ITO 9(1)(4), MUMBAI V. DATAMATICS SOFTWARE P.LTD, MUMBAI

ITA 5433/MUM/2010

• Counselvise Citation: 543319914 RSA 2010
• Duration Of Justice: 1 year(s) 9 month(s) 2 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 04-04-2012
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: D
• Next Hearing Date: 29-03-2012
• Assessment Year: 2006-2007
• Appeal Filed On: 02-07-2010
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: RUPINDER BRAR
• Assessee Lawyers: J P BAIRAGRA
• Keywords: Deemed to accrue or arise in india; Bad and doubtful debts
• Section: 133(6)

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL MUMBAI BENCH D MUMBAI BEFORE SHRI B.R. MITTAL (JUDICIAL MEMBER) AND SHRI RAJENDRA SINGH (ACCOUNTANT MEMBER) ITA NO. 5433/MUM/2010 ASSESSMENT YEAR-2006-07 THE ITO ((1)(4), AAYAKAR BHAVAN, MUMBAI-400 020 VS. M/S. DATAMATICS SOFTWARE PVT.LTD., PLOT NO. B/5, MIDC, PART-B, CROSS LANE, MAROL, ANDHERI(E), MUMBAI-400 093 PAN-AABCD 9259Q (APPELLANT) (RESPONDENT) APPELLANT BY: MS. RUPINDER BRAR RESPONDENT BY: SHRI J.P. BAIRAGRA DATE OF HEARING :29.03.2012 DATE OF PRONOUNCEMENT: 4.4.2012 O R D E R PER B.R. MITTAL, JM : THE DEPARTMENT HAS FILED THIS APPEAL FOR ASSESSMEN T YEAR 2006-07 AGAINST ORDER OF LD. CIT(A) DT. 30.4.2010. 2. GROUND NO. 1 OF APPEAL IS AS UNDER: ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE AND IN LAW, THE LD. CIT(A) ERRED IN DELETING THE ADDITION OF RS. 79,51,827/- MADE BY THE AO ON ACCOUNT OF EXPLAINED INCOME, WITHOUT APPRECIATING THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW. 2. THE RELEVANT FACTS ARE THAT ASSESSEE COMPANY WAS PROVIDING FACILITY MANAGEMENT SERVICES TO M/S. KNOWLEDGE WORKS GLOBAL LTD (HEREINAFTER TO BE REFERRED IN SHORT KWGL). DURING THE COURSE OF ASSE SSMENT PROCEEDINGS, ASSESSING OFFICER OBSERVED FROM PROFIT & LOSS ACCOU NT AND TDS CERTIFICATE ITA NO. 5433/M/2010 2 FILED BY ASSESSEE THAT ASSESSEE COMPANY WAS IN RECE IPT OF MANAGEMENT FEE FROM KWGL. THE AO HAS IN PARA 3.5 OF ASSESSMENT OR DER AT PAGE-4 HAS GIVEN DETAILS OF THE PAYMENT AND THE TDS DEDUCTED BY KWGL , WHICH IS AS UNDER: ALONGWITH RETURN OF INCOME, THE ASSESSEE FILED A T DS CERTIFICATE RECEIVED FROM M/S. KNOWLEDGE WORKS GLOBAL PVT. LTD. THE CONTENTS OF THE CERTIFICATES ARE REPRODUCED BELOW: DATE AMOUNT PAID/RECEIVED (RS) TDS (RS.) SURCHARGE (RS) EDUCATION CESS(RS) TOTAL TAX DEPOSITED (RS) CHEQUE/ DD/CASH BSR CODE OF THE BRANCH DATE OF DEPOSIT CHALLAN NO./TRANSFER VOUCHER NO. 30.4.05 164,634.00 62,050 6,205 / - 1,365.00 69,620/ - 712379 220912 10.5.05 3 30.4.05 169,410 .00 63,850 6,385/ - 1,405.00 71,640/ - 812434 220912 7.6.05 79 30.4.05 