IDFC INVESTMENT ADVISIORS LTD, MUMBAI V. DCIT RG 1(2), MUMBAI

ITA 537/MUM/2012

• Counselvise Citation: 53719914 RSA 2012
• Duration Of Justice: 1 year(s) 7 month(s) 11 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 06-09-2013
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: I
• Next Hearing Date: 17-07-2013
• Assessment Year: 2008-2009
• Appeal Filed On: 25-01-2012
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: K C P PATNAIK
• Keywords: Non-deduction of tax
• Section: 194C

Judgement Text

I IN THE INCOME TAX APPELLATE TRIBUNAL I BENCH, MUMBAI .. , !'# $ $ $ $ ! %, & !'# !' BEFORE SHRI P.M. JAGTAP, AM AND SHRI SANJAY GARG, J M !./ I.T.A. NO. 537 /MUM/2012 ( &) % $*% &) % $*% &) % $*% &) % $*% / / / / ASSESSMENT YEAR : 2008-09) IDFC INVESTMENT ADVISORS LIMITED, ONE INDIA BULLS CENTRE, 841, JUPITER MILLS COMPOUND, SENAPATI BAPAT MARG, MUMBAI 400 013. ) ) ) ) / VS. THE DY. COMMISSIONER OF INCOME-TAX- RANGE 1(2), AAYAKAR BHAVAN, M.K. ROAD, MUMBAI 400 020. #+ !./ PAN : AABCI 5524 R ( +, / // / APPELLANT ) .. ( -.+, / RESPONDENT ) +, / 0 ! / APPELLANT BY : SHRI FARROKH V. IRANI -.+, / 0 ! / RESPONDENT BY : SHRI K.C.P. PATNAIK !)$ / / // / DATE OF HEARING : 17-07-2013 12* / / DATE OF PRONOUNCEMENT : 06-09-2013 '3 / O R D E R PER P.M. JAGTAP, A.M . : .. THIS APPEAL FILED BY THE ASSESSEE IS DIRECTED AGAIN ST THE ORDER OF THE LD. CIT(A) 2, MUMBAI DTD. 03-11-2011 FOR A.Y. 2008-09 . 2. THE COMMON ISSUE RAISED IN GROUND NO. 1 TO 4 OF THIS APPEAL RELATES TO THE DISALLOWANCE OF RS. 4,59,56,000/- MADE BY THE A .O. U/S 40(A)(IA) OF THE ITA 537/MUM/2012 2 INCOME TAX ACT, 1961 (THE ACT) FOR NON DEDUCTION OF TAX AT SOURCE WHICH HAS BEEN PARTLY SUSTAINED BY THE LD. CIT(A). 3. THE ASSESSEE IN THE PRESENT CASE IS A COMPANY WH ICH IS ENGAGED IN THE BUSINESS OF RENDERING INVESTMENT ADVISORY AND PORTF OLIO MANAGEMENT SERVICES. THE RETURN OF INCOME FOR THE YEAR UNDER C ONSIDERATION WAS FILED BY IT ON 29-9-2008 DECLARING LOSS OF RS. 17,33,630/-. DUR ING THE COURSE OF ASSESSMENT PROCEEDINGS, IT WAS NOTICED BY THE A.O. THAT THE ASSESSEE HAS PAID A TOTAL SUM OF RS. 4,59,56,000/- TO ITS HOLDING COM PANY M/S IDFC LIMITED ON ACCOUNT OF REIMBURSEMENT OF VARIOUS EXPENSES. THE S AID AMOUNT WAS COMPRISING OF REIMBURSEMENT OF RENT AMOUNTING TO RS . 56,14,216/- AND REIMBURSEMENT OF OTHER OFFICE AND ADMINISTRATIVE EX PENSES AMOUNTING TO RS. 4,03,41,784/-. ACCORDING TO THE A.O., THE ASSESSEE WAS REQUIRED TO DEDUCT TAX AT SOURCE FROM THE SAID AMOUNTS PAID TO ITS HOLDING COMPANY IDFC LIMITED AND SINCE THE SAME WAS NOT DONE, HE REQUIRED THE AS SESSEE TO EXPLAIN AS TO WHY THE SAID AMOUNT PAID BY IT TO IDFC LIMITED SHOU LD NOT BE DISALLOWED U/S 40(A)(IA) OF THE ACT FOR NON-DEDUCTION OF TAX AT SO URCE. IN REPLY, THE FOLLOWING SUBMISSION WAS MADE BY THE ASSESSEE VIDE LETTER DAT ED 30-11-2010 OFFERING ITS EXPLANATION IN THE MATTER:- DURING THE FINANCIAL YEAR 2007-08, THE EXPENSES IN CURRED BY THE COMPANY INCLUDED CERTAIN EXPENDITURE PAID BY ITS 10 0 PERCENT HOLDING COMPANY IE. IDFC ON ITS BEHALF. THE DETAILED BREAKU P OF THE SANE IS ENCLOSED FOR YOUR REFERENCE. IDFC HAS CHARGED BACK SAME AMOUNT TO THE COMPANY WITHOUT ANY MARKUP. THE EXPENSES INCURR ED BY THE COMPANY WERE IN THE NATURE OF STAFF EXPENSES, COMMU NICATION EXPENSES, TRAINING EXPENSES, PROFESSIONAL FEES, CON VEYANCE ARID TRAVELING, ELECTRICITY EXPENSES, INTERNET EXPENSES ETC AND IDFC HAS ALREADY DEDUCTED TAX ON SUCH PAYMENTS WHEREVER REQU IRED. IN THIS CONNECTION WE WISH TO SUBMIT THAT THE PAYME NTS MADE BY THE COMPANY TO IDFC