BIMETAL BEARINGS LIMITED,CHENNAI vs. DCIT, CHENNAI

आयकर अपीलीय अिधकरण, ‘‘ए” �ायपीठ, चे�ई IN THE INCOME-TAX APPELLATE TRIBUNAL ‘A’ BENCH, CHENNAI �ी धु�ु� आर.एल रे�ी, �ाियक सद� एवं �ी एस जयरामन, लेखा सद� के सम� Before Shri Duvvuru RL Reddy, Judicial Member & Shri S. Jayaraman, Accountant Member आयकर अपील सं./I.T.A. Nos. 668, 669, 670 & 671/Chny/2015 िनधा�रण वष�/Assessment Years:2007-08 to 2010-11 M/s. Bimetal Bearings Limited, The Deputy Commissioner of 18, Race Course Road, Vs. Income Tax, Large Taxpayer Unit, Coimbatore 641 018. 1775, Jawaharlal Nehru Inner Ring Road, Anna Nagar Western Extension, [PAN:AAACB2036Q] Chennai 600 101. (अपीलाथ� /Appellant) (��थ�/Respondent) अपीलाथ� की ओर से / Appellant by : Shri R. Vijayaraghavan, Advocate ��थ� की ओर से/Respondent by : Shri AR.V. Sreenivasan, JCIT सुनवाई की तारीख/ Date of hearing : 02.07.2019 घोषणा की तारीख /Date of Pronouncement : 29.08.2019 आदेश /O R D E R PER DUVVURU RL REDDY, JUDICIAL MEMBER: These four appeals filed by the same assessee are directed against different orders of the ld. Commissioner of Income Tax (Appeals) 17, Chennai all dated 30.01.2015 relevant to the assessment years 2007-08, 2008-09, 2009-10 and 2010-11. Since common issues have been raised in these appeals, heard together and are being disposed of by this common order for the sake of brevity.

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2007-08, the Assessing Officer made disallowance of 16,35,618/- by applying the provisions of Rule 8D of the IT Rules towards expenditure for the purpose of earning the dividend income. On appeal, the ld. CIT(A) confirmed the disallowance.

2.1 We have heard both the sides, perused the materials available on record and gone through the orders of authorities below including paper book along with case law filed by the assessee. It was the argument of the ld. Counsel that the applicability of Rule 8D is not retrospective, but applicable from the assessment year 2008-09 onwards and therefore, the Assessing Officer was not correct in making disallowance by applying the provisions of Rule 8D and prayed that the decision of the decision of the Hon’ble Jurisdictional High Court in the case of Simpson & Co. Ltd. v. DCIT in T.C. No. 2621 of 2006 dated 15.10.2012. We find force in the arguments of the ld. Counsel. Various Courts and Benches of the Tribunal including the Hon’ble Supreme Court in the case of Maxopp Investment Ltd. v. CIT 402 ITR 640 concurred that application of provisions of Rule 8D is prospective in nature and could not be made applicable to cases prior to assessment year 2008–09. Accordingly, in view of the judgement of Hon’ble Jurisdictional High Court in the case of Simpson & Co. Ltd. v. DCIT (supra), we direct the Assessing Officer to restrict the disallowance towards earning of exempt

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income @ 2% of the dividend amount only. Thus, the ground raised by the assessee is allowed.

2.2 In the assessment years 2008-09 and 2009-10, by applying the provisions of Rule 8D of the IT Rules towards expenditure for the purpose of earning the dividend income, the Assessing Officer made disallowance of ₹.21,80,640/- and ₹.38,75,992/- respectively. On appeal, the ld. CIT(A) confirmed the disallowances.

2.2.1 We have heard the rival contentions, perused the materials available on record and gone through the orders of authorities below including paper book along with case law filed by the assessee. By referring to the grounds of appeal, where the assessee has relied upon the decisions in the case of CIT v. Hero Cycles 323 ITR 518 (P&H) and the Delhi Benches of the Tribunal in the case of ACIT v. Sub Investments 8 ITR (Tri) 33 have held that unless the Assessing Officer established that specific expenditure has been incurred by the assessee for earning exempt income, there can be no disallowance under section 14A of the Act, the ld. Counsel prayed for deleting the disallowance made by the Assessing Officer. In the case of Maxopp Investment Ltd. v. CIT (supra), the Hon’ble Supreme Court has observed that as long as an exempt income was earned, the expenditure incurred as attributable to earning such exempt income, had to be disallowed under section 14A of the Act. Since the Assessing Officer has

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rightly determined the disallowance by applying Rule 8D, the ground raised by the assessee stands dismissed for both the assessment years.

