AVTEC LTD.,NEW DELHI vs. ACIT (LTU), CIRCLE-1 , NEW DELHI

PER NAVEEN CHANDRA, ACCOUNTANT MEMBER:-

The above captioned bunch of seven separate appeals by same

assessee are preferred against separate ordersof the ld. CIT(A)

pertaining to different Assessment Years.

assessee and pertain to same assessee, they were heard together and

are disposed of by this common order for the sake of convenience and

brevity.

ITA No. 1009/DEL/2015 [A.Y 2011-12]

“1. That having regard to the facts and circumstances of the case, Ld. CIT(A) has erred in law and on facts in confirming the action of Ld. AO in making addition of Rs.4,52,848/- by allocating the expenses of head office against the profits of the MEPZ unit and thereby erred in decreasing the profit of the appellant from the MEPZ unit that too by recording incorrect facts and findings and without providing adequate opportunity of hearing.

are that the assessee is in the business of manufacturing and selling of

automobile power-trains and power-shift transmissions along with

components forming part of heavy duty power trains. The appellant

company has three units. The unit at Chennai is known as MEPZ unit

where exemption is claimed u/s 10AA of the Act (referred to as the

"eligible unit"). The other units are the Power Product Division (PPD) at

Tamil Nadu and Power Unit Plant (PUP) at Pithampur, Madhya Pradesh

(referred to as the "non-eligible unit").During the year under

assessment, the assessee has declared income of Rs.41,31,42,853/-

under normal provisions of the Act and a book profit of Rs

32,28,72,128/- u/s 115JB of the Act.

on account of allocation of head office expenses against MEPZ unit of

Rs.25,48,189/-; on account of allocation of bank and loan processing

charges against MEPZ unit of Rs.73,311/-; on account of provision of

10AA(9) r.w. section 80IA(8) of Good transferred from other units to

MPEZ unit of Rs.48,24,337/-; disallowance of prior period expenses of

Rs.41,51,598/-; disallowance of amount written off claimed as

expenditure of Rs.11,27,679/- and disallowance of amount on account

of warranty claims of Rs.43,57,377/- and payment of employees

contribution beyond due date of Rs 5,31,027/-.

fees; Tax audit fees; Certification fees; out of pocket expense;

Directors commission and sitting fees amounting to Rs 82,48,607/-

were shown only under the head ‘Head Office’. The AO observed that

the expenses of the head office which have not been allocated to the

manufacturing units, should be allocated to the MEPZ in the ratio of

their turnover as they relate to every aspect of the business and

cannot be isolated for any single unit and attributed to the head

office. The Assessing Officer further observed that the effect of not

allocating the expenses to tax exempt unit is that the loss is reduced in

that unit and profit is reduced in the taxable units. Accordingly, the

Assessing Officer relying upon the decision of the decision of the ITAT

Mumbai Bench in the case of Asea Brown Boveri Ltd 77 TTJ Mum 502,

allocated a sum of Rs. 4,52,848/- to the MEPZ unit in the ratio of their

turnover and made addition of the same.

of Rs 73,311/- to the MEPZ unit. Regarding addition on account of price

difference in respect of goods transferred to 10AA unit, the Assessing

Officer observed as per Central Excise Act, the profit @ 10% is assumed

and duty is charged @ cost plus 10%. The AO however, adopted the GP

ratio @ 12.30% of the assessee and computed the profit on transfer of

goods to the MPEZ unit invoking the provisions of section 10AA(9) read

with section 80IA(8).

confirmed the action of the Assessing Officer by observing that in the

absence of any other alternative basis for allocation was suggested by

the assessee, the findings of the Assessing Officer of allocation basis of

head office is considered reasonable. The CIT(A), however, reduced

the addition on account of price difference in respect of goods

transferred to 10AA unit by considering the net profit attributed to all

purchases and sales made by the MEPZ unit.

by way of filing the present appeal.

that this issue has been decided by the co-ordinate bench in assessee’s

own case for A.Y 2008-09 in ITA No. 4165/DEL/2014 vide order dated

04.01.2019 wherein this issue has been decided in favour of the

assessee and against the revenue. It was also submitted that the ITAT

in AY 2009-10 and 2010-11 has allowed the assessee appeal on these

grounds.The ld AR contended that the expenses not directly linked in

the eligible unit can not to be taken into account. It is submitted that

for the allocation of head office expenses and bank and loan processing

charges, there is no provision in the Act which prescribes about the

allocation of expenses. Further, the ld AR argued that the eligible unit

need to be independently assessed. It relied on the decision of

1) DCW Ltd.vs. ADIT [2010] 37 SOT 322 (Mumbai) 132 TTJ 442

2) Punjab Con-Cast Ltd vs. ACIT (1994) 49 ITD 430 (Chandigarh-Tri) (Mumbai)

argued that the AO has compared the profit rate with the Excise law. It

was submitted that the AO without application of mind, has made the

additions of GP @ 12.30%-. With regard to Section 10AA (9) vis a vis 80

IA (8), it is stated that theAO is not empowered to reallocate the

expenses u/s 801A (8)- as held in Punjab Con-Cast Ltd. by Chandigarh

Tribunal. The ld AR questioned as to how the GP ratio can be

compared with FMV and that the AO is required to find out the

corresponding FMV as held in Wipro Informa Technology vs. DCIT 88

TTJ 778.

