ACIT, CHENNAI vs. CARAT LANE TRADING PVT. LTD., CHENNAI

आदेश/ O R D E R

PER S. JAYARAMAN, ACCOUNTANT MEMBER:

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2. M/s. Carat Lane Trading Pvt. Ltd., the assessee, is engaged in trading in jewellery, precious and semi-precious stones and other ornamental items made of precious metals. In the assessment made for assessment year 2012- 13, the AO disallowed Rs. 56,51,905/- for non-deduction of tax u/s. 195/40(a)

/40a(ia), added Rs. 3,17,126/- toward bogus purchase and disallowed Rs. 7,10,666/- & Rs. 73,244/-, PF & ESI payments, respectively, remitted beyond the due date. Aggrieved, theassessee filed an appeal before the CIT (A) and the CIT(A) allowed the appeal . Against the order of the CIT(A) , the Revenue filed this appeal.

4. Non-deduction of TDS:

The assessee company has not deducted TDS on the payments made to foreign partiesfor the services rendered in various foreign destinations and hence, the Assessing Officer disallowed Rs. 56,51,905/-. In this regard the CIT(A) held as under:

“8. I have carefully perused the facts in issue, the reasons based on which the AO has preferred the disallowance / addition, the arguments advanced by the appellant and material on record. The dispute relates to the :-3-: ITA No. 213/Mds/2017 exigibility of tax in relation to the payment made by the appellant to the foreign entity for the services rendered in various foreign destinations. It is in this context that the exigibility of tax to the payment have to be examined as to whether the tax liability is triggered in terms of Sec.9(1)(i) r.w.s.5 of the Income Tax Act.

10. The non-residents to whom payments were made were for 'services which cannot be classified as constituting either managerial or services which are technical in nature within the meaning of s.9(1)(vii) of the Act. The Board's circular NO.715 also clarified that payment to clearing and forwarding agents for carriage of goods is subject to deduction of tax at source u/s 194C while s.194J stipulates deduction of tax at source in respect of professional and technical services. In s.194J the expression "tee for technical services" has been given the same meaning as laid down in Explanation 2 to s.9(1 )(vii).

they are in the nature of the services within the meaning of Sec. 9(1 )(vi) or 9(1 )(vii) being 11 royalty 11 or "technical services". As such the same would be taxable as business profits in the country of residence. It is held therefore that since the payments are not chargeable to tax in India u/s 9(1)(vii) r.w.s. 195, the provisions of s.40(a)(i) will not be applicable. The AO is directed to delete the addition made towards payments made to non residents.”

4.1 The Revenue’s relevant grounds of appeal are as under:

1. The order of the learned CIT(A) is contrary to law, facts and circumstances of the case 2. The learned CIT(A) erred in directing the Assessing Officer to delete the disallowance made u/s.40(a)(i)/40(a)(ia) rws 195 of the LT. Act to the tune of Rs.56,51,905/-. 2.1 The ld. CIT(A) failed to appreciate the fact there was violation of the provisions of section 195 of the IT Act, in as much as the foreign payments were made without deduction of tax at source, and such payments are liable to disallowed u/s. 40(a)(i)/40(a)(ia) of the IT Act. 2.2 The learned CIT(A) ought to have appreciated the fact that the services offered by the foreign entities amounts to services in the nature of managerial, technical or consultancy. 2.3 The learned CIT(A) failed to appreciate that the nature of services rendered by the foreign entities involved managing of web portal, uploading and display of content online which in turn involves technical skill and expertise, falling in the realm of technical consultancy services, within the meaning and scope of Sec.9(1)(vii) of the IT. Act. 2.4 The learned CIT(A) ought to have appreciated that the services rendered by the foreign service providers in the instant case were more in the nature of technical/managerial nature and therefore, the facts of this case is clearly distinguishable from the facts arising in case of CIT vs. Faizaan Shoes P Ltd 367 ITR 155 wherein the Hon'ble jurisdictional High Court has held that commission paid to non-resident Indian will not fall within the meaning of 'fees for technical services'.”

