The assessee has not filed any appeal thereafter to the Tribunal in respect of quantum. In the meanwhile, the Assessing Officer initiated penalty proceedings under Section 271(1)(c) of the Income Tax Act, 1961. The Assessing Officer passed penalty order dated 27 November 2013 under section 271(1)(c) of the Act and held that the assessee has concealed the particulars of its income and has also furnished inaccurate particulars of its income. The Assessing Officer levied penalty of 100 percent of the tax which works out to Rs. 10,49,995/-.

5 ITA No. 2188/Del/2017

and the Tribunal concurring with the view of the CIT(A) dismissed the appeal of the tax department. The Ld. AR further submitted that the CIT(A) in his penalty order has incorrectly observed that the details of TDS compliance on the amount payable to Control Risk were not furnished by the assessee. In fact, the Assessing Officer in the assessment order contended that the amount payable to Control Risk was capital in nature. However, the CIT(A) after examination of facts and law in case of the assessee held that the expenses were revenue in nature. The CIT(A) further directed the assessee to furnish the details for withholding tax compliances in relation to payment made to Control Risk. The relevant details were duly furnished by the assessee. The Ld. AR further submitted that the assessee made withholding initially on the amounts payable to Control Risk, however the assessee was later advised not to withhold taxes on the amounts payable to Control Risk, as the same was not taxable in the hands of Control Risk in India. The Ld. AR submitted that out of total expense of INR 48,87,931 in relation to Control Risk, TDS was deducted on an amount of INR 31,69,862 and no TDS was deducted on the balance amount of INR 17,18,069. Therefore, the disallowance was made by the CIT(A) u/s 40(a)(i) of the Act. In this regard, the Ld. AR pointed out that the issue of taxability of amount received by Control Risk is a question of interpretation which involves examination of provisions of Income-tax Act and DTAA between India and Singapore. The Ld. AR further pointed out that payment made to Control risk does not amount to FTS as per provisions of Article 12(4) of India Singapore DTAA as the same does not result into making available technical know-how etc. to the recipient (i.e. to the assessee), hence no taxes were required to be deducted on the said payment. In this regard, detailed submission were made before the CIT(A) in the quantum wherein explaining the reasons as to why the amount paid to Control Risk is not chargeable to tax. However, the CIT(A) without examining the taxability of receipts in the hands of Control Risk in India, disallowed the same in the hands of the assessee u/s 40(a)(ia) of the Act on the assumption that the withholding was required on the aforesaid amount. The Ld. AR submitted that the details were submitted before the Assessing

6 ITA No. 2188/Del/2017

Officer and the CIT(A) in quantum proceedings and thus, the assessee has furnished correct particulars of income and never concealment any income. Besides this as relates to Penalty on disallowance of expenses debited to the account Recruitment and Training expenses’ amounting to Rs. 14,01,295 upheld by the CIT(A) for non-deduction of TPS in quantum proceedings, the Ld. AR submitted that during the year under consideration, the amount of Rs. 14,01,295 was paid to non-residents for movers and packers services in respect of expat employees seconded to the assessee company, which was debited under the head- ‘Recruitment and Training expenses’. The assessee duly withheld taxes on the expenses charged under the head-‘Recruitment and Training expenses’, wherever applicable. In the assessment order, the Assessing Officer disallowed the entire amount changed under the head - ‘Recruitment and Training expenses’ of Rs. 35,47,953. However, the CIT(A) restricted the disallowance to aforesaid expenses of Rs. 14,01,295 for non- deduction of TDS, ignoring the submission of the assessee that withholding was not required as it is not taxable in the hands of the non-resident recipients. The CIT(A) without adjudicating the above issue in his order, upheld the disallowance. The Assessing Officer and the CIT(A) invoked and levied penalty u/s 27l (l)(c)of the Act merely on the ground that the assessee did not file an appeal against the CIT(A) in quantum proceedings, which demonstrates that the liability to withhold tax on payments made to Control Risk charged under the head - ‘Professional Fee and Consultancy Fee’ (amounting to INR 17,18,119), and payment made to Crown and Schenker charged under the head - ‘Professional Fee and Consultancy Fee’ (amounting to INR 14,01,295) was accepted by the assessee. In this regard, the Ld. AR submitted that the assessee in order to buy peace with revenue and considering the time and cost involved in the litigation did not challenge the order passed by the CIT(A) order before the Tribunal. Further, judiciary at various occasions has held that merely non filing of appeal should not be construed as acceptance by the assesse in order to levy of penalty. The Ld. AR further submitted that the basic