ARE MERE REIMBURSEMENT OF COSTS INC URRED ON BEHALF OF THE COMPANY AND HENCE NOT LIABLE TO FURTHER DEDU CTION OF TAX AT SOURCE. IN THIS REGARD WE WOULD LIKE TO PLACE RELIANCE ON T HE DECISION OF MUMBAI TRIBUIA1 IN THE CASE OF DDIT VS. CHUBB PACIFIC UNDE RWRITING ITA 537/MUM/2012 3 MANAGEMENT SERVICES PVT LTD. IN THIS CASE HOLDING C OMPANY OF THE ASSESSEE MADE PAYMENTS TO THIRD PARTIES ON ITS BEHA LF. THE PAYMENTS WERE MADE ON ACCOUNT OF ADMINISTRATIVE CONVENIENCE SINCE THE ASSESSEE HAD NOT YET COMMENCED OPERATIONS . THE HOLDING COMPANY MADE APPROPRIATE WITHHOLDING ON THE PAYMENT S MADE TO THE THIRD PARTIES ON BEHALF OF THE ASSESSEE. BASED ON T HESE FACTS, THE MUMBAI TRIBUNAL HELD THAT REIMBURSEMENT OF SUCH PAY MENTS BY THE ASSESSEE TO ITS HOLDING COMPANY SHOULD NOT BE SUBJE CT TO TAX WITHHOLDING IN INDIA SINCE THE SAME CANNOT BE TERME D AS INCOME OF THE HOLDING COMPANY. IN THE ASSESSEES CASE ALSO, IT IS REITERATED THAT A.Y.2008-09 WAS THE SEND YEAR OF ITS OPERATION AND PAYMENTS WERE MADE BY IDFC LTD ON BEHALF OF ASSESSEE. NO INCOME A ROSE TO IDFC LTD ON ACCOUNT OF SUCH TRANSACTIONS. HENCE THE ASSESSEE WAS NOT REQUIRED TO WITHHOLD TAXES ON THE REIMBURSEMENT MADE TO IDFC LTD. RELIANCE IS ALSO PLACED ON THE FOLLOWING JUDICIAL P RONOUNCEMENTS IN SUPPORT OF THE PROPOSITION THAT REIMBURSEMENT OF EX PENSES IS NOT IN THE NATURE OF INCOME AND IS THEREFORE NOT LIABLE TO TAX . MAHINDRA & MAHINDRA LTD VS. DCIT (2009) MUMBAI CIT VS. FORTIS HEALTH CARE LTD (2009) ITA 8/2009 (D ELHI) CIT VS. SIEMENS AKTIONGESELLSCHAFT (2009) 310 ITR 3 20 (BONA) CIT VS. INDUSTRIAL ENGINEERING PRODUCTS PVT LTD 202 1TR 104 CIT VS. DUNLOP RIBBER CO. LTD (1983) 142 ITR493 (CA L) ITO VS. DR. WIILMAR SCHWABE INDIA PVT LTD, (2005) 3 SOT 71 (DELHI) RAYMOND LTD VS. DCIT (2003) 86 LTD 791 (BORN) CLIFFORD CHANCE, UK VS. DCII (2002) S2 IT!) 106 (9O M MANNESMANN DEMAG LAUCHHAMMER VS. CIT (1988) 26 III) 198 (HYD.) ` CONSIDERING THE AFORESAID JUDICIAL PRONOUNCEMENTS AND FACTS OF THE CASE, IT IS SUBMITTED THAT THE PAYMENTS MADE BY THE ASSESSEE TO IDFC LTD DURING THE CAPTIONED A Y REPRESENTS REIMBURSEME NT OF EXPENSES AND THUS THE ASSESSEE WAS NOT RESPONSIBLE FOR DEDUC TING ANY TAX AT SOURCE WHILE MAKING SUCH PAYMENT. IN VIEW OF THE AB OVE, IT IS SUBMITTED THAT SUCH PAYMENT CANNOT BE DISALLOWED. 4. THE ABOVE SUBMISSION MADE BY THE ASSESSEE WAS NO T FOUND ACCEPTABLE BY THE A.O. FOR THE FOLLOWING REASONS GIVEN IN THE ASSESSMENT ORDER:- (A) IT HAS ALREADY DISCUSSED IN PARA 4.2 ABOVE, TH E ASSESSEE HAS REIMBURSED VARIOUS EXPENSES LIKE SALARIES, COMPUTER SOFTWARE, LEASE RENT, LICENSE FEE, MEMBERSHIP SUBSCRIPTION, PROFESS IONAL FEE, TELEPHONE EXPENSES, TRAVEL EXPENSES ETC TOTALING TO RS.4,59,5 6,000/- TO ITS HOLDING ITA 537/MUM/2012 4 COMPANY. EXCLUDING LEASE RENT, THE BALANCE AMOUNTS OF REIMBURSEMENT WORKS OUT TO RS.4,03,41,784/-. (B) THE -RENTAL EXPENSES IS ALREADY DISALLOWED FOR THE REASONS STATED IN ABOVE PARAGRAPHS. (C) THE ASSESSEE HAS NOT SUBMITTED ANY DOCUMENTARY EVIDENCE IN SUPPORT OF BASIS OF CHARGING OF THE AMOUNTS PAID TO ITS HOLDING COMPANY. (D) IT IS ADMITTED FACT THAT ALL THE EMPLOYEES ARE ON THE PAY ROLL OF ITS HOLDING COMPANY IE.. M/S IDFC LTD AND THE REIMBURSE MENT OF EXPENSES MOSTLY INCLUDES EMPLOYEE COST AND THE INFRASTRUCTUR E PROVIDED TO THE FOR PERFORMING THEIR DUTIES. THEREFORE, THE ARRANGE MENT BETWEEN THE ASSESSEE AND ITS HOLDING COMPANY IS IN THE NATURE O F CONTRACT WHICH IS ORAL AND NOT RECORDED IN WRITING. THEREFORE, THE AM OUNTS PAID EVEN WITHOUT ANY MARKUP ALSO ATTRACTS PROVISIONS OF SECT