:-5-: ITA No. 213/Mds/2017 4.2 The DR assailed the order of the CIT(A) on the basis of the grounds of appeal and the assessment order. Per contra, the AR submitted that as per the decision of the Supreme Court in the case of Kotak Securities, a payment can be treated as FTS only if the payee renders a special, exclusive or customized service ; however , the assessee has not received any such service from any of the Payees . Further, as per the DTAAs between India and USA,UK and Canada there are ‘Make available Clauses' ; however the Payees have not made available any technical knowledge, know-how etc to the assessee and therefore the alternate submission is thatthe payments to entities in USA, UK and Canada should be allowed . The DTAAs between India and Israel, Ireland and Rumania do not have ‘Make available Clauses'.

However, on the face of it, the payments of Rs 2,65,097 to Face Book headquartered in Ireland for online advertisement and Rs 43,060 to Padiact.com headquartered in Rumania for bulk promotion mails cannot be treated as FTS and therefore these two amounts should also be allowed. The AR primarily contested the payments on three broad categories . a) Non exclusivity and therefore,the following payments are not FTS

Sl.No Name of the Country Amount paid Nature of service foreign country by the provided assessee 1. Facebook Ireland 2,65,097 Online advertisement 2. Linkedin USA 1,46,277 Online advertisement 3. Padiact.Com Rumania 43,060 Bulk promotion Mails

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(b) Though it was a custom made software, since the following entities are of USA origin with which India has a DTAA with ‘Make available clause’ and since these entities have not made available the know how, the following payments are not FTS

Sl.No Name of the Country Amount paid Nature of service foreign country by the provided assessee 1. Constant USA 1,29,344 Publicity Material- Contact Content writers

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(c) In respect of the paymentsmade to Handup Ltd the AR submitted that Israel entered into following protocolon 29.01.1996, which , interalia, contained the following:

“2. The competent authorities of the Contracting States shall initiate the proper procedure to review the provisions of Articles 12 and 13 (Royalties and fees for technical services, respectively) after a period of five years from the date of entry into force of this convention. However, if under any Convention or Agreement between India and any third State which enters into force after 1-1- 1995, India limits its taxation at source or Royalties or Fees for Technical Services or Interest or Dividends to a rate lower or a scope more restricted than the rate or scope provided for in this Convention, the same rate or scope as provided for in that Convention or Agreement on the said items of income shall also apply under this Convention with effect from the date on which the present Convention comes into force or the relevant Indian Convention orAgreement, whichever enters into force later." "3. In respect of paragraph 2 of Article 25, it is understood that if India enters into an Agreement or Convention for the avoidance of double taxation with a third State after 1-1-1995, whereby the difference in the rates of tax between enterprises of a permanent establishment of a company of a country other than India and that of India is removed or reduced, then, a corresponding reduction shall be effected in respect of rates of taxes on profits according to the enterprises of a company which is a resident of Israel." The above two paragraphs were omitted by Notification No. SO 441(E) [No.10/2017 (F .No.500/14/2004-FTD-II)]' dated 14-2-2017, w.e.f. 14-2-2017. However, the two paragraphs are relevant to us as our case pertains to A.Y. 2012-13 which is prior to 14.02.2017.

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The following DTAAs had Make Available Clause inserted after 1.1.1995: 1. India-Netherlands - Make Available clause inserted in 1999 - Amending Notification No.SO 693{E), dated 30-8-1999 w.eJ. 1.4.1997 2. India-Portugal- DTAA entered on 30th April 2000. 0.1 - 3. India-Malta - DTAA entered on 22nd November 1995 .

Therefore, the AR submitted that the assessee can use the shelter of the Make Available Clause in these DTAAs (Netherland, Portugal and Malta) and conclude that FTS paid by the assessee to Handup Ltd, Israel, even though charged to tax as FTS as per DTAA between India and Israel, the same won't be charged to taxation as per Most Favoured Nation Clause mentioned as above.

