THE ACIT, KOCHI vs. M/S.COCHIN SHIPYARD LTD, KOCHI

The common issue contended by the assessee in all these are as given below –

The assessee is a public sector undertaking engaged in building, repair and maintenance work of ships. The assessment was completed u/s. 143(3) by making certain disallowances. Later, the AO noticed that the assessee has claimed depreciation on plant & machinery put to use in previous year 2007-08 for an amount of Rs.53,77,981 for AY 2009-10 u/s. 32(1)(iia). The assessee submitted that as per 2nd proviso to section 32(1)(ii), the depreciation allowance is restricted to 50% where the assets have been put to use for a period of less than 180 days in the year of acquisition. The assessee further submitted that there is no restriction for the balance amount to be claimed as a deduction in the subsequent year and accordingly the assessee has claimed a deduction. The AO did not accept the contention and accordingly disallowed the additional depreciation.

The CIT(A) on further appeal deleted the disallowance on the ground that the decision of coordinate Bench of the Tribunal in the case of Apollo Tyres Ltd., Kitex Garments Ltd. and Sud-Chemie India Pvt. Ltd. are clearly applicable to assessee’s case. The CIT(A) further relied on the decision of the Supreme court in the case of Bajaj Tempo Ltd. v. CIT [1992] 196 ITR 188 to conclude that the additional allowance u/s. 32(1)(iia) is a one time benefit to encourage the industrialisation and that the provisions have to be construed reasonably liberally and purposively to make the provision meaningful. Aggrieved the revenue is in appeal before the Tribunal.

The ld. AR reiterated the submissions made before the lower authority and the ld. DR relied on the order of the AO.

We notice that the issue of allowability of additional depreciation claimed u/s. 32(1)(iia) where the assets have been put to use for less than 180 days in the year of acquisition claimed as a deduction in the subsequent year has been considered by the Hon’ble Kerala High Court in the case of CIT v. Kitex Garments Ltd., of 2014 wherein it is held that –

Considering the binding nature of the decision of the Jurisdictional High Court and the facts of the assessee’s case we see no reason to interfere with the order of the CIT(A). Hence this common issue raised in AY 2009-10 to 2013-14 by the revenue is dismissed Disallowance made u/s. 40(a)(ia)

The assessee during the years under consideration i.e. AYs 2010-11 to 2013-14 made payment to one R.S. Platou Asia Pte Ltd. towards commission payment for acting as an intermediary between the assessee and another foreign company in the course of the process of foreign company buying a ship from the assessee. The AO treated the said payment as fees for technical services on the basis of website information of the payee company wherein it was stated that the payee company had a staff of about 50 high calibre professionals and has initiated set up of several joint ventures between reputable local and international shipping companies. The AO relied on the decision of the Supreme Court in the case of G.E. Technology, 327 ITR 456 by holding that the payment made by the assessee to broker are towards services in the nature of fees for technical services.

The CIT(A) on further appeal held that the impugned payments are not liable for tax deduction at source as the same is paid for services rendered outside India to non-resident broker. Accordingly the CIT(A) deleted the disallowance u/s. 40(a)(ia). Aggrieved, the revenue is in appeal before the Tribunal.

The ld. AR submitted that the AO had made the addition based on website information of the payee wherein it was mentioned that the payee is employing highly skilled people. This according to the ld. AR cannot be the reason for holding that the payee is rendering technical services to the assessee. The ld. AR also submitted that the AO did not consider the clauses of the agreement (page 18 & 19 of PB) wherein it is clearly mentioned that the payments are done towards brokerage. The ld. AR further submitted that the impugned payment does not fall within Article 12 of the DTAA between India & Singapore since the payment is a simple broking transaction between the assessee and the payee. The ld. AR also submitted that the services are rendered by the payee outside India and the payee does not have any permanent establishment in India to attract taxability in India for services rendered outside India. It is also submitted by the ld. AR that the revenue has not made any disallowance towards the same payment in earlier assessment year and cannot change its view for the years under consideration.

The ld. DR relied on the order of the AO.