178,165.00 67,150 6,715/ - 1,477 .00 75,342/ - 250938 220912 9.7.05 2 30.4.05 215,577.00 81,250 8,125/ - 1,788.00 91,163/ - 524404 220912 23.8.05 3 30.4.05 280,126.00 105,577 10,559 2,323.00 118,459 576100 220912 14.9.05 6 30.4.05 233,088.00 87,850 8,785/ - 1,933.00 98,568/ - 282358 220912 11.10.05 3 TOTAL 1,241,000.00 467,727 46,774 10,291 .00 524,792 / - - -- - 3. THE AO CALLED FOR INFORMATION U/S. 133(6) OF I.T . ACT FROM VARIOUS PARTIES INCLUDING KWGL. IN RESPONSE TO NOTICE U/S. 133(6), KWGL SUBMITTED THAT FACILITY MANAGEMENT SERVICES ARE PROVIDED TO A SSESSEE COMPANY FOR WHICH FEE CHARGED BUT THERE WAS NO FORMAL AGREEMENT . THE LEDGER ACCOUNT OF ASSESSEE COMPANY IN THE BOOKS OF KWGL WAS ALSO S UBMITTED BEFORE AO. IT IS RELEVANT TO STATE THAT AO HAS MADE ANNEXURE-A TO THE ASSESSMENT ORDER, THE SAID LEDGER ACCOUNT OF ASSESSEE-COMPANY IN THE BOOKS OF KWGL. THE AO OBSERVED ON PERUSAL OF SAID LEDGER ACCOUNT THAT PAY MENT HAD BEEN MADE THROUGH CHEQUE ON MONTHLY BASIS FROM APRIL TO MARCH , 2006 AND TDS WAS DEDUCTED ACCORDINGLY. IN ORDER TO VERIFY LEDGER ACC OUNT SUBMITTED BY KWGL, AO CALLED FOR BOOKS OF ACCOUNT AND BANK STATEMENT OF ASSESSEE COMPANY. IN RESPONSE THERETO, ASSESSEE FILED REPLY WHICH IS REP RODUCED BY AO IN PARA 3.8 OF ASSESSMENT ORDER WHICH READS AS UNDER: OUR CLIENT STATES THAT AS PER THEIR RECORD THERE H AS BEEN NO TRANSACTION AMOUNTING TO RS. 1,10,60,716/- TOWAR DS FACILITY MANAGEMENT SERVICES AS STATED BY THEM. OUR CLIENT HAS NOT MADE ANY PAYMENT TO THIS EFFECT AND NEITHER CLAIMED ANY EXPENDITURE RELATED TO IT. IN CASE YOU NEED ANY CLARIFICATIONS IN THIS REGARD, OUR CLIENT WILL NEED TO CROSS EXAMINE THE SAID KNOWLEDG E WORKS GLOBAL LTD., SO AS TO ESTABLISH THE FACTS IN THIS REGARD. ITA NO. 5433/M/2010 3 4. FURTHER, AO HAS STATED THAT ON BEHALF OF KWGL, M /S. SUDIT PAREKH & CO., CHARTERED ACCOUNTANT VIDE THEIR LETTER DT. 26. 12.2008 STATED THAT THERE WAS A TYPOGRAPHICAL MISTAKE IN THEIR LETTER DT. 5.1 0.2008. THE CONTENTS OF SAID LETTER DT. 26.12.2008 ARE STATED BY AO IN PAR A 3.9 AT PAGE-5 OF ASSESSMENT ORDER WHICH READS AS UNDER: IN REPLY TO THE SAID NOTICE, OUR CLIENT HAS FURNIS HED A DETAILED REPLY DT. 5 TH OCTOBER FILED IN YOUR OFFICE ON 7 TH OCTOBER. IN THE AFORESAID LETTER, THERE IS A TYPOGRAPHICAL MISTAKE THAT HAS CREPT IN INADVERTENTLY. IN THE FIRST PARAGRAPH, WHILE GIVING THE NATURE OF T RANSACTIONS ENTERED INTO WITH M/S. DATAMATICS SOFTWORLD PVT. LT D., IT HAS BEEN WRONGLY MENTIONED THAT THE ASSESSEE PROVIDED F ACILITIES MANAGEMENT SERVICES TO M/S. DATAMATICS SOFTWORLD PV T. LTD., AND FOR WHICH FEES ARE RECEIVED BY THE ASSESSEE FRO M