ION 194C OF THE ACT. THE ASSESSEE HOWEVER FAILED TO DEDUCT TAX AT SOURCE AS REQUIRED UNDER THE SAID PROVISIONS. THE TWO ENTITIES BEING SEPARATE AND INDEPENDENT BOT H HAVE TO MAINTAIN SEPARATE BOOKS FOR THE ACCOUNTING PURPOSES AND TAX PURPOSES. WHAT THE ASSESSEE TRIED TO EXPLAIN IN ITS SUBMISSION IS THE ARRANGEMENT MADE IN DISBURSAL OF THE EXPENDITURE FOR THEIR OWN CONVE NIENCE. THIS ARRANGEMENT WILL NOT ABSOLVE ASSESSEE FROM ITS LIAB ILITY TO DEDUCT TAX AT SOURCE ON THE EXPENSES PAID TO IDFC LTD, EVEN IF IT IS WITHOUT ANY MARKUP AS CLAIMED. THE HOLDING COMPANY DEFINITELY H AVE A LEGAL OPTION TO AVAIL NIL DEDUCTION CERTIFICATE U/S 197 FROM I TS ASSESSING OFFICER IF SUCH AMOUNTS ARE NOT LIABLE FOR TAX AND THERE IS NO INCOME COMPONENT. HOWEVER, THE SAME WAS NOT DONE. THE ASSESSEE IS CLE ARLY A DEFAULT IN MAKING TDS ON THE RENT PAID TO HOLDING COMPANY. (E) AS FAR AS THE JUDICIAL PRONOUNCEMENT RELIED UPO N BY THE ASSESSEE ARE CONCERNED, THE SAID DECISIONS ARE WITHOUT CONSIDERI NG THE PROVISIONS OF SECTION 197 AND THE CERTIFICATION OPTIONS AVAILABLE UNDER THE ACT TO THE DEDUCTOR AS WELL AS TO THE DEDUCTEE. HENCE, THE SAI D RATIO DOES NOT APPLIES TO THE ASSESSEES CASE. FOR THE REASONS GIVEN ABOVE, THE A.O. DISALLOWED TH E RENT OF RS. 56,14,216/- AND OTHER EXPENSES OF RS. 4,03,41,784/- U/S 40(A)(I A) OF THE ACT FOR THE FAILURE OF THE ASSESSEE TO DEDUCT TAX AT SOURCE FROM THE PA YMENT OF THE SAID EXPENSES MADE TO ITS HOLDING COMPANY IDFC LIMITED. ITA 537/MUM/2012 5 5. THE DISALLOWANCE MADE BY THE A.O. U/S 40(A)(IA) OF THE ACT WAS CHALLENGED BY THE ASSESSEE IN AN APPEAL FILED BEFOR E THE LD. CIT(A) AND IT WAS SUBMITTED ON BEHALF OF THE ASSESSEE BEFORE THE LD. CIT(A) THAT THE ENTIRE AMOUNT OF RS. 4,59,56,000/- HAVING BEEN PAID TO IDF C LIMITED TOWARDS REIMBURSEMENT OF ACTUAL EXPENSES INCURRED ON ITS BE HALF, THERE WAS NO OBLIGATION TO DEDUCT TAX AT SOURCE FROM THE SAID PA YMENT. IT WAS SUBMITTED THAT THE IDFC LIMITED HAD RECOVERED FROM THE ASSESS EE THE SAID EXPENSES AS ACTUALLY INCURRED BY THEM WITHOUT THERE BEING ANY M ARK-UP. IT WAS SUBMITTED THAT THE EXPENSES INCURRED BY IDFC LIMITED ON BEHAL F OF THE ASSESSEE AND SUBSEQUENTLY REIMBURSED BY THE ASSESSEE WERE IN THE NATURE OF RENT EXPENSES, COMMUNICATION EXPENSES, TRAINING EXPENSES, PROFESSI ONAL FEES, CONVEYANCE AND TRAVELING, ELECTRICITY EXPENSES, INTERNET EXPEN SES ETC. AND IDFC LIMITED HAD ALREADY DEDUCTED TAX ON PAYMENT OF THESE EXPENS ES, WHEREVER REQUIRED. IT WAS CONTENDED THAT THE ASSESSEE COMPANY WAS NOT LIABLE TO DEDUCT TAX AT SOURCE FROM THE PAYMENT MADE TO IDFC LIMITED TOWARD S REIMBURSEMENT OF THE SAID EXPENSES ACTUALLY INCURRED ON ITS BEHALF. IN SUPPORT OF THIS CONTENTION, RELIANCE WAS PLACED ON BEHALF OF THE AS SESSEE ON THE DECISION OF MUMBAI BENCH OF ITAT IN THE CASE OF STRATCAP SECURI TIES (I) P. LTD. VS. ACIT (ITA NO. 7049/MUM/2008) WHEREIN THE DISALLOWANCE MA DE U/S 40(A)(IA) OF THE ACT WAS HELD TO BE UNSUSTAINABLE BY THE TRIBUNAL IN THE SIMILAR FACTS AND CIRCUMSTANCES HOLDING THAT TAX WAS NOT LIABLE TO BE DEDUCTED FROM THE PAYMENT MADE ON ACCOUNT OF REIMBURSEMENT OF EXPENSE S ESPECIALLY WHEN THE SAID EXPENSES HAD ALREADY BEEN SUBJECTED TO DEDUCTI ON OF TAX AT SOURCE WHILE THE PAYMENT WAS ORIGINALLY MADE. IT WAS FURTHER CON TENDED ON BEHALF OF THE ASSESSEE BEFORE THE LD. CIT(A) THAT THERE WAS NO RE LATIONSHIP OF CONTRACTOR AND CONTRACTEE BETWEEN THE ASSESSEE COMPANY AND IDFC LI MITED AND THEREFORE THE PAYMENT OF EXPENSES MADE BY THE ASSESSEE TO IDFC LI MITED EVEN OTHERWISE WAS NOT LIABLE FOR DEDUCTION