2008-09 to 2010-11 has been given on different facts. The ld DR

submitted that for AY 2008-09 to 2010-11, the assessee had declared

loss in its MEPZ unit. The issue decided by the CIT(A) was that the loss

of the MEPZ unit be set off against the income of the other units.

Consequently, the CIT(A) held that the allocation of HO expense and

bank and processing charge to the eligible unit will have no tax

implication and allowed the assessee appeal. This finding of the CIT(A)

was confirmed by the ITAT. The ld DR submitted that in the impugned

year the issue of loss in the MEPZ unit to be set off with the profits of

other unit does not exist and hence the factor of expense allocation

being tax neutral as decided by the CIT(A) and the ITAT for AY 2008-09

will not apply in the AY 2011-12.

relevant material on record. Having heard the rival submissions, we

find that the facts in the instant year are materially different from the

facts as available in AY 2008-09 and 2009-10. In AY 2008-09 and 2009-

10, the assessee had declared loss from the 10AA eligible unit and the

question before the CIT(A) was whether the loss of eligible unit of

MEPZ u/s 10AA can be set off against profits of the taxable units while

computing the gross total income. The CIT(A) held that the loss of the

MEPZ unit be set off against the income of the other units of the

assessee and since the loss is to be set off, apportioning certain

expenses against the profit of the MEPZ unit will have no tax

implication. The decision of the CIT(A) for allowing set off of loss from

profits of other Units and apportioning expense to loss making MEPZ

unit being tax neutral, was held valid, legal and plausible view by the

ITAT. Further the decision of CIT(A) that was also confirmed by ITAT as

follows:

“15. Since grounds no.2, 3, 4 & 5 are offshoot of Ground No.1 being the addition on account of allocation of head office expenses; allocation of bank and loan processing charges; bad debts written off and addition on account of goods transferred to 10AA unit, the same have been rightly decided by ld. CIT (A). So, finding no illegality or perversity, the same are determined against the Revenue.”

for the assessee that this issue has been decided in favour of the

assessee vide order dated 04.01.2019 in assessee’s own case [supra]. In

AY 2008-09 and 2009-10, there was loss in the MEPZ unit and therefore

the CIT(A)/ITAT held that the apportionment of expense to MEPZ unit

will be tax neutral. In the instant year, issue of loss of the MEPZ unit

does not exist and there is no question of setting off of loss of MEPZ

unit from profit of other units. The issue of apportioning the HQ

expenses to the eligible MEPZ unit was not substantially decided in the

ITAT (Supra) decision.

common expenditure of the head Quarters needs to be allocated on

areasonable and scientific basis to the eligible unit for correctly

determining its profit during the year. We also of the considered view

that the commission and fees paid to the Directors, the audit and

certification fees, claimed as HO expense,was in thenature of the

expenses that relate to activities at the strategic, managerial,

regulatoryand overall oversight level and has a direct nexus with the

activities at MPEZ availing deduction under Section 10AA.

TheHeadOffice (HO) does not exist for its own sake, but itsexistence is

relevant for all activities undertaken by various undertakings

/divisions/profitcentersand ought to be reasonably allocatedto the

eligible undertakings.We also note that allocating the expenses on

proportionate basis of turnover is reasonable.We are, therefore, of the

considered opinion that the AOis justified in allocating such expenses

in the nature of commission to the Directors, Audit fees and bank and

loan processing charges to the MEPZ units.

the decision of the hon’ble Delhi High Court in the case of EHPT India

P ltdDelhi Court 350 ITR 41 which accepted,in principle, the concept

of allocation of expense to the eligible units as follows:

“In the light of the observations of the Supreme Court in Hukum Chand Mills Ltd. (supra),in a case where alternative methods of apportionment of the expenses are recognized and there is no statutory or fixed formula, the endeavour can only be towards approximation without any great precision or exactness. If such is the endeavour, it can hardly be said that there is an attempt to distort the profits”.

In view of the above discussion, the ground no 1 and 2 is decided

against the assessee.

Goods transferred to 'MPEZ' unit, we find that the CIT(A) has not

recorded a finding that such goods are transferred at the Fair Market

Value.Respectfully following the decision of Wipro Ltd ITA no

1349/Bang/2010, relied upon by the assessee, we remit this issue back

to the AO for ascertaining the fair market value of such goods

transferred to and from the MEPZ unit to arrive at the profit of the

eligible unit. The ground no 3 is decided accordingly.

account of prior period expenses.

Officer observed that the assessee has not been able to substantiate

with concrete documentary evidence that the prior period expenses

are crystallized in the year under consideration. Accordingly, addition

of Rs. 41,51,598/- was made by the Assessing Officer.