4.1 We have heard the rival submissions. By filing copy of the detailed chart, wherein, payment of Technical service fees to various persons in which, TDS has been deducted under section 195 of the Act, the ld. Counsel

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for the assessee has reiterated the submission has made before the authorities below that the non-residents have raised separate invoices for the technical service fees and reimbursement of other expenses. By referring to various decision, it was further submission that there was no element of income attributable to the reimbursement of actual flight charges warranting deduction of TDS, whereas, TDS towards technical fees paid by the assessee was already deducted. By following the decision of the Tribunal in the case of Ashok Leyland Ltd. [2009] 313 ITR (AT) 191 (Chennai), wherein, it was held that reimbursement of expenditure towards air fare, accommodation, etc. shall be considered as part of the payments made for the purpose of receiving the technical service, since the assessee has not paid TDS on the payments of travel and other charges to the persons providing the technical services, the Assessing Officer made disallowance under section 40(a)(i) of the Act.

4.2 However, while making disallowance, the Assessing Officer has not given any findings in the assessment order that the reimbursement of expenses could be recognized as income of the assessee and assessable to tax. By following the decision in the case of CIT v. Industrial Engineering Projects P. Ltd. 202 ITR 1014, wherein the Hon’ble Delhi High Court has held that reimbursement of expenses can, under no circumstances, be regarded as revenue receipt; as well as the decision of the Division Bench of

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the Calcutta High Court in the case of CIT v. Dunlop Rubber Co. Ltd. 142 ITR 493 for the preposition that the reimbursement of the expenditure does not involve profit element [subsequent to the decision of the Chennai Benches relied on by the Assessing Officer], in the case of Cairn Energy India Pvt. Ltd. v. ACIT 126 TTJ 226, the Chennai Benches of the Tribunal has held that no income accrued or had arisen to the parent company from the payments by way of reimbursement of expenses. In view of the above judicial precedents and the expression used in section 195(1) of the Act is “chargeable under the provisions of the Act” and such payments made to the non-resident which have no elements of income embedded in them are not be subjected to withholding of tax in respect of such payments under section 195 of the Act, we are of the considered opinion that the disallowance is not at all warranted under section 40(a)(i) of the Act towards reimbursement of travel charges made by the assessee and accordingly, the addition made by the Assessing Officer stands deleted for all the assessment years under appeal.

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the services were rendered by the non-resident outside India. However, the Assessing Officer has not accepted the submissions of the assessee and the commission payments were brought to tax. On appeal, the ld. CIT(A) confirmed the disallowance.

5.1 We have heard the rival submissions. It was the submission of the ld. Counsel that the commission was paid by the assessee only for procurement of export orders and therefore, there is no need to deduct tax. By relying upon the decision in the case of CIT v. Faizan Shoes P. Ltd. 367 ITR 155 (Mad), the ld. Counsel for the assessee prayed for deleting the addition made under section 40(a)(i) of the Act. Alternatively, it was submitted that even if the commission is treated as fees for technical services, it is not taxable if rendered outside India in view of the decision of the Hon’ble Supreme Court in the case of Ishikawajima-Harima Heavy Industries Ltd. v. DIT 288 ITR 408. We find force in the argument of the ld. Counsel. With regard to the issue as to whether the TDS has to be deducted or not on the commission payments made to non-resident entities for the purpose procurement of export orders, we find that the issue is squarely covered in favour of the assessee by the decision of the Hon’ble Jurisdictional High Court in the case of CIT v. Faizan Shoes Pvt. Ltd. (supra). By following the above decision of the Hon’ble High Court, the Coordinate Benches of the Tribunal have decided the issue in favour of the

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assessee in many cases. Otherwise also, once the commission payment was made to non-resident, no disallowance could be made in view of the decision of the Hon’ble Supreme Court in the case of Ishikawajima-Harima Heavy Industries Ltd. v. DIT (supra) since the provisions of section 9(1)(vii)(c) of the Act mandates twin conditions that such services must be utilized in India and must be rendered in India. The ld. DR. could not controvert the above findings of the Tribunal. Thus, the addition made under section 40(a)(i) of the Act towards non deduction of TDS for the payment of foreign commission stands deleted.

