ACIT, NEW DELHI vs. SH. HEMANT SACHDEV, NEW DELHI

per Article 15 of the DT AA. It is correct that the definition of professional services is an inclusive, not exhaustive, one, and could include the sort of consultancy and advisory services carried out by the appellant's firm. But to my mind, the activities would fall within the meaning of 'business profits' as per Article 7 of the DT AA, wherein clause 7 reads-

".

Article 7 renders liable to tax the profits of the enterprise i.e. profits derived from the activities of the permanent establishment in the Contracting State.

6.2 It is to be understood that a resident taxpayer is liable to taxation in India on global income, regardless of the place of accrual or receipt thereof. However, the tax laws of certain foreign countries also provide for the taxation in that country of the income which actually accrues or arises or is received in that country although the assessee may not be resident in that country. This would result in a part of the income suffering tax, both in India and the country, where the income arose or accrued. Similarly a non-resident in India is taxable on the income accruing in India in addition to this income being liable to tax in their country of residence, on worldwide income principle. Taxing jurisdictions provide relief from double taxation by entering into a Double - Taxation Avoidance Agreement, such as the Convention between the Government of the USA and the Government of India for the avoidance of double taxation. CBDT Circular no. 333 dated 02.04.1982 makes it clear that the provisions of the treaty will prevail over the provisions of the Act, in case of a conflict. Thus, there cannot be any doubt that the appellant is entitled to the protection from double taxation, when he is liable to tax in India on account of residence, and liable to tax in the USA where the source of income is situated.

There is also no doubt that the income in question has suffered taxation in the USA, being derived from a place of business in the USA and activities carried out therefrom, and that too at the US tax rate of 48.35%. Hence, the appellant, as per the provisions of Article 25(2)(a) of the DTAA, would be allowed a deduction from tax on the income which has been taxed in the USA, "an amount equal to the income tax paid in the USA, whether directly or by deduction. Hence, if the income was to be added in the taxable income of the appellant, there would be no tax payable, as credit has to be allowed for taxes deducted in the USA.

After considering all the above facts, and the provisions of law, it is held that the addition made of Rs.l,16,12,023/- is not justified, and is deleted. Hence, the appellant succeeds in grounds of appeal nos. 1 and 2.”

7. At ground no. 3, the appellant has contested the disallowance of 25% of foreign travel expenses. I have examined the details of expenditure incurred which are claimed to have been provided to the assessing officer vide submission dated 29.12.2009. The appellant has also produced details of purchases made from companies in the countries visited. Considering the purchases made of Rs.4,27,88,689/-, the travel expenditure of Rs.14,01,331/- does not appear excessive. Moreover, the assessing officer has not pointed out any defects in the bills/vouchers relating to travel, or found that it was in the nature of personal expenditure. It is held, therefore, that no cogent material exists for disallowance of 25% of the expenditure claimed. The It disallowance ofRs.3,50,332/- is accordingly deleted.

9. At ground no. 5, the issue is of disallowance of business promotion expenses, on items of expenditure held to be capital in nature. The appellant has produced the purchase bills concerned, and it is seen that the bill of Rs. 41,552/- dated 18.10.2006 consists of 13 items, including one microwave oven for Rs. 4,400/-, one music system, ten phones, etc. The bill of Rs. 32,600/- dated 4.11.2006 is for 4 pieces of mobile phones, and not one, as assumed by the AO. The appellant has submitted that these items were purchased for festival gifting to clients, which were necessary in the interest of promotion of his business, and were normal business expenditure. It is apparent that the expenditure concerned has not created capital assets, and the numbers of items purchased indicate that they are intended for gifts. Considering the explanation offered by the appellant, the expenditure is held to be revenue in nature, and the addition made of Rs. 74,152/- is deleted.

10. The final ground pertains to disallowance u/s 40A(3) of payment made in cash to a club of Rs.50,0001-. The appellant has produced the details of payment by cheque no. 940406 dated 29.08.2006 drawn on Citibank for the club membership. Disallowance u/s 40A(3) was clearly not called for, and in any case, could only have been made at 20% of the payment, and not of the entire amount. The appellant has explained that the club membership was a necessary business expenditure for purposes of meeting and entertaining his clients and foreign suppliers. The addition of Rs.50,000/- u/s 40A(3) is found to be unfounded and without merit, and is deleted.”