CIT(A).After considering the facts and submissions, the ld. CIT(A) came

to the conclusion the that no detailed explanation was furnished by the

assessee in respect of the miscellaneous expenses of Rs. 3,05,156/-

and, therefore, it cannot be held that liability had crystallized in the

current years. With regard to Rs. 1 lakh towards legal and profession

expenses, the ld. CIT(A) was of the view that there is no evidence of

any dispute with the other party and with respect to repair and

maintenance expense of Rs 1 lakh, no details were given.

given late in the current year and as the work was done in the earlier

year, the assessee had accounted for it in the books and there is no

reason as to why the same could be held to have crystallized in the

current year. Accordingly, out of total disallowance of Rs. 43,03,903/-

an amount of Rs. 5,05,156/- was held to be relating to prior period and

sustained the same.

what has been stated before and argued that the prior period expenses

quantified during the year is allowed in the year of booking. The ld.

counsel for the assessee relied upon the following decisions to support his contention:  CIT vs. Indian Petrochemicals Corp [2016] 74 Taxmann 163 (Gujarat)  ACIT v National Agricultural Co-operative Marketing Federation of India  PCIT vs. Balmer Lawrie and Company Ltd. [2023] 149 Taxmann 286 (Cal)  PCII vs. Rajasthan State Seed Corporation Ltd. [2017] 88 Taxmann 445 (Raj)

assessee, before us, has argued that the prior period expenses

quantified during the year is allowed in the year of booking. The

assessee however, has not controverted the findings of the CIT(A) that

assessee did not furnish any detail explanation with respect to misc.

expense of Rs 3,05,156/-, repair and maintenance expense of Rs 1 lakh

and legal and profession fees of Rs 1 lakh. As the assessee has not been

able to substantiate its claim of such expense being crystalised in the

current year, the findings of the CIT(A) is sustained. The ground no 4 is

dismissed.

234C is consequential in nature.

partly allowed.

ITA No. 6332/DEL/2016 [A.Y 2012-13]

expenses and loan processing charges,have already been discussed and

dealt by us elaborately hereinabove and decided in favour of the

Revenue and against theassessee. Respectfully following the same, we

direct accordingly. Ground no 1 to 6 are dismissed.

adjudication is with regard to Fees for Technical Services [FTS].

into a contract with M/s ESG International Inc for warehousing

facilities for keeping the goods stored in its premises for the period

from 2007-2012. The assessee has paid Rs. 99,88,079/- to M/s ESG

International for keeping the goods stored in its premise during the

year under consideration.

Officer noticed that the assessee has not deducted TDS on the payment

made to M/s ESG International. The Assessing Officer was of the view

that the scope of services under the contract include managerial

/technical services and consequently the payment made to ESGI was in

the nature of Fees for Technical services. Therefore, on such services,

TDS was required to be made. As no TDS was deductedon the payment

made by it to M/s ESG Internationalas per provisions of section 195 of

the Act, the Assessing Officer disallowed the amount of Rs. 99,98,079/-

CIT(A), the ld. CIT(A) confirmed the disallowance.The ld. CIT(A) was of

the view that if the assessee wished to dispute the liability to deduct

tax on the ground that the sum paid would not be the income

chargeable to tax in case of recipient, an assessee is expected to

approach the Assessing Officer u/s 195(2) of the Act rather than taking

the decision himself in respect of an issue for which the jurisdiction

has been conferred upon him.

Independent warehouse service provider, based out in USA. It is

submitted that the scope of the contract include, among other things,

that the ESGI provide appropriate floor space at its warehouse at USA;

to accommodate AVTEC consignments; receiving AVTECH export

documents from their designated bank; Loading/Uploading of Material/

Unpack all pieces, conduct perpetual inventory checks; insuring stock/

Provide Quality Engineering Services. It is the say of the AR that

AVTECH has no control over the activities of ESGI.

submitted that the moment a remittance is made to non-resident,

obligation to deduct tax at source does not arise; it arises only when

such remittance is a sum chargeable under section 4, 5 and 9 of the I T

Act.It is stated that apart from the above charging provisions sections

90, 91 and DTAA are also relevant as the charging sections are subject

to section 90, 91. To support his view, the ld. counsel for the assessee

relied upon the decisions by the Hon'ble Supreme Court in GE India

Technology Cen (P) Ltd. vs. CIT [2010] 193 Taxmann 234 (SC)].

assessment order that the payment to ESG is a composite contract and

the assessee needs to apply to Assessing Officer u/s 195(2), the ld.

counsel for the assessee, relied on Transmission Corpn of AP ltd V

CIT (1999) 239 ITR 587(SC),to state that such an approach to the

concerned authority is available where payer is in doubt of taxability

of the payment in the hands of recipient. In the instant case, the

assessee did was not in doubt.

