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Income Tax Appellate Tribunal, MUMBAI BENCH “D”, MUMBAI
Before: SHRI RAJESH KUMAR & SHRI RAM LAL NEGI
Per Rajesh Kumar, Accountant Member:
The above titled appeals have been preferred by the assessee against the order dated 16.10.2009, 18.09.2009 & 05.01.2011 of the Commissioner of Income Tax (Appeals) [hereinafter referred to as the CIT(A)] relevant to assessment years 2004-05, 2005-06 & 2006-07 respectively. for A.Y. 2005-06 2. The various grounds raised by the assessee are as under:
2 M/s. Marvel Drugs Pvt. Ltd. “1. The learned CIT(A) erred in holding that training expenses incurred on account of Abhishek Shah were personal in nature and thereby confirming the disallowance of Rs. 24,02,435/-.
The learned CIT(A) erred in distinguishing the decision of the Hon'ble Bombay High Court in case of Sakal Paper Pvt. Ltd. 114 ITR 256 without appreciating that the facts in case of your appellant were similar to that of Sakal Paper Pvt. Ltd.
The learned CIT(A) erred in ignoring the contribution made by Abhishek Shah while undergoing training which evidences the fact that these expenses were in the nature of business expenditure.
4. The learned CIT(A) erred in holding that as Abhishek Shah and Bhowli Shah were not connected to the appellant either as employee or as advisor, the traveling expenses incurred by them were not in the nature of business expenditure without considering the invitation letter from the buyer calling upon Abhishek Shah for a business meeting and explanation given by your appellant as regards Bhowli Shah.
5. The learned CIT(A) erred in holding that foreign traveling expenses incurred on account of Abhishek Shah required deduction of tax at source u/s 40a (i)(a) of the Income Tax Act and considered this as a default for the purpose of confirming the disallowance.
6. The learned CIT(A) erred in confirming disallowance of Rs. 1,33,622/- on account of foreign traveling expenses of Abhishek Shah.
7. The learned CIT(A) erred in confirming disallowance to the extent of 25% of the total expenses incurred on foreign travel of Nikhil Shah and Bhowli Shah to USA amounting to Rs.94,653/-.
8. The learned CIT(A) failed to deal with the documents submitted before him which clearly indicated that payment made to Om Freight Forwarding Ltd. were in the nature of reimbursement of the export freight charged by British Airways and these payments being made to foreign airlines, there was no need to deduct tax at source as the airlines is not chargeable to tax in India and erroneously confirming disallowance of Rs.2,27,221/-.
9. The appellant craves leave to add, alter, amend, modify or delete any or all the aforesaid grounds of appeal.”
3. The only issue raised in ground No.1 to 5 is against the order of Ld. CIT(A) upholding the order of AO wherein the AO has disallowed training expenses abroad of Rs.24,02,435/- of Shri Abhishek Shah.
3 M/s. Marvel Drugs Pvt. Ltd.
The facts in brief are that the assessee is engaged in manufacturing of drugs and drugs intermediaries etc. The assessee filed the return of income on 30.10.2005 declaring the income of Rs.1,01,23,200/- which was processed under section 143(1) of the Act. Thereafter, the case of the assessee was selected under scrutiny and statutory notices were issued and served upon the assessee. During the course of assessment proceedings, the AO noticed that assessee has debited an amount of Rs.24,02,435/- on account of training expenses in the P&L account under the head ‘manufacturing and other expenses’. The AO further noticed from the perusal of tax audit report that tax auditor has stated in annexure 7 in respect of clause 18 that the payment was covered under section 40A(2)(b) of the Act as made in connection specified person on account of training expenses of Rs.24,02,435/- of Shri Abhishek Shah in foreign university. Accordingly, the AO called upon the assessee to file certain details relating to Shri Abhishek Shah as under: i) Mr. Abhishek N. Shah is an employee of company since when ii) Whether he is a shareholder in the company if yes, extent of shareholding iii) Since when Abhishek N. Shah is working for the company along with prove, in form of salary register or appointment letter. iv) Whether any nature of bond is taken from Abhishek Shah if yes. copy of the same clearly giving the bounded period for which Mr. Abhishek Shah is at least required working with the company after ''completion of training. v) Copy of Board resolution for the bearing of training expenses of Mr. Abhishek Shah. vi) Why these training expenses should not be disallowed as personal expenditure.