THE SAID COMPANY. THE CORRECT POSITION IS THAT IT IS M/S. D ATAMATICS SOFTWORLD PVT. LTD., WHICH PROVIDED THE SAID FACIL ITY MANAGEMENT SERVICES TO KNOWLEDGE WORKS GLOBAL LTD. AND FOR WHICH FEES WERE PAID BY KNOWLEDGE WORKS GLOBAL LTD ., TO DATAMATICS SOFTWORLD PVT. LTD., YOU MAY NOTE FROM THE OTHER DETAILS FILED ALONGWITH THE SAID LETTER DT. 5 TH OCTOBER THAT THE FACTS BRING OUT THE CORRECT POSIT ION AS GIVEN ABOVE. THE ERROR IS DEEPLY REGRETTED. 5. THE AO HAS STATED THAT IN ORDER TO VERIFY AS TO WHETHER THERE WAS A TRANSACTION OF ASSESSEE WITH KWGL AND ALSO TO VERIF Y PAYMENTS MADE BY KWGL TO ASSESSEE-COMPANY, HE CALLED FOR BOOKS OF AC COUNT INCLUDING BANK STATEMENT OF ASSESSEE, BUT ASSESSEE FAILED TO SUBMI T THE SAME. AO HAS STATED THAT FROM THE LEDGER ACCOUNT OF KWGL, IT IS OBSERVED THAT ASSESSEE RECEIVED A SUM OF RS. 1,05,59,424/- INCLUDING SERVI CE TAX OF RS. 9,80,847/- ON ACCOUNT OF FEE TOWARDS FACILITY MANAGEMENT SERVI CES BUT ASSESSEE HAS ONLY OFFERED RS. 16,26,750/-. THUS, THERE IS A DIF FERENCE OF RS. 79,51,827/- WHICH IS RECEIVED OR ACCRUED DURING THE YEAR FROM K WGL AND ASSESSEE HAS NOT OFFERED IT FOR TAXATION. THE AO HAS GIVEN A TA BULAR CHART AT PAGES 5 & 6 OF ASSESSMENT ORDER. THE AO AFTER CONSIDERING SAID TRANSACTIONS, HAS STATED THAT ASSESSEE PROVIDED FACILITY MANAGEMENT SERVICES FOR WHICH ASSESSEE WAS ITA NO. 5433/M/2010 4 TO RECEIVE AS FEES TO THE TUNE OF RS. 85,04,134/-. THE REVERSAL ENTRY AS STATED BY ASSESSEE IS VAGUE AND CONTRARY TO ACCOUNT ING STANDARD. IN PROPRIETY, IT SHOULD HAVE BEEN CREDITED AS INCOME A ND IF AT ALL ANY DOUBT ABOUT THE CERTAINTY OF INCOME, SAME COULD HAVE BEEN CLAIMED AS BAD DEBTS. THUS, AO CONCLUDED THAT TDS CLAIMED BY ASSESSEE COM PANY AMOUNTING TO RS. 5,24,792/- IS RELATING TO INCOME OF RS. 1,05,59 ,424/-, OUT OF WHICH ONLY RS. 16,26,750/- HAS BEEN OFFERED FOR TAXATION. ACCO RDINGLY, AO ADDED THE DIFFERENCE OF RS. 79,51,827/- TO THE INCOME OF ASSE SSEE. BEING AGGRIEVED, ASSESSEE FILED APPEAL BEFORE FIRST APPELLATE AUTHOR ITY. 6. THE SUBMISSIONS MADE BY ASSESSEE BEFORE LD. CIT( A) HAVE BEEN STATED BY LD. CIT(A) IN PARA 5.3 OF IMPUGNED ORDER WHICH I S AS UNDER: BEFORE ME THE APPELLANT HAS SUBMITTED AS UNDER: THE APPELLANT COMPANY WAS PROVIDING FACILITY MANAGE MENT SERVICES TO M/S. KNOWLEDGE WORKS GLOBAL LTD. SAID S ERVICES WERE DISCONTINUED FROM THE MONTH OF OCTOBER 2005. ACCORDINGLY, THE APPELLANT COMPANY HAS RAISED MONTH LY BILLS IN RESPECT OF FACILITY MANAGEMENT SERVICES RENDERED FO R THE MONTHS OF APRIL 2005 TO SEPTEMBER 2005. HOWEVER, DI SPUTE AROSE ABOUT THE FACILITY MANAGEMENT SERVICES PROVID ED BY THE APPELLANT