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Income Tax Appellate Tribunal, “G” BENCH, MUMBAI
Before: SHRI C.N. PRASAD, JM & SHRI RAJESH KUMAR, AM Shri P P Jayaraman Shri G Nantha Kumar
2 and 658/Mum/2015 आदेश / O R D E R PER RAJESH KUMAR, A. M: These cross appeals are directed against the order dated 10-11-2014 passed by the ld. CIT(A)-21, Mumbai. These appeals for the sake of convenience are clubbed together, heard together and are being disposed of in this consolidated order. We will first take up ITA No.658/Mum/2015:-
The issue raised in the first ground of appeal is against the deletion of Rs.1,68,49,000/- by the ld.CIT(A) under section 40(a)(ia) of the Income Tax Act, 1961 (hereinafter called the Act) on the ground that no TDS has been deduced by the assessee.
At the outset, the ld.AR brought to our attention that the identical issue has been decided by the Co-ordinate Bench of the Tribunal in assessee‘s own case in (AY: 2009-10), dated 15.04.2016
Brief facts of the case are that the AO during the course of assessment proceedings noticed that the assessee has charged to the profit and loss account Rs.168.49 lakhs on account of secondment charges under the head ―Personnel cost‖. The AO called upon the assessee to justify the allowability of secondment charges having regard to the Joint Venture partners, namely GAIL and British Gas which was replied by the assessee vide letter dated 6.2.2013. The assessee 3 and 658/Mum/2015 submitted before the AO that the secondment charges were on the employees seconded by GAIL and British Gas to work in Mahanagar Gas Ltd and therefore there was no mark up in the payments made to them which was proved by the assessee by furnishing a copy of the secondment agreement and other evidences which provided that all taxes in India of the employees seconded to Mahanagar Gas Ltd have been deducted from the salary and paid to the Government tax exchequer. The assessee also produced before the AO a letter dated 1.9.1997 issued by the ITO (TDS), authorizing the assessee not to deduct tax at source. Further on the basis of said letter the AO held that the said exemption was granted only in respect of financial year 1997-98 and accordingly came to the conclusion that the assessee failed to deduct TDS on the secondment payment of Rs.1,68,49,000/- and the expenses were not allowable under section 40(a)(ia) of the Act and accordingly disallowed the same and added to the total income of the assessee. Aggrieved by the order of the AO, the assessee preferred an appeal before the first appellate authority, who allowed the appeal of the assessee by observing and holding as under :
―3.1 I have considered the facts and circumstances of the case. This issue had come into consideration of CIT(A) in A.Y. 2009-10 wherein in para 2.3 it is held as under : "2.3 I have considered the facts of the case. The appellant has entered into the secondment agreement with British Gas (BG) by which provides their employees for working under the supervision of Mahanagar Gas Co. Ltd. to assist them in their business activity and salary payment to this secondment employee will be borne by BG.