From the AR’s submissions and on the facts, it is clear that these entities who have rendered the impugned services admittedly have no presence in India by way of permanent establishment and no business connection in as much as that the services were rendered outside India. It would suffice to hold that the basic ingredients to trigger the operation of Sec.9(1)(i) are conspicuous in their absence in the above services as explained by the assessee, supra. The payment(s) made to them would not be exigible to tax unless and until a case has been made out that they are in the nature of the services within the meaning of Sec. 9(1 )(vi) or 9(1)(vii) being “royalty “ or "technical services".

The Revenue could not assail the assessee’s above contentions . Since the :-9-: ITA No. 213/Mds/2017 abovepayments are not chargeable to tax in India u/s 9(1)(vii) r.w.s. 195, the provisions of s.40(a)(i) will not be applicable. The corresponding grounds of the Revenue are dismissed.

The AO received information from the CIT-I, Chennai vide C.No.1278/CIT- 1/2014-15 dated 14.8.2014 that the assessee company has made some bogus purchase entries for AY 2011-12 to the extent of Rs. 3,17,126/-. When the AR was asked to clarify their transactions with Maan Diamonds, it was clarified that they had purchased with Maan Diamonds during earlier years, but no transaction was carried out during the year. This contention was not accepted by him as the entire bogus transactions were admitted by Banwarilal Jain (the person who furnished the entries) in hisstatement recorded u/s.132(4) during the FY 2011-12.

6.1 The CIT(A) the held as under:

“20. I have carefully perused the facts in issue, submissions made by the appellant and material on record. The sole basis of the disallowance made by the AO rested on the statement recorded u/s.132(4) of the IT Act some time during the FY 2011-12 relevant to AY 2012-13 made by one Mr. Banwarilal Jain. Evidently Shri.Banwarilal Jain was providing accommodation entry to several traders and businessmen. Such information was received by the AO from the CIT-I charge vide intimation dated 14.1.2014, the amount involved being Rs. 3,17,126/-. By way of clarification sought from the appellant by the AO, the same were confirmed as transactions validly held with Maan Diamonds during earlier years, but no transaction were carried out during the year. The :-10-: ITA No. 213/Mds/2017 grievance of the appellant is that that the statements and materials relied upon by the AO were not made available nor the opportunity to cross examine Shri. Banwarilal Jain were not made available to the appellant. Notwithstanding the same, the appellant itself denied having any transaction of purchase or otherwise with M/s. Maan Diamonds during the year under consideration in which the disallowance has been made by the AO. The AO has not brought on record any material to show that the purchases accounted for by the appellant during the impugned year included purchase from M/s. Maan Diamonds. The AO ought to have ascertained as to the year (AY) the transaction of Rs.3,17,126/- pertains to especially in view of the assertion that no purchase from M/s. Maan Diamond was made and accounted for by the appellant during the period under consideration. This is relevant juxtaposed with the assertion that no purchases or transactions were made with M/s. Maan Diamonds by the appellant during the year under appeal. The bald statement of one Shri.Banwarilal Jain cannot form the basis of the substantive disallowance from the total purchases accounted for in the absence of material to show that any purchase was attributed to M/s. Maan Diamonds at the first place. The disallowance made by the AO cannot be upheld and hence the plea of the appellant succeeds. This ground of appeal is allowed.”

6.2 The Revenue’s relevant grounds of appeal are as under:

“3. The learned CIT(A) erred in deleting the disallowance made in respect of bogus purchases of Rs.3,17,126/-. 3.1 The learned C!T(A) failed to appreciate that the addition was made based on the findings of the Investigation Wing that the purchases were bogus in nature. 3.2 The learned CIT(A) failed to appreciate that the assessee did not furnish any material evidence to prove that the transaction took place in the earlier A.Y.2011-12.”

