DCIT 2(2), MUMBAI vs. MORGAN STANLEY INDIA CAPITAL P.LTD, MUMBAI

Date of Hearing :04.10.2017 Date of Pronouncement :11.10.2017 O R D E R

Per Mahavir Singh, Judicial Member

“2. (a) "On the facts and in the circumstances of the case and in law, the Ld. CIT(A) has erred in deleting the addition of Rs.9,26,983/- without appreciating that the addition u/s. 14A was made as per the provisions contained in Section 14A read with Rule 8D and therefore the same ought to have been upheld." (b) "On the facts and in the circumstances of the case and in law, the Ld. CIT(A) has erred in deleting the addition of Rs.9,26,983/- without appreciating that the addition u/s. 14A was made as per calculation mechanism provided under Rule 8D thereby ignoring the fact that the disallowance is investment based and not income based."

Morgan Stanley India Capital P Ltd challenged the deletion of disallowance made by the CIT(A) of interest under Rule 8D(2)(ii) amounting to ` 9,26,983/-

(Amount in Rs) Particulars As at 31st March 2009 As at 31st March 2008 Sources of Fund Shareholders’ Funds 598,81,50,200 30,81,63,039 Loan Funds 512,43,51,193 Total 1111,25,01,393 30,81,63,039 Application of Fund Fixed Assets 2213,16,446 Investments 200 28,72,12,364 Deferred Tax Assets 23,15,586 14,63,383 Net Current Assets 1079,84,83,664 1,94,87,292 Debit Balance in Profit & Loss A/c 9,03,85,497 Total 1111,25,01,393 30,81,63,039 In view of the above, the learned counsel stated that in this year investment is only of ` 200/-, whereas in the immediately preceding year investment was to the tune of ` 28,72,12,364/- and in this year the shareholders fund i.e. assessee’s own funds are to the tune of ` 598,81,50,200/- According to him this is more than the investment made and in view of the decision of Hon’ble Bombay High Court in the case of HDFC Bank Ltd [2014] 366 ITR 505 (Bom.) the presumption is that the assessee has made investment in instruments which gives tax free income is out of own funds and, hence, no disallowance can be made by invoking the provisions of Morgan Stanley India Capital P Ltd section 14A of the Act read with Rule 8D. When a query was put forward to learned senior Departmental Representative, he fairly conceded that the issue is covered by the decision of Hon’ble Bombay High Court in the case of HDFC Bank Ltd (supra). Respectfully following the decision of Hon’ble Bombay High Court in the case of HDFC Bank Ltd (supra), we confirm the order of the CIT(A) deleting the disallowance on this issue. This ground of the Revenue is dismissed.

3. (a) "On the facts and in the circumstances of the case and in law, the Ld. CIT(A) has erred in deleting the disallowance made u/s. 40(a)(ia) for failing to deduct tax at source while making payment of administrative and general expenses ignoring the fact that such disallowance was correctly made as tax was not deducted by the assessee and therefore there was a default on its part as per the clarification (Answer No.30) given by Board's Circular No. 715." (b) "On the facts and in the circumstances of the case and in law, the Ld. CIT(A) has erred in relying upon the judgment of Delhi High Court in the case of C.I.T. Vs. Fortis Health Care Ltd. overlooking the fact that the facts and circumstances of the case are clearly distinguishable."

Morgan Stanley India Capital P Ltd companies after deduction of tax at source from these payments in accordance with the provision of Act. The assessee company was asked to provide information in this respect to which it submitted as under:

Name of the party Nature of payment Sec Rate of Amount Amount of TDS including TDS (%) service tax 1. Morgan Stanley Administrative support 194C 2.93% 106645538 3121620 India Fin. Services cross charge Pvt. Ltd 2. Morgan Stanley Administrative support 194C 2.27% 1218071 27651 Investment cross charge Management Pvt Ltd 3. Morgan Stanley Data Centre Suport, IT- 194J 11.33% 2303590 260997 Advantage HR and other Services Pvt. Ltd. infrastructure support 4. Morgan Stanley Administrative support 194C 2.27% 68561689 1556350 India Company cross charge Pvt. Ltd. The Assessing Officer noticed that the assessee has deducted TDS u/s. 194C of the Act on three services, whereas in the case of Morgan Stanley Advantage Services Pvt. Ltd. TDS have been deducted u/s. 194J of the Act. Accordingly, he disallowed a total amount of ` 17,64,25,298/- by invoking the provisions of section 40(a)(ia) of the Act. Aggrieved, the assessee preferred appeal before the CIT(A).

Morgan Stanley India Capital P Ltd 9. We have heard the rival contentions and have gone through the facts and circumstances of the case. We find that the assessee has deducted TDS on payments u/s. 194C of the Act. It is merely an allegation of the Assessing Officer that TDS should have been deducted u/s. 194J of the Act @10%. According to the Assessing Officer this is a short deduction of TDS. The Assessing Officer disallowed the expenses by invoking the provisions of section 40(a)(ia) of the Act. We find that this issue is squarely covered in favour of the assessee by the decision of Hon’ble Calcutta High Court in the case of S K Tekriwal (supra), wherein the Hon’ble High Court has reproduced the findings of the Tribunal as under:

“… We are of the view that the conditions laid down under section 40(a)(ia) of the Act for making addition is that tax is deductible at source and such tax has not been deducted. If both the conditions are satisfied then such payment can be disallowed under section 40(a)(ia) of the Act but where tax is deducted by the assessee, even under bona fide wrong impression, under wrong provisions of TDS, the provisions of section 40(a)(ia) of the Act cannot be invoked. Here, in the present case before us, the assessee has deducted tax under section 194C(2) of the Act and not under section 194-I of the Act and there is no allegation that this TDS is not deposited with the Government account. We are of the view that the provisions of section 40(a)(ia) of the Act has two limbs one is where, inter alia, the assessee has to deduct tax and the second where after deducting tax, inter alia, the assessee has to pay into the Government account. There is nothing in the said section to treat, inter alia, the assessee as defaulter where there is a shortfall in deduction. With regard to the shortfall, it cannot be assumed thatthere is a default as the deduction is not as required by or under the Act but the fact is that this expression, 'on which tax is deductible at source under Chapter XVII-B and such tax has not been deducted or, after deduction has not been paid on or before the due date specified in sub-section (1) of section 139'. This section 40(a)(ia) of the Act refers only to the duty to deduct tax and pay to the Government account. If there is any shortfall due to any difference of opinion as to the taxability of any item or the nature of payments falling under various TDS provisions, the assessee can be declared to be an assessee in default under section 201 of the Act and no disallowance can be made by invoking the provisions of section 40(a)(ia) of the Act. Accordingly, we confirm the order of the Commissioner of Income-tax (Appeals) allowing the claim of the assessee and this issue of the Revenue's appeal is dismissed."

Morgan Stanley India Capital P Ltd 2. We find no substantial question of law is involved in this case and, therefore, we refuse to admit the appeal. Accordingly, the appeal is dismissed. Similarly, Hon’ble Gujarat High Court in the case of CIT vs. Prayas Engineering Ltd. in Tax appeal No.1237/2014 dated 17.11.2014, deleted the disallowance on similar facts. Respectfully following the decision of Hon’ble Calcutta High Court in the case of S K Tekriwal (supra) and that of Hon’ble Gujarat High Court in the case of Prayas Engineering Ltd (supra), we confirm the order of the CIT(A) deleting the disallowance.

Order pronounced in the open court on this day of 11 October 2017.