ITO, NEW DELHI vs. M/S. MODI APOLLO INTERNATIONAL GROUP PVT. LTD., NEW DELHI

Per L.P. Sahu, Accountant Member:

Out of the above three appeals, the appeals for the assessment year

2007-08 have been filed by the assessee and Revenue against the order dated

01.11.2010 whereas the appeal for A.Y. 2009-10 is filed by Revenue against

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order dated 31.07.2013 of learned CIT(A)-VIII, New Delhi. The issues involved

in both the appeals of the Revenue are common. The grounds raised by

assessee and Revenue in appeals for A.Y. 2007-08 are as under :

Grounds raised by Revenue :

2.1. The Ld. CIT(A) ignored the findings recorded by the AO and the fact that the assessee did not deduct tax at source as the nature of payment is technical skill on the part of recipient.

3.1 The Ld. CIT(A) ignored the fact that the payment has been made for bestowing the brand name and technology of M/s Apollo International Inc. U.S.A.

4.1 The Ld CIT(A) ignored the findings recorded by the A.O. and the fact that the assessee cold not file evidence to substantiate its claim of bad debts.

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5.1 The Ld. CIT(A) ignored the findings recorded by the A.O. and the fact that the assessee could not file evidence to substantiate its claim of expenses on account of repair and maintenance during the course of assessment proceedings.

Ground raised by the Assessee:

“1. The learned CIT(A) has grossly erred on the facts of the case and in law in upholding disallowance of Rs.20,80,553/- made u/s. 40(a)(ia) made on account of late deposit of TDS.”

company of Apollo International Inc USA and group concern of Shri K.K. Modi.

It is engaged in the business of educational and coaching institutes. It filed its

return of income declaring nil income. The case was processed u/s. 143(1)

and later on, it was picked up for scrutiny. During the scrutiny proceedings,

the Assessing Officer found that it has paid Rs.40,43,614/- towards evaluation

charges to Western International Universities. In this regard the assessee

explained before the AO that it has made payments towards reimbursement of

expenses incurred by the foreign universities on evaluating the credentials of

students at the time of admission and also during the progress of their course

in India and as such, these expenses do not include any element of profit in it.

Hence, no TDS is deductible on such payments. The Assessing Officer noted

that evaluating the credentials of students requires some technical skills.

Therefore, reimbursement of expenses paid by the assessee is covered under

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the subject matter of Fee for Technical services. Since these payments have

been made to non-residents, therefore, he applied section 195 of the IT Act

and accordingly disallowed the entire payments.

2.1 The AO further noted that a sum of Rs.35,87,067/- has been paid to

Apollo International Inc towards royalty payments at 5% of gross tuition

Revenue after netting off. In this regard, the assessee submitted that it has

been paid as per their agreements dated 30.01.2003 between M/s. MAIGPL &

M/s. Apollo International Inc and TDS was also deducted. Therefore, it is a

Revenue Expenditure. The AO did not accept the submissions of the assessee

and he involved section 35A (1) of the Act and treated it as Capital

Expenditure and the AO disallowed 25% out of total payment of royalty of

Rs.35,87,067/-.

2.2 The next dispute is with regard to disallowance of Rs.3,26,466/- made

on account of bad debts written off. During the course of assessment

proceedings, the Assessing Officer called for the details of bad debts requiring

the assessee to justify how such debts became bad. In this regard, the AR of

the assessee submitted before the AO that fee of the students remained

outstanding in spite of repeated attempts by sending reminders to the

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students. He also explained the amended provisions of section 36(1) before

the AO. The AO narrated the circumstances under which bad debts can be

considered and accordingly he did not accept the submissions of the assessee

and disallowed the bad debts written off in the books of account of the

assessee.

2.3 During the course of assessment proceedings, the AO further noted that

a sum of Rs.21,51,747/- was also debited under the head ‘repair &

maintenance’ (others). In this regard the AO asked for the details of the

expenses incurred, but the assessee did not comply with the requirements of

the Assessing Officer. However, the assessee filed a chart of expenses vide

their letter dated 06.07.2009 at para 11 of total 11 heads, but he did not file

the details of repair and maintenance. The AO, therefore, disallowed the

expenditure of Rs.21,51,747/- claimed for repair and maintenance. Aggrieved

by the order of the Assessing Officer, the assessee appealed before the first

appellate authority and the ld. CIT(A) allowed the appeal of the assessee.