International, USA is not an income accrued or arise in India as per

section 4,5 &9(1)(vii)(b)r.w. Article 12 of the India -USA DTAA.

defines the Fees for technical services means any managerial,

technical or consultancy services. Whereas, as per Article 12 of India-

USA DTAA, Fees for technical services means technical or consultancy

services. On the joint reading of Explanation 2 and Article 12 of India-

USA DTAA, it is stated thatunder DTAA the managerial services are

missing. Only the technical or consultancy services are given with the

conditions of “make available”of technical knowledge, experience or

skill.

warehouse charges are treated as managerial services under the

Income Tax Act, only the technical or consultancy services are

prescribed in DTAA. As per section 90(2), the income tax Act or DTAA

whichever is more beneficial will be applicable. As the DTAA has

restricted meaning of 'fees for technical services' as compared to the

Income Tax Act, definition as per the DTAA will be applicable in the

said case. Meaning thereby that as no managerial services are in DTAA,

no income is deemed to accrue or arise in India for ESG International.

The AR relied on the decision of Delhi High Court in the case of Steria

India Ltd (2016) 72 Taxmann 1 (Delhi).

USA-DTAA,are not fulfilled for treating the payment made for

warehouse charges as fees for technical services. It is stated that there

is a continuation of services i.e., the assessee is paying the

warehousing charges on yearly basis to ESG International.The Hon'ble

Delhi High Court in CIT vs. Bio-Rad Lab (Singapore) Pte Ltd 155

Taxmann 646 (Delhi) (2024) for the proposition that the continued

provisioning and rendering of services over a substantial period of time

would clearly detract from an assumption that technical or consultancy

services had been ‘made available’.

would not be sufficientfor beingTechnical or consultancy services. It

has to be read alongside and in conjunction with "make available".

Both the rending of service and the skill, knowledge and expertise

being made available are conditions which must be concurrently and

cumulatively satisfied. Mere furnishing of services would not suffice

and a liability of tax would be triggered only if the technical or

consultancy service were coupled with a transfer of the expertise

itself. The AR relied on the Hon'ble Delhi High Court in International

Management Group (UK) Ltd. V CIT [2024] 164 taxmann 225 (Del). It

is submitted that as per the scope of contract as stated [supra] the

functions rendered by ESG International includes day to day

warehousing operations. In the said case the assessee is utilizing the

space for warehousing operation on yearly basis as held in Bio Rad

[supra] that the payment made on yearly basis indicates no technology

has been transferred. The AR submitted that the payment made to ESG

International will not be in the nature of fees for technical services as

per DTAA as no technology was transferred and hence the 'make

available’ conditions are not complied with. So, there is not

requirement of tax deduction in India.

made payment outside India for business or profession carried on by

such person outside India and for the purposes of making or earning

any income from any source outside India. It is submitted that payment

forthe space utilization of warehouse was made to ESG International

USA for the international operation including the services like loading,

unloading of material, inventory management, quality control,

insurance. The assessee is utilizing the space for the delivery of

material through the warehouse to the overseas customers. There is no

business activity in India of ESG International USA. The space charges

were paid outside India for business or profession carried on by

assessee for the overseas operations hence no income is deemed to

accrue or arise in India. Even under the second exception of section

9(1)(vii)(b) to the taxability of FTS paid by a resident, wherein FTS

payable in respect of services utilized for the purpose of making or

earning any income from any source outside India is not an income

within the ambit of section 9 of the Act. The ld AR relied on the

following decisions:

i) International Management Group (UK) Ltd. vs. CIT [2024] 164 Taxmann 225 Delhi) ii) HCI. Singapore Pte. Ltd. v ACIT [2024] 158 taxmann 45 (Delhi-Tri) iii) ITO (International Taxation) v. HCL Technologies [2024] 166 taxmann 193 (Delhi- Tri) iv) QAI India Ltd. v DCIT [2024] 165 Taxmann 118 (Delhi-Tri) v) ACTT v. LX Pantos India (P) Ltd [2024] 162 Taxmann 701 (Delhi-In) vi) Orbit Bearing India (P) Ltd. v. ACIT [2024] 163 Faxmann 112 (Rajkot-Tri)

made in Explanation to section 9 does not nullify the exception

provided in section 9(1)(vii)(b). In other words, even where the non-

resident has provided services outside India and received payment

thereof, the payment would not be deemed to accrue or arise in India,

if the services provided by the non-resident are utilized by the resident

in a business carried on outside India or for the purposes of earning

income from any source outside India. He relied on the following

judgements :

i) International Management Group (UK) Ltd. vs. CIT [2024] 164 Taxmann 225 (Delhi)

ii) CIT v IndusInd Bank Ltd. [2019] 106 taxmann 343/264 Taxmann 190/415 ITR 115 (Bom)

iii) HCL Singapore Pte. Ltd. v ACIT [2024] 158 taxmann 45 (Delhi- Tri)

authorities below.

relevant material on record. Having heard the rival submissions, we

find that the factual matrix of the instant case is that the assessee has

made payment to ESGI, a non-resident independent warehouse service

provider based in USA for providing appropriate warehousing facilities

at its warehouse at USA. ESG International, USA has no business

activity in India. The assessee has made payment for warehousing

charges outside India for business or profession carried on by assessee

for the overseas operations.The issue to be adjudicated is whether

such payment received by the non-resident from the assessee is

exigible to tax in India. In the event the receipt by ESGI is taxable as

deemed income in India, the assessee would be obligated to deduct tax

u/s 195(2).

that we need to analyse section 195 of the Act which reads as under:

(1) Any person responsible for paying to non-resident, not being a company, or to a foreign company, any interest or any other sum chargeable under the provisions of this Act (not being income chargeable under the head salaries shall at the time of credit of such income to the account of the payee or at the time of payment thereof in cash, or by the issue of a cheque or draft or by any other mode, whichever is earlier, deduct income- tax thereon at the rates in force.