6.3 The DR assailed the order of the CIT(A) based on the assessment order and on the above grounds of appeal. Per contra, the AR submitted during the :-11-: ITA No. 213/Mds/2017 assessment proceedings, the assessee has informed the AO by its letter dated 23.03.2015 that the purchase of Rs 3,17,126 was in respect of A.Y. 2011-12 and in the impugned assessment year viz A.Y. 2012-13, there were 'No Transactions' . By its letter dated 24.03.2015, theassessee has enclosed a copy of the purchase bill dated 21.10.2010 which pertains to A.Y.2011-12. The AR clarified that theassesseehas purchased with Maan Industries during earlier years and no transaction was carried during the year. Still , the made this addition. Before the CIT(A}, the assessee has filed details like Receipt Notes, Payment Vouchers, Retail Invoice and bank statement in which the payment of Rs 3,17,126 was cleared. Still the Revenue has raised a ground that 'the assessee did not furnish any material evidence to prove that the transaction took place in the earlier A.Y.2011-12.

7. We heard the rival contentions and gone through relevant material. On the above facts, we do not find any reason to interfere the order of the CIT(A) and hence the corresponding grounds of the Revenue are dismissed.

8. On the disallowance of PF & ESI:

The AO disallowed Rs. 7,10,666/- employees contribution & ESI Rs.

73,244/- which was remitted to Government before the due date and filed return u/s. 139(1). The CIT(A) held as under:

“22. I have carefully perused the facts in issue, submissions made by the appellant and material on record. As regards the disallowance of delayed

:-12-: ITA No. 213/Mds/2017 payment on employees contribution to PF is concerned, it will serve useful purpose to refer to Circular NO.22/2015 dated 17.12.2015 in F.No. 279/Misc./140/ 2015-ITJ. It has been clarified therein, that the Apex Court decision in the case of CIT v. Alom Extrusions Ltd 185 Taxman 416 has been accepted with regard to the employer's contribution to the PF Fund or Superannuation Fund or Gratuity Fund if deposited on or before the due date. No disallowance could be made u/s 438 of the Act. It has also been contribution to Welfare Funds governed by s.36(1 )(va). However, in view of the jurisdictional High Court's decision dated 24.7.2015 in the case of CIT vs. Industrial Security and Intelligence India (P) Ltd in TC (A) NO.585 & 586 of 2015 and MP No.1 of 2015, it has been held therein placing reliance on the Delhi High Court's decision in the case of Aimil Ltd 321 ITR 508, that if the assessee had deposited employees contribution towards PF and ESI after the due date as prescribed under the relevant Act, but before the due date of filing of the return under the Income Tax Act, no disallowance could be made in view of the provisions u/s.43B as amended by Finance Act 2003. Respectfully following the ratio laid down by the Hon'ble High Court, the plea of the appellant is allowed. This ground of appeal is allowed.”

8.1 The Revenue’s relevant grounds of appeal are as under:

“4. The learned C!T(A) has erred in deleting the addition made in respect of employees contribution towards PF & ESI of Rs.7,83,910/- which was remitted beyond the prescribed due dates 4.1 The learned CIT(A) erred in deleting the addition made in respect of delayed remittance of its employees contribution of Provident Fund despite the fact that Circular No.22/2015 dated 17.12.2015 clearly applies to claim of deduction relating employers' contribution and not for employees contribution to welfare funds. 4.2 The learned CIT(A) failed to appreciate that any received sum received on account of employees' contribution to Provident Fund & ESI not remitted within the due date is to be treated as the income of the assessee and taxed in his hands as per provisions of Sec.2(24)(x) of the LT. Act, 1961.”

:-13-: ITA No. 213/Mds/2017 8.2 The DR assailed the order of the CIT(A) based on the assessment order and on the above grounds of appeal. Per contra, the AR submitted that the return was filed on 28.09.2012 and the remittances were made before the due date on filing return. Although, the CIT(A) deleted the disallowancebased on the jurisdictional High Court decisions still the department has filed this appeal.

9. We heard the rival contentions. Since, the CIT(A) has applied the ratio of the jurisdictional High Court, his order in this regard does not require interference. The corresponding grounds of Revenue’s appeal are dismissed.

Order pronounced on Thursday, the 28th day of December, 2017 at Chennai.