that the ld. AO made good order and it does not require any interference. He

further submitted that the evaluation charges paid to the non-resident, is

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subject matter of TDS. If any expenses are paid to the non-resident, section

195 of the Act is invoked. He submitted that the assessee has submitted only a

list of repair and maintenance expenses which requires detailed examination

with supporting evidence.

submitted a written synopsis, which reads as under :

“In terms of the provisions of section 195 of the Act, no tax is required to be deducted from the payment to non-resident, which are not chargeable to tax in India. (Refer GE India Technology Centre vs CIT: 327 ITR 456)

The payments made by assessee as reimbursement of evaluation charges was not taxable, since such reimbursements does not have any element of income therein. Reliance in this regard is placed on following decisions:

• CIT vs Tejaji Farsaram Kharawalla Ltd.: 61 ITR 95 (SC) • CIT v. Industrial Engineering Projects Private Limited: 202 ITR 1014 (Del.) • Van Oord ACZ India P. Ltd. v. CIT: 323 ITR 130 (Del.) -ft>n C fc**ft2 • CIT v. Fortis Healthcare ltd.: 181 Taxman 257 (Del.) ~ fa \^ • CIT v Dunlop Rubber Co Ltd.: 142 ITR 493 (Calcutta) ^ • CIT v, SG Pgnatale: 124 ITR 391 (Guj.) • CIT v. Siemens Aktiongesellschaft: 310 ITR 320 (Bom.) • Mahindra and Mahindra Ltd. v. DCIT: 313 ITR 263 (AT)(Mumbai) (SB) • HNS India VSAT Inc. vs. DDIT: 95 ITD 157 (Del ITAT) • Compagnie Francaise D'Etudes Et De Construction vs. IAC: 8 ITD 215 • DCIT vs. Lazard India (P) Ltd.: 41 SOT 72 (Mum ITAT)

ii. Reimbursement not in the nature of FTS Even otherwise, it is respectfully submitted, the aforesaid payment is not in the nature of 'Fees for included services' as defined in Article 12

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of DTAA between India and USA ('the Treaty') since there is no rendering of technical services which "make available" technical knowledge, experience, skill, know-how or processes, or consist of the development and transfer of a technical plan or technical design and therefore, the same cannot be covered under Article 12 of the India-USA Tax Treaty.

Reference, in this regard, is made to the decision of Hon'ble Supreme Court in the case of CIT vs. M/s Kotak Securities Ltd. (SLP © No. 19907/2012).

Reliance is also placed on the following decisions:

• DIT vs Guy Carpenter and Co. Ltd.: 207 Taxman 121 (Delhi) • CIT vs De Beers India Minerals (P) Ltd.: 208 Taxman 406 (Karnataka) • Raymond Limited Vs DCIT: 80 TTJ 120 (Mum. ITAT)

Since, the aforesaid payment made to Apollo International Inc USA does not involve making available of technical knowledge, the same does not constitute fee for included services in terms of Article 12 of the DTAA with USA and, therefore, no tax is required to be deducted at source from such payment under section 195 of the Act and the disallowance made by the assessing officer, therefore, has rightly been deleted by the CIT(A) and the payment is not liable to tax in India under section 195 of the Act.

The assessee had paid royalty to Apollo International Inc. pursuant to the agreement dated 31.01.2003 for use of brand name, curriculum, course material fee, etc. The payment of royalty is linked with the gross tuition revenue derived from programs or courses based on the educational offerings made by Apollo and its affiliates relating to Western International University programs in India, i.e., 5% of gross tuition fees. Therefore, royalty was directly linked to the earning of tuition revenue. The complete grants to be offered by Apollo and its affiliates are spelled out in Article 1 of the agreement and consideration for the grant is mentioned in Article 2 of the agreement.

It is respectfully submitted that the payment of royalty in terms of the agreement did not result in creation of a new asset or an enduring advantage in the capital field.