OF TAX AT SOURCE U/S 1 94C OF THE ACT. IT WAS ALSO BROUGHT TO THE NOTICE OF THE LD. CIT(A) BY THE ASSE SSEE THAT THE EXPENDITURE REIMBURSED TO IDFC LIMITED WAS INCLUSIVE OF BONUS O F RS. 1,19,51,553/- ITA 537/MUM/2012 6 PERTAINING TO A.Y. 2007-08 AND SINCE IT WAS ALREADY DISALLOWED BY THE A.O. AS PRIOR PERIOD EXPENDITURE, THE SAME COULD NOT BE DIS ALLOWED AGAIN U/S 40(A)(IA) OF THE ACT WHICH CLEARLY RESULTED IN DOUBLE ADDITIO N. 6. AFTER CONSIDERING THE SUBMISSION MADE ON BEHALF OF THE ASSESSEE AND THE MATERIAL AVAILABLE ON RECORD BEFORE HIM INCLUDI NG THE ORDER OF THE A.O., THE LD. CIT(A) HELD THAT ALTHOUGH THE AMOUNT IN QUE STION WAS PAID BY THE ASSESSEE TO IDFC LIMITED TOWARDS REIMBURSEMENT OF E XPENSES, THE SAID PAYMENT WAS MADE AS PER THE ORAL CONTRACT BETWEEN T HE ASSESSEE COMPANY AND IDFC LIMITED. HE HELD THAT THE ASSESSEE, THERE FORE, WAS LIABLE TO DEDUCT TAX AT SOURCE FROM THE PAYMENT MADE TO IDFC LIMITED TOWARDS REIMBURSEMENT OF EXPENSES U/S 194C OF THE ACT IRRES PECTIVE OF THE FACT THAT IDFC LIMITED HAD ALREADY DEDUCTED TAX AT SOURCE WHI LE MAKING THE SAID PAYMENT ORIGINALLY ON ACCOUNT OF SALARY, RENT ETC. HE HELD THAT THE ASSESSEE HAVING FAILED TO DEDUCT TAX AT SOURCE FROM THE PAYM ENT MADE TO IDFC LIMITED TOWARDS REIMBURSEMENT OF EXPENSES, THE DISALLOWANCE ON ACCOUNT OF THE SAID EXPENSES WAS RIGHTLY MADE BY THE A.O. U/S 40(A)(IA) OF THE ACT. HE, HOWEVER, ACCEPTED THE OTHER CONTENTION OF THE ASSESSEE THAT THE AMOUNT OF RS. 1,19,51,553/- ON ACCOUNT OF BONUS PERTAINING TO A.Y . 2007-08 INCLUDED IN THE SAID EXPENSES HAVING BEEN DISALLOWED BY THE A.O. AS PRIOR PERIOD EXPENSES AND THE SAID DISALLOWANCE HAVING BEEN CONFIRMED BY HIM, THE SAME AMOUNT COULD NOT BE DISALLOWED AGAIN U/S 40(A)(IA) OF THE ACT WHICH OTHERWISE RESULTED IN DOUBLE DISALLOWANCE. ACCORDINGLY, THE D ISALLOWANCE OF RS. 4,59,56,000/- WAS SUSTAINED BY HIM TO THE EXTENT OF RS. 3,40,04,447/-. 7. THE LD. COUNSEL FOR THE ASSESSEE SUBMITTED THAT THE ASSESSEE IS A COMPANY INCORPORATED IN THE YEAR 2006 WITH THE OBJE CTIVE OF TO CARRY ON THE BUSINESS OF PROVIDING INVESTMENT AND PORTFOLIO MANA GEMENT SERVICES. HE SUBMITTED THAT DURING THE YEAR UNDER CONSIDERATION, THE ASSESSEE COMPANY HAD NO STAFF OF ITS OWN OR EVEN INFRASTRUCTURE TO C ARRY ON THE BUSINESS ACTIVITY ITA 537/MUM/2012 7 AND THEREFORE THE INFRASTRUCTURE FACILITIES AND ENT IRE STAFF WERE PROVIDED BY ITS HOLDING COMPANY IDFC LIMITED. HE INVITED OUR ATTENT ION TO THE COPY OF MOU BETWEEN THE ASSESSEE COMPANY AND IDFC LIMITED PLACE D AT PAGE 108 OF HIS PAPER BOOK TO SHOW THAT THE NECESSARY STAFF REQUIRE D BY THE ASSESSEE COMPANY WAS TO BE PROVIDED BY IDFC LIMITED ON DEPUT ATION BASIS AND THE ASSESSEE COMPANY WAS TO REIMBURSE THE SALARY COST O F THE SAID EMPLOYEES ON DEPUTATION TO IDFC LIMITED BASED ON THE ACTUAL COST INCURRED BY IDFC LIMITED. HE SUBMITTED THAT THE EXPENDITURE IN QUEST ION DISALLOWED BY THE A.O. U/S 40(A)(IA) OF THE ACT WAS MAINLY ON ACCOUNT OF S TAFF EXPENSES TO THE EXTENT OF RS. 3.66 CRORES AND THE SAME WAS RECOVERED BY ID FC LIMITED FROM THE ASSESSEE COMPANY ON ACTUAL BASIS WITHOUT ANY MARK-U P. HE INVITED OUR ATTENTION TO P&L ACCOUNT OF THE ASSESSEE COMPANY PL ACED AT PAGE 7 OF THE ASSESSEES PAPER BOOK, SCHEDULE -9 OF THE P&L ACCOU NT PLACED AT PAGE 11 OF THE PAPER BOOK GIVING DETAILS OF THE STAFF COST AND THE NOTE FORMING PART OF ACCOUNT OF THE ASSESSEE PLACED AT PAGE 15 OF HIS PA PER BOOK WHEREIN THE FACT OF STAFF EXPENSES HAVING BEEN REIMBURSED BY THE ASS ESSEE TO IDFC LIMITED ON ACTUAL BASIS WAS CLEARLY MENTIONED. HE