It was submitted before the AO that Shri Abhishek Shah was appointed as director of the company w.e.f. 19.12.2002 and is holding 10% of the share holding of the company as corroborated by the board resolution. Thereafter, the AO asked further details from the assessee about training of Mr Abhishek
4 M/s. Marvel Drugs Pvt. Ltd. Shah in USA qua details of training, name and address of the institution and other details of fees, travelling, visit to India, lodging and boarding etc. It was replied by the assessee vide written submission dated 19.12.2007 wherein it was submitted that as to how the education and training taken by Shri Abhishek Shah in USA benefited Marvel Drugs Pvt. Ltd. It was submitted that Shri Abhishek Shah studied in Georgia Tech, USA where he became president of a few Associations at University and did course in Georgia Tech, USA on time management, efficiency management, system planning, documentation etc. However, the reply of the assessee did not find favour with the AO and he observed that Shri Abhishek Shah was neither an employee nor working with the company in any capacity, he was just undergraduate of 19 years of age and had gone to USA for studying chemical engineering which is noway related to the business of the assessee. The AO observed that the course for which he has applied was for 5-6 years but he returned within four years and not submitted any proof of completion of study which in any way whatsoever was related to the business of the assessee. The AO further noted that the expenses incurred were in the nature of board expenses, athletic fees, health fees, recreation facility fees, student activity fees, transportation charges, tuition fees, bus fund fees, insurance and food etc. and he finally added the said expense of Rs.24,02,435/- to the income of the assessee by holding that the same constitutes personal expenses of the director Shri Nikhil Shah and Shri Abhishek Shah and can not be allowed as business expenditure.
5 M/s. Marvel Drugs Pvt. Ltd.
6. In the appellate proceedings, the Ld. CIT(A) confirmed the disallowance by observing and holding as under: “2.2 I have considered the submissions. The appellant is owned to the extent to almost 80% by the family of Shri Abhishek Shah. Being the promoter of the company and majority shareholder, the family of Shri Shah are in a position to control the affairs of the company in the manner of their choice. Shri Abhishek Shah is the son of the head of the company and a major share holder who would obviously take over the appellant company in future. With this object in view, Shri Abhishek was encouraged get first hand experience of the working of the company. He studied the existing procedures followed and made innovations. This would be a part of his learning process. It cannot be regarded as services rendered by an expert consultant in the field for which the company would spend a large sum of money for a number of years. A few instances of involvement would not make his an expert consultant for which the company would pay such a huge sum of money.
2.3 Shri Abhishek Shah is only 19 years old and is an under graduate student. However, brilliant he may be, an undergraduate student is still not experienced and equipped with the necessary wherewithal to transform a company as contended by the appellant. An important thing to note is also, the so called situation from Sanofi Synthelabo is dated 07.09.2007 which is much after the relevant previous year which ended on 31.03.2005. By the time this letter was issued, possibly Mr. Shah was about to complete his graduation. During the previous year, Shri Shah was not an employee of the company. The appointment of Shri Shah as a director in 2002 has been challenged by the A.O. as being after thought. The appellant has not been able to disprove the allegation of the A.O. that the resolution of the Board was submitted to the ROC only after the issue has been raised in the assessment proceedings.
2.4 Viewed from a technical angle, the expenditure on Shri Shah cannot be treated as an expenditure on employee welfare or salary or benefits since Shri Shah was not an employee in the relevant period. In that case, the payment to Shri Shah can only be allowed if it is treated as payment for services rendered to the appellant. There is no agreement between the appellant company and Shri Shah requiring his services as an expert in the field for improvement of the procedures and systems followed by the company. Shri Shah does not possess any special qualification or experience to render such services. In any case, payments for such services would be of a one time nature for a particular project and not a continuous expenditure running over a period of years within any limit prescribed.