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Reliance in this regard is placed on following decisions, wherein, it has been held that royalty paid on a running basis, as percentage of revenues is a revenue expenditure:

• CIT vs. Sharda Motor Industries Ltd: 319 ITR 109 (Del.) • Climate Systems India Ltd, vs. CIT : 319 ITR 113 (Del.) • G4S Securities System India (P) Ltd. v. CIT : 338 ITR 46 (Del.) • CIT v. Lumax Industries Limited: 173 Taxman 390 (Del.) • CIT v J.K. Synthetics Ltd: 309 ITR 371 (Del.) - SLP dismissed vide order dated 16.11.2009 in S.L.P.(C) No.17346 of 2009 • CIT v. Ciba India Ltd: 69 ITR 692 (SC) • Alembic Chemical Works Co. Ltd. vs. CIT: 177 ITR 377 • CIT v Shriram Pistons and Rings Limited -CC 12154/2009 (Supreme Court) (dismissing the SLP filed by the revenue against the order of the Delhi High Court in ITA No. 167/2008) • Shriram Refrigeration Industries Ltd. v, CIT: 127 ITR 746 (Del) • Triveni Engineering Works Ltd. v. CIT: 136 ITR 340 (Del) • CIT vs. Prem Heavy Engineering Works P. Limited: 282 ITR 11 (Del.) • Climate Systems India Limited v CIT; 319 ITR 113 (Del.) • Shriram Pistons and Rings Limited v CIT: 219 CTR 228 (Delhi) • Shriram Pistons and Rings Limited v CIT: 307 ITR 363 (Delhi) • CIT vs. Essel Propack: 325 ITR 185 (Bom) • CIT vEicher Motors Ltd: 163 Taxmann 556 (M.P.) • CIT V. Munjal Showa Ltd. : 329 ITR 449 (Del) • CIT v. Denso India P. Ltd.: ITAO 16/2008 (Del.) (HC) • CIT v. EKL Appliances Ltd : ITA No 1069/2011 (Del)(HC) • Honda Siel Cars v. ACIT : 111 TTJ 630 (Del) • CITv. Modi Revlon(P) Ltd: 210 Taxman 161(MAG.) (Del) • CIT v. Artos Breweries Ltd : [2013] 215 Taxman 80 (AP HC) • Fenner (India) Ltd v. ACIT : [2012] 139 ITD 406 (Chennai) • Hero Honda Motors Limited v. DCIT : ITA Nos. 716 to 718/Del/2008 • Hero MotoCorp Ltd v. ACIT: ITA No. 5130/Del/2010 (Del)

In view of the aforesaid, considering all the relevant factors, it will kindly be appreciated that the expenditure on royalty represented revenue expenditure which is allowable as a deduction in the computation of the income of the assessee. Hence, the action of assessing officer in disallowing the payment of royalty as revenue expenditure is not sustainable.

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The assessee is in the business of providing education to students and in some cases part of the fee remains outstanding and in spite of repeated attempts by sending them reminders remain due. Therefore an amount of Rs. 3,26,466 outstanding have been written off as bad debts.

It would be pertinent to point out here that under the pre-amended provisions of section 36(1)(vii) of the Act, the assessee was required to establish that the debt which is being written off had become bad in the year in which it was written off. This entailed considerable litigation because satisfaction in such matters was quite subjective. In order to reduce the scope of litigation, an amendment was brought with effect from 1.4.89 in section 36(1)(vii) of the Act, by the Finance Act, 1987 to the effect that it would be sufficient compliance with the provisions of that section if the debt was written off in the books of accounts.

Reliance is placed on the following decisions:-

• TRF Ltd. v. CIT: 323 ITR 397 (SC) • CIT vs Auto Pins India Ltd.: 208 Taxman 5 (Delhi) • CIT v. Autometers Limited: 292 ITR 345 (Del) • CIT vs. Coates of India Limited: 232 ITR 324 (Cal) • CIT vs. Brilliant Tutorials (P) Ltd: 292 ITR 399 (Mad) • Nandlal Vithaldas v. CIT: 180 ITR 609 (Bom) • CIT v. Star Chemicals (Bombay) P. Ltd.: 220 CTR 319 • DIT v. Oman International Bank SAOG: 313 ITR 128 (Bom)

Reliance is placed on the recent Circular No. 12/2016 issued by CBDT clarified that it is sufficient for the assessee to write off the debts as irrecoverable in the books of accounts to claim deduction.

Having regard to the aforesaid decisions of the Courts it is amply clear that it has been left to the prudence of the businessman to judge whether the debt has become bad or irrecoverable and the decision to write off a debt is considered as sufficient ground for allowing the claim of bad debt. Hence, the action of assessing officer in disallowing Rs. 3, 26,466 on account of bad debts as revenue expenditure is not sustainable.