4 and 658/Mum/2015 This amount will be reimbursed by the Mahanaqar Gas Co.Ltd. without any mark up. The secondment employees will be working under the supervision of Mahanagar Gas Co. Ltd. and if Mahanagar Gas Co. Ltd. is not satisfied with the with the performance of these employees BG may replace him with another suitable employee. The employer and employee relationship exist between BG and secondment employee and not with the Mahanagar Gas C0.Ltd. Similar issue has arisen in the case of IDSoI1DS Software Solutions (India) Pvt Ltd. vs. ITO (International Taxation), ITAT Bangalore 'A' Bench (2009) 122 TTJ 410 (Bang) wherein it was held as under : "Salary paid by US companu under secondment agreement to managing director who was appointed by US company and seconded to its Indian subsidiary having already suffered tax at source, reimbursement of said salary by assessee to IDS need not suffer tax, at source‖ In this instant case also salary to the secondment employee was paid by the BG and its reimbursement by Mahanagar Gas Co. Ltd. to without any mark up. 'BG for the payment of salary to secondment employee had also deducted tax at source and paid to the Departtment.This is similar to the case mentioned above. Further to it in the case of CIT V/s Kotak Securities Ltd. Appeal 3111 of 2009 the Hon‘ble Bombay High Court held as under : ―Held, the present case, the assessee had bona fide reason to believe that the tax was not deductible at source under section 194J of the Act and, therefore, the Assessing Officer was not justified in invoking section 40(a)(ia) of the Act and disallowing the business expenditure by way of transaction charges incurred by the assessee. The transaction charges paid by the assessee to the stock exchange constitute "fees for technical services" covered under section 194J of the Act and, therefore, the assessee was liable to deduct tax at source while crediting the transaction charges to the account of the stock exchange. However, since both the Revenue and the assessee were under the bona fide belief for nearly a decade that tax was not deductible at source on payment of transaction charges, no fault can be found with the assessee in not deducting the tax at source in the assessment year in question and consequently disallowance made by the Assessing Officer under section 40(a)(ia) of the Act in respect 5 and 658/Mum/2015 of the transaction charges cannot be sustained. Hence appeal disposed off” In the instant case also appellant and Department were under the bona fidebelief that no tax is deductible by Mahanagar Gas CO. Ltd. for the reimbursement to the BBG for secondment employee as held by the Bombay High Court in the above mentioned case. Applying the above two decisions, it is clear that Mahanagar Gas Co. Ltd. need not deducts-the TDS for reimbursement for secondment employee for payment to B'G as BG has deducted the TDS and paid to the Department. In view of the above reasons, the addition made by the A.O. is deleted. This ground of appeal is allowed."
The ld.AR at the beginning of the hearing submitted that the ground taken by the revenue is covered in favour of the assessee in assesse‘s own case in and hence the ground taken by the revenue should be dismissed.
The ld. DR relied on the order of the AO.
We have carefully considered the rival submissions and perused the material placed before us including the orders of the authorites below and the case law relied upon by the assessee. We find from the material placed before us and the decision of tribunal relied upon by the AR that the issue raised by the revenue covered is in favour of the assessee in assessee‘s own case in ITA No. 1945/Mum/2013(supra). The operative part is as under : ―6. Now we go through the case law cited by the Ld. counsel for the assessee in the case of CIT Vs. Kotak Securities Ltd. (2012) 340 ITR 333 (Bom), wherein it has been held as under:
6 and 658/Mum/2015 ―31. The object of introducing section 40(a)(ia), as explained in the Central Board of Direct Taxes Circular No. 5, dated July 15, 2005—See [2005] 276 ITR (St.) 151 ), is to augment compliance with the TDS provisions in the case of residents and curb bogus payments. Moreover, though section 194J was inserted with effect from July 1, 1995, till the assessment year in question that is the assessment year 2005-06 both the Revenue and the assessee proceeded on the footing that section 194J was not applicable to the payment of transaction charges and accordingly, during the period from 1995 to 2005 neither the assessee has deducted tax at source while crediting the transaction charges to the account of the stock exchange nor the Revenue has raised any objection or initiated any proceedings for not deducting the tax at source. In these circumstances, if both the parties for nearly a decade proceeded on the footing that section 194J is not attracted, then in the assessment year in question, no fault can be found with the assessee in not deducting the tax at source under section 194J of the Act and consequently, no action could be taken under section 40(a)(ia) of the Act. It is relevant to note that from the assessment year 2006-07 the assessee has been deducting tax at source while crediting the transaction charges to the account of the stock exchange though not as fees for technical services but as royalty. It is further relevant to note that it is not the case of the Revenue that on account of the failure on the part of the assessee to deduct tax at source, the Revenue has suffered presumably because, the stock exchange has discharged its tax liability for the assessment year in question. In any event, in the facts of the present case, in view of the undisputed decade old practice, the assessee had bona fide reason to believe that the tax was not deductible at source under section 194J of the Act and, therefore, the Assessing Officer was not justified in invoking section 40(a)(ia) of the Act and disallowing the business expenditure by way of transaction charges incurred by the assessee.