(2) Where the person responsible for paying any such chargeable under this Act (other than salary) to non-resident considers that the whole of such sum would not be income chargeable in the case of recipient he may an application in such form and manner to the Assessing Officer to determine in such manner, as may be prescribed the appropriate proportion of such sum so chargeable, and upon such determination,

tax shall be deducted under sub- section (1) only on that proportion of the sum which is so chargeable. [Emphasis Supplied).

provides that TDS u/s 195 is to be made on payment made to non-

resident on i.e., “any other sum chargeable” under the act. We

therefore find force in the assessee argument that the assessee is

required to deduct tax at source only in cases where the remittance

made by the assessee is ‘any sum chargeable’ under section 4, 5 and 9

of the I T Act and that provisions of sections 90, 91 and DTAA would

also have to be considered. This view is supportedby the decisionby

the Hon'ble Supreme Court in GE India Technology Cen (P) Ltd. vs.

CIT [2010] 193 Taxmann 234 (SC)] which held as follows:

“The payer is bound to deduct TDS only if the tax is assessable in India. If tax is not so assessable, there is no question of tax being deducted.”

composite contract, the assessee needs to apply u/s 195(2) only in the

event where payer is in doubt of taxability of the payment in the hands

of recipient. This view is supported by the decision of Transmission

Corpn of AP ltd V CIT (1999) 239 ITR 587(SC), which held as under:

“..195(2) provides a remedy by which a person may seek a determination of the appropriate proportion of such sum so chargeable where a proportion of the sum so chargeable is liable to tax. The said sub-section gets attracted only in cases where the payment made is a composite payment in which certain proportion of payment has an element of income chargeable to tax in India. The words ‘such sum’ clearly indicate that 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.”

International, USA is an income accrued or arise in India as per section

4,5 &9(1)(vii)(b)r.w. Article 12 of the India -USA DTAA, we need to

examine the relevant provisions of section 9 and Article 12 of the

DTAA. The same is reproduced below:

Section 9(1)(vii)(b)- Income by way of fees for technical services payable by- a. ….. b. a person who is resident, except where the fees are payable in respect of services utilized in a business or profession carried on by such person outside India or for the purposes of making or earning any income from any source outside India. [Exception Clause]

Explanation 2 of section 9(1)(vii)(b) For the purposes of this clause, fees for technical services means any consideration (including any lump sum consideration) for the

rendering of any managerial, technical or consultancy services (including the provision of services of technical or other personnel) but does not include consideration for any construction, assembly, mining or like project undertaken by the recipient or consideration which would be income of the recipient chargeable under the head salaries.

Explanation of section 9 For the removal of doubts, it is hereby declared that for the purposes of this section income of a non-resident shall be deemed to accrue or arise in India under clause (v) or (vi) or (vii) of sub- section (1) and shall be included in the total income of the non- resident, whether or not. - (i) the non-resident has a residence or place of business or business connection in India or (ii) the non-resident has rendered services in India [Emphasis Supplied)

Article 12 India - USA DTAA Fees for included services [FIS] 12(4)- For purposes of this Article, "fees for included services" means payments of any kind to any person in consideration for the rendering of any technical or consultancy services (including through the provision of services of technical or other personnel) if such services: a. ……

b. make-available technical knowledge, experience, skill, know- how, or processes or consists of the development and transfer of a technical plan or technical design.

find that itprovides an exception to the taxability of Fees for technical

service(FTS) paid by a resident, wherein FTS payable is in respect of

services utilized for the purpose of making or earning any income

from any source outside India. In the instant case, the assessee made

payment made to ESG International USA for the space utilization of

warehouse, outside India, for the international operation andfor the

delivery of material through the warehouse to the overseas customers

of the assessee. The ESG International, USA has no business activity in

India. We therefore are of the considered opinion that the payment

made by the assessee to ESG International, USA is not an income within

the ambit of section 9 of the Act.We are supported in our findings by

the following decisions:

i) International Management Group (UK) Ltd. vs. CIT [2024] 164 Taxmann 225 (Delhi) ii) HCI. Singapore Pte. Ltd. v ACIT [2024] 158 taxmann 45 (Delhi-Tri)

we find that the condition of “managerial” services do not find any

mention in the Article 12 of the said DTAA. There is a restrictive

definition of FTS provided in DTAA and it will, on account of the

provision of section 90(2) of the Act, have precedence over the wider

definition provided in Explanation 2 of section 9(1)(vii) which includes

managerial, technical or consultancy services. We are therefore with

the assessee’s contention that even if the warehouse charges paid by

the assessee are treated as ‘managerial services’ under the Income

Tax Act, the payment received by the ESG International cannot be

considered as deemed income that has accrued or arisen in India as

DTAA incorporates only the ‘technical’ or ‘consultancy’ services and

does not prescribes the ‘managerial’ services as FTS. The view is

supported by the decision of Delhi High Court in the case of Steria

India Ltd (2016) 72 Taxmann 1 (Delhi).