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6.1 We have considered the rival contentions. By referring to the paper book page 12, it was the submission of the ld. Counsel that the said sum was found credited to CST payable account and was remaining unpaid on the date of signing the tax audit report and hence was disclosed in the said annexure. It was further submitted that the credit relates to ta demand raised by the commercial tax department for earlier years for non-submission of C- Forms relating to certain inter-state sales and based on the demand , the said sum was debited to the respective customers and credited to CST payable account and a perusal of the records confirm the same. It was further submission that the debits to customers and the liability shown in CST payable account were also reversed subsequently to the extent of C- Form received from the customers. It was further submission that the amount of ₹.11,47,542/- does not actually represent CST collected during the year 2006-07 that remained unpaid but only represents demand raised by the commercial tax department, which was not claimed as an expenditure in computing the total income under the Act. The disclosure in the annexure to Form No. 3CD was made on the basis of entry in the CST payable account and would not have been disclosed had the entry not been made in that said account. Thus, the ld. Counsel prayed for deleting the disallowance made under section 43B of the Act. On the other hand, the ld. DR submitted that the matter may be remitted back to the file of the Assessing Officer for detailed examination. In view of the above, the Assessing Officer is directed

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to verify the clarifications of the assessee and decide the issue afresh in accordance with law after allowing an opportunity of being heard to the assessee.

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order, the expenses are rents of the London office, salaries of the London office, etc. and these payments, which are paid by the London office are not assessable to tax in India in the hands of the actual recipients. Consequently, the present assessee is not liable for withholding the tax on the above payments which are reimbursed to the London office as assessee’s share. Therefore, the ld. CIT(A) has held that the Assessing Officer was not justified in invoking the provisions of section 40(a)(ia) of the Act and disallowing the above expenses and directed to allow the reimbursement of London. 5.1 The ld. DR has submitted that the assessee has paid the amount to another Indian company and not to anyone in London and therefore, the TDS to the said amount is very much warranted and pleaded that the order of the ld. CIT(A) should be reversed and restored that of the Assessing Officer. 5.2 On the other hand, the ld. Counsel for the assessee has vehemently argued that if the holding company incurred expenses on behalf of the subsidiary company, the subsidiary company is required to reimburse such expenditures and submitted that the issue is squarely covered in favour of the assessee by the decision of the Tribunal in assessee’s own case for assessment years 2005-06 & 2006-07 and prayed that the same should be followed for the assessment year under consideration. 5.3 We have heard the rival contentions and perused the decision in assessee’s own case for the assessment years 2005-06 and 2006-07 in I.T.A. Nos. 89 & 90/Mds/2015 dated 22.05.2015, wherein, the Coordinate Benches of the Tribunal has observed and held as under: “6. The next issue in both the appeals of the Revenue is that Commissioner of Income Tax (Appeals) erred in directing the Assessing Officer to delete disallowance made under section 40(a)(i) in respect of the amounts paid by the assessee to M/s. Amalgamation Pvt. Ltd. The Assessing Officer while completing the assessment noticed that assessee made certain payments to M/s. Amalgamation Pvt. Ltd. and no TDS was deducted on such payments and therefore proposed to disallow the said payments under section 40(a)(i) of the Act. In the course of assessment proceedings, assessee submitted that amounts paid to M/s. Amalgamation Pvt. Ltd. were reimbursement of expenses made by the assessee. The expenses were incurred on behalf of the assessee by M/s. Amalgamation Pvt. Ltd., therefore such expenses were reimbursed and the provisions of TDS have no application. 7. On appeal, Commissioner of Income Tax (Appeals) deleted the disallowance against which Revenue is in appeal before us. 8. Departmental Representative vehemently supports the orders of Assessing Officer in invoking the provisions of section 40(a)(i) of the

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Act on the payments made to M/s. Amalgamation Pvt. Ltd. for non- deduction of TDS and disallowing the same. 9. Counsel for the assessee submits that these expenses are only reimbursement of expenses made to M/s. Amalgamation Pvt. Ltd., which is a holding company as that company had incurred expenses. Counsel for the assessee submits that holding company incurred expenses on behalf of the subsidiary company and subsidiary company reimbursed the such expenditure. He submits that M/s. Amalgamation Pvt. Ltd. which is a holding company incurred expenses towards rent, salary office facilities, travelling & secretarial services and these expenses were borne by the subsidiary company according to the services rendered by them and their office expenses were allocated based on the turnover. Therefore since the amounts represent reimbursement of expenses TDS provisions have no application. Therefore counsel submits that order of the Commissioner of Income Tax (Appeals) may be sustained. 10. Heard both sides. Perused orders of lower authorities. The Commissioner of Income Tax (Appeals) has considered the issue as to whether TDS provisions have application to the amounts paid to M/s. Amalgamation Pvt. Ltd. or not in para 5.1 & 5.2 of his order observing as under:- “5.1 The Id.AR contested as under: "The Amalgamation Pvt. Ltd pays the representative who acts on behalf of the participating group company's representative office at London. The total expenditure on the expenditure including rent, office facilities etc. incurred for the purpose of export promotion of products offered by the participating companies in the group during that year. The assessee is one of the participating companies in that group. It is submitted that entire amount has been paid to Amalgamation Ltd which pays to a person outside India who is a non resident. Therefore, the provision of the Indian Income Tax Act does not apply and therefore, no TDS has to be deducted by the assessee. As per explanation 1 to section 9 (1)(b), no income shall deem to accrue or arise in India to a non resident. It is an established principle of law that the TDS has to be deducted only in cases where the tax is payable and not otherwise. Once the tax liability does not exist, the question of deducting TDS does not arise.