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As stated supra, the details in respect of repair and maintenance expenses were duly filed by assessee before the assessing officer during the course of assessment proceedings. Accordingly, the contention of the assessing officer that such details were not filed before him was incorrect and disallowance made by him on said basis is therefore, unsustainable.”

record, we find that the order of the ld. CIT(A) on the issues involved in

grounds Nos. 2 to 4.1 needs no interference. The ld. CIT(A) has disposed of

these issues observing as under :

“4. I have carefully considered the submissions made on behalf of the appellant company and the findings recorded by the Id.AC. On consideration, I find that in terms of shareholders agreement dated 13* August, 2001 certain responsibilities have been accepted by Apollo International and the appellant company which are more specifically described in Article-5 of the agreement, Further, in terms of Article-5.4 the compensation for services to be rendered by Apollo International to the appellant company and vice a versa has been defined as under:-

"Compensation for services: Modi shall be responsible for providing Indian based management expertise, expertise of local environment in India, relations with government, banks, other Indian authorities. Apollo Shall be responsible for providing American based management expertise, expertise of higher education operations, the principal technology and knowhow and licensing of relevant corporate name, trademark or logo. The parties shall mutually agree from time to time on;- the fees payable to Modi and Apollo for making these services available. In addition, Apollo and Modi shall be reimbursed actual costs incurred by the shareholder concerned in providing and making available the services aforesaid to the company subject to such costs, charges and expenses being vouched and verified and approved by the Board; provided, however, that in computing the fees payable to the Apollo under this section regard shall be had to the fact that Apollo and its affiliates (including university of Phoenix, WIU, etc) will be eligible

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for fees, royalties and reimbursement of costs and expenses incurred u/s 5.1 thereof, and likewise in computing the fees payable to Modi under this section regard shall be had to the fact that Modi and its affiliates (including Medicare) shall be eligible for fees, royalties, costs and expenses for providing reimbursement of costs and expenses u/s 5.2 thereof.”

As per Article 5.1 the responsibilities on the part of the Apollo International includes –

a. Primary supervision and implementation responsibility for academic, operational and administrative aspects of all Apollo related components of the company.

b. Primary supervision and implementation for the curriculum and curriculum development and curriculum review and assessment as it pertains to the Apollo related components of the company or any other components that make use of university of Phoenix, Western International University or Apollo Group, INC based programs and services.

c. Primary supervision and implementation for faculty and staff training

d. Primary supervision and implementation for the training of enrolment and academic counselors of any components of the company that makes use of Apollo Programs and services

e. Identification of the timing and management of Apollo's IPO

f. Primary supervision and implementation responsibility for negotiating.....

In addition, the Apollo was also to provide to the company the educational expertise and curriculum development in order to develop new courses, degree programmes and certificates etc.

Thus, it may be seen that the reimbursement of evaluation charges was (a) in terms of expressed provisions in the shareholders agreement, (b) it was for services to be rendered in terms of Article 5.1 of the agreement, (c) it was mutually agreed between the Apollo International

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and the appellant company to reimburse each other towards the services rendered by them in terms of Article 5, and (d) the reimbursement was to be made as per actual cost incurred by either side in providing and making available the services as listed in Article 5. Further, the reimbursement was subject to further condition was subject to further condition that such costs, charges and expenses were duly vouched and verified and approved by the Board. Therefore, I am of the view that there was no element of income embedded in the reimbursement of evaluation charges of Rs 4043614.

As regards, the finding of the AO that the identification of suitable candidates for admission requires technical expertise, I find that AO has not elaborated as to what kind of technical expertise was involved in the process of rendering of assistance to enable the appellant company to identify the suitable candidates for admission and during the duration of the course. Therefore, I have no hesitation in holding that (a) there was no element of profit embedded in the reimbursement and taxable under the IT Act, (b) no technical expertise/services were required for rendering assistance in identification of the suitable candidates for admission and. (c) there was no liability of deduction of tax u/s 195 of the IT Act, 1961. Accordingly, the disallowance made by the Id.AO is being deleted.”

“5.5 I have carefully considered the submissions made on behalf of the appellant company and the findings recorded by the ld. AO. On consideration, I find myself in agreement with the ld. Counsel for the appellant that there is no similarity between the cases of Jonas Wood Head and Sons & CIT Vs Southern Switchgear Ltd and facts of the appellant's case. The AO has not pointed out as to how the payment of royalty was on capital account as no discussion in this regard has been made by him. On the other hand, the appellant has demonstrated that the payment of royalty was with reference to the gross fee collected by it and the same was to be paid for seeking access to the curriculum and course material of Apollo International and therefore, there was no capital element involved in it. Therefore, the disallowance made by the AO is being deleted.”