7 ITA No. 2188/Del/2017

principles which emerges from the reading of section 271(1 )(c) of the Act is that the Assessing Officer has to establish that the assessee has either, Concealed income; or (i) Furnished inaccurate particulars of income; or (ii) Deeming provisions of Explanation 1 to section 271(l)(c) of the Act (iii) applies

The factum of concealment of particulars of income or furnishing of inaccurate particulars needs to be established before penalty can be levied. In other words, penalty under section 271 (l)(c) of the Act cannot be levied where the assessee acted on a bonafide belief and had furnished all the facts relating to the income of the subject year. At the outset, the Ld. AR submitted that the penalty has been levied based on the disallowance made in the assessment order u/s 40(a)(i) of the Act. The Ld. AR further pointed out that the matter on which disallowance is made involves interpretation of provisions of the Act along with relevant DTAA. Further, the disallowance u/s 40(a)(ia) was upheld in the quantum proceedings without adjudicating the taxability of receipts in the hands of the non-resident recipients. In this regard, it is submitted that the jurisdictional Delhi High Court in the case of CIT v. AT & T Communication Services India (P.) Ltd [2012] 18 taxmann.com 144 (Delhi High Court) has held that disallowance under section 40(a)(i) cannot be a reason to impose penalty under section 271(1)(c) of the Act. Further, the Apex Court in the case of CIT vs Reliance Petroproducts Pvt. Ltd. [2010] 322 ITR158(SC) has held that mere making of the claim, which is not sustainable in law, by itself, will not amount to furnishing inaccurate particulars regarding the income of the assessee. The Ld. AR further submitted that in the matter under consideration, there is no ‘Concealment of Income’ or ‘furnishing of inaccurate particulars of income by the assessee. In this regard, the Ld. AR submitted that the words ‘conceal’ means to hide, to keep secret. In Commissioner of Income-tax vs. Indian Metals And Ferro Alloys Limited reported in [1995] 211 ITR 35, it was held by the Hon’ble Orissa High Court that the offence of concealment is thus a direct

8 ITA No. 2188/Del/2017

attempt to hide an item of income or a portion thereof from the knowledge of the income-tax authorities”. The admission or rejection of a claim is a subjective exercise and whether a claim is accepted or rejected has nothing to do with furnishing of inaccurate particulars of income. What is a correct claim and what is an incorrect claim could be a matter of perception. The Ld. AR submitted that in view of the details furnished before the Assessing Officer and the CIT(A), it is apparent and clear that the assessee had duly submitted the relevant details and disclosed all the material facts in the course of quantum proceedings. As regards to conditions of Explanation 1 to Section 271(l)(c) of the Act, the same are not applicable to the case of the assessee. The Ld. AR submits that complete facts were submitted during the course of assessment proceedings Therefore, once complete particulars were filed on a bona fide belief that no payments made to Control Risk for due diligence services and to Crown and Schenker for relocation charges were not subject to withholding tax in India on the basis of the facts and legal precedents submitted during the course of assessment proceedings and penalty proceedings, the disallowance under section 40(a)(i) cannot under any circumstances lead to levy of penalty. Merely because the argument/ contention of the assessee was not accepted, it cannot be assumed that there was concealment of particulars of income or furnishing of inaccurate particulars of income by the assessee. Secondly, the provisions of Explanation 1 to section 271(1)(c) of the Act would also not be applicable to the facts of the assessee’s case because the present case does not fall within any of the clauses of the said Explanation. The provisions of the said Explanation are not applicable to the assessee’s case because the assessee has given/offered an explanation. The assessee has furnished complete details of the payments made to Control Risk (for due diligence services) and Crown and Schenker for (relocation services), namely copy of invoices, certificate obtained from Chartered Accountants, copy of extract of proposal and report from Control Risk. It has not been alleged in the course of assessment proceedings that the explanation offered by the assessee was false. Merely the contention of the assessee has not been accepted and no material/ evidence were produced

