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Income Tax Appellate Tribunal, ‘B’ BENCH, CHENNAI
Before: SHRI V. DURGA RAO & SHRI G. MANJUNATHA
आदेश /O R D E R PER G. MANJUNATHA, ACCOUNTANT MEMBER:
These appeals filed by the assessee are directed against separate orders of the Commissioner of Income Tax (Appeals), Large Taxpayer Unit, Chennai, dated 08.01.2013 and 25.12.2013 and pertains to assessment years 2009-10 & 2010-11. Since common issues involved in both the appeals relates to non-
:-2-: 689/Chny/2012 & 495/Chny/2014 adjudication of certain grounds of appeal taken by the assessee, we prefer to dispose off these appeals by way of this consolidated order.
2. The brief facts of the case are that the assessee has filed appeals against orders of the Ld. CIT(A) , Large Taxpayer Unit, for assessment years 2009-10 & 2010-11 and said appeals were disposed off by the Tribunal vide common order dated 20.03.2019 in & 495/Chny/2014. The assessee has filed a Miscellaneous Petition against the order of the Tribunal dated 20.03.2019 in ITA 689/Chny/2012 & 495/Chny/2014 and requested to recall the order of the Tribunal for the reason stated in its Miscellaneous Petition No. 255 & 256/Chny/2019. The Tribunal vide its order dated 24.02.2020 in MP No. 255 & 256/Chny/2019 has recalled the order dated 20.03.2019 in ITA No. 689/Chny/2012 & 495/Chny/2014, qua, ground no. 3 to 7 of grounds of appeal filed by the assessee for assessment year 2009-10 and ground no. 5 to 7.3 and additional ground no. 1 to 7 for assessment year 2010-11. The relevant grounds of appeal filed by the assessee are produced as under: ITA No.689/CHNY/2012 for assessment year 2009-2010 ‘’3. The Commissioner of Income tax (Appeals), LTU erred in confirming the disallowance of Rs.6 1,23,06,054/- u/s 40(a)(i) as the appellant had :-3-: 689/Chny/2012 & 495/Chny/2014 not deducted TDS from the payments made to Hardy Exploration and Production India Inc (HEPI) u/s 195.
3.1 The Commissioner of Income tax (Appeals), LTU ought to have appreciated that payment made to HEPI was for the purchase of crude oil and hence payment is not subject to tax in India.
3.2 The Commissioner of Income tax (Appeals), LTU ought to have appreciated that Section 195 requires that tax is to be deducted at source from payment to a non-resident only if the amount is chargeable to tax 3.3 The Hon’ble Supreme Court in G.E.Technology Center vs. CIT (327 ITR 256) has held that that if there is no income chargeable to tax in India then there is no requirement for deducting tax at source under the Income Tax Act, 1961.
3.4 The Commissioner of Income tax (Appeals), LTU ought to have appreciated that the disallowance u/s 40(a)(i) can be made only in respect of amounts outstanding and payable as on 3l march and not on amounts which have been paid during the previous year. Appellant relies on the decision of Special bench in the case of Merilyn Shipping and Transports V. ACIT, reported in 16 ITR (Trib) I (Vis) (SB).
3.5 Without prejudice, only the profit accruing to MIs. Hardy Exploration and Production India Inc on sale of crude to the Appellant which is taxable in India can be disallowed u/s 40(a)(i) and not the entire payment.
Further the following additional grounds were filed before the Tribunal
1. The CIT(A) erred in confirming disallowance u/s.40(a)(i) of the Act, for non-deduction of tax under section 195(1) of the Act, the total Gross Payments made for purchase of crude oil from the Indian PE of the non- resident M/s.Hardy Exploration and Production India Inc (HEPI) and not the profit chargeable to tax.
The CIT(A) ought to have appreciated as per the provisions of Article 7 of the DTAA between India and USA, the ratio of the decision of the Apex Court in the case of G.E.Technology Centre P Ltd v CIT 327 ITR 456 and the clarification issued by the CBDT vide Instruction No.02/2014 dated
:-4-: 689/Chny/2012 & 495/Chny/2014 26.02.2014 read with CBDT Circular No.3/2015 dt 12.02.2015 the Assessing Officer has to first determine the income chargeable to tax under the Indian Income Tax Act 1961 on which tax has to be deducted and then compute the amount to be disallowed, if any, u/s 40(a)(i). As the Assessing Officer has not done so, even though the assessment of the recipient was available, the CIT(A) should have set aside the disallowance u/s 40(a)(i).