“19. The next question that arises is concerning the extent to which the benefit under the India-UK DTAA can be made available to the assessee. As already noticed the definition of fee for technical services' occurring in article 13(4) of the Indo-UK DTAA clearly excludes managerial services. What is being provided by SF to the assessee terms of the Management Services Agreement is managerial services. It is plain that once

the expression 'managerial services' is outside the ambit of 'fee for technical services', then the question of the assessee having to deduct tax at source from payment for the managerial services, would not arise, It is therefore, not necessary for the Court to further examine the second part of the definition, viz, whether any of the services envisaged under article 13(4) of the Indo-UK DTAA are 'made available’ to the assessee by the DTAA with France. [Emphasis Supplied)

France is similarly worded as in Article 12 of the Indo-USA DTAA. We

therefore are of the considered view that the payment made to ESGI is

outside the ambit of fees for technical services as the USA-India DTAA

do not provide for ‘managerial’ services as FTS. We therefore hold that

there did not deemed to accrue or arise in India any income for ESGI

and hence there is no requirement of tax deduction u/s 195 of the Act

on such payment.

Available” conditions, as per USA-DTAA, are not fulfilled for treating

the payment made for warehouse charges as fees for technical

services. We find that the assessee is paying the warehousing charges

on yearly basis to ESG International which indicates no technology has

been transferredand hence the 'make available’ conditions are not

complied with. Therefore, the decision of the Hon'ble Delhi High Court

in CIT vs. Bio-Rad Lab (Singapore) Pte Ltd 155 Taxmann 646 (Delhi)

(2024) squarely applies that the continued provisioning and rendering

of services over a substantial period of time would clearly detract from

an assumption that technical or consultancy services had been ‘made

available’. On this account also the payment made to ESGI do not fall

under the description of FTS and accordingly we hold that there is no

requirement of tax deduction u/s 195 of the Act in India for such

payment. In that view of the matter, Ground No. 7 to 9 of the assessee

is allowed.

ITA No. 8081/DEL/2018 [A.Y 2013-14]

already been dealt by us hereinabove and decided in favour of the

Revenue and against the assessee. Respectfully following the same, we

direct accordingly.

been discussed and decided by us in favour of the assessee and against

the Revenue hereinabove while dealing with Ground No. 7 to 9 in A.Y

2012-13. Respectfully following the same, we order accordingly.

noticed that the assessee has claimed expenditure of Rs 1,25,533/- for

foreign travelling pertaining to AY 2012-13 which was disallowed by the

AO. The CIT(A) held that as the expense related to prior period,

sustained the addition.

previous year, hence may be allowed in the AY 2012-13.

relevant material on record. Having heard the rival submissions, we

find in the factual matrix of the instant case, there is no reason to

interfere with the order of the CIT(A). Ground Nos. 4is therefore

dismissed.

facts relating to this issue are that the Assessing Officer noticed that

the assessee has claimed expenditure for foreign travelling of its

Directors in connection with two of its subsidiaries, namely ASSAG

and ZVD, amounting to Rs. 15,55,239/- pertaining to A.Y 2012-13. The

Assessing Officer disallowed 30% of Rs. 15,55,239/- on adhoc basis i.e.,

Rs 4,66,572/- of the foreign travel expensesas the assessee failed to

prove the benefit which has accrued to it on account of foreign

travelling.

upheld the finding of the Assessing Officer.

the assessee stated that ASSAG is a Swiss based Company, subsidiary of

the appellant. It is stated that its core competencies include

developing, producing customized solutions based on mechanical

transmissions and in rotating applications. It is submitted that the

appellant is having Joint Venture (JV) company and JV's role was to sell

the appellant and subsidiary products like their components and

transmissions making Tooling Machine in Russia.Hence, as the

Subsidiary/ JV were formed to advance the business interest of the

appellant, the said travelling expenditure expense may be allowed.

Supreme Court in the case of SA Builders, submitted that the holding

company advances borrowed money to a subsidiary and the same is

used by the subsidiary for some business purposes, the holding

company would ordinarily be entitled to deduction of interest on its

borrowed loans. The ld. counsel for the assessee also relied upon the

decision of the Hon'ble Madras High Court in the case of Elgi

Equipment Ltd 20 Taxmann 142.

below.

relevant material on record. Having heard the rival submissions, we

find force in the contentions of the ld. counsel for the assessee. The

ld. CIT(A) has admitted that the said expense has been incurred for

subsidiary company and the joint venture. We find that the ld DR has

not controverted the claim that the directors of the assessee

undertook foreign travel for the selling the products of the JV and the

subsidiary. This would, in our opinion, naturally advance the business

interest of the assessee and there is commercial expediency in

undertaking such travel. In view of this and following the decision of

the Supreme Court in S.A.Builders, we direct the AO to delete this

addition of foreign travel of the directors. The ground no 5 is allowed.