CONTENDED TH AT THE PAYMENT IN QUESTION THUS WAS MADE BY THE ASSESSEE ON ACCOUNT O F REIMBURSEMENT OF STAFF AND OTHER INCIDENTAL ADMINISTRATIVE EXPENSES AS WEL L AS RENT ACTUALLY INCURRED BY IDFC LIMITED ON ITS BEHALF WITHOUT ANY MARK-UP A ND THIS POSITION WAS ACCEPTED EVEN BY THE A.O. AS WELL AS BY THE LD. CIT (A) IN THEIR RESPECTIVE ORDERS. HE INVITED OUR ATTENTION TO THE RELEVANT PO RTION OF THE ORDER OF THE A.O. AS WELL AS THAT OF THE LD. CIT(A) TO SHOW THAT FIND ING/OBSERVATION TO THIS EFFECT WAS GIVEN BY THEM. HE CONTENDED THAT THE AMOUNT IN QUESTION THUS WAS ENTIRELY PAID BY THE ASSESSEE TO IDFC LIMITED ON AC COUNT OF REIMBURSEMENT OF ACTUAL EXPENDITURE WITHOUT ANY MARK-UP AND THE IDFC LIMITED HAVING ALREADY DEDUCTED TAX AT SOURCE FROM THE SAID EXPENSES, WHER EVER APPLICABLE, THE ASSESSEE WAS NOT LIABLE TO DEDUCT TAX AT SOURCE FRO M THE PAYMENT OF THE SAID EXPENSES AS HELD IN THE FOLLOWING JUDICIAL PRONOUNC EMENTS:- ITA 537/MUM/2012 8 (I) ITO VS. DR. WILLMAR SCHWABE INDIA (P.) LTD. (2005) 3 SOT 71 (DELHI) (II) CIT VS. SIEMENS AKTIONGESELLSCHAFT (2009) 310 ITR 3 20 (BOM) (III) CIT VS. INDUSTRIAL ENGINEERING PROJECTS PVT. LTD. 2 02 ITR 1014 (DEL) (IV) CIT VS. DUNLOP RUBBER CO. LTD. 142 ITR 493 (CAL.) (V) M/S UTILITY POWERTECH LTD. VS. ACIT (ITA 2561/M/09 ORDER DTD.19.4.10 (VI) ITO VS. ISE SECURITIES & SERVICES LTD. (ITA 6391/M/ 09 ORDER DTD.30.12.11. (VII) MAHYCO MONSANTO BIOTECH (INDIA) LTD. VS. ADDL. CIT (ITA NO. 5842/MUM/12 ORDER DT. 30-11-2012. 8. THE LD. D.R., ON THE OTHER HAND, RELIED ON THE ORDE RS OF THE AUTHORITIES BELOW IN SUPPORT OF THE REVENUES CASE ON THIS ISSU E THAT THE ASSESSEE HAVING FAILED TO DEDUCT TAX AT SOURCE FROM THE PAYMENT MAD E TO IDFC LIMITED, THE DISALLOWANCE U/S 40(A)(IA) OF THE ACT HAS BEEN RIGH TLY MADE BY THE A.O. AND CONFIRMED BY THE LD. CIT(A). 9. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS AND ALS O PERUSED THE RELEVANT MATERIAL AVAILABLE ON RECORD. THE LD. COUNSEL FOR T HE ASSESSEE HAS DEMONSTRATED BEFORE US FROM THE RELEVANT P&L ACCOUN T OF THE ASSESSEE COMPANY, SCHEDULE AND NOTE FORMING PART OF ACCOUNTS OF THE ASSESSEE AS WELL AS THE MOU BETWEEN THE ASSESSEE COMPANY AND IDFC LI MITED THAT THE AMOUNT IN QUESTION DISALLOWED BY THE A.O. U/S 40(A) (IA) OF THE ACT WAS PAID BY THE ASSESSEE COMPANY TO IDFC LIMITED TOWARDS REIMBU RSEMENT OF ACTUAL EXPENDITURE INCURRED BY THE SAID COMPANY ON BEHALF OF THE ASSESSEE COMPANY WITHOUT ANY MARK-UP OR ELEMENT OF PROFIT AND THE LD . D.R. HAS NOT DISPUTED THIS POSITION. AS A MATTER OF FACT, THIS POSITION HAS NOT BEEN DISPUTED EVEN BY THE A.O. OR THE LD. CIT(A) IN THEIR RESPECTIVE ORDE RS. ON THE CONTRARY, THE FACT THAT THE AMOUNT IN QUESTION WAS PAID BY THE ASSESSE E TO IDFC LIMITED TOWARDS REIMBURSEMENT OF EXPENSES WAS ACCEPTED BY T HE A.O. AS WELL AS BY THE LD. CIT(A) WHILE RECORDING THE FINDING/OBSERVAT ION IN THEIR RESPECTIVE ORDERS. THEY HAVE ALSO NOT DISPUTED THE FACT THAT THE EXPENSES REIMBURSED BY ITA 537/MUM/2012 9 THE ASSESSEE COMPANY TO IDFC LIMITED WERE MAINLY IN CLUDED SALARY PAID TO STAFF MEMBERS AND RENT PAID FOR PREMISES AND WHILE MAKING THESE PAYMENTS ORIGINALLY, IDFC LIMITED HAD DEDUCTED THE TAX AT SO URCE WHEREVER REQUIRED. 