COMPANY AND ACCORDINGLY, AS AGREED THE AP PELLANT COMPANY HAD TO CANCEL THE BILLS FOR THE MONTHS OF M AY 2005 TO SEPTEMBER 2005, DETAILS OF WHICH ARE AS UNDER: MAY 2005 RS. 14,07,254 JUNE 2005 RS. 14,79,986 JULY 2005 RS. 17,90,750 AUGUST 2005 RS. 18,89,930 SEPTEMBER 2005 RS. 19,36,214 ------------------ TOTAL RS. 85,04,134 ========= THEREFORE, THE REVERSAL ENTRIES WERE PASSED BY THE APPELLANT COMPANY AS WELL AS BY THE M/S. KNOWLEDGE WORKS GLOB AL LTD. AS MUTUALLY AGREED BETWEEN BOTH THE PARTIES, WHICH IS EVIDENT FROM THE COPY OF ACCOUNT OF THE APPELLANT COMPANY IN THE BOOKS OF M/S. KNOWLEDGE WORKS GLOBAL LTD. RECEIVED BY THE ID. AO WHICH IS THE ANNEXURE A TO THE ASSESSMENT ORDER. ITA NO. 5433/M/2010 5 ACCORDINGLY, IN EFFECT, THE APPELLANT COMPANY HAS R ECEIVED THE FOLLOWING AMOUNTS WHICH ARE INCLUDED UNDER THE HEAD OTHER INCOME IN THE HOOKS OF THE APPELLANT COMPANY (1) FACILITY MANAGEMENT SERVICES FOR APRIL 2005 13, 67,582 LESS SERVICE TAX 1,26,582 12,41,000 (2) PAYROLL SERVICES FOR OCT. TO DEC.2005 3,87,750 TOTAL 16,28,750 ====== SINCE M/S. KNOWLEDGE WORKS GLOBAL LTD. CREDIT THE ACCOUNT OF THE APPELLANT COMPANY IN RESPECT OF FACI LITY MANAGEMENT SERVICES ON MONTHLY BASIS ON RAISING OF THE BILL BY THE APPELLANT COMPANY THEY HAVE CREDITED TO THE ACC OUNT OF THE APPELLANT COMPANY FOR THE MONTHS OF MAY 2005 TO SEP TEMBER 2005 ALSO AND ACCORDINGLY TDS IS DEDUCTED AND PAID ON THESE BILLS ALSO WHICH IS EVIDENT FROM TDS CERTIFICATE IN CORPORATED IN PARA 3.5 OF THE ORDER THAT THOUGH DATE OF BILL MENT IONED APRIL 2005, BUT TDS IS DEPOSITED ON DIFFERENT DATES IN TH E MONTH OF. MAY 2005 TO OCTOBER 2005. HOWEVER AS SUBMITTED ABOV E THESE FACILITY MANAGEMENT SERVICES BILLS FOR THE MONTHS O F MAY 2005 TO SEPTEMBER 2005 WERE SUBSEQUENTLY CANCELLED BUT S INCE TDS ALREADY DEDUCTED AND PAID CANNOT HE CORRECTED, THEY HAVE ISSUED THE TDS CERTIFICATE OF RS.524,792/- IN WHICH THEY HAVE SHOWN THE AMOUNT PAYABLE OF RS. 12.41,000/- ONLY W HICH IS TOWARDS FACILITY MANAGEMENT SERVICES CHARGES PAYABL E FOR THE MONTH OF APRIL 2005. IN OTHER WORDS , THIS TDS CERT IFICATE GIVES THE CLEAR PICTURE OF AMOUNT PAID BY THEM FOR THE MO NTH OF APRIL 2005 OF RS. 12.41.000/ ONLY. HOWEVER, SINCE THEY HAVE ALREADY DEDUCTED TDS IN RESPECT OF THE BILLS FOR T HE MONTHS OF MAY 2005 TO SEPTEMBER 2005, THEY HAVE MENTIONED THE AMOUNT OF TDS PAID OF RS. 5,24,792/- IN THIS CERTIFICATE. FURTHER THE APPELLANT COMPANY HAS SHOWN THE INCOME ON ACCOUNT OF FACILITY MANAGEMENT SERVICES OF RS. 16,2 6, 750/-. THE DIFFERENCE OF RS. 3,87,750/- IS ON ACCOUNT OF I NCOME RECEIVABLE FOR PAYROLL SERVICES FROM OCTOBER 2005 T O DECEMBER,2005. 