MARVEL DRUGS PVT LTD., MUMBAI V. ITO-6(3)(3), MUMBAI

ITA 3626/MUM/2023

• Counselvise Citation: [2024] 101 COUNSELVISE.COM (IT) 8497 (ITAT-MUMBAI)
• Duration Of Justice: 4 month(s) 18 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 26-02-2024
• Appeal Filed By: Assessee
• Order Result: PartlyAllowed
• Bench Allotted: D
• Next Hearing Date: 20-02-2024
• Assessment Year: 2006-2007
• Appeal Filed On: 08-10-2023
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Keywords: Unexplained investment; Capital expenditure; TDS; Set aside
• Section: 69; 271(1)(c); 143(3); 40(a)(ia); 133(6); 195; 250; 274

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL MUMBAI BENCH “D”, MUMBAI BEFORE SHRI OM PRAKASH KANT, ACCOUNTANT MEMBER AND SHRI SANDEEP SINGH KARHAIL, JUDICIAL MEMBER ITA No.3626/M/2023 Assessment Year: 2006-07 M/s. Marvel Drugs Pvt. Ltd., 20, Nagin Mahal, 82 VN Road, Mumbai – 400 020 PAN: AAACM4655N Vs. ITO 6(3)(3), Aayakar Bhavan, Mumbai – 400 020 (Appellant) (Respondent) Present for: Assessee by : Shri Surendra Nijsure, A.R. Revenue by : Smt Mahita Nair, Sr. D.R. Date of Hearing : 21.02.2024 Date of Pronouncement : 27/02/.2024 O R D E R Per : Sandeep Singh Karhail, Judicial Member: 1. The present appeal has been filed by the assessee challenging the impugned order dated 11/08/2023 passed under section 250 of the Income Tax Act, 1961 (“the Act”) by the learned Commissioner of Income Tax (Appeals), National Faceless Appeal Centre, Delhi [“learned CIT(A)”], for the assessment year 2006-07, which in turn arose from the penalty order dated 26/03/2013 passed under section 271(1)(c) of the Act. 2. In this appeal, the assessee has raised the following grounds:- “1) The learned CIT(A) erred in law and on facts in confirming penalty u/s 271(1)(c) in respect of 2 disallowances in the quantum assessment order, that were set aside to the file of the CIT(A) and another 1 disallowance, that was allowed, in quantum appeal by Hon'ble ITAT vide order dated 20/5 / 2019 2) The learned CIT(A) erred in law and on facts in confirming penalty u/s 271(1)(c) in respect of other disallowances disregarding that it did not involve any concealment or furnishing of inaccurate particulars. M/s. Marvel Drugs Pvt. Ltd. ITA No.3626/M/2023 2 3) The learned CIT(A) erred in not dealing with the contention of the appellant challenging the validity of the penalty order in as much as the assessment as well as penalty order erroneously relied on both limbs of 271(1)(c), and therefore the AO failed to record his satisfaction while initiating proceedings for imposition of penalty under section 271(1)(c) as to which limb of the provisions of section 271(1)(c) is attracted. Your appellant craves leave to add to alter or vary any of the Grounds of Appeal set out herein above.” 3. The only grievance of the assessee is against the levy of penalty under section 271(1)(c) of the Act. 4. We have considered the submissions of both sides and perused the material available on record. The facts of the case are that the assessee is engaged in the business of manufacturing drugs and drugs intermediaries, etc. For the year under consideration, the assessee filed its return of income on 27/11/2006 declaring a loss of Rs.2,41,764/-. The return filed by the assessee was selected for scrutiny and vide order dated 05/12/2008 passed under section 143(3) of the Act the income of the assessee was assessed at Rs.47,38,860/- after making various additions/disallowances. In further appeal, the learned CIT(A) partly allowed the appeal filed by the assessee. In the meanwhile, the penalty proceedings vide notice dated 11/12/2008 issued under section 274 r/w section 271(1)(c) of the Act were initiated. The Assessing Officer (“AO”) vide penalty order dated 26/03/2013, passed under section 271(1)(c) of the Act, levied a penalty of Rs.11,23,763/-. In the quantum appeal against the aforesaid order passed by the learned CIT(A), the coordinate bench of the Tribunal vide order dated 20/05/2019 granted partial relief to the assessee. Accordingly, vide impugned order, the appeal by the assessee, against the penalty order passed under section 271(1)(c) of the Act, was partly allowed. 5. In the present appeal, the assessee has confined its challenge to the penalty levied in relation to the following additions:- Sl No. Particulars Amount (in Rs.) (a) Disallowance under section 40(a)(ia) on commission expenses 1,53,390 (b) Unexplained investment in capital work in progress 4,70,961 M/s. Marvel Drugs Pvt. Ltd. ITA No.3626/M/2023 3 (c) Capital expenditure claimed as Revenue expenses 3,71,430 (d) Foreign travelling expenses 2,37,287 (e) Commission and brokerage paid to foreign agent 66,015 (a) Penalty levied in relation to disallowance made under section 40(a)(ia) of the Act on commission expenses 6. Vide assessment order dated 05/12/2008 passed under section 143(3) of the Act, the AO disallowed an amount of Rs.1,53,390/- under section 40(a)(ia) of the Act, as no details were furnished by the assessee whether TDS was deducted on the aforesaid amount paid by the assessee as