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Income Tax Appellate Tribunal, MUMBAI BENCH “K”, MUMBAI
Before: SHRI RAJENDRA & SHRI AMIT SHUKLA
ITA No. : 627/Mum/2015 (Assessment year: 2009-10) DCIT- 5(1)(2), Vs M/s Dominion Diamond (India) Room No. 568, Pvt Ltd (Formerly known as 5th Floor, M/s. Harry Winston Diamond Aayakar Bhavan, (India) Pvt Ltd), M K Road, JE 9010, 9th Floor, Tower J, Mumbai -400 020 Bharat Diamond Bourse, BKC, Bandra (East), Mumbai -400 051 �थयी लेखा सं.:PAN: AAFCA 0652 E अपीलाथ� (Appellant) ��यथ� (Respondent) Appellant by Shri N Padmanabhan : Respondent by : Shri Kirit Kamdar सुनवाई क� तार�ख /Date of Hearing : 07-12-2015 घोषणा क� तार�ख /Date of Pronouncement : 06 -01-2015 आदेश ORDER अिमत शु�ला, �या. स.: PER AMIT SHUKLA, JM: The aforesaid appeal has been filed by the revenue against the impugned order dated 17.11.2014, passed by CIT(A)-9, Mumbai for the quantum of assessment passed u/s 143(3) for the assessment year 2010-11, on following grounds:- “
1. Whether on the facts and circumstances of the case and in law, the Ld. CIT(A) was right in directing the Assessing Officer to delete the disallowance made u/s 37(1) of the I.T. Act without appreciating the fact that the said provisions are in nature of contingent liability, on ad-hoc arrangement which awaits finality ?
2. Whether on the facts and circumstances of the case and in law, the Ld. CIT(A) was right in directing the Assessing Officer to delete the disallowance made u/s 40(a)(ia) of the 2 M/s Dominion Diamond (India) Pvt Ltd (Formerly known as M/s. Harry Winston Diamond (India) Pvt Ltd), I.T. Act without appreciating the fact that the assessee was under an obligation to deduct tax under section 195(1) in respect of payments made ?”
2. The assessee company is engaged in the business of wholesale trading of rough diamonds. The AO noted that, assessee has shown provision for TP Study Report for Rs. 4,41,200/- and provision for TP Accountant Report of Rs. 88,240/-, under the head “legal and professional fees”. In response to show cause notice the assessee submitted that it had obtained services from M/s Price Waterhouse Coopers Pvt. Ltd. and consultancy firm, M/s Price Waterhouse & Co. in respect of yearly compliance to be undertaken u/s 92D. The assessee for the year under consideration had incurred a cost for services obtained in related to the issue of TP accountant report in Form 3CEB and for the services obtained in relation to the preparation TP Study report. Based on the cost incurred by the assessee for similar services for the previous years for Rs. 88,420/- and Rs. 4,41,200/-, a provision has been created for the year under consideration for the similar amount payable to identified payee i.e. PwC P. Ltd. and Price Waterhouse & Co. for the services rendered in relation to the assessment year 2010-11. Further, the assessee has deducted TDS on such payments liable to be made to PWC. Hence, such a provision was fully allowable and no disallowance could have been made u/s 37(1) or u/s 40(a)(ia). However, the AO held that such an amount debited is purely in the nature of provision which cannot be allowed under the Income tax Act. Accordingly, he disallowed Rs. 5,92,440/- as debited by the assessee. He further noted that, the assessee had shown security support charges of Rs. 24,97,038/- under the head “Office expenses”. In response to the show cause notice, as to why TDS has not been deducted, the assessee submitted that it avails operation and security support services from M/s Dominon Diamond Building Services, Canada to help in loss prevention and safety of customers. The services availed are in the nature of maintenance of common security 3 M/s Dominion Diamond (India) Pvt Ltd (Formerly known as M/s. Harry Winston Diamond (India) Pvt Ltd), Dominion group companies. Since section 195 casts an obligation on every person to deduct tax at source from payments made to non-residents, which are chargeable to tax in India which here in this case is not chargeable, under the DTAA, because it mainly provides security support services and does not grant any right to use design or model, plan or process, hence it cannot be treated as payment of “royalty” either in view of the provisions of the Act or as per the provisions of India-Canada-DTAA. However, the AO rejected the assessee’s contention and held that, assessee was liable to deduct TDS as the said amount was taxable under the Act. The AO has however not specified, whether such a payment is on account of ‘royalty’ or on account of ‘fee for technical services’ or is otherwise taxable in view of any specific provisions of the Act or DTAA.
