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Income Tax Appellate Tribunal, “A” BENCH : BANGALORE
Before: SHRI N.V. VASUDEVAN & SHRI JASON P. BOAZ
Per N.V. Vasudevan, Vice President Assessee by name M/s. Avastagen Project International Pvt. Ltd., against the order dated 30.11.2017 of CIT(Appeals)-13, Bengaluru, relating to assessment year 2009-10 wherein order passed by the AO u/s 201(1) and 201(1A) of the Income-Tax Act, 1961 [“the Act”] was upheld.
The assessee is a private limited company and is a 2. subsidiary of M/s Avestagen Ltd. A survey was conducted in the case of the assessee u/s 133A of the I.T. Act on 26-07-2013. During the course of survey, it was identified from the assessee's books of accounts that TDS dues by the assessee for the FY 2008-09 stood at Rs. 7,271/- . It was also noticed from the assessee's books of accounts that tax deduction entries for sum Rs. 92,67,940 were reversed at the end of the year. These deduction entries pertained to R & D expenses which were supposed to be payable to the assessee's parent company, Avestagen Ltd. However, it was decided that no sums would be paid by the assessee to the parent company and therefore the entries for payment of R&D Expenses and for deduction of tax at source were reversed at the end of the same financial year. The parent company too in its books of accounts
SP No.174/B/19 & Page 3 of 12 had reversed the entries for income. No TDS was claimed by the parent company in respect of the above tax deductions which were subsequently reversed.
In the proceedings u/s. 201(1) and 201(1A) of the Act, the 3. fact that the entries of TDS & payment of R&D expenses have been reversed is not disputed. However, the AO has held that tax once deducted cannot be reversed. He disregarded the entries for reversal of TDS and treated the assessee in default u/s 201(1) with respect to the above TDS of Rs. 92,67,940/-. In total, the assessee was treated as deductor in default for a sum of Rs.92,75,211/- [Rs. 7,271/- + Rs. 92,67,940/-]. Further, a sum of Rs. 85,88,563/- was computed and levied as interest u/s 201(1A) of the I.T. Act.
Aggrieved by the order u/s 201(1) and 201(1A), the 4. assessee preferred appeal before the CIT(Appeals).
Before the CIT(Appeals), the assessee reiterated its 5. submissions made before the AO. The assessee relied on the decision of the Hon’ble High Court of Karnataka in / 2007 held in case of Wipro Health Care IT Ltd., wherein it was held that when the agreement to pay Royalty was cancelled before the closure of account, though earlier the debit entries were made monthly for royalty, no TDS liability arises when
SP No.174/B/19 & Page 4 of 12 once the entries are cancelled subsequently. The observations of the Hon’ble High Court are as follows:-
From the aforesaid material on record, it is clear that agreement with regard to payment of royalty was cancelled, no royalty was payable and therefore, the question of deducting TDS on such royalty does not arise. These facts are not in dispute. Therefore, in the facts and circumstances of the case we are of the view that the order passed by the Tribunal is correct. Hence, we pass the following order: Appeal is allowed.
The assessee submitted that its case was squarely 6. covered by the above judgment. It was further submitted that as the principal sum of Rs. 92,67,940/- itself is not payable by the assessee, the consequent interest liability is also not payable and has to be deleted.
The CIT(Appeals), however, did not agree with the 7. submission of the Assessee. The CIT(A) called upon the Assessee to file a copy of agreement between the Assesseet and Avestagen Ltd. for assignment of work, based on which consultancy payments were made and also evidence regarding cancellation of the said agreement. A typed copy of a letter signed by Managing Director of Avestagen Ltd, addressed to the Assessee was filed which letter it was stated that "the agreement made by and between the Avestagen Ltd and SP No.174/B/19 & Page 5 of 12 Avestagenome Projects International Pvt. Ltd bearing registered No. U73100KA2007PTC044724 dated 10th day of January, 2008 stands terminated with immediate effect."