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The assessee relies upon the decision of the CIT(A) in the assessee's sister concern in the case of I.P Rings in ITA No.523/06-07 for the AY 1999-2000 against which the department has not filed any appeal to the tribunal. " 5.2 I have gone through the facts and circumstances of the case. It is understood from the facts of the case that Amalgamation Pvt Ltd is a holding company under which several other group companies are working. Whatever expenditure is incurred by the holding company in London to share the office space, advertisement expenses, travelling, telephone charges etc., are being shared by all of them as per the understanding they had with the holding company. The share of expenditure paid by the subsidiary companies are in the form of reimbursement of expenditure incurred by the holding company on behalf of subsidiary companies. Since the reimbursement of expenditure by the holding company is not leading to any accrual of income in the hands of that company, the question of making TDS on such income does not arise. Further the amounts paid outside India in the instant case are not falling under either royalty, interest or fee for technical services, therefore they are not chargeable to tax in India. The decision of the Hon'ble Supreme Court in the case of G.E. India Technology Centre P Ltd, 327 ITR 456 (SC) (2010) comes to the rescue of the appellant. Furthermore, my Id. predecessor has allowed such claim in his order vide ITA No. 523/06-07/A. III dated 14.7.2010 in the case of another group concern I.P. Rings Ltd for A.Y. 99-2000 for similar payments made to Amalgamations P Ltd. In view of the above discussion, the disallowance u/s 40(a)(i) is not called for. The AO is directed to withdraw the disallowance. The ground is allowed.” 11. On going through the order of the Commissioner of Income Tax (Appeals) we do not find any valid reason to interfere with the findings of the Commissioner of Income Tax (Appeals) in deleting the disallowance and therefore uphold his order on this issue.” 5.4 The ld. DR could not controvert the above findings of the Tribunal. Hence, respectively following the decision of the Coordinate Benches, we find no infirmity in the order passed by the ld. CIT(A) and the ground raised by the Revenue is dismissed.”

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Respectfully following the above decisions of the Tribunal, the disallowance made by the Assessing Officer under section 40(a)(ia) of the Act stands deleted.

8.1 We have considered the rival contentions. By referring to the written submissions as well as various case law, the ld. Counsel for the assessee has submitted that the coupon scheme of the assessee is a sales promotion scheme. A cash discount coupon, depending upon the product is included inside the packing of the product. The ultimate purchaser after he purchases the product, produces the coupon from inside the package, produces to the sales representative of the company and obtains cash back. This is a reduction in purchase price in the hands of the ultimate purchaser. It was

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further submission that the assessee has numerous dealers all over the country. The product of the assessee is sold to all the dealers at the list price and the amount recovered. This is on principal to principal basis. The dealers deal with numerous other products and not that of the assessee alone. All the risk and reward is transferred to the dealer who becomes the owner. The products sold are removed from the stock of the assessee and the sale price is offered as income. It was further submission that the dealers sell the products at the MRP listed on the product to the ultimate users. These are mainly mechanics who buy the product for being used along with other components, in the repair of vehicles. This sale is also on a principal to principal basis and the dealer realises the sale price as per invoice, which is his income. This is the normal channel of distribution. Outside this channel of distribution, the company offers cash back to the ultimate purchaser. The purchaser presents the coupon to the company’s sales representatives and collects the cash. Thus, the payment is made directly to the purchaser. It was further submission that the commission in terms of section 194H of the Act is payable for services rendered in connection with purchase and sale of goods. In this case, the recipient is the purchase. He has not rendered any services and commission cannot be paid to the purchaser himself. It was further submission that the said incentive is nothing but sales promotion expenses in the nature of cash back discount and therefore, it was submitted that the provisions section 194H of the Act has no application to the facts of

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the case warranting disallowance under section 40(a)(ia) of the Act and prayed for deleting the addition for all the assessment years.