2.5 The facts and circumstances clearly shows that the expenditure has been incurred for purpose other than the purpose of business of the appellant company. The disallowance of the expenditure u/s.37(1) is therefore, held to be justified.
2.6 The A.O. has very aptly distinguished the decisions cited by the appellant in its favour. In case of Sakal Paper P. Ltd., the person who was sent was an employee who had experience of 5 years and was going abroad to pursue a Degree in journalism, which was directly relevant to the company's business. The Karnataka High Court in the case of R.K.K.R. Steels P. Ltd. cited by the A.O. has actually come down heavily on such expenditure loaded on a family business observing that 6 M/s. Marvel Drugs Pvt. Ltd. expenditure which a father incurs out of natural love and affection cannot become a business expenditure merely because the father is the owner of the business. While coming to the decision the Court also observed that the assessee did not have a regular scheme of sending people abroad for training. In view of the above, the disallowance made by the A.O. on training expense of director Shri Abhishek Shah is confirmed.”
The Ld. A.R. vehemently submitted before us that Shri Abhishek Shah was appointed as director of the assessee company on 19.12.2002 and was holding 10% share capital of the assessee company. The Ld. A.R. drew attention to the board resolution at page No.202 of the paper book, form No.32 filed with the ROC at page 203 and 204 and company master data from MCA filed at page No.205. The Ld. A.R. submitted that Shri Abhishek Shah was studying chemical engineering which was the line of the business of the assessee by drawing our attention to page No.55 of the paper book and submitted that the director of the company was sent abroad for doing technical courses which were useful to the business of the assessee as the assessee was engaged in the business of manufacturing of drug and drug intermediaries. The Ld. A.R. submitted that the clients of the assessee have disapproved the company’s plant in 2001 and again in 2007 on multiple grounds and it was only for that purpose Shri Abhishek Shah started improving the system, documentations, efficiency in the plant by using the knowledge gained through his training and education which resulted in client resuming the trade with the assessee company. A client Snofi having disapproved the assessee again started dealing with the assessee after appreciating the initiatives taken by the assessee through Shri Abhishel Shah stating it to be satisfactory and thereafter the said customer Snofi again started purchasing the goods manufactured by the company. The Ld. A.R.
7 M/s. Marvel Drugs Pvt. Ltd. submitted that the said customer used to purchase 70% of the production of the company. The Ld. A.R. also submitted that the assessee received first ISO 9001-2000 certification and was now in the process of obtaining certification for services for WHO-GMP & EDMF. The Ld. A.R. also brought to our notice the various deficiencies pointed out by main customer Snofi by referring to page No.9 of the paper book wherein in the audit report dated 13.07.2001 it was pointed out that numerous failures regarding GMP requirements have been noted during audit which included manufacturing quality system, lack of documentations and quality control etc. It was also stated that this showed that the assessee was not complying with the regulations and not approved for supplying drugs to Snofi. The Ld. A.R. submitted that AO has accepted that Shri Abhishek Shah joined the assessee back in August 2006 onward and continued to work with the assessee. In the assessment proceedings the AO after specifically raised a query on training expenses which was replied by the assessee and the AO allowed the training expenses of Rs.15.25 lakhs incurred on the training of Shri Abhishek Shah. The Ld. A.R. submitted that all these expenses were allowable expenses under section 37 of the Act as wholly and exclusively incurred in connection with the business of the assessee. In defence of his argument, the Ld. D.R., relied on a series of decisions as under: 1. CIT vs. Kohinoor Paper – (1997) 92 Taxman 316 (MP) 2. Aswathanarayana & Eswara vs. DCIT – (2018) 97 taxman.com 572 (Mad) 3. CIT vs. Ras Information – (2011) 200 Taxman 305 (Kar) 4. Sakal Papers Ltd. vs. CIT – 114 ITR 256 (Bom)
8 M/s. Marvel Drugs Pvt. Ltd. The Ld. A.R. also tried to distinguish the cases relied upon by the AO while making the addition. The Ld. A.R. finally submitted before the Bench that in view of the foregoing submissions and the ratio laid down by the Tribunals, High Courts, the training expenses may be allowed by setting aside the order of Ld. CIT(A).