The CIT(A) on an examination of this letter came to the 8. conclusion that the reversal of entries made in the books of accounts of the Assessee as well as Avestagen Ltd., was bogus for the following reasons: a) As per the Agreement the Assessee has to reimburse Avasthagen Ltd., such amount as is inclusive of the cost incurred, within 15 days of the date of invoice and the invoices shall be raised at the end of each calendar quarter. Therefore the sequence of events must be first raising invoice and then making payment. The Assessee however did not produce the invoices, although the same were specifically asked for vide note- sheet entry dated 31.03.2017. Logical interference is that the payments credited to the account of Avestagen Ltd. in the books of the Assessee were after the services were rendered by Avestagen Ltd. to the Assessee and therefore there is no case for reversal of entries. b) The reversal of entries is not supported by any valid document. The Agreement to render services by Avasthagen Ltd., is dated 13.4.2008 and the cancellation entries is dated 15.4.2008. Within two days the agreement has been terminated. No acceptable reason has been given for cancellation of the agreement. c) The stamp paper on which this Agreement was signed was purchased on 27.11.2007; the Agreement
SP No.174/B/19 & Page 6 of 12 was made on 10.01.2008 and signed on 13.04.2008 (as per the details on the Agreement). Thus it took a minimum period of four months (from 27.11.2007 to 13.04.2008) to deliberate and reduce in writing the decision to enter an Agreement. It doesn't appeal to common sense that in next two days, it was decided to be cancelled without any reason. d) The decision of Hon'ble The Karnataka High Court in the case of Wipro Health Care (supra) is not applicable to the facts of the appellant's case. In the case of Wipro Health Care, the cancellation of the agreement was not in doubt.
Aggrieved by the order of the CIT(A), the Assessee has preferred the present appeal before the Tribunal. We have heard the rival submissions. The learned counsel for the Assessee reiterated stand of the Assessee as put forth before the AO/CIT(A). The learned DR relied on the order of the CIT(A).
We have carefully considered the rival submissions. The 9. Assessee is in the business of research in bio science. There was a Survey u/s. 133A of the Act in the business premises of the Assessee with a view to verify whether TDS are being properly remitted. In the course of survey, the Officer conducting the Survey found that there were reversal of entries for payment to Avastagen Ltd., parent company of the Assessee. Entries for TDS on the aforesaid payment entries were also found. But no TDS had been deducted and paid to SP No.174/B/19 & Page 7 of 12 the Government. Even in the course of survey the Officer conducting the Survey found that the entries in the name of Avastagen Ltd., were reversed. The case of the Assessee was that payments were to be made to Avastagen Ltd., for common research which they were to do for all the group entities and the benefit of such common research would be passed on to the Assessee. There was an agreement dated 13.4.2008 between Avastagen Ltd., and the Assessee for providing benefit of research carried out by the former to the Assessee. However that agreement was terminated by a letter dated 15.4.2008 and therefore the entries for payments to be made to Avastagen Ltd., were made in the books of accounts and subsequently there were reversal of entries and therefore there was neither entry for payment in the books of accounts nor any actual payment and therefore there was no question of deduction of any tax at source so as to attract provisions of Sec.201(1) & 201(1A) of the Act.
The plea of the Assessee was supported by documents 10. which were disbelieved by the revenue authorities for two reasons, viz., (i) that the entries for payment and reversal of entries were made in the books of accounts even after the alleged termination of the Agreement between the Assessee and Avastagen Ltd., i.e., after 15.4.2008. (ii) the cancellation cannot be believed to be true because there were no reasons
SP No.174/B/19 & Page 8 of 12 assigned for cancellation of the agreement and the cancellation theory did not appeal to common sense.
In our view both the reasons assigned by the revenue 11. authorities cannot be the basis to hold that there was in fact an entry for payment which obligates the Assessee to deduct tax at source. Admittedly, even at the time of survey, the entries for payments as well as the entry for reversal of those entries were found. The theory of reversal cannot therefore be an after- thought. Had there been no reversal of entries in the books of accounts the liability of the Assessee to deduct tax at source would exist. It is only owing the mistake in making the entries for payment despite the agreement having been terminated that the reversal of entries became necessary. Therefore the reversal of entries cannot be said to be an after- thought. Secondly, the termination of agreement between the parties was unilateral and there is no material on record to show that the plea of termination of the agreement was not true. The parties to an agreement are at liberty to vary the terms of the agreement or terminate the agreement. The conclusions of the revenue authorities in this regard are purely based on surmises and cannot be sustained.