2513/- on account of professional tax has not been pressed on the

smallness of the amount. The same is dismissed as not pressed.

appeal of the assessee is partly allowed.

ITA No. 2893/DEL/2018 [A.Y 2014-15]

been discussed and decided by us hereinabove while dealing with

Ground No. 7 to 9 in A.Y 2012-13 in favour of the assessee.

Respectfully following the same, we order accordingly.

14,09,369/- made by the Assessing Officer towards irrecoverable taxes

claimed by the assessee.

amount of 14,09,369/- under the head irrecoverable taxesin relation to

excise duty on sales return,debited by the assessee is wrongly claimed.

the ld. CIT(A) observed that the same cannot be claimed as business

loss for tax purposes as the excise duty is part and parcel of

manufacturing activity which has not been refunded by the Excise

Department.

excise duty on sales return. It is stated that the excise duty was paid

earlier when the goods were manufactured. However, in case of sales

return, though the assessee was eligible for reverse Cenvat credit of

the excise duty so paid at the time of manufacture under the existing

excise regime, the same was denied by the excise department. It was

argued that the same was considered as cost to the company and

consequently the same was charged to profit and loss account. It was

further submitted that no claim of excise duty was received from the

Excise Department subsequently. The ld. counsel for the assessee

further stated that where payment of excise has been made, MODVAT

credit constituted an expense u/s 37 of the Act. The ld. counsel for

the assessee relied upon the decision in the case of CIT Vs. Samtel

India Ltd 43 Taxmann 104(Delhi). and Mohan Spinning Mills 27

Taxmann.com 332 [Chandigarh Tri].

below.

relevant material on record. Having heard the rival submissions, we

find force in the contentions of the ld. counsel for the assessee. We

note that the assessee has paid the excise duty on the raw materials

for the goods manufactured at the time of manufacturing. When the

goods are returned, the assessee does not get back the excise duty

paid on the raw materials. Such a payment on account of excise duty

has to be allowed as a deduction u/s 37(1) as the same is incurred for

the business purpose. This proposition was allowed by the hon’ble

Delhi High Court in the case of Samtel India (supra). The AO’s method

of adding back the non-reversed excise duty to WIP once the sales

return takes place, is not correct as when the goods are received back

on return, excise duties are not reversed by the Excise Department.

Followingthe decision of Samtel India (2014) 43 Taxmann 104(Delhi),

we therefore direct the AO to delete the addition on account of

irrecoverable taxes. The ground no 2 is allowed.

appeal of the assessee is allowed.

ITA No. 4716/DEL/2018 [A.Y 2015-16]

solitary issue pertains to Ground No. 1 relating to FTS – Ware house

charges has already been discussed and decided by us hereinabove in

favour of the assessee while dealing with Ground No. 7 to 9 in A.Y

2012-13. Respectfully following the same, we order accordingly.

ITA No. 7366/DEL/2019 [A.Y 2016-17]

already been discussed and decided by us hereinabove in favour of the

assessee while dealing with Ground No. 7 to 9 in A.Y 2012-13.

Respectfully following the same, we order accordingly.

traveling expenses. The CIT(A) held that it was not ascertainable from

the evidence that the same is exclusively for business purpose.

not allowed. He argued that firstly the Books of accounts needs to be

rejected and relied on PCIT v R.G. Buildwell Engineers Ltd. [2018] 99

Taxmann 284 (SC). He further stated that there is no Specific finding

by the AO with regard to disallowance and relied on ACIT vs. Mitsui &

Co India (P) Ltd [2023] 155 Taxmann 19 (Delhi- Tri). The ld AR also

pointed out that the expense is to be proved as bogus expenditure -

before disallowance and relied on Sheo Bhagwan Goel v ACIT [2022]

139 Taxmann 259 (Raipur-Tri). Similarly, he stated that Mere

estimation of disallowance under facts and circumstances is not

permissible and relied on J.J. Enterprises vs. CIT 254 ITR 216 (SC). Th

ld AR finally submitted that Company Assets used for personal purpose

by employees are allowed and relied on Sayon ji Iron &Engg Co. [2002]

121 Taxmann 43 (Gujarat).

relevant material on record. Having heard the rival submission, we find

considerable force in the assessee argument. We are of the considered

view that where the expense incurred is not under doubt and the same

is incurred for the business purposes, the same is required to be

allowed. We accordingly direct the AO to delete the ad hoc addition on

account of travelling expenditure. The ground no 4 and 5 is allowed.

on account of Gift and present.