export clearing charges. In further appeal, the learned CIT(A) vide order dated 05/01/2011 dismissed the ground raised by the assessee on this issue. We find that the coordinate bench of the Tribunal vide order dated 20/05/2019 passed in assessee’s quantum appeal in Marvel Drugs Pvt. Ltd. v/s ACIT, in ITA No.5321/Mum./2010, for the assessment year 2006-07, deleted the aforesaid disallowance. The relevant findings of the coordinate bench, in the aforesaid decision, are reproduced as under:- “16. After hearing both the parties and perusing the material on record, we observe that the assessee has made payment of freight to M/s. Om Freight Forwarding Ltd. who is an agent of British Airways which is hired by the assessee to transport the cargo. We have examined the ledger accounts opened in the name of M/s. Om Freight Forwarding Ltd. in the books of the assessee as the invoice was received from the said party, however, the invoices backed by an airway’s bill of British Airways, copies of which are placed on page No.58 & 59. We find merit in the contentions of the Ld. A.R. that this is just a payment to the non resident through agent M/s. Om Freight Forwarding Ltd. and therefore the same is not liable for TDS at source. The case of the assessee is squarely covered by the ratio laid down in the case of Tab Leather Works vs. ACIT – 23 taxmann.com 58 (Kol). The operative part of the decision is as under:- “5. We have heard the rival contentions, perused the material on record and duly considered factual matrix of the case as also the applicable legal position. 6. It is an admitted position that so far as the airfreight is concerned, it is paid to the agents on the actual basis and that the bills and airfreight documents have been directly issued to the foreign airlines. PDP and DHL, while accepting payments for airfreight components, have acted merely as agents of the respective airlines and have not received the airfreight payments in their own right. In copies of airway bills, which have been filed before us in the paperbook, the name of thes e agents is shown as "Issuing carrier's agent and the city" as also the agent's code is given as "Agent's IATA code". There is thus enough material to demonstrate that th e persons having received money for the M/s. Marvel Drugs Pvt. Ltd. ITA No.3626/M/2023 4 airfreight have received the same in their capacity as "issuing carrier's agent" i.e. agent of the airline concerned. The airfreight payment is thus made to the foreign airlines, namely SIA, Emirates, British Airway s and Lufthansa - though through the agent, i.e. PDP and DHL etc. 7. In view of the above discussions, in our considered view , the payments cannot be said to have been made to a resident company , and, accordingly, the provisions of Section 194 C , which apply only on the resident recipients, donot come into play. 8. As for the stand that the assessee should have moved the application under section 195(2) in case of payments to non residents and assessee's failure to do so is to be visited with consequences for non deduction at source, the law is now settled by Hon'ble Supreme Court in the case of GE India Technology Centre Pvt Ltd Vs CIT (327 ITR 456) wherein Their Lordships have categorically held that, " where a person responsible for deduction is fairly certain, then he can make his own determination as to whether the tax was deductible at source and, if so, what should be the amount thereof". The plea of the revenue authorities to the effect that where the assessee does not move an application under section 195(2) and makes the remittance without deduction of tax at source, the assessee should be visited with consequences for non deduction of tax at source, which was accepted by Hon'ble Karnataka High Court in the case of CIT Vs Samsung Electronic Co Ltd ( 320 ITR 209), was categorically rejected by Their Lordships, and Their Lordships observed as follows: In our view, section 195(2) is based on the "principle of proportionality". The said sub -section gets attracted only in cases where the payment ma de is a composite payment in which a certain proportion of payment has an element of "income" chargeable to tax in India. It is in this context that the Supreme Court stated, "If no such application is filed, income - tax on such sum is to be deducted and it is the statutory obligation of the person responsible for paying such 'sum' to deduct tax thereon before making payment. He has to discharge the obligation to TDS". If one reads the observation of the Supreme Court, the words "such sum" clearly indicate that the observation refers to a case of composite payment where the payer has a doubt regarding the inclusion of an amount in such payment which is exigible to tax in India. In our view, the above observations of this Court in Transmission Corpn. of A.P. Ltd.'s case (supra) which is put in italics has been completely, with respect, misunderstood by the Karnataka High Court to mean that it is not open for the payer to contend that if the amount paid by him to the non- resident is not at all "chargeable to tax in India", then no TAS is required to be deducted from such payment. This interpretation of the High Court completely loses sight of the plain words of section 195(1)which in clear terms lays down that tax at source is deductible only from "sums chargeable" under the provisions of the Income -tax Act, i.e., chargeable under sections 4, 5 and 9 of the Income -tax Act. 9. We have also noted that it is not even the revenue's case that the amounts paid to foreign airlines, on account of airfreight payments, are taxable in India, and quite rightly so, because, as the provisions of all the respective tax treaties clearly provide , the profits from operations of ships and aircrafts in the international traffic are taxable only in the state in which the respective enterprise are fiscally domiciled and not in the source state. This rule, howsoever devoid of paradigm justification as it may appear to many of us, is one of the fundamental rules followed in almost all the tax treaties and our tax treaties with UK, UAE, Singapore and Germany are no exception to this general rule. It is only elementary that a tax deduction at source under section 195 is only a vicarious liability inasmuch as when recipient s of income, i.e. the airlines M/s. Marvel Drugs Pvt. Ltd. ITA No.3626/M/2023 5 concerned, have no primary liability to pay tax, there cannot be any vicarious liability to deduct tax from payments in which such income is embedded. 10. In view of the above discussions as also bearing in mind entirety of the case, we are of the considered view that the assessee did not have any obligations to deduct tax at source - whether under section 194 C or under section 195 - from payments made to the foreign airlines for airfreight. In this view of the matter, the impugned disallowances under section 40(a)(ia) are devoid of any merits, nor can these disallowances be made under section 40(a)(i) either - as alternatively suggested by the authorities below. We, accordingly, direct the Assessing Officer to delete the impugned disallowances. The assessee gets the relief accordingly. 11. In the result, the appeals are allowed in the terms indicated above. Pronounced in the open court today on 31 s t day of May 2012.” The facts of this case are materially similar to one as cited above we, therefore, respectfully following the ratio laid down in the above decision, direct the AO to delete the disallowance.” 17. The facts of this case are materially similar to one as cited above, we, therefore, respectfully the ratio laid down in the above decision, direct the AO to delete the disallowance” 7. Since the addition has been deleted by the coordinate bench in the quantum proceedings, we find no basis in sustaining the penalty in relation to the aforesaid disallowance. Accordingly, the same is directed to be deleted. (b) Penalty levied in relation to unexplained investment in capital work in progress (c) Penalty levied in relation to capital expenditure claimed as Revenue expenses 8. During the assessment proceedings, from the response to the notice under section 133(6) of the Act issued to M/s JAES Construction, through whom the assessee claims to have carried out work in progress at its Taloja factory site to the extent of Rs.40,69,500/-, it was observed that the party has confirmed the total work to be completed to the extent of Rs.45,40,490/-. Accordingly, the assessee was asked to show cause as to why the balance amount of Rs.4,70,961/- be not considered as an unexplained investment. In the absence of any satisfactory response from the assessee, the AO vide order passed under section 143(3) of the Act treated the aforesaid amount of Rs.4,70,961/- as unexplained investment under section 69 of the Act. M/s. Marvel Drugs Pvt. Ltd. ITA No.3626/M/2023 6 9. Further, during the assessment proceedings, it was observed that the assessee has claimed Rs.4,21,306/- in the profit and loss account under the head “manufacturing and other expenses”. From the response to the notice under section 133(6) of the Act issued to M/s JAES Construction, it was observed that one of the bills amounting to Rs.3,71,430/- claimed in the profit and loss account was an intentional mistake committed by the assessee, as had it been capitalised, the assessee could not have been able to suppress its income. Accordingly, the AO vide order passed under section 143(3) of the Act disallowed the amount of Rs.3,71,430/- and added the same to the total income of the assessee. 10. In further appeal, the learned CIT(A) dismissed the grounds raised by the assessee in respect of the aforesaid additions. We find that the coordinate bench of the Tribunal vide aforesaid order dated 20/05/2019, passed in assessee’s quantum appeal, restored both issues to the file of the learned CIT(A) to be decided after considering the facts and law. It is evident from the record that the learned CIT(A), vide impugned order, affirmed the findings of the AO and upheld the penalty levied on this issue on the basis that since the issue has only been restored to the file of the learned CIT(A) for de novo adjudication, therefore assessment order on this aspect is unaltered and thus the additions are still subsisting. 