3. The CIT(A) ought to have held that, when the recipient M/s. Hardy Exploration and Production India Inc has paid the requisite tax taking into account the amount received from the Appellant, further disallowance of the same amount in the hands of the Appellant would amount to double taxation of that amount and hence the disallowance should be deleted.
4. The CIT(A) ought to have appreciated that that as per provisions of sec 191, once the payee has paid the tax, the TDS cannot be recovered from the Assessee payer and hence the amount cannot be disallowed in the hands of the Assessee u/s 40(a)(i).
5. The CIT(A) erred in law in not applying the provisions of Non Discrimination as per article 26 (3) of the DTAA between India and USA, whereby, the payment by an Indian resident to a resident of USA should be allowed in computing the taxable income of the Indian payer as if such payments have been made to an Indian resident. As payments to an Indian Resident for purchase of oil does not require deduction of tax, payment to HEPI cannot be disallowed for non deduction of tax as per Article 26(3) of the DTAA.
6. The CIT(A) ought to have appreciated that as per article 26 (3) of the DTAA between India and USA which provides that allowability, in the hands of the resident Payer, of the amount paid to a Resident USA should be on the same conditions as if the payment was made to an Indian resident. Consequently the CIT(A) ought to have held that as per Proviso to section 40 (a) (ía) read with Proviso to sec 201 (1) and in the light of the decision of the Delhi High Court in the case of CIT Vs Ansal Land Mark Township Pvt Ltd read with Article 26(3) of the DTAA between India and USA, no disallowance can be made in the hands of the payer as the recipient has paid the Tax.
:-5-: 689/Chny/2012 & 495/Chny/2014 7. In any event, the Tribunal erred in law in not directed that disallowance u/s.40(a) (i) should be restricted to the amount of income which is found to be chargeable to tax in the hands of the recipient’’. 2010-2011 ‘’5. The Commissioner of Income tax (Appeals), LTU erred in confirming the disallowance of Rs.24,71 ,39,263/- u/s 40(a)(i)for non-deduction TDS from the payments made to Hardy Exploration and Production India Inc (HEPI) u/s 195.
5.1 The Commissioner of Income tax (Appeals), LTU ought to have appreciated that payment made to HEPI was for the purchase of crude oil and hence payment is not subject to tax in India.
5.2 The Commissioner of Income tax (Appeals), LTU ought to have appreciated that Section 195 requires that tax is to be deducted at source from payment to a non-resident only if the amount is chargeable to tax 5.3 The Hon’ble Supreme Court in G.E.Technology Center vs. CIT (327 ITR 256) has held that that only that portion of the payment to the non resident chargeable to tax in India tax has to be deducted at source under the Income Tax Act, 1961.
5.4 Without prejudice, under the DTAA between UK and India only the profit accruing to M/s. Hardy Exploration and Production India Inc on production and sale of crude to the Appellant is taxable in India. Hence the entire payment can not be disallowed u/s 40(a)(i).
5.5 Without prejudice disallowance u/s 40(a)(ia) can be made only in respect of amounts outstanding and payable as on 3 l march and not the amounts which have been paid during the previous year. Merilyn Shipping and Transports V. ACIT, reported in 16 ITR (Trib) I (Vis)(SB). Vector Shipping 85 CCH 201 (All. H.C).
6. The Commissioner of Income tax (Appeals), LTU erred in confirming the disallowance of Rs. 15,83,20,443/- u/s 40(a)(i) for non-deduction of TDS from the payment made to M/s NIKO (Neco) Ltd. 6.1The Commissioner of Income tax (Appeals) ought to have appreciated that payment made to M/s. NIKO (Neco) Ltd was for the purchase of crude oil and hence payment is not subject to tax in India.
:-6-: 689/Chny/2012 & 495/Chny/2014 6.2 The Commissioner of Income tax (Appeals), LTU ought to have appreciated that Section 195 requires that tax is to be deducted at source from payment to a non-resident only if the amount is chargeable to tax.
6.3 The Hon’ble Supreme Court in G.E.Technology Center vs. CIT (327 ITR 256) has held that that if there is no income chargeable to tax in India then there is no requirement for deducting tax at source under the Income Tax Act, 1961.