8. The Ld. D.R., on the other hand, relied heavily on the order of authorities below by submitting that the assessee has incurred expenses on training and travelling abroad on Shri Abhishek Shah who was a related party and who went abroad for doing chemical engineering which in no way connected to the business of the assessee of manufacturing of drugs and drugs intermediaries. The Ld. D.R. submitted that the assessee has incurred all these expenses which are of personal in nature and charged these to the profit & loss account only to reduce the profits of the assessee company to avoid tax liability and therefore same are not allowable as business expense. The ld Dr submitted that order of Ld. CIT(A) may be affirmed by dismissing the appeal of the assessee for the reasons that personal expenses were charged against the business which is not permissible.
We have heard the rival submissions of both the parties and perused the material on record. We observe that in this case Shri Abhishek Shah went abroad when he was 18 years of age and he did studies in chemical engineering. The allegation of the authorities below are that the line of study which he accomplished abroad is not connected with the business of the assessee and the expenses incurred on training and travelling
9 M/s. Marvel Drugs Pvt. Ltd. abroad were purely of personal in nature. However, we find from the records before us including the board resolution form No.32, company master data, Snofi report who is a major customer of the assessee and various other documents that Shri Abhishek Shah after having studied abroad and after accomplishing his training rejoined the assessee in August 2006. Thereafter, as records revealed Shri Abhishek Shah carried out a number of improvisations in the company and the customer who have left the company for various defects and deficiencies in the system, documentation, and quality control started procuring the material from the company. We further note that in A.Y. 2003- 04, the AO allowed such expenses after making a specific query and after taking into account the explanation of the assessee. Similarly, the expenses of travel of Shri Abhishek Shah to UK and Indonesia were allowed by the assessee in the assessment order for A.Y. 2003-04. We further note that while Shri Abhishek Shah was studying abroad, he was associated with the assessee company and attending various business meetings , conferences and was procuring orders from abroad and therefore we are not in agreement with the conclusion drawn by the Ld. CIT(A) that expenses incurred on training abroad are of personal in nature. We have also perused the case laws relied upon by the Ld. A.R. and observed that the case of the assessee is squarely covered under the similar facts in favour of the assessee. In the case CIT Vs Kohinoor Paper Products (Supra ) the Madhya Pradesh High court has affirmed the order of the tribunal wherein the coordinate bench has held that where the higher education and experience gained by the partner proved beneficial to the firm and the subsequent events established that the intention and purpose of sending abroad is to return with 10 M/s. Marvel Drugs Pvt. Ltd. better education and experience and the business of the firms is benefitted then the expenses are allowable. Similar ratios have been laid in the other decisions. The case laws as relied upon by the Ld. A.R. have been distinguished by the Ld. A.R. and we observe that same are not applicable to the present case. Accordingly, we hold that the training expenses of Mr Abhishek Shah are allowable expenses. The order of the Ld. CIT(A) is set aside and the AO is directed to allow the expenses.
The issue in ground No.6 is against the confirmation of disallowance of Rs.1,33,622/- on account of foreign travelling expenses on Shri Abhishek Shah.
11. Since we have already decided the issue in favour of the assessee by holding that the expenses on training incurred by the assessee on Shri Abhishek Shah abroad is a business expenditure. Therefore, our decision would apply mutatis mutandis to this ground also. Accordingly, we direct the AO to allow the foreign travelling expenses of Rs. 1,33,622/- of Shri Abhishek Shah.
The issue raised in ground No.7 is not pressed at the time of hearing. Therefore, the same is dismissed as not pressed.
The issue raised in ground No.8 is against the confirmation of disallowance by Ld. CIT(A) of Rs.2,27,221/- as made by the AO qua the export freight to British Airways for non deduction of tax at source.
The facts in brief are that AO during the course of assessment proceedings observed that assessee has paid an 11 M/s. Marvel Drugs Pvt. Ltd. amount of Rs.2,27,221/- for export claim charges to M/s. Om Freight Forwarding Ltd. and no TDS was deducted by the assessee and accordingly a show cause notice was issued as to why the same should not be disallowed under section 40(a)(ia) of the Act which was not replied by the assessee. The AO after considering the reply of the assessee disallowed the said amount under section 40(a)(ia) of the Act and added the same to the income of the assessee.