9 ITA No. 2188/Del/2017

before the assessee to contradict the explanation offered by it. During the course of assessment proceedings, complete details and requisite evidence (namely copy of invoices, certificate obtained from Chartered Accountants, copy of extract of proposal and report from Conrol Risk) in support of the claim of the assessee were furnished. Therefore, it cannot be said that the assessee was not able to substantiate its claim. The Ld. AR summarized its contentions as under: ■ No particulars of income have been concealed; ■ No inaccurate particulars of income has been furnished; ■ The additions made during the assessment proceedings/ appellate Proceedings were on account of difference in opinion and debatable question of law; ■ No evidence has been brought on record to establish that the assessee had acted deliberately or was guilty of contumacious conduct; ■ The conditions provided under Explanation 1 to section 271(1)(c) are not satisfied in the present case of the Appellant.

The Ld. AR further submitted that the assessee has not furnished any inaccurate particulars during the course of any proceedings. Further, the case of the assessee also does not fall within Explanation 1 to section 271 (l)(c) of the Act. In this regard, the Ld. AR submitted that the Hon’ble Supreme Court in the case CIT vs. Reliance Petroproducts Pvt. Ltd. [2010] 322 ITR158(SC) while deciding the matter in relation to an addition in respect of interest expenditure made during the course of assessment proceedings. The principle which emerges from Reliance Petroproducts (supra) case is that making a claim which is disallowed by the Assessing Officer would not tantamount to furnishing of inaccurate particulars or concealment of income. Therefore, in view of the above, mere rejection of a claim cannot result into levy of penalty. In the facts of the case, mere rejection of claim of the assessee that the amount payable to Control Risk, Crown and Schenker (being non-resident parties) does not warrant withholding and thus disallowance made u/s 40( cannot result into levy of penalty u/s 271(l)(c)of the Act. Following are the key grounds basis

10 ITA No. 2188/Del/2017

which penalty u/s 27 l(l)(c) of the Act is not leviable in case of the assessee:

I) Difference of Opinion - Not a fit Case to levy Penalty. Case laws relied upon by the assessee in this regard are as under: a) CIT vs Reliance Petroproducts Pvt. Ltd. [(2010) 322ITR 158] (SC) b) CIT vs. Nath Bros. Exim International Ltd [2007] 288 ITR 670 (Delhi HC) c) Devsons Pvt. Ltd vs. CIT(A) [2011] 196 TAXMAN 21 (Delhi HC) d) CIT Vs. Bacardi Martini (2007) (288 ITR 585) (Delhi. HC) e) Karan Ragh a v Exports P Ltd vs CIT [2012] 349 ITR 112 (Del HC) f) CIT v. Krishna Maruti Ltd. [2011] 11 taxmann.coml48 (Delhi HC) g) Harshvardhan Chemicals and Minerals Ltd. [2003] (259 ITR 212) (Rajasthan HC) h) Calcutta Credit Corporation [1987] (166 ITR 29) (Calcutta HC) i) Garg Engineering Co [1999] 235 ITR 451) (Allahabad High Court) j) CIT vs GD Naidu and Others (1987) 165 ITR 63 (Madras HC) k) Nuchem Ltd v. Deputy Commissioner of Income-tax [1993] (47ITD 487) (Delhi ITAT)

II) Rejection of claim made by the Appellant by the AO cannot result in imposition of penalty under section 271 (l)(c) of the Act. Case laws relied upon by the assessee in this regard are as under: a) CIT vs Reliance Petroproducts Pvt. Ltd. [(2010) 322 ITR 158] (SC) b) CIT Vs Lotus Trans Travels (P) Ltd. [177 Taxman 37 (Del)] (Delhi HC) c) CIT Vs Regency Express Builders (P) Ltd. [166 Taxman 269 (Del)] (Del HC) d) Glorious Realty (P) Ltd. Vs ITO (29 SOT 292) (Mumbai ITAT)

III) Penalty cannot be initiated merely for the reason that additions have been made in quantum proceedings as Penalty proceedings are separate and distinct from such proceedings and therefore imposition of penalty is not mandatory/ automatic. Case laws relied upon by the assessee in this regard are as under:- a) Ananthram Veersinghaiah & Co. [1980] (123 ITR 457 (Supreme Court) b) CIT vs. Chetan Dass Lachhman Dass (1995)214 1TR 726 (Delhi HC) c) CIT vs JK Synthetics Ltd (1996)219 ITR 267 (Delhi HC) d) CIT vs Dharmachand L. Shah (1993)204 ITR 462 (Bombay HC)