The Ld. CIT(A) so far as disallowance of expenditure aggregating to Rs. 5,92,440/- on account of provisions of TP Study Report and TP Accountant report paid to PWC, held that in view of the nature of mercantile system of accounting, the assessee has to debit all the expenses pertaining to the current year in its P&L account and provision was made on the basis of similar expenditure incurred in the earlier year, therefore, it cannot be said that it has only a guess work or ad-hoc in nature. Accordingly, he directed the AO to delete the said disallowance.
So far as disallowance of Rs. 24,97,038/- u/s 40(a)((ia) on the payment of security support charges to M/s Dominion Diamond Building Services Canada is concerned, the Ld. CIT(A) upheld the contention of the assessee that the payment made to the non-resident company was not taxable in India and hence there was no question of disallowance u/s 40(a)(ia). Further, he held that it is not the case of the AO that the income earned by the Canadian Party from the assessee is taxable in India nor it is the case of payment in respect of “fee for technical services” or in the 4 M/s Dominion Diamond (India) Pvt Ltd (Formerly known as M/s. Harry Winston Diamond (India) Pvt Ltd), nature of “royalty”. Accordingly, he deleted the said disallowance on the ground that assessee was not liable to deduct TDS.
After considering the rival contentions of the parties and on perusal of relevant finding given in the impugned orders, we find that, so far as the issue of disallowance of expenditure aggregating to Rs. 5,92,440/-, it is an undisputed fact that these were the provisions made for ‘TP Study Report’ and ‘TP Accountant Report’ prepared for the current assessment years as per the statutory requirement such a provision for payment was made on the basis of similar amount paid in the earlier year. Since the assessee is following mercantile system of accounting, the expenditure pertaining to current assessment year has to be taken into account and the assessee has rightly debited the expenses pertaining to the current year based on similar payment made in the earlier year. We completely agree with the finding of the CIT(A) that such a provision could neither said to be guess work or ad-hoc in nature. Rather, in these circumstances it is a kind of ascertained liability which is a deductible expenditure. Accordingly, we affirm the order of the CIT(A) on this score.
So far as the disallowance u/s 40(a)(ia) on security charges of Rs.24,97,038/-, it is not in dispute that the said payment has been made to non-resident company, M/s Dominion Diamond Building Services, Canada. Such payments are on account of services availed in the nature of maintenance on common security platform applicable to all the Group companies. Such a security related to services provided by the Candian Company was as below:- i) “Security surveillance services ii) Analysis of unexpected or suspicious occurrences iii) Security audit process to ensure that proper security requirement are in place iv) Emergency communication services and v) Security related technical support services”.
5 M/s Dominion Diamond (India) Pvt Ltd (Formerly known as M/s. Harry Winston Diamond (India) Pvt Ltd), Expenses incurred by the said company towards security surveillance Services provided to the assessee are recharged to the assessee with the mark-up of 5%. The assessee’s case has been that, it has availed benefit and as per the DTAA provisions, the “fee for included services” would be treated rendering of technical, or consultancy services and such services should make available technical knowledge, experience, skill, know-how or processes to the assessee for a development and transfer of technical plan or technical design. Here in this case, there is no make available of any such kind of technical services. Once such a payment do not fall within the category of technical services under the treaty, then it cannot be held that the assessee was liable to deduct TDS u/s 195. Before us, Ld. Counsel also pointed out that, in the assessment year 2011-12, the AO himself has not made any disallowance u/s 40(a)(ia) on similar payment made to the said foreign entity. Thus, under these facts and circumstances of the case process when AO himself has not mentioned as to how such an amount is taxable in India either under the provision of the Act or under the provisions of the DTAA, hence, disallowance made by the AO on the ground that assessee has not deducted TDS cannot be upheld. Accordingly, the finding of the CIT(A) on this score also is affirmed. Accordingly, ground raised by the revenue is dismissed.
In the result, appeal of the revenue stands dismissed. Order pronounced in the open court on 6th January, 2016.
Sd/- Sd/- (राजे��) (अिमत शु�ला) लेखा सद�य �याईक सद�य (RAJENDRA) (AMIT SHUKLA) ACCOUNTANT MEMBER JUDICIAL MEMBER Mumbai, Date: 6th January, 2016 6 M/s Dominion Diamond (India) Pvt Ltd (Formerly known as M/s. Harry Winston Diamond (India) Pvt Ltd), 1) अपीलाथ� /The Appellant. 2) ��यथ� /The Respondent. 3) The CIT(A) -9, Mumbai. 4) The CIT–5, Mumbai. 5) िवभागीय �ितिनिध “के”, आयकर अपीलीय अिधकरण, मुंबई/ The D.R. “K” Bench, Mumbai. 6) गाड� फाईल \ Copy to Guard File. आदेशानुसार/By Order / / True Copy / /