In the appellate proceedings, the Ld. CIT(A) also confirmed the order of AO by holding that the assessee has not supplied the break up of the expenses incurred with supporting documents, bills and vouchers and thus justified the additions.
After hearing both the parties and perusing the material on record, we observe that the assessee has made payment of freight to M/s. Om Freight Forwarding Ltd. who is an agent of British Airways which is hired by the assessee to transport the cargo. We have examined the ledger accounts opened in the name of M/s. Om Freight Forwarding Ltd. in the books of the assessee as the invoice was received from the said party, however, the invoices backed by an airway’s bill of British Airways, copies of which are placed on page No.58 & 59. We find merit in the contentions of the Ld. A.R. that this is just a payment to the non resident through agent M/s. Om Freight Forwarding Ltd. and therefore the same is not liable for TDS at source. The case of the assessee is squarely covered by the ratio laid down in the case of Tab Leather Works vs. ACIT – 23 taxmann.com 58 (Kol). The operative part of the decision is as under:-
12 M/s. Marvel Drugs Pvt. Ltd. “5. We have heard the rival contentions, perused the material on record and duly considered factual matrix of the case as also the applicable legal position.
It is an admitted position that so far as the airfreight is concerned, it is paid to the agents on the actual basis and that the bills and airfreight documents have been directly issued to the foreign airlines. PDP and DHL, while accepting payments for airfreight components, have acted merely as agents of the respective airlines and have not received the airfreight payments in their own right. In copies of airway bills, which have been filed before us in the paperbook, the name of thes e agents is shown as "Issuing carrier's agent and the city" as also the agent's code is given as "Agent's IATA code". There is thus enough material to demonstrate that th e persons having received money for the airfreight have received the same in their capacity as "issuing carrier's agent" i.e. agent of the airline concerned. The airfreight payment is thus made to the foreign airlines, namely SIA, Emirates, British Airway s and Lufthansa - though through the agent, i.e. PDP and DHL etc.
7. In view of the above discussions, in our considered bview , the payments cannot be said to have been made to a resident company , and, accordingly, the provisions of Section 194 C , which apply only on the resident recipients, donot come into play.
As for the stand that the assessee should have moved the application under section 195(2) in case of payments to non residents and assessee's failure to do so is to be visited with conseque nces for non deduction at source, the law is now settled by Hon'ble Supreme Court in the case of GE India Technology Centre Pvt Ltd Vs CIT (327 ITR 456) wherein Their Lordships have categorically held that, " where a person responsible for deduction is fair ly certain, then he can make his own determination as to whether the tax was deductible at source and, if so, what should be the amount thereof ". The plea of the revenue authorities to the effect that where the assessee does not move an application under s ection 195(2) and makes the remittance without deduction of tax at source, the assessee should be visited with consequences for non deduction of tax at source, which was accepted by Hon'ble Karnataka High Court in the case of CIT Vs Samsung Electronic Co Ltd ( 320 ITR 209), was categorically rejected by Their Lordships, and Their Lordships observed as follows:
In our view, section 195(2) is based on the "principle of proportionality". The said sub -section gets attracted only in cases where the payment ma de is a composite payment in which a certain proportion of payment has an element of "income" chargeable to tax in India. It is in this context that the Supreme Court stated, "If no such application is filed, income -tax on such sum is to be deducted and it is the statutory obligation of the person responsible for paying such 'sum' to deduct tax thereon before making payment. He has to discharge the obligation to TDS". If one reads the observation of the Supreme Court, the words "such sum" clearly indicate t hat the observation refers to a case of composite payment where the payer has a doubt regarding the inclusion of an amount in such payment which is exigible to tax in India. In our view, the above observations of this Court in Transmission Corpn. of A.P. L td.'s case (supra) which is put in italics has been completely, with respect, misunderstood by the Karnataka High Court
13 M/s. Marvel Drugs Pvt. Ltd. to mean that it is not open for the payer to contend that if the amount paid by him to the non-resident is not at all "chargeable to tax in India", then no TAS is required to be deducted from such payment. This interpretation of the High Court completely loses sight of the plain words of section 195(1)which in clear terms lays down that tax at source is deductible only from "sums chargeab le" under the provisions of the Income -tax Act, i.e., chargeable under sections 4, 5 and 9 of the Income -tax Act.