8.1 On perusing the above finding of the ld. CIT(A), with regard to ground no. 1, we note that there is no doubt that the income in question has suffered taxation in the USA, being derived from a place of business in the USA and activities carried out therefrom, and that too at the US tax rate of 48.35%. Hence, the assessee, as per the provisions of Article 25(2)(a) of the DTAA, would be allowed a deduction from tax on the income which has been taxed in the USA, "an amount equal to the income tax paid in the USA, whether directly or by deduction. Hence, if the income was to be added in the taxable income of the assessee, there would be no tax payable, as credit has to be allowed for taxes deducted in the USA. After considering all the above facts, and the provisions of law, Ld. CIT(A) has rightly held that the addition of Rs.1,16,12,023/- was not justified, therefore, the Ld. CIT(A) has rightly deleted the addition in dispute, which does not need any interference on our part, hence, we uphold the order of the Ld. CIT(A) on the issue in dispute and accordingly, we dismiss the ground no. 1 raised by the Revenue.

8.2 With regard to ground no. 2, we find that the assessee has contested the disallowance of 25% of foreign travel expenses. The details of expenditure incurred which are claimed to have been provided to the Assessing Officer vide submission dated 29.12.2009.

The assessee has also produced details of purchases made from companies in the countries visited. Considering the purchases made of Rs.4,27,88,689/-, the travel expenditure of Rs.14,01,331/- does not appear excessive. Moreover, the Assessing Officer has not pointed out any defects in the bills/vouchers relating to travel, or found that it was in the nature of personal expenditure. Therefore, the Ld. CIT(A) has observed that no cogent material exists for disallowance of 25% of the expenditure claimed. Therefore, the Ld. CIT(A) has rightly deleted the addition in dispute, which does not need any interference on our part, therefore, we uphold the order of the Ld. CIT(A) on the issue in dispute and accordingly, we dismiss the ground no. 2 raised by the Revenue.

8.3 With regard to ground no. 3, we find that issue of disallowance of business promotion expenses, on items of expenditure held to be capital in nature. On this issue, the assessee has produced the purchase bills concerned, and it appears that the bill of Rs. 41,552/- dated 18.10.2006 consists of 13 items, including one microwave oven for Rs. 4,400/-, one music system, ten phones, etc. The bill of Rs. 32,600/- dated 4.11.2006 is for 4 pieces of mobile phones, and not one, as assumed by the AO. The assessee has submitted that these items were purchased for festival gifting to clients, which were necessary in the interest of promotion of his business, and were normal business expenditure. Hence, it is apparent that the expenditure concerned has not created capital assets, and the numbers of items purchased indicate that they are intended for gifts.

Considering the explanation offered by the assessee, the expenditure was rightly held as revenue in nature, and the addition of Rs. 74,152/- was rightly deleted by the Ld. CIT(A), which does not need any interference on our part, therefore, we uphold the order of the Ld. CIT(A) on the issue in dispute and accordingly, we dismiss the ground no. 3 raised by the Revenue.

8.4 With regard to ground no. 4, we find that this ground relates to disallowance u/s 40A(3) of payment made in cash to a club of Rs.50,000-. We note that the assessee has produced the details of payment by cheque no. 940406 dated 29.08.2006 drawn on Citibank for the club membership. Disallowance u/s 40A(3) was clearly not called for, and in any case, could only have been made at 20% of the payment, and not of the entire amount. The assessee has explained that the club membership was a necessary business expenditure for purposes of meeting and entertaining his clients and foreign suppliers.

Therefore, the Ld. CIT(A) has rightly observed that the addition of Rs.50,000/- u/s 40A(3) was found unfounded and without merit, and was rightly deleted, which does not need any interference on our part, therefore, we uphold the order of the Ld. CIT(A) on the issue in dispute and accordingly, we dismiss the ground no. 4 raised by the Revenue.