6.4 Without prejudice, under the DTAA between Japan and India only the profit accruing to MIs. NIKO (Neco) Ltd on production and sale of crude to the Appellant is taxable in India. Hence the entire payment cannot be disallowed u/s 40(a)(i).
6.5 Without prejudice disallowance u/s 40(a)(i) can be made only in respect of amounts outstanding and payable as on march and not the amounts which have been paid during the previous year. Merlyn Shipping and Transports V. ACIT, reported in 16 ITR (Trib) I (Vis)(SB). Vector Shipping 85 CCH 201 (All. H.C)”
7.0 The Commissioner of Income tax (Appeals), LTU erred in confirming the disallowance of the provision of Rs. 17,00,05,000/- made for Retirement benefits of supervisory and non-supervisory employees as per DPE guidelines as being contingent liability and added to the total income of the appellant.
7.1 The Commissioner of Income tax (Appeals), LTU ought to have appreciated that As per the Department of Public Enterprises ( DPE) guideline dated 26th Nov 2008, all Central public sector enterprises are required to contribute 30% of Basic pay as superannuation benefit which may include contribution to provident fund (CPF),Gratuity , Pension and Post superannuation medical benefits.
7.2 The Commissioner of Income tax (Appeals), LTU ought to have appreciated that In line with the above guideline, the appellant has made additional provision towards retirement benefit to the extent of 8.62% of the Basic pay as Superannuation benefit for the employees as the remaining 2 1.38% has been met through contribution to provident fund (CPF), Gratuity and other retirement benefits.
7.3 The Commissioner of Income tax (Appeals), LTU ought to have appreciated that the above provisions are business liability has arisen in the accounting year that are to be discharged at a future date. The appellant is certain of incurrence of the liability and the estimation made with reasonable certainty. Having met
:-7-: 689/Chny/2012 & 495/Chny/2014 these requirements, the provision created by the appellant should be allowed as ascertained liability.
Further the following additional grounds were filed before the Tribunal
The CIT(A) erred in confirming disallowance u/s.40(a)(i) of the Act, for non- deduction of tax under section 195(1) of the Act, the total Gross Payments made for purchase of crude oil from the Indian PE of the non-resident MIs.Hardy Exploration and Production India Inc (HEPI) and not the profit chargeable to tax.
2. The CIT(A) ought to have appreciated as per the provisions of Article7 of the DTAA between India and USA, the ratio of the decision of the Apex Court in the case of G.E.Technology Centre P Ltd v CIT 327 ITR 456 and the clarification issued by the CBDT vide Instruction No.02/20 14 dated 26.02.20 14 read with CBDT Circular No.3/2015 dt 12.02.2015 the Assessing Officer has to first determine the income chargeable to tax under the Indian Income Tax Act 1961 on which tax has to be deducted and then compute the amount to be disallowed, if any, u/s 40(a). As the Assessing Officer has not done so, even though the assessment of the recipient was available, the CIT(A) should have set aside the disallowance u/s 40(a)(i).
3. The CIT(A) ought to have held that, when the recipient M/s. Hardy Exploration and Production India Inc has paid the requisite tax taking into account the amount received from the Appellant, further disallowance of the same amount in the hands of the Appellant would amount to double taxation of that amount and hence the disallowance should be deleted.
4. The CIT(A) ought to have appreciated that that as per provisions of sec 191, once the payee has paid the tax, the TDS cannot be recovered from the Assessee payer and hence the amount cannot be disallowed in the hands of the Assessee u/s 40(a)(i).
5. The CIT(A) erred in law in not applying the provisions of Non Discrimination as per article 26 (3) of the DTAA between India and USA, whereby, the payment by an Indian resident to a resident of USA should be allowed in computing the taxable income of the Indian payer as if such payments have been made to an Indian resident. As payments to an Indian Resident for purchase of oil does not require deduction of tax, payment to HEPI cannot be disallowed for non deduction of tax as per Article 26(3) of the DTAA.