relating to gift and personal expenses have no relation to business

activity and accordingly made disallowance of the same.The ld. CIT(A)

observing that no breakup of the same was submitted, and the

assessee could not explain how the gift articles given to auditors is for

business purposes, partly allowed the claim and confirmed Rs. 93,040/-

.

expenditure incurred is incidental to his trade for the purpose keeping

the trade going is an allowed expenditure. For this contention, he

relied on the decision of the Hon'ble Supreme Court in the case of

Delhi Safe Deposit Co. Ltd. [133 ITR 756] (SC). The ld. counsel for the

assessee relied on the decision in the case of CIT v

ChandulalKeshavlal& Co 38 ITR 601 wherein it has been held that “If

the expenditure is incurred for the purpose of trade of the assessee

and it does not matter thatpayment may enure for the benefit of third

party, is allowed.” The ld AR also relied on the case of ACIT vs.

Chhattisgarh Steel & Power Ltd. [2023] 156 Taxmann 606 (Raipur-Tri),

where it has been held that gift expenses claimed by assessee-

company related to and incurred for purpose of its business which were

duly reflected in books of account were allowable as business

expenditure.

relevant material on record.Having heard the rival submission, we find

considerable force in the assessee argument. We are of the considered

view that where the expense incurred is not under doubt and the same

is incurred for the business purposes, the same is required to be

allowed. We accordingly direct the AO to delete the addition on

account of Gift and present. The ground no 6 is allowed.

supporting proof to establishthe genuineness of the claim on account

of garden expenses to the tune of Rs. 24,52,573/-, disallowed

proportionate amount @ 25%.The ld. CIT(A) partly allowed this ground

of appeal holding that the ld. counsel for the assessee has not been

able to establish that the entire expenses are incurred for business

purposes and restricted the disallowance to 10% of Rs. Rs. 25,52,573/-.

be allowed as the same is for business purpose u/s 37(1). The ld AR

relied upon the decisions in the case of Modi Spg. &Wvg. Mills Co Ltd.

[1993] 202 ITR 708 (Delhi) and CIT v. Torrent Pharmaceuticals Ltd.

[2013] 29 Taxmann 405 (Gujarat).

relevant material on record. Having heard the rival submission, we find

considerable force in the assessee argument. We are of the considered

view that where the expense incurred is not under doubt and the same

is incurred for the business purposes, the same is required to be

allowed. We accordingly direct the AO to delete the addition on

account of Garden expense. The ground no 7 and 8 is allowed.

ITA No. 1008/DEL/2019 [A.Y 2012-13]

the Act.

penalty on account of addition made on account of allocation of HQ

expense of Rs 4,79,486/-; allocation of bank loan and processing

charge of Rs 3,27,223/- and addition of FTS of 99,98,079/- on the

grounds of assessee having furnished inaccurate particular of

income.The AO relied upon the decision of the Hon'ble Supreme Court

in the case of Union of India and another Vs. Dharmendra Textiles 306

ITR 277 and Atul Mohan Bindal 317 ITR 1 wherein it has been held that

mens rea need not be established before imposition of penalty u/s

271(1)(c) of the Act.

CIT(A) deleted the penalty on account of allocation of HQ expense of

Rs 4,79,486/- and allocation of bank loan and processing charge of Rs

3,27,223/-. The CIT(A), however, relying upon Explanation 1 to section

271(1)(c), upheld the penalty on addition of FTS of 99,98,079/-.

relevant material on record and perused the materials on record. The

substantiveaddition on account of payment made to ESGI as FTS of

99,98,079/- has been deleted by us in AY 2012-13

hereinabove.Considering the facts of the case, we take recourse in the

legal dictum of ‘sublatofundamento, cadit opus’, meaning thereby,

that in case the foundation is removed, the super structure falls. Since

the foundation [assessment] has been removed, the super structure

i.e. penalty must fall. Once the basis of a proceeding is gone, all

consequential acts, actions, and orders would fall to the ground

automatically. We, therefore hold that the decision of the CIT(A),

confirming the penalty on account of payment made to ESGI as FTS is

unsustainable and direct the Assessing Officer to delete the penaltyu/s

271(1)(c) of the Act for AY 2012-13. The ground no 1 to 3 is allowed.

years are decided as below:

ITA No. 1009/DEL/2015 [A.Y 2011-12] is partly allowed.

ITA No. 6332/DEL/2016 [A.Y 2012-13] is partly allowed.

ITA No. 8081/DEL/2018 [A.Y 2013-14] is partly allowed.

ITA No. 2893/DEL/2018 [A.Y 2014-15] is allowed.

ITA No. 4716/DEL/2018 [A.Y 2015-16] is allowed

ITA No. 7366/DEL/2019 [A.Y 2016-17] is allowed.

ITA No. 1008/DEL/2019 [A.Y 2012-13] is allowed.

The order is pronounced in the open court on 29.11.2024.

Sd/- Sd/-

[VIKAS AWASTHY] [NAVEEN CHANDRA] JUDICIAL MEMBER ACCOUNTANT MEMBER

Dated: 29th November, 2024.

VL/