11 ITA No. 2188/Del/2017

e) CIT vs Ishtiaq Hussain (1998) 232 ITR 673 (Allahabad HC)

IV) Disallowance under section 40(a)(i) cannot be a reason to impose penalty under section 271(l)(C)of the Act. Case laws relied upon by the assessee in this regard are as under: a) CIT v. AT & T Communication Services India (P.) Ltd [2012] 18 taxmann.com 144 (Delhi High Court) held that Tribunal was justified in deleting levy of penalty upon assessee holding that disallowance of an amount by invoking provisions of section 40(a)(i) could not be a ground to levy penalty under section 271(1)(c) upon assessee. b) CIT v. Filtrex Technologies (P.) Ltd. [2015] 59 taxmann.com 371 (Karnataka High court) c) DCIT v. IndiahitCom (P.) Ltd [2007] 15 SOT 440 (Delhi ITAT) d) DCIT, New Delhi v. M/s Poddar Pigments Ltd [2014] ITA No. 2219/Del/2014 (Delhi - Tribunal)

V) Merely non filing of appeal should not be construed as acceptance by the assesse in order to levy of penalty. Case laws relied upon by the assessee in this regard are as under: a) CIT vs. Asian Hotels Ltd. (2007) 296 ITR 374 b) CIT v. Rajrtish Nath Aggarwal [2008] 172 Taxman 26 (P&H) c) CIT v. Manjunatha Cotton & Ginning Factory [TS-936-HC-2012 (KAR HC)] d) DCIT v. Ms. AishwaryaRai [2007] 12 SOT 114(Mum.ITAT) e) Rai Industrial Power Pvt. Ltd. Vs DCIT (ITA 4862/Del/2013) [Delhi ITAT]

12 ITA No. 2188/Del/2017

concealment of income furnishing, inaccurate particulars of income, and if there is any involvement of deeming provisions as per Explanation1 to Section 271(1)(c). And these element whether applicable or not has to be determined first. The penalty is levied by the Revenue on the basis of disallowance made in the assessment order u/s 40(a)(i) of the Act and the same requires interpretation of provisions of the Act along with DTAA between India and Singapore. Expenses disallowed u/s 40(a)(i) on account of non withholding of taxes was subject to payments made to vendors based in Thailand who are in the business of providing movers and packers Services to its client. This was in relation to the expats’ transfer movement. The service related to Movers and Packers cannot be characterized as royalty income in the hands of those vendors under the provisions of India Thailand DTAA and the same does not quality as technical service as it does not include the element of technical services relating to FTS. Hence, the tax relating to Section 40(a)(i) will not be applicable in assessee’s case and is a contesting issue. Merely not filing appeal on the contesting issues does not tantamount to concealment of income and furnishing inaccurate particulars of income. These two elements along with Explanation 1 of Section 271(1)(c) are not present in assessee’s case for imposing penalty or initiating penalty proceedings. As related to payment made to control risk, the same also does not impugned to FTS as per the provisions of Article 12(4) of India Singapore DTAA as the same does not result in making available technical knowhow to the recipient. Thus, these two elements upon which the penalty has been imposed by the Revenue Assessment Year contesting in nature and the assessee though has not opted for any appeal, it cannot be stated that these are the element of concealment of income and furnishing of inaccurate particulars. The case laws given by the assessee are clearly applicable in assessee’s case specially that of Reliance Petroproducts Pvt. Ltd.(supra). Hence we delete the penalty and allow the appeal of the assessee.

13 ITA No. 2188/Del/2017

Sd/- Sd/- (N. K. BILLAIYA) (SUCHITRA KAMBLE) ACCOUNTANT MEMBER JUDICIAL MEMBER

Dated: 22/03/2021 R. Naheed * Copy forwarded to: 1. Appellant 2. Respondent 3. CIT 4. CIT(Appeals) 5. DR: ITAT

ASSISTANT REGISTRAR ITAT NEW DELHI