“6.3 I have carefully considered the submissions made on behalf of the appellant and on consideration, I find that in the course of assessment proceedings, the appellant has filed details of the bad debts, vide its

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letter dated 13th August, 2009 and the AO has not recorded any adverse finding that the debts in question were not actually written off. The only reason assigned by the AO is that the assessee has not substantiated the fact that the amounts in question have actually become irrecoverable. In my view, the stand taken by the ld. AO is not in accordance with the amended provisions of law. As per the amended law, the amounts in question should have been actually written off by the appellant during the year under consideration. Therefore, the disallowance in question is being deleted.”

maintenance expenses of Rs.21,51,747/-, the assessee had details of repair

and maintenance expenses placed before the AO, which is at paper book page

No. 50 to 53. In this regard, the observation of the ld. CIT(A) seems to be

correct. The finding of the ld. CIT(A) is as under :

“7.2. In the course of appellate proceedings, it has been argued by the ld. Counsels for the appellant that the finding of the ld. AO that the requisite details were not made available to him is factually incorrect. It is submitted that the requisite information was filed by the appellant company vide its letter dated 30.11.2009. In support, a copy of letter dated 30.11.2009 along with detailed ledger accounts of repairs and maintenance of computers, office furniture, electrical equipments, office maintenance and repair and maintenance of car has been filed before me. On a perusal of the individual ledger accounts I find that all the items claimed by the appellant are of routine nature including AMC charges for computer systems, day to day expenses of office and office equipment, purchase of stationery and repair of electrical items, purchase and replacement of small parts of office furniture and equipments etc. No major item of expenditure has been claimed in either of the accounts. In view of the aforesaid fact situation, I do not find myself in agreement with the ld.AO that the expenditure of Rs 2151747 was not either explained or the same was not admissible. Accordingly, the disallowance of Rs 2151747 is also being deleted.”

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CIT(A). Therefore, the appeal of the Revenue for assessment year 2007-08 is

liable to be dismissed. Since all the issues involved in appeal of the Revenue

for A.Y. 2009-10 are identical as discussed in appeal for A.Y. 2007-08,

therefore, the conclusions reached by us in appeal for A.Y. 2007-08 would

equally follow in appeal of the Revenue for A.Y. 2009-10. Accordingly, the

appeal of the Revenue for A.Y. 2009-10 also deserves to be dismissed.

during the assessment proceedings, the Assessing Officer noted that the

assessee has deducted TDS on certain payments, but the same has been

deposited late. Therefore, the AO disallowed the total expenses of

Rs.20,80,553/- and added back to the income of the assessee u/s. 40(a)(ia) of

the Act. Section wise details are as under:

Contractor Exp u/s. 194C Rs. 320410 Professional Exp. u/s. 194J Rs. 1710143 Salary Exp. u/s 192 Rs. 50000 Total Rs. 2080553

The CIT(A) for want of details of payment made in subsequent years as per

section 40(a)(ia), clause A, B, sustained the disallowance made by the AO.

Aggrieved by this order, the assessee is in appeal before the Tribunal.

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book where the details of late deposit of TDS have been mentioned which is

the part of tax audit report at clause 27(b) of Form No. 3CD. He further

submitted that the tax was deducted and deposited late, but before the end of

the Financial Year. Therefore, it is allowable as per section 40(a)(ia) of the

Act.

record, we find that as per records, the details were submitted before the

lower authorities, but they have not commented on such details placed at page

No. 35 of the paper book in tabulation form. It is clear from the said details

that the assessee has deducted TDS and deposited late, but before the end of

the financial year which is allowable u/s. 40(a)(ia). Neither the CIT(A) nor the

AO has given details in his order in this regard. Therefore, it would be proper

to send back the issue to the file of AO for proper verification of the date of

payments, date of deduction and date of deposits of TDS with the government

account and then to decide the issue as per law after giving reasonable

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opportunity of being heard to the assessee. Accordingly, the appeal of the

assessee deserves to be allowed for statistical purposes.

2009-10, are dismissed and the appeal of the assessee For A.Y. 2007-08 is

allowed for statistical purposes.

Order pronounced in the open court on 30.11.2016.

Sd/- Sd/-

(BEENA PILLAI) (L.P. SAHU) Judicial Member Accountant Member

Dated : 30.11.2016. *aks/-

Copy of order forwarded to: (1) The appellant (2) The respondent (3) Commissioner (4) CIT(A) (5) Departmental Representative (6) Guard File By order Assistant. Registrar Income Tax Appellate Tribunal Delhi Benches, New Delhi