10. IN THE CASE OF UTILITY POWERTECH LIMITED (SUPRA ), A SIMILAR ISSUE AROSE FOR CONSIDERATION OF THE CO-ORDINATE BENCH OF THIS TRIB UNAL WHEREIN THE DISALLOWANCE U/S 40(A)(IA) OF THE ACT WAS MADE BY T HE A.O. ON ACCOUNT OF PAYMENT MADE BY THE ASSESSEE TOWARDS REIMBURSEMENT OF EXPENSES FOR NON- DEDUCTION OF TAX AT SOURCE AND THE SAID DISALLOWANC E WAS DELETED BY THE TRIBUNAL RELYING ON THE DECISION OF HONBLE BOMBAY HIGH COURT IN THE CASE OF SIEMENS AKTIONGESELLSCHAFT (SUPRA) WHEREIN IT WAS H ELD RELYING ON THE DECISION OF HONBLE DELHI HIGH COURT IN THE CASE OF INDUSTRI AL ENGINEERING PROJECTS PVT. LTD. (SUPRA) THAT THE REIMBURSEMENT OF EXPENSES COU LD NOT BE REGARDED AS REVENUE IN THE HANDS OF THE PAYEE. IT WAS HELD BY THE TRIBUNAL THAT WHEN THERE WAS NO ELEMENT OF INCOME AND THE PAYMENT WAS ONLY AS REIMBURSEMENT OF EXPENSES ACTUALLY INCURRED BY THE PAYEE, THEN TH ERE WAS NO OBLIGATION TO DEDUCT TAX AT SOURCE AND NO DISALLOWANCE COULD BE M ADE U/S 40(A)(IA) OF THE ACT. IN THE CASE OF STRATCAP SECURITIES (I) P. LTD . (SUPRA), THE CO-ORDINATE BENCH OF THIS TRIBUNAL DELETED THE SIMILAR DISALLOW ANCE MADE U/S 40(A)(IA) OF THE ACT HOLDING THAT TAX AT SOURCE WAS NOT LIABLE T O BE DEDUCTED FROM THE PAYMENT MADE TOWARDS REIMBURSEMENT OF EXPENSES ESPE CIALLY WHEN THE SAID EXPENSES HAD ALREADY BEEN SUBJECTED TO TAX DEDUCTIO N AT SOURCE WHILE THE PAYMENT WAS ORIGINALLY PAID. TO THE SIMILAR EFFECT ARE THE OTHER DECISIONS OF THE TRIBUNAL IN THE CASE OF ISE SECURITIES & SERVIC ES LTD. (SUPRA), MAHYCO MONSANTO BIOTECH (INDIA) LTD. (SUPRA) AND DR. WILMA R SCHWABE INDIA (P.) LTD. (SUPRA) CITED BY THE LD. COUNSEL FOR THE ASSESSEE. 11. IN THE PRESENT CASE, THE PAYMENT IN QUESTION WA S MADE BY THE ASSESSEE COMPANY TO IDFC LIMITED TOWARDS REIMBURSEMENT OF EX PENSES ACTUALLY INCURRED BY THE SAID COMPANY ON BEHALF OF THE ASSES SEE WITHOUT ANY MARK-UP ITA 537/MUM/2012 10 OR ELEMENT OF PROFIT AND THIS BEING THE UNDISPUTED POSITION, WE HOLD, KEEPING IN VIEW THE RATIO OF THE VARIOUS DECISIONS OF THE T RIBUNAL AS DISCUSSED ABOVE, THAT THE DISALLOWANCE MADE BY THE A.O. U/S 40(A)(IA ) OF THE ACT AND CONFIRMED BY THE LD. CIT(A) IS NOT SUSTAINABLE. THE SAME IS ACCORDINGLY DELETED ALLOWING GROUND 1 TO 4 OF THE ASSESSEES APPEAL. 12. THE GRIEVANCE RAISED BY THE ASSESSEE IN GROUND NO. 5 IS THAT THE LD. CIT HAS ERRED IN NOT ADJUDICATING UPON THE ISSUE RELATI NG TO THE DISALLOWANCE OF 1/3 RD OF AMOUNT OF RENT PAID BY THE ASSESSEE TO IDFC LIM ITED. 13. WITHOUT PREJUDICE TO THE DISALLOWANCE MADE BY H IM U/S 40(A)(IA) OF THE ACT ON ACCOUNT OF RENT PAID BY THE ASSESSEE TO IDFC LIMITED, THE CLAIM OF THE ASSESSEE ON ACCOUNT OF DEDUCTION FOR THE SAID RENT WAS ALSO EXAMINED BY THE A.O. ON MERIT. ON SUCH EXAMINATION, HE HELD THAT T HE ENTIRE RENT PAID BY THE ASSESSEE WAS NOT WHOLLY AND EXCLUSIVELY INCURRED FO R THE PURPOSE OF ASSESSEES BUSINESS. HE THEREFORE INVOKED THE PROV ISIONS OF SECTION 38(2) OF THE ACT AND MADE A DISALLOWANCE OF RS. 18,71,404/- OUT OF RENT BEING 1/3 RD OF THE TOTAL RENT PAID BY THE ASSESSEE TO IDFC LIMITED . ALTHOUGH THIS ISSUE WAS SPECIFICALLY RAISED BY THE ASSESSEE IN GROUND NO. 1 (E) TAKEN BEFORE THE LD. CIT(A) AND SUBMISSION THEREON WAS ALSO MADE, IT APP EARS THAT THE LD. CIT(A) AFTER HAVING CONFIRMED THE DISALLOWANCE MADE BY THE A.O. U/S 40(A)(IA) HAS NOT ADJUDICATED UPON THIS ISSUE. SINCE THE DISALLO WANCE MADE U/S 40(A)(IA) OF THE ACT HAS NOW BEEN DELETED BY US, THIS ISSUE IS R EQUIRED TO BE DECIDED ON MERIT AND SINCE THE LD. CIT(A) HAS NOT GIVEN ANY FI NDING ON MERIT OF THIS ISSUE, WE REMIT THIS MATTER TO THE FILE OF THE LD. CIT(A) FOR DECIDING THE SAME ON MERIT AFTER GIVING THE ASSESSEE AN OPPORTUNITY OF BEING H EARD. GROUND NO. 5 OF ASSESSEES APPEAL IS ACCORDINGLY TREATED AS ALLOWED . 