Accordingly, we hold that the transaction charges paid by the assessee to the stock exchange constitute "fees for technical services" covered under section 194J of the Act and, therefore, the assessee was liable to deduct tax at source while crediting the transaction charges to the account of the 7 and 658/Mum/2015 stock exchange. However, since both the Revenue and the assessee were under the bona fide belief for nearly a decade that tax was not deductible at source on payment of transaction charges, no fault can be found with the assessee in not deducting the tax at source in the assessment year in question and consequently disallowance made by the Assessing Officer under section 40(a)(ia) of the Act in respect of the transaction charges cannot be sustained. We make it clear that we have arrived at the above conclusion in the peculiar facts of the present case, where both the Revenue and the assessee right from the insertion of section 194J in the year 1995 till 2005 proceeded on the footing that the assessee is not liable to deduct tax at source and in fact immediately after the assessment year in question, i.e., from the assessment year 2006-07 the assessee has been deducting tax at source while crediting the transaction charges to the account of the stock exchange.‖ 7. We also find that the issue is covered by the decision of ITAT, Bangalore bench in the case of IDS Software Solutions (India) (P) Ltd. Vs. ITO (International Taxation) (2009) 122 TTJ 410 (Bang), wherein the facts discussed as regards to where the assessee entered into a ‗secondment agreement‘ with a US Company and obtained the services of an employee and the question arose whether the reimbursement by the assessee to the US Company of the salary paid by the US Company was chargeable to tax as ―fees for technical services‖ . It was held that though the US Co was the employer in a legal sense but since the services of the employee had been seconded to the assessee and since the assessee was to reimburse the emoluments and it controlled the services of the employee, it was the assessee which for all practical purposes was the employer. Accordingly, the salary reimbursed to the US Co was not chargeable to tax. Though the person deputed by the US Co was a technical person, the consideration paid under the secondment agreement was not ―fees for technical services‖ because the fact that the seconded employee was responsible and subservient to the payer (assessee) and was required to also act as officer or authorized signatory or nominee of the assessee made it inconsistent with an agreement for providing technical services. In view of the above facts and circumstances, we dismiss this issue of revenue‘s appeal.‖ 8 and 658/Mum/2015 Respectfully following the order of co-ordinate bench, we dismiss the ground no.1 raised by the revenue.
The issue raised in ground no.2 is against the deletion of Rs.30 lakhs made by the AO on estimated basis on account of compensation from customers without appreciating the facts that the assessee was following mercantile system of accounting, and hence, the compensation receivable from the customers was required to be accounted on accrual basis.
The ld. AR submitted before us that the co-ordinate bench in (supra) vide para 9 of the order sent back the issue to the file of the AO to decide the issue in term of the principles laid down in the order passed in ITA No. 6832/Mum/2011 for Asst. Year 2008-09 dated 27.02.2013. The ld. AR submitted that the issue be restored back to the file of the AO to be decided in accordance with the said decision. On the other hand , the ld. DR also fairly agreed to the submissions of the ld.AR.
We find that the identical had come up before the Tribunal and the Tribunal has sent back the issue to the file of the AO for re-adjudication in term of the principles laid down in the order passed in for Asst. Year 2008-09 vide order dated 27.02.2013. The relevant operative para of the said order is reproduced below :
9 and 658/Mum/2015 ―9. At the outset, ld. counsel for the assessee stated that this issue has already been remitted back to the file of AO in the immediate preceding year exactly on identical facts by Tribunal in assessee‘s own case in for Asst. Year 2008-09 vide order dated 27.02.2013 and on similar line if the issue is remitted back to the file of the AO that will suffice the matter. On query from the bench, ld. Sr. DR has not objected to the stand of the assessee. Hence, we direct the AO to decide the issue in term of the principles laid down in the order passed in ITA No. 6832/Mum/2011 for Asst. Year 2008-09 vide order dated 27.02.2013. This issue of revenue‘s appeal is allowed for statistical purposes‖ 11. In view of the above, we are inclined to send the issue back to the file of the AO to decide the matter afresh in terms of ratio laid down in ITA No. 6832/Mum/2011(supra). Accordingly, the ground is allowed for statistical purposes.