8.2 In this case, admittedly, the transaction was taken place between the assessee company and the purchaser. For selling the product, the company offered cash back to the ultimate purchaser, which cannot be termed as commission in terms of section 194H of the Act. The purchaser purchase the company’s product on discounted price has nothing to do with rendering of any services treating the same as commission. The Assessing Officer also observed that the amount was actually paid by the assessee after the receipt of coupons from the ultimate beneficiaries. It is not the case of the Department that the assessee has discounted the price to the agent/dealer for the sale of assessee’s product warranting application of provision of section 194H of the Act. In order to sell its product, the assessee offered discount/incentives directly to the beneficiaries/purchaser, which is nothing but sales promotion, and therefore, the discount/incentives cannot be held as commission paid to the beneficiaries/purchaser where the question of rendering service does not arise. Our view is duly fortified by the decision of the Telangana and Andhra Pradesh High Court in the case of CIT v. United Breweries Ltd. 387 ITR 150, wherein, the Hon’ble High Court has held as under: “9. From the facts noted by the Tribunal, in the order under appeal, it is evident that beer was sold by the respondent-assessee to the

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APBCL, and the APBCL hand, in turn, sold the beer, purchased by them from the respondent-assessee, to retail dealers. Both these transactions were independent of each other, and were on a principal to principal basis. No services were rendered by the retail dealer to the respondent-assessee, and the incentive given by the respondent- assessee, to the retailers as trade discount, was only to promote their sales. The Tribunal rightly held that in the absence of relationship of a principal and agent, and as there was no direct relationship between the respondent-assessee to the retailers could only be treated as sales promotion expenses, and not as commission, as no services were rendered by the retailers to the respondent-assessee.” Under these facts and circumstances, we are of the considered opinion that the assessee is not required to deduct TDS under section 194H of the Act in view of the decision of various Benches of the Tribunal as well as the decision in the case of CIT v. United Breweries Ltd. (supra). Accordingly, the addition made under section 40(a)(ia) of the Act stands deleted for all the assessment years under appeal.

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“Prudence – Provisions should be made for all known liabilities and losses even though the amount cannot be determined with certainty and represents only a best estimate in the light of available information.” Since the assessee has been followed Clause 4(i) of the above notification, the ld. Counsel for the assessee has submitted that the amount cannot be disallowed under contingent nature and prayed that the disallowance made on this account should be deleted. 4.2 Per contra, the ld. DR has submitted that the claim of the assessee is a mere provision, which was nothing but a contingent liability as on 31.03.2011 in the books of the assessee and therefore, the same cannot be allowed as deduction. Thus, the above provision cannot be allowed as deduction being contingent in nature. 4.3 We have heard both sides, perused the materials available on record and gone through the orders of authorities below. Admittedly, the assessee has not incurred the discount coupon expenses of ₹.4,82,418/- and merely created a provision. After considering the above notification of the CBDT and its content as reproduced hereinabove, the Assessing Officer has observed that it was nothing but a contingent liability as on 31.03.2011 and cannot be allowed as deduction. The ld. CIT(A) has also considered the provision as a contingent liability and confirmed the disallowance. The mere provision created by the assessee was actually not incurred by the assessee and the same does not constitute as an expenditure and therefore, the same cannot be subject matter of deduction, as expenditure which was deductible for Income Tax purposes towards a liability actually the assessee has not incurred even though the assessee follows mercantile system of accounting. When the assessee was following mercantile system of accounting, the liability of the assessee is crystallized and therefore, mere provision cannot be held as an ascertained liability and the same is nothing but contingent liability, which cannot be allowed as deduction in the relevant assessment year. Accordingly, we are of the considered opinion that the ld. CIT(A) has rightly confirmed the disallowance made on this account. Thus, the ground raised by the assessee is dismissed.” Respectfully following the above decision in assessee’s own case, the ground raised in all the appeals of the assessee stands dismissed.

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Order pronounced on the 29th August, 2019 at Chennai.

Sd/- Sd/- (S. JAYARAMAN) (DUVVURU RL REDDY) ACCOUNTANT MEMBER JUDICIAL MEMBER Chennai, Dated, the 29.08.2019 Vm/- आदेश की �ितिलिप अ�ेिषत/Copy to: 1. अपीलाथ�/Appellant, 2.��थ�/ Respondent, 3. आयकर आयु� (अपील)/CIT(A), 4. आयकर आयु�/CIT, 5. िवभागीय �ितिनिध/DR & 6. गाड� फाईल/GF.