14. DURING THE COURSE OF APPELLATE PROCEEDING BEFOR E THE TRIBUNAL, THE ASSESSEE HAS RAISED THE FOLLOWING GROUNDS AS ADDITI ONAL GROUNDS:- ITA 537/MUM/2012 11 6. WITHOUT PREJUDICE TO THE EXISTING GROUNDS OF AP PEAL, THE ID. COMMISSIONER OF INCOME TAX (APPEAL) [CIT(A)] ERRE D IN CONFIRMING THE ACTION OF ASSESSING OFFICER BY UPHOLDING THE DISALL OWANCE OF 1,19,51,553/- WITH RESPECT TO EXPENSES DEBITED UNDE R THE HEAD PRIOR PERIOD EXPENSE. 6.1. WITHOUT PREJUDICE TO THE ABOVE, THE ID. CIT(A) ERRED IN NOT CONSIDERING THE SUBMISSION OF THE APPELLANT, THAT I N THE EVENT THE PRIOR PERIOD EXPENSES AMOUNTING TO 1,19,51,553/- ARE HELD AS EXPENSES PERTAINING TO AY 2007- 08 AND NOT OF AY 2008-09, TH EN THE SAME SHOULD BE ALLOWED AS A DEDUCTION IN THE AY 2007-08. 7. THE APPELLANT PRAYS THAT IN THE EVENT OF IT BEIN G HELD THAT PRIOR PERIOD EXPENSES OF RS 77,38,000/- WERE NOT ALLOWABL E IN AY 2009-10, THE SAME SHOULD BE ALLOWED IN AY 2008-09. 15. THE ASSESSEE HAS ALSO MOVED AN APPLICATION SEEK ING ADMISSION OF THE AFORESAID ADDITIONAL GROUNDS FOR THE FOLLOWING REAS ONS:- IT IS SUBMITTED THAT THE APPELLANT HAD RAISED THE FOLLOWING ISSUES BEFORE THE COMMISSIONER OF INCOME TAX (APPEAL): 1.) DISALLOWANCE UNDER SECTION 40(A)(IA) OF THE INC OME TAX ACT, 1961 (ACT) ON PAYMENT AMOUNTING TO RS. 4,59,56,00 0 MADE BY THE APPELLANT TO ITS HOLDING COMPANY (I.E. IDFC LIM ITED). THE ISSUE WAS REGARDING WHETHER THE SAID PAYMENT IS IN THE NATURE OF SERVICE FEE OR REIMBURSEMENT AND ACCORDINGLY, WHETH ER THE APPELLANT WAS LIABLE TO DEDUCT TAX AT SOURCE ON SUC H PAYMENTS; AND II.) DISALLOWANCE OF RS 1,19,51,553 CLAIMED BY THE APPELLANT AS PRIOR PERIOD EXPENSES WHICH ALREADY FORMED A PART O F THE ABOVE DISALLOWANCE OF RS 4,59,56,000 UNDER SECTION 40(A)( IA) OF THE ACT. THE CIT(A) VIDE HIS ORDER DATED NOVEMBER 3, 2011 UP HELD THE ACTION OF THE ASSESSING OFFICER WITH RESPECT TO GROUND NO (I) . WITH RESPECT TO GROUND NO (II) THE CIT(A) HELD THAT THE ACTION OF T HE ASSESSING OFFICER IN DISALLOWING THE PRIOR PERIOD EXPENSES IN AY 2008-09 IS CORRECT, HOWEVER, IT ALSO HELD THAT SINCE THE PRIOR PERIOD E XPENSE IS ALREADY INCLUDED IN THE DISALLOWANCE OF RS 4,59,56,000 MADE UNDER SECTION 40(A)(IA) OF THE ACT, THE SAME WOULD TANTAMOUNT TO DOUBLE DISALLOWANCE AND ACCORDINGLY, A DIRECTION WAS ISSUED TO THE ASSE SSING OFFICER TO DELETE THE SAME. ITA 537/MUM/2012 12 AGGRIEVED BY THE ORDER OF THE CIT(A), THE APPELLANT APPEALED BEFORE THE INCOME TAX APPELLATE TRIBUNAL (ITAT) ON THE REIMB URSEMENT ISSUE, HOWEVER, SINCE PRIOR PERIOD EXPENSES WERE ALREADY F ORMING PART OF REIMBURSEMENT ISSUE, THE APPELLANT INADVERTENTLY MI SSED TO TAKE THE GROUND OF THE PRIOR PERIOD EXPENSE ISSUE. ACCORDING LY, THE FAILURE TO RAISE THIS GROUND INITIALLY WAS NEITHER DELIBERATE NOR CONTUMACIOUS AND WE THEREFORE REQUEST THAT THE PRESENT APPLICATION B E PLACED BEFORE THE BENCH FOR NECESSARY ORDERS. REASON FOR RAISING ADDITIONAL GROUND NO 7. IT IS SUBMITTED THAT A SIMILAR ISSUE REGARDING THE PRIOR PERIOD EXPENSE AMOUNTING TO RS 77,38,000 AROSE IN AY 2009- 10 WHER E THE APPELLANT HAD CLAIMED IT AS AN ALLOWABLE EXPENDITURE WHEREAS THE ASSESSING OFFICER DISALLOWED THE SAME DURING THE COURSE OF TH E ASSESSMENT PROCEEDINGS WHICH WERE COMPLETED ON NOVEMBER 30, 20 11. IN THIS REGARD, IT IS SUBMITTED THAT THE APPELLANT HAS ALRE ADY FILED AN APPEAL BEFORE THE ITAT WITH RESPECT TO THE SAID ISSUE. HOWEVER, WITHOUT PREJUDICE TO THE ABOVE, IN CASE TH E PRIOR PERIOD EXPENSE AMOUNTING TO RS 77,38,000 IS NOT ALLOWED IN AY 2009-10 THEN THE SAME SHOULD BE ALLOWED IN AY 2008-09. YOUR HONO R WOULD APPRECIATE THAT THE SAID GROUND COULD NOT HAVE BEEN RAISED EARLIER, IN VIEW OF THE FACT THAT THE CIT(A) ORDER FOR AY 2009- 10 WAS RECEIVED ON FEBRUARY 11, 2013 WHEREAS THE APPEAL FOR AY 2008-09 WAS FILED BEFORE YOUR HONOR ON JANUARY 25, 2012 (I.E. PRIOR TO RECEI PT OF CIT(A) ORDER FOR AY 2009102]. 