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Income Tax Appellate Tribunal, MUMBAI BENCH “I”, MUMBAI
M/s Hermes Maritime Services Pvt. Ltd. 1001/1002, Great Eastern Summit-B, Plot No. 66, Sector-15, CBD Belapur, Navi Mumbai-400614 PAN: AABCH4865Q ...... Appellant Vs. ACIT-15(2) (1), Aayakar Bhavan, M.K. Road, Mumbai-400020. ..... Respondent Appellant by : Sh. Rajen Damani Respondent by : Sh. Milind S. Chavan Date of hearing : 15/03/2022 Date of pronouncement : 07/04/2022 ORDER PER GAGAN GOYAL, A.M:
This appeal by the assessee is directed against the order of Commissioner of Income Tax (Appeals)-24, Mumbai [hereinafter referred to as ‘the CIT (A)’] dated 10.01.2019 for the Assessment Year (AY) 2014-15. The assessee has raised the following grounds of appeal:
Sr.no Grounds of appeal
Tax effect 1 Bonus Paid to staff: Rs. 63,300
1. The Appellant submits that considering the facts and circumstances of the case and the law prevailing on the subject, the learned AO was not justified in making (A.Y. 2014-15) addition on account of yearly bonus paid to employees u/s. 36(1)(ii) of the Income Tax Act,1961.
2. The Appellant had, paid in all the year statutory yearly bonus amounting to Rs. 2,11,000/- to the employees that was forming the part of the salaries of the employees and not as the profit or dividend but at the time of feeding the data in the software, the amount was inadvertently entered under clause 20(a) of the form 3CD. 2 Payment to non-resident: Rs. 226,356 The Appellant submits that considering the facts and circumstances of the case and the law prevailing on the subject, the learned Assessing Officer was not justified in making disallowance u/s. 40(a)(i) on non-deduction of TDS u/s. 195 while making payment the payment of Rs. 7,54,518/- to non-resident in China for services rendered and utilised outside India. Total Tax effect Rs. 289,656
Brief facts of the case are that the assessee e-filed his return of income for AY 2014-15 on 30.11.2014 declaring total income of Rs. 47,70,030/-. Assessee’s case was selected for scrutiny and assessed under section 143(3) of the Income Tax Act, 1961 (for short ‘the Act’).
The assessee is a company engaged in the business of providing services for international vessels and handling the vessels at overseas ports, services of manpower supply and repair related activities. During assessment proceeding, the Assessing Officer (AO) noticed that the auditors have disallowed an amount of Rs. 2, 11,000/- on account of bonus paid to staff under section 36(1) (ii) of the Act. In addition to this ld. AO examined the AIR statement. As per AIR statement, assessee/appellant paid fees for technical services to a foreign party in China amounting to Rs. 7, 54,518/-. The Ld. AO held that as the assessee was liable to deduct tax under section (A.Y. 2014-15) 195 of the Act on this payment therefore, the ld. AO disallowed an amount of Rs. 7, 54,518/- under section 40(a) (i) of the Act.
During appeal proceedings before the ld. CIT (A) contentions of the assessee were not accepted and ld. CIT (A) holds as under: “4.2.2 During the course of assessment proceedings, the appellant submitted that bonus of Rs.2, 11,000 reflected in Form 3CD is covered under the total salary expenses debited to P&L Account. In the appellate proceedings, the appellant further submitted that this amount was the Diwali bonus paid to the employees for the year and it was a typographical error at the time of filling and filing Form 3CD wherein the amount was stated in Clause 20(a) of the said form. The payment was not in the nature of profit or dividend payable to the employees but was Diwali bonus paid consistently over the years.
4.2.3 I have considered the submissions of the appellant; however, the appellant has not proved the bonafideness or the correctness of the entire matter with any documentary evidence. It has stated that there was an error in the form. It is important to note here that the form which is being referred is the Tax Audit Report which is certified by a Chartered Accountant on the on the basis of the audit conducted and in accordance with the Provisions of the Income tax Act. Moreover, this is an audit report and is also signed by the Chartered Accountant. Any reporting made by the Chartered Accountant in this report is basis the books of accounts audited. Merely stating that there has been an error in reporting by the appellant cannot change the acceptance of the position adopted by the tax auditor in his report.
4.2.4 Thus, in the absence of any contrary evidence on record to establish the bonafideness of the issue, I find no reason to interfere with the addition made by the Ld. AO and confirm the same. This ground of appeal is dismissed.”
6. The appellant had made payment of-Rs.7, 54,918 to M/s. Russian Maritime Register of Shipping (Tianjin) Co. Ltd., foreign company, for the survey fees. The (A.Y. 2014-15) said payment was made considering the same not to be taxable u/s. 9(1) (vii) of the Act as well as Article 12 of the India-China DTAA.
7. 1 The Ld. AO disallowed the same u/s. 40(a) (i) (incorrectly mentioned as 40(a) (ia) in the impugned order) as the appellant did not furnish any satisfactory details or documents to contend that the aforesaid payment was not taxable in India.
7.2 During the course of appellate proceedings, the appellant submitted that bonus of Rs. 2, 11, 000/- reflected in form No. 3CD is covered under the total salary expenses debited to P&L A/c. In the appellate, the appellant further submitted that this amount was the Diwali bonus paid to the employees for the year and it was a typographical error at the time of filing form no. 3CD, wherein the amount was stated in Clause 20(a) of the said form. The payment was not in the nature of profit or dividend payable to the employees but was Diwali Bonus paid consistently over the years.