:-8-: 689/Chny/2012 & 495/Chny/2014 6. The CIT(A) ought to have appreciated that as per article 26 (3) of the DTAA between India and USA which provides that allowability, in the hands of the resident Payer, of the amount paid to a Resident USA should be on the same conditions as if the payment was made to an Indian resident. Consequently the CIT(A) ought to have held that as per Proviso to section 40 (a) (ia) read with Proviso to sec 201(1) and in the light of the decision of the Delhi High Court in the case of CIT Vs Ansal Land Mark Township Pvt Ltd read with Article 26(3) of the DTAA between India and USA, no disallowance can be made in the hands of the payer as the recipient has paid the Tax.
In any event the tribunal erred in law in not directing that disallowance u/s 40(a) (i) should be restricted to the amount of income which is found to be chargeable to Tax in the hands of the recipient’’.
The Ld. AR for the assessee submitted that although the Tribunal has restored the issue of disallowance of certain payments u/s. 40(a)(ia) of the IT Act, 1961 (herein after “the Act”), for non- deduction of tax at source u/s. 195 of the Act, but in para 39.4 of Tribunal order the issue has been remitted back to the file of the AO to examine applicability of second proviso to section 40(a)(ia) of the Act which is inserted by the Finance Act, 2012 w.e.f. 01.04.2013. However, the other ground taken by the assessee including non- application of TDS provisions to impugned payment and consequent disallowance of expenditure u/s. 40(a)(ia) of the Act, in light of the provison of Article 7 of DTAA between India and USA and certain judicial precedent was not adjudicated. Therefore, the issue of disallowance u/s. 40(a)(i) of the Act, in respect of purchase price of oil in view of provisions of Article 26(3) of the DTAA
:-9-: 689/Chny/2012 & 495/Chny/2014 between USA and India needs to be set aside to the file of the AO in its entirety to consider the issue afresh denovo, by the Assessing Officer. Therefore, he submitted that the issue may be set aside to the file of the AO for denovo consideration in light of various awarement made by the assessee.
The Ld. DR on the other end supporting order of the CIT(A), submitted that the assessee has not filed necessary evidences to justify its case of non-application of TDS provision and consequent disallowance of expenditure u/s. 40(a)(ia) towards oil purchase from resident of India. On those facts, the AO as well as the CIT(A) held that the expenditure incurred on oil purchase is not allowable u/s. 40(a)(ia) for non-deduction of tax at source. However, he fairly agreed that the issue may be set aside to the file of the AO as requested by the Ld. AR of the assessee to consider afresh.
We have heard both the parties, perused the materials available on record and gone through orders of the authorities below. Admittedly, the assessee has raised various grounds including non-application of TDS provision and consequent disallowance of expenses u/s. 40(a)(ia) of the Act towards expenditure incurred on oil purchase from resident of India in light of :-10-: 689/Chny/2012 & 495/Chny/2014 Article 26(3) of DTAA between India and USA. The assessee also taken support from various case laws including the decision of Hon’ble Supreme Court in the case of GE Technologies Centre P Ltd. Vs CIT (327 ITR 256) and CBDT Instruction No. 2 of 2014 dated 26.02.2014 read with CBDT Circular No. 3 of 2015 dated 12.02.2015. But, the Tribunal while adjudicating the issue has restored the appeal to the file of the AO to examine applicability of second proviso to section 40(a)(ia) of the Act, which is inserted by the Finance Act, 2012 w.e.f. 01.04.2013. However, the other issues raised by the assessee including non-application of TDS provision in light of Article 26(3) of DTAA between India and USA. Therefore, we are of the considered view that while adjudicating the issue of disallowance of expenditure incurred towards oil purchase from resident of India, the provision of Article 26(3) of the DTAA between India and USA needs to be considered in light of the decision of Delhi High Court in the case of CIT vs Ansal Land Mark Township Pvt Ltd. Hence, we set aside the issue of disallowance of expenditure incurred towards oil purchase from resident of India u/s. 40(a)(ia) of the Act in its entirety and direct the AO to reconsider the issue denovo in accordance with law after considering various awarement made by the assessee including the case laws cited in support of its arguments. Accordingly, the issue of disallowance of :-11-: 689/Chny/2012 & 495/Chny/2014 expenditure u/s. 40(a)(ia) has been set aside to the file of the AO for assessment years 2009-10 & 2010-11.
In the result, the appeals filed by the assessee for assessment years 2009-10 & 2010-11 in & 495/Chny/2014 are treated as allowed for statistical purposes in terms of our observations give herein above.
Order pronounced in the court on 08th October, 2021 at Chennai.