In the case of CIT Vs. Wipro Healthcare IT Ltd., (2013) 34 12. taxmann.com 74 (Karnataka), the facts were that the assessee
SP No.174/B/19 & Page 9 of 12 in that case entered into a Collaboration Agreement with M/s. GE Information Technology Inc., USA (GEMS IT, USA). According to the contract, the USA company had given license to the assessee, the right to use the IPRs belonging to that company and also to participate in Global Technology Development efforts funded by them. The assessee was to pay royalty at 15% on internal and export sales of all products made, sold, assembled and licenced by the assessee. According to the Assessee the agreement came to be executed on 6th September, 2000. In the financial year 2001-02 the assessee- company made debit entries on monthly basis in royalty account since royalty was payable to the US Company. However, before closure of the account a reverse entry was made in respect of the royalty payable at Rs. 1,92,42,304/-, the reason being that the royalty payment was cancelled from the very inception, from the terms of the agreement entered into between the parties, which was supported by the letter dated 09.07.2002 issued by US Company. The Assessing Officer held that the agreement was not cancelled but only the payment of royalty was cancelled. Therefore, he passed an order under Section 201(1) of the IT Act raising demand of tax of Rs. 30,46,188/- and also held that the interest is payable thereon. On appeal the Tribunal held that since the Agreement was cancelled there was no obligation to deduct tax at source. On further appeal, the SP No.174/B/19 & Page 10 of 12 Hon’ble High Court held that from the material on record, it was clear that if agreement with regard to payment of royalty was cancelled, no royalty was payable and therefore, the question of deducting TDS on such royalty does not arise. Therefore, in the facts and circumstances of the case the order passed by the Tribunal was correct.
The aforesaid decision of the Karnataka High Court is 13. squarely applicable to the facts of the present case. Apart from the above, entries in the books of accounts are not conclusive with regard to liability to tax when it is shown that the taxable event had in fact not taken place or was given up or abandoned. We therefore hold that there was no obligation on the part of the Assessee to deduct tax at source and therefore the orders u/s.201(1) & 201(1A) of the Act are liable to be vacated and are hereby vacated.
The appeal of the Assessee is allowed. Since the appeal 14. is allowed, the Stay Petition becomes infructuous and hence the same is dismissed.
ITA No.433/Bang/18.
This is an appeal by the Assessee by name Avastagen 15. Quality Agricultural Pvt. Ltd. against the order dated 30.11.2017 of CIT(A)-13, Bengaluru, relating to AY 2011-12.
SP No.174/B/19 & Page 11 of 12 This company is also a group company of Avastagen Ltd.
This appeal also arises pursuant to proceedings u/s.201(1) & 201(1A) of the Act. The order was passed in the case of this Assessee pursuant to the Survey U/s.133A of the Act conducted on 26.7.2013. The facts are identical as in the case of the Assessee in ITA No. 428/Bang/18. The reversal of entries in the case of this Assessee was on account of salary paid to employees of parent company who were sent on deputation. These employees were paid salary by the parent company and TDS on the same was also deducted by the parent company. The Assessee reimbursed payments to the parent company. Besides the above, the Assessee also reimbursed the parent company rent, electricity cost and office maintenance expenses in respect of office space of the parent company utilized by the Assessee. The Assessee made entries for payment as well as for TDS on the above payments but these entries were reversed and it was claimed that since there was reversal of entries there was no obligation to deduct tax at source. No reasons whatsoever were assigned by the Assessee for reversal of entries in the books of accounts. In the circumstances, we are of the view that liability to deduct tax at source did exist at the time when entries were made in the books of accounts. Since reversal of these entries were made without any basis, the reversal of entries will not have the effect of taking away the SP No.174/B/19 & Page 12 of 12 obligation of the Assessee to deduct tax at source. In the circumstances, we uphold the order of CIT(A) confirming the order of the AO passed u/s.201(1) & 201(1A) of the Act.
The appeal of the Assessee is therefore dismissed. 17. In the result, ITA 18. No.433/Bang/2018 is dismissed. Pronounced in the open court on this 17th day of July, 2019.