We have considered the findings of ld. AO, ld. CIT (A) and submissions made by assessee/appellant before us. In our considered opinion, the taxes can only be collected as per authority of law and if any, mistake has crept in the Tax Audit Report because of wrong reporting/feeding the data in software by the office assistant of the Auditor, inadvertently an assessee comes forward with a bonafide reply it is the duty of the AO to consider such reply on merits so that (A.Y. 2014-15) correct taxes can be collected. It cannot be simply brushed aside at threshold itself without considering the same on merits.
It is pertinent to discuss the provisions of section 36(1) (ii) of the Act applying which disallowance has been made as under: “Section 36(1)(ii) any sum paid to an employee as bonus or commission for services rendered, where such sum would not have been payable to him as profits or dividend if it had not been paid as bonus or commission;
Rider or exception carved out in section36 (1) (ii) would apply only to an 10. employee who is also a shareholder in company [2018] 95 taxmann.com 159 (Mumbai - Trib.) in the ITAT Mumbai Bench 'B' Nat Steel Equipment (P.) Ltd. v. Deputy Commissioner of Income-tax, Mumbai. The purpose of jeopardising the right of an assessee to claim the payment of bonus or commission as an expense, by making available the disabling rider in section 36(1) (ii) is that when a particular amount was to be paid to the shareholder as dividend, the company cannot be allowed a deduction on the ground of claiming the payment of the same as a bonus or commission to such shareholder. To put it in other words, section36(1)(ii) is intended to prevent an escape from taxation by describing a payment as bonus or commission, when in fact ordinarily it should have reached the shareholder as profit or dividend.
The purpose of applying section 36(1) (ii) is to put a cheque on malpractice of paying bonus in the guise of dividend to the employees whom are incidentally shareholder also. Here in this case, there is no allegation on assessee that the (A.Y. 2014-15) bonus has been paid to the people falling in the category of employee and shareholder both. Merely on the reporting of tax auditor, without establishing the conditions for attracting section 36(1) (ii) no disallowance of bonus paid can be made. The fact discussed above, in addition to relying on Tax Auditor’s report ought to be verified by the Ld. AO.
In the result, issue of disallowance under section 36(1) (ii) made by ld. AO and confirmed by ld. CIT (A) is restored to the file of Ld. AO for verification after providing a reasonable opportunity to the assessee. This ground of assessee is allowed for statistical purposes.
On second matter pertaining to non-deduction of TDS under section 195 of the Act assessee’s fact and contentions are as under: “a. The appellant had made a payment of EURO 8,987.03 (equivalent to INR 7,54,918.61) to Russian Maritime Register of Shipping (Tianjin) Co. Ltd. China ('the non-resident’) for fees for technical services-availed and utilized outside India and which is also certified in Form 15CA & 15CB.
b. Attention is invited to section 195(1) of the Act, which specifically says that - “Any person responsible for paying to non-resident, not being a company, or to a foreign company, any interest (not being interest referred to in section 194LB or section 194LC) or section 194LD or any other sum chargeable under the provisions of the Act (not being income chargeable under the head “Salaries”) shall, at the time of credit of such income to the account of payee or at the time of payment thereof in cash or by the issue of a cheque or draft or by any other mode, whichever is earlier, deduct income tax thereon at the rate in force.”
Here the key words “any other sum Chargeable” which entails all payments which are chargeable under the Act.
(A.Y. 2014-15) c. For the chargeability of income of a non - resident, section 5(2) of the Act specifically says that the income of the non-resident includes all income from whatever source derived which-
(i) Is received or is deemed to be received in India in such year by or on behalf of such person; or (ii) Accrues or arises or is deemed to accrue or arise to him in India during such period. d. Since the payment for fees for technical services is paid from India to a non- resident in China, therefore there is no question of income received or deemed to be received in India by or on behalf of such non-resident. e. According to section 9(1) (vii) (b) of the Act which says that “income by way of fees for technical services payable by a person who is a resident, except where the fees are payable in respect of services utilised in a business or profession carried on by such person outside India or for the purpose of making or earning any income from any source outside India”. f. The assessee is a Ship Management Agent for its overseas ship owners, who are non-residents. The payee carried out their business & profession outside India and is earning income from sources outside India for services performed and utilized outside Indian territorial waters on foreign vessels. g. Therefore, income of the non-resident is not taxable in India and accordingly this amount shall not be covered under the key word “any other sum Chargeable” of the section 195 of the Act.”
During hearing before us Ld. Counsel for the assessee argued that company is in operation since last 10 years. Same nature of payments were being made in past also and in succeeding years also. Department never raised this issue of (A.Y. 2014-15) taxability of the same payment in India and consequently applicability of section 195 of the Act. Even in this year there are other payments of similar nature and were accepted by the Ld. AO.
In addition to above assessee further argued that the payment is in the nature of reimbursement and not in the nature of FTS/Royalty. This argument has been raised for the first time before the Tribunal. Taking into consideration entirety of facts, without commenting on merits, we deem it appropriate to restore this issue to the file of Ld. AO FOR de-novo examination after allowing reasonable opportunity of hearing in accordance with law. This ground of assessee is allowed for statistical purposes.
In the result appeal filed by the assessee is allowed for statistical purposes. Order pronounced in the open court on 7th day of April, 2022.