Appeal of the assessee is partly allowed. The only issue raised in all the grounds of appeal
is against the upholding the order of the AO confirming the disallowance made u/s 14A which was calculated by taking the entire financial expense including bank charges for disallowance under s. 14A of the Act whereas the assessee pleaded that for the purpose of disallowance u/s 14A only interest is to be taken and not bank charges.
13. The brief facts of the case are that during the course of assessment proceedings, the AO noted that the assessee has earned exempt income of Rs.4.27 crores which was claimed as exempt and also suo mottu 10 and 658/Mum/2015 disallowed Rs.52.13 lakhs as expenses attributable to the earning of the said income. The AO, however was not satisfied with the claim of the assessee and accordingly invoked the provisions of section 14A r.w.rule 8D and re-calculated the disallowance of Rs.10.47 lakhs apart from the suo motto disallowance.
During the appellate proceedings before the first appellate authority, the ld.CIT(A) also dismissed the appeal of the assessee after rejecting the contentions of the assessee by observing and holding as under : . ―6.1 The facts of the case were that the A.O. had disallowed Rs.10,47,OOO/- u/s.14A of the Act. 6.2 During appellate proceedings the appellant submitted as under: "The learned AO wrongly took the entire financial expenses including bank charges for disallowance under section 14A instead of only the interest figure. This has led to the increase in disallowance. The entire calculation sheet of 14A is enclosed for your ready reference. The interest amount as per the Schedule 0 is Rs.8,13,419/- plus Rs. 64,34,152/ - totaling to Rs.72,48,204/ - instead of Rs.1,87,34,611/- as taken by the Ld.AO. What has been done is to take the entire schedule of interest and finance charges instead of only the interest amounts. We request you to kindly give directions to the Ld AO to amend the amount taken for disallowance.‖ 6.3 I have considered appellant's submissions. The appellant's main contention is that A.O. had included bank charges in computation of sec.14A which appellant objects. When we examine sec.2(28A) interest includes other charges paid for the interest. Bank charges is also to be counted as part of the interest, hence, I find no error in the A.O's computation. This ground of appeal
is dismissed. ― 11 and 658/Mum/2015
15. The ld. AR vehemently, submitted before that the FAA has misinterpreted the provisions of section 2(28A) of the Act. The ld AR took us through the details of ―Interest and Finance Charges‖ in schedule –O at page 3 of the paper book and submitted that the AO has wrongly included the amount of bank charges of Rs.114.27 loss as appearing in the above referred Schedule for the purposes of calculating disallowance under section 14A of the Act , whereas as per the Act only interest part was required to be taken for the purpose of disallowance. The ld. AR further stated that since the bank charges are not part of the interest expenses and therefore required to be not taken into account for calculating the disallowance. Finally the ld counsel of the assessee prayed that the addition as sustained by the FAA should be deleted as being contrary to the provisions of the Act . The ld. DR, on the contrary relied upon the orders of the authorities below.
16. We have carefully considered the rival contentions and perused the material placed before us including the orders of authorities below. We find that the AO has included the bank charges of Rs.114.27 loss as part of the interest expenses for the purpose of working out the disallowance u/s 14A r.w.r.8D(2)(ii)of the Rules thereby making additional disallowance of Rs.10,47,000/-which is over and above the assessee‘s suo-mottu disallowance of Rs.52.13 lakhs being expenditure for earning the 12 and 658/Mum/2015 exempt income by the assessee. It was submitted before us by the ld.AR that the bank charges were deducted by the banks for the various transactions/collections of money entered into in the ordinary course of business and in no way constituted the part of interest expenses as per the provisions of section 2(28A) of the Act. A perusal of provision of section 2(28A) reveals that the interest includes only interest payable on the money borrowed and included any service fees or other charges in respect of money borrowed. For the sake of better understanding, we reproduce the provisions of section 2(28A) of the Act. : ―(28A) "interest" means interest payable in any manner in respect of any moneys borrowed or debt incurred (including a deposit, claim or other similar right or obligation) and includes any service fee or other charge in respect of the moneys borrowed or debt incurred or in respect of any credit facility which has not been utilised ;‖