15. KEEPING IN VIEW THE REASON GIVEN ABOVE BY THE A SSESSEE IN THE APPLICATION SEEKING ADMISSION OF THE ADDITIONAL GRO UNDS AND HAVING REGARD TO THE FACT THAT THE LD. D.R. HAS NOT RAISED ANY OBJEC TION FOR THE ADMISSION OF THE SAID ADDITIONAL GROUNDS, WE ADMIT THE ADDITIONAL GR OUNDS FILED BY THE ASSESSEE AND NOW PROCEED TO DECIDE THE SAME ON MERI T. 17. AS REGARDS THE ISSUE RAISED IN GROUND NO. 6 REL ATING TO DISALLOWANCE MADE BY THE A.O. AND CONFIRMED BY THE LD. CIT(A) ON ACCOUNT OF PAYMENT OF BONUS PERTAINING TO A.Y. 2007-08 TREATING THE SAME AS PRIOR PERIOD EXPENSES, IT IS OBSERVED THAT THE SAID DISALLOWANCE WAS MADE BY THE A.O. AND CONFIRMED BY THE LD. CIT(A) MAINLY ON THE GROUND THAT THE ASS ESSEE COULD NOT ESTABLISH THAT THE LIABILITY ON ACCOUNT OF PAYMENT OF BONUS P ERTAINING TO A.Y. 2007-08 ITA 537/MUM/2012 13 WAS CRYSTALISED DURING THE YEAR UNDER CONSIDERATION . EVEN AT THE TIME OF HEARING BEFORE US, THE LD. COUNSEL FOR THE ASSESSEE HAS NOT BEEN ABLE TO ESTABLISH SATISFACTORILY THAT THE LIABILITY ON ACCO UNT OF BONUS PERTAINING TO A.Y. 2007-08 WAS CRYSTALISED OR HAD ARISEN DURING THE YE AR UNDER CONSIDERATION AND THIS BEING SO, WE FIND NO JUSTIFIABLE REASON TO INTERFERE WITH THE IMPUGNED ORDER OF THE LD. CIT(A) CONFIRMING THE DISALLOWANCE MADE BY THE A.O. ON ACCOUNT OF PAYMENT OF BONUS PERTAINING TO A.Y. 2007 -08 TREATING THE SAME AS PRIOR PERIOD EXPENDITURE. GROUND NO. 6 OF ASSESSEE S APPEAL IS ACCORDINGLY DISMISSED. 18. AS REGARDS GROUND NO. 6.1 RELATING TO THE ASSES SEES ALTERNATIVE CLAIM THAT DEDUCTION ON ACCOUNT OF PAYMENT OF BONUS PERTA INING TO A.Y. 2007-08 SHOULD BE DIRECTED TO BE ALLOWED IN A.Y. 2007-08, W E FIND NO MERIT IN THE SAME AS THE PRESENT APPEAL BEFORE US IS FOR A.Y. 20 08-09 AND THE DIRECTION SOUGHT BY THE ASSESSEE FOR ALLOWING DEDUCTION IN A. Y. 2007-08 CAN BE GIVEN ONLY WHILE DISPOSING OF THE APPEAL FOR THAT YEAR. GROUND NO. 6.1 IS ACCORDINGLY DISMISSED. 19. IN GROUND NO. 7, THE ASSESSEE HAS SOUGHT A DIRE CTION FROM US TO THE A.O. THAT THE EXPENSES OF RS. 77,38,000/- PERTAININ G TO A.Y. 2008-09 BEING DISALLOWED IN A.Y. 2009-10 TREATING THE SAME AS PRI OR PERIOD EXPENDITURE, THE SAME SHOULD BE ALLOWED IN A.Y. 2008-09. WE ACCORDI NGLY DIRECT THE A.O. TO CONSIDER THE CLAIM OF THE ASSESSEE FOR THE SAID EXP ENSES IN THE YEAR UNDER CONSIDERATION I.E A.Y. 2008-09 ON BEING DISALLOWED IN A.Y. 2009-10 AS PRIOR PERIOD EXPENSES PERTAINING TO A.Y. 2008-09. THE A. O. SHALL CONSIDER THIS ALTERNATIVE CLAIM OF THE ASSESSEE ON MERIT IN ACCOR DANCE WITH LAW AFTER VERIFYING OF THE RELEVANT ASPECTS. GROUND NO. 7 IS ACCORDINGLY TREATED AS ALLOWED. ITA 537/MUM/2012 14 20. IN THE RESULT, APPEAL OF THE ASSESSEE IS PARTLY ALLOWED. 4 5 &) %4 / 63 #$ 7 / 89 ORDER PRONOUNCED IN THE OPEN COURT ON 6 TH SEPT. 2013. . '3 / 12* :')5 06-09-2013 2 / SD/- SD/- (SANJAY GARG) (P.M. JAGTAP ) & !'# JUDICIAL MEMBER !'# / ACCOUNTANT MEMBER MUMBAI ; :') DATED 06-09-2013. $.&).!./ RK , SR. PS '3 / -&6; <;* '3 / -&6; <;* '3 / -&6; <;* '3 / -&6; <;*/ COPY OF THE ORDER FORWARDED TO : 1. +, / THE APPELLANT 2. -.+, / THE RESPONDENT. 3. = () / THE CIT(A)- 2, MUMBAI 4. = / CIT 1 MUMBAI 5. ;$@ -&&) , , / DR, ITAT, MUMBAI I BENCH 6. A% B / GUARD FILE. '3)! '3)! '3)! '3)! / BY ORDER, !.; -& //TRUE COPY// C C C C/ // /!8 !8 !8 !8 ( DY./ASSTT. REGISTRAR) , , , , / ITAT, MUMBAI