We heard the rival submissions and perused the material on record. The assessee has entered into a brokerage agreement with R S Platou (Asia) Pte Ltd., Singapore for payment of USD 700,000 as brokerage. It is noticed that this payment relates to the new building of CSL Hull, No.BY 081, referred to as the vessel in the said agreement. It is further noticed from the perusal of the agreement that the said brokerage is payable by the assessee to the payee in connection with the transaction of sale of the above referred ship. From the perusal of the facts, it is clear that the payment made by the assessee to the payee is towards brokerage charges. We see merit in the argument of the ld. AR that the AO has come to the conclusion that the payments are towards fees for technical services based on website information is not correct. The ld. AR during the course of hearing also submitted that the assessee has separate technical services agreement with overseas entities who render the technical services to the assessee with regard to ship building and maintenance and taxes deducted on those payments. We notice that the Hon’ble Supreme Court in the case of CIT v. Toshoku Ltd. [1980] 125 ITR 525 (SC) has considered a similar issue where it is held that the commission amounts earned by non-resident assessees for services rendered outside India cannot be deemed to be income which have either accrued or arisen in India. A similar view is held by the Hon’ble Delhi High Court in the case of Eon Technology P. Ltd., [2011] 15 taxmann.com 391.

In view of this discussion and considering the facts of the present case, we are of the considered view that the payments made by the assessee are brokerage charges towards services rendered by the payee outside India are not subject to tax deduction at source and therefore no disallowance is warranted u/s. 40(a)(ia). Accordingly we see no reason to interfere with the decision of the CIT(A). Therefore this issue contended in AY 2010-11 to 2013-14 by the revenue is dismissed.

For AYs 2012-13 & 2013-14 one more issue contented is with regard to disallowance u/s. 14A of the Act. The AO noticed that the assessee had received dividend income during the year under consideration and that the assessee had not made any disallowance towards earning such dividend income. The assessee submitted before the AO that the assessee had sufficient surplus funds and all investments were made out of own funds. The AO did not accept the submissions of the assessee on the ground that there is a common administrative set up for all business activities including investment activities and therefore disallowance u/s. 14A r.w. Rule 8D is warranted. The AO computed the disallowance in accordance with Rule 8D(2)(ii) & (iii).

Aggrieved the assessee preferred appeal before the CIT(A). The CIT(A) gave partial relief to the assessee on the ground that the assessee had sufficient surplus funds. With regard to disallowance made under Rule 8D(2)(ii), the ld. CIT(A) upheld the disallowance of 0.5% of average investments. The ld. AR submitted that it is settled position that when own funds are available, no disallowance u/s. 14A is warranted and accordingly prayed that the order of the CIT(A) in this regard may be upheld. The ld. DR relied on the order of the AO.

We heard the rival submissions and perused the material on record. We notice that the similar issue was considered by Hon’ble Karnataka High Court in the case of CIT Vs. Micro Labs Ltd. (2016) 383 ITR 490, where it was held that no disallowance out of interest expenditure is called for. The relevant extract of the observations made by Hon’ble Karnataka High Court in the above said case is as below - “40. We have heard the rival submissions. A copy of the availability of funds and investments made was filed before us which is at pages 38 to 42 of the assessee's paper book and the same is enclosed as ANNEXURE-III to this order. It is clear from the said statement that the availability of profit, share capital and reserves & surplus was much more than investments made by the assessee which could yield tax free income.

The Hon'ble Bombay High Court in Reliance Utilities & Power Ltd. 313 ITR 340 (Bom) has held that where the interest free funds far exceed the value of investments, it should be considered that investments have been made out of interest free funds and no disallowance u/s. 14A towards any interest expenditure can be made. This view was again confirmed by the Hon'ble Bombay High Court in CIT v. HDFC Bank Ltd., ITA No.330 of 2012, judgment dated 23.7.14, wherein it was held that when investments are made out of common pool of funds and non-interest bearing funds were more than the investments in tax free securities, no disallowance of interest expenditure u/s. 14A can be made.

In the light of above said decisions, we are of the view that disallowance of interest expenses in the present case of Rs.49,42,473 made under Rule 8D(2)(ii) of the I.T. Rules should be deleted. We order accordingly." Thereafter, it was held by Hon’ble Karnataka High Court as under:- “The aforesaid shows that the Tribunal has followed a decision of the Bombay High Court in the case of CIT v. HDFC Bank Ltd. [2014] 366 ITR 505/226 Taxman 132 (Mag.)/49 taxmann.com 335 . When the issue is already covered by a decision of the High Court of Bombay with which we concur, we do not find any substantial question of law would arise for consideration as canvassed.”

On perusal of records (page 69 of paper book) it is noticed that the own funds as per the Balance sheet as on 31.03.2012 and 31.03.2013 as given below are much higher than the amount of investment of Rs.19.18 lakhs –

In the result, all the appeals by the revenue are dismissed.