9. We have also noted that it is not even the revenue's case that the amounts paid to foreign airlines, on account of airfreight payments, are taxable in India, and quite rightly so, because, as the provisions of all the respective tax treaties clearly provide , the profits from operations of ships and aircrafts in the international traffic are taxable only in the state in which the respective en terprise are fiscally domiciled and not in the source state. This rule, howsoever devoid of paradigm justification as it may appear to many of us, is one of the fundamental rules followed in almost all the tax treaties and our tax treaties with UK, UAE, Si ngapore and Germany are no exception to this general rule. It is only elementary that a tax deduction at source under section 195 is only a vicarious liability inasmuch as when recipient s of income, i.e. the airlines concerned, have no primary liability to pay tax, there cannot be any vicarious liability to deduct tax from payments in which such income is embedded.
10. In view of the above discussions as also bearing in mind entirety of the case, we are of the considered view that the assessee did not ha ve any obligations to deduct tax at source - whether under section 194 C or under section 195 - from payments made to the foreign airlines for airfreight. In this view of the matter, the impugned disallowances under section 40(a)(ia) are devoid of any meri ts, nor can these disallowances be made under section 40(a)(i) either - as alternatively suggested by the authorities below. We, accordingly, direct the Assessing Officer to delete the impugned disallowances. The assessee gets the relief accordingly.
In the result, the appeals are allowed in the terms indicated above. Pronounced in the open court today on 31 s t day of May 2012.”
The facts of this case are materially similar to one as cited above we, therefore, respectfully following the ratio laid down in the above decision, direct the AO to delete the disallowance.
In the result, the appeal of the assessee is allowed. (A.Y. 2004-05) 19. The ground No.1 is not pressed and dismissed accordingly.
The second ground which is without prejudice and the issue is identical to one as decided by us in ground No.1 to 5 in 14 M/s. Marvel Drugs Pvt. Ltd. ITA No.1167/M/2010. Therefore, our above decision in ITA No.1167/M/2010 would, mutatis mutandis, apply to this appeal as well. Accordingly, the AO is directed to allow the expenses of training expenses of Rs.17,31,831/-. 21. Appeal of the assessee is partly allowed.
ITA No.5321/M/2011 (A.Y. 2006-07) 22. The issue raised in ground Nos.1 to 4 are identical to one as decided by us in in ground No.1 to 6 which have been allowed in favour of the assessee. Accordingly, we direct the AO to allow these expenses on training and travelling expenses in view of our own decision in ITA No.1167/M/2010.
Ground No.5 is not pressed and accordingly the same is dismissed.
The issue raised in ground No.6 is identical to one as decided by us in ground No.2 in A.Y. 2004-05 which has been allowed in favour of the assessee. We, therefore, in view of our own decision on ground No.2 in ITA No.1089/M/2010 A.Y. 2004-05 direct the AO to delete the disallowance.
The issue raised in ground No.7 is against the order of Ld. CIT(A) confirming the addition of Rs.4,77,961/- upholding the order of AO which was on account of difference between the balance as per the accounts of the assessee and a civil contractor JAES construction and ground No.8 is in respect of order of Ld. CIT(A) not deciding the issue raised in ground No.4
After hearing both the parties and perusing the material on record, we observe that the Ld. CIT(A) has not decided the issue raised in ground No.7 & 8 and we are of the view that the same need to be restored to the file of the Ld. CIT(A) to be decided as per facts and law after affording a reasonable opportunity of hearing to the assessee. Accordingly, we restore the issues in ground No.7 & 8 to the file of the Ld. CIT(A) to decide the same afresh.
In the result, all the three appeals of the assessee are partly allowed for statistical purposes.
Order pronounced in the open court on 20.05.2019.