NIPPON KOEI CO. LTD.,BEGUMPET vs. ADIT (INTERNATIONAL TAXATION)- 2, HYDERABAD

Per contra, the Learned Departmental Representative (“Ld. DR”) relied on the findings of the Ld. AO and submitted that the interest paid under section 201(1A) of the Act arises from failure to deposit TDS within the prescribed time and cannot be treated as expenditure incurred wholly and exclusively for business purposes. Accordingly, the Ld. DR prayed for upholding of the disallowance made by the Ld. AO.

We have carefully considered the rival submissions and perused the material available on record. The issue under consideration relates to the allowability of interest paid under section 201(1A) of the Act as a business expenditure. We have gone through the decision of this Tribunal in the case of Trinity Infraventures Ltd. vs. ACIT (supra), as relied upon by the Ld. AR. On perusal of the same, we found that the decision of the Hon’ble Madras High Court in the case of CIT vs. Chennai Properties & Investment Ltd. 239 ITR 435 was not considered by the Tribunal while passing that order. We have gone through the relevant

On perusal of the above, we find that in Chennai Properties & Investment Ltd. (supra), the Hon’ble Madras High Court categorically held that interest paid on account of delayed remittance of TDS cannot be treated as business expenditure under section 37(1) of the Act and cannot be regarded as a compensatory payment. Therefore, following the binding judicial precedent of the Hon’ble Madras High Court, we hold that the interest paid under section 201(1A) of the Act is not allowable as a Page 5 of 20 deduction under section 37(1) of the Act as business expenditure. Accordingly, we find no infirmity in the order of the Ld. AO in disallowing the sum of Rs.2,10,265/-. Consequently, Ground No.1 raised by the assessee stands dismissed.

Ground No. 2 of the assessee relates to disallowance of Rs.3,08,08,089/- under Section 40(a)(i). In this regard, the Ld. AR submitted that the assessee is engaged in providing consultancy services to Chennai Metro Rail Limited (“CMRL”) in connection with Chennai Metro Rail Project Phase-2. Since the assessee itself did not have the requisite expertise for carrying out certain technical functions, it engaged Mr. Anthony Burchell (“Mr. Tony”), an international expert, as an independent freelance consultant. The Ld. AR submitted that during the year under consideration, the assessee has made payment of Rs.3,08,08,089/- /- to Mr. Tony on account of the consultancy charges. However, the Ld. AO has treated the same as salary paid to Mr. Tony. As there was no TDS made by the assessee under section 192 of the Act, on the said payment, the Ld. AO disallowed the same under section 40(a)(i) of the Act. It was further submitted that the nature of services rendered by Mr. Tony is purely consultancy and that the assessee has discharged GST under Reverse Charge Mechanism (RCM) on such payments, which would arise only in the case of procurement of consultancy services, and not in the case of salary. Therefore, according to the Ld. AR, the GST characterization supports the consultancy nature of the arrangement. The Ld. AR also submitted that Mr. Tony issued

Per contra, the Ld. DR strongly supported the order of the Ld. AO and submitted that the agreement between the assessee and Mr. Tony, as examined by the Ld. AO, clearly establishes an employer-employee relationship. The Ld. DR invited our attention to Article 1, Article 2, Article 4, Appendix-1 (Scope of Services), and Appendix -2 (Financial Terms & Conditions) of the agreement of the assessee with Mr. Tony (page nos. 281 to 291 of the paper book), where it is specifically mentioned that: a. Mr. Tony shall report to the General Manager of Railway Engineering Department of the assessee (“GM”) (Article- 1). b. He shall receive instructions from the GM from time to time (Article-1). c. He is exclusively assigned to the assessee’s project and shall devote his full time to the services (Article-2).