11. During the hearing, the learned AR submitted that the impugned additions are arising on account of the reconciliation of certain details pertaining to M/s JAES Construction, through whom the assessee claims to have carried out work in progress at its Taloja factory site. It was further submitted that pursuant to remand by the coordinate bench, the issue is still under consideration before the learned CIT(A) and no order has been passed till date. Accordingly, in view of the circumstances, as noted above, we deem it appropriate to restore the issue of levy of penalty in respect of the aforesaid additions to the file of the learned CIT(A). Since the levy of penalty depends on the additions ultimately sustained by the learned CIT(A), therefore the learned CIT(A) may decide on the sustainability of the penalty on these issues M/s. Marvel Drugs Pvt. Ltd. ITA No.3626/M/2023 7 after its decision on the aforesaid additions. With the above directions, the impugned order on this issue is set aside. (d) Penalty levied in relation to Foreign travelling expenses 12. During the assessment proceedings, the assessee was asked to furnish the complete details in respect of the foreign travel expenses debited during the year. From the perusal of details furnished by the assessee, it was observed that assessee’s wife also accompanied the Managing Director of the assessee. Accordingly, the AO disallowed 50% of Rs.2,63,692/-, i.e. Rs.1,31,846/-, in respect of the expenditure pertaining to the Managing Director. Further, the AO disallowed the expenses of Rs.26,208/- for the wife of the Managing Director and the expenditure of Rs.79,233/- for which no bills/vouchers were produced. Accordingly, the AO made a total disallowance of Rs.2,37,287/-. In further appeal, the learned CIT(A) dismissed the ground raised by the assessee on this issue. It is an admitted position that in the quantum appeal before the Tribunal, the assessee did not press its ground challenging the aforesaid addition. During the hearing, no material was brought on record to controvert the findings of the AO that the expenditure incurred on foreign tours of the family members is wholly and exclusively for the purpose of the business of the assessee. Accordingly, we find no infirmity in the findings of the learned CIT(A), vide impugned order, in upholding the penalty in relation to the aforesaid addition. (e) Penalty levied in relation to commission and brokerage paid to foreign agent 13. During the assessment proceedings, it was observed that the expenditure of Rs.66,015/- claimed to have been paid against commission and brokerage, the assessee had not submitted any supporting bills and vouchers. Further, the assessee has not established any connection of the aforesaid expenditure with the business of the assessee. Accordingly, the AO disallowed the aforesaid expenditure of Rs.66,015/- and added the same to the total income of the assessee. In further appeal, the learned CIT(A) dismissed the ground raised by the assessee on this issue. It is an admitted position that the M/s. Marvel Drugs Pvt. Ltd. ITA No.3626/M/2023 8 assessee did not raise any ground against the aforesaid addition in its quantum appeal before the Tribunal. During the hearing, no material was brought on record to prove that the expenditure was incurred wholly and exclusively for the purpose of the business of the assessee. Accordingly, we find no infirmity in the findings of the learned CIT(A), vide impugned order, in upholding the penalty in relation to the aforesaid addition. 14. As a result, ground no. 1 rasied in assessee’s appeal is allowed for statistical purposes, while ground no. 2 is dismissed. 15. The next issue raised by the assessee pertains to the validity of the penalty order due to not striking off one of the limbs while initiating the penalty under section 271(1)(c) of the Act. From the perusal of the notice dated 11/12/2008 issued under section 274 r/w section 271 of the Act, forming part of the paper book on pages 17-18, we find that the AO has placed the tick against the option “have concealed the particulars of your income”. Since the assessee was duly put to notice under section 274 about the basis of initiating penalty proceedings under section 271(1)(c) of the Act, we are of the considered view that no prejudice has been caused to the assessee and there is no violation of the principles of natural justice. As a result, ground no. 3 raised in assessee’s appeal is dismissed. 16. In the result, the appeal by the assessee is partly allowed for statistical purposes. Order pronounced in the open court on 27.02.2024. Sd/- Sd/- (OM PRAKASH KANT) (SANDEEP SINGH KARHAIL) ACCOUNTANT MEMBER JUDICIAL MEMBER Mumbai, Dated:27.02.2024. * Kishore, Sr. P.S. M/s. Marvel Drugs Pvt. Ltd. ITA No.3626/M/2023 9 Copy to:The Appellant The Respondent The CIT, Concerned, Mumbai The DR Concerned Bench //True Copy// By Order Dy/Asstt. Registrar, ITAT, Mumbai.