In the rejoinder, the Ld. AR also clarified, by referring to the confirmation placed at page no. 395 of the paper book, that the term ‘employer’ used in certain correspondences referred to CMRL and not to the assessee, and therefore the reliance placed by the Ld. DR on such terminology is misplaced. Thus, the Ld. AR

We have considered the rival submissions and perused the material available on record. While we note the clarification that the term “employer” was used in the context of CMRL and not the assessee, the decisive issue is not terminology, but the substance of the working relationship evidenced from the contractual terms and actual conduct. We have gone through Article 1, Article 2, Article 4, Appendix-1 (Scope of Services), and Appendix-2 (Financial Terms & Conditions) of the agreement of the assessee with Mr. Tony (page nos. 281 to 291 of the paper book), which is to the following effect:

The Ground No.3 of the assessee pertains to the addition of Rs.3,49,255/- made by the Ld. AO on account of disallowance of certain expenses under section 44DA of the Act. It was submitted that these expenses represent small amounts incurred towards reimbursement of expenses incurred by the staff of the Head Office located in Japan. The Ld. AR submitted that though the assessee could not produce the necessary supporting evidence before the Ld. AO during the assessment proceedings, the same was duly furnished before the Ld. DRP along with explanations. The Ld. AR invited our attention to para nos. 2.4 to para no. 2.4.3 of the order of the Ld. DRP, wherein the relevant factual details were recorded. It was further submitted that although the Ld. DRP, in para no. 2.4.1 of its order, noted the factual position and the evidences furnished by the assessee, in Page 13 of 20 the subsequent paragraphs, the Ld. DRP discussed certain unrelated issues and omitted to adjudicate this specific ground. Therefore, the Ld. AR prayed that the matter may be restored to the file of the Ld. AO for reconsideration of the issue afresh, after examining the evidences already produced before the Ld. DRP.

Per contra, the Ld. DR fairly accepted that there was no specific adjudication by the Ld. DRP on this issue and submitted that the issue may be remanded to the file of the Ld. AO for fresh adjudication.

We have carefully considered the rival submissions and perused the material available on record. We have gone through para nos. 2.4 to 2.4.3 of the Ld. DRP’s directions, which is to the following effect:

The issue involved in ground no.4 pertains to disallowance of Rs.13,76,205/- made under section 40(a) of the Act towards performance bond guarantee and bank guarantee charges. The Ld. AR submitted that the said expenditure was incurred by Head Office (“HO”) in Japan on behalf of the branch office in India towards charges paid to a lender in Japan against funds availed by the assessee in India, and subsequently the assessee reimbursed the same to its HO in Japan. It was further submitted that such payments are not in the nature of commission or brokerage to attract the provisions of section 194H of the Act, as there exists no principal–agent relationship between the assessee and the bank. In support of this contention, the Ld. AR relied on the decision of the Coordinate Bench of the Tribunal in the case of Navnirmaan Highway Project Pvt. Ltd. vs. DCIT [ITA

Per contra, the Ld. DR supported the order of the Ld. AO/DRP, contending that the assessee was required to deduct tax at source under section 194H of the Act and failure to do so warranted disallowance under section 40(a) of the Act. Accordingly, the Ld. DR prayed for upholding of the deletion of Rs.13,76,205/- made by the Ld. AO.

We have carefully considered the rival submissions and perused the material available on record. We find merit in the contention of the Ld. AR. The issue stands squarely covered by the decision of the Coordinate Bench of the Tribunal in the case of Navnirmaan Highway Project Pvt. Ltd. vs. DCIT (supra). In this regard, we have gone through para no.7 of the order of the Coordinate Bench of the Tribunal in the case of Navnirmaan Highway Project Pvt. Ltd. vs. DCIT (supra), which is to the following effect:

Ground No.5 raised by the assessee is in respect of initiation of penalty proceedings by the Ld. AO under section 270A of the Act. The initiation of penalty proceedings is only a consequential and preliminary step, and therefore, the ground raised by the assessee at this stage is premature. It is well settled that no appeal lies against mere initiation of penalty proceedings, as the cause of action would arise only when a penalty order is actually passed under section 270A of the Act. Accordingly, this ground of appeal does not survive for adjudication at this stage. Therefore, we hold that Ground No.5 raised by the assessee is premature and is dismissed as infructuous.

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