7. LD. CIT(A) AFTER CONSIDERING THE SUBMISSIONS OF ASSESSEE AND ORDER OF AO AS WELL AS COPY OF AGREEMENT DT. 4 TH AUGUST, 2004 AND COPY OF TERMINATION AGREEMENT ENTERED INTO BETWEEN ASSESSEE AND KWGL DT. 31.3.2006 FOR PROVIDING FACILITY MANAGEMENT SERVICE S AND ALSO AFTER SEEKING REMAND REPORT FROM AO HAS DELETED THE SAID ADDITION OF RS. 79,51,827/- VIDE PARA 5.4 OF THE IMPUGNED ORDER WHICH READS AS UNDER : ITA NO. 5433/M/2010 6 I HAVE CONSIDERED THE SUBMISSION OF THE APPELLANT, O RDER OF THE AO AND BRIEF FACTS OF THE CASE ARE THAT THE APPELLANT COMPANY WAS PROVIDED FACILITY MANAGEMENT SERVICE TO M/S. KNOWLEDGE WORKS GLOBAL LTD. AND THE APPELLANT COMPA NY HAS RAISED MONTHLY BILLS IN RESPECT OF FACILITY MANAGEM ENT SERVICES RENDERED FOR THE MONTH OF APRIL 2005 TO MARCH 2006. THE COPY OF AGREEMENT PROVIDING FACILITY MANAGEMENT SERVICES EN TERED BETWEEN M/S. KNOWLEDGE WORKS GLOBAL LTD. AND THE CO PY OF TERMINATION OF AGREEMENT BETWEEN THE TWO COMPANIES WERE SUBMITTED. COPY OF THE LEDGER ACCOUNT OF M/S. KNOWL EDGE WORKS GLOBAL LTD. WAS ALSO SUBMITTED WHICH WAS SUBMITTED BEFORE THE AO. FROM THE PERUSAL OF THESE DOCUMENTS, IT IS NOTI CED THAT THE AGREEMENT OF PROVIDING FACILITY MANAGEMENT SERVICES DATED 4/8/2004 WAS TERMINATED VIDE TERMINATION AGREEMENT DATED 31/03/2006. ACCORDING TO THIS AGREEMENT, THE APPEL LANT HAS REVERSED THE ENTRIES IN THE LEDGER ACCOUNT IN THE M ONTH OF MAY 2005 TO SEPTEMBER 2005 WHICH SHOW THE PAYMENT OF RS.85,04,134/-. THE REVERSAL ENTRIES WERE PASSED BY THE APPELLANT COMPANY AS WELL AS M/S. KNOWLEDGE WORKS G LOBAL LTD. HAS MUTUALLY AGREED BETWEEN BOTH THE PARTIES. THE L EDGER ACCOUNT OF THE APPELLANT COMPANY IN THE BOOKS OF AC COUNTS OF M/S. KNOWLEDGE WORKS GLOBAL LTD. WHICH IS MADE A PA RT AS ANNEXURE- A OF THE ASSESSMENT ORDER. THESE REVERSAL ENTRIES ARE CLEARLY_ SHOWN ON 31/03/2006. THE ARGUMENT OF THE A O IS THAT THE APPELLANT CANNOT MAKE REVERSE ENTRIES ON THE BA SIS OF TERMINATION AGREEMENT. HE HAS OF THE VIEW THAT IF ANY CLAIM IS TO BE MADE, IT SHOULD BE A NATURE OF BAD DEBTS IN THE NEXT YEAR AND IT CANNOT BE CLAIMED IN THE YEAR UNDER CONSIDERATIO N. THE AO HAS NOT DISPUTED THE LEDGER ACCOUNT OF THE APPELLAN T COMPANY IN THE BOOKS OF M/S. KNOWLEDGE WORKS GLOBAL LTD. NOR T HERE IS ANY DISCREPANCY NOTICED IN THE BOOKS OF THE APPELLANT B ECAUSE THE REVERSAL OF ENTRIES ARE MADE ON THE BASIS OF TERMIN ATION AGREEMENT MUTUALLY AGREED BY BOTH THE COMPANIES. F ROM THESE FACTS OF THE CASE, IT IS OBSERVED THAT THERE IS NO DISPUTE REGARDING THE REVERSAL OF ENTRIES BOOKS OF ACCOUNT OF BOTH TH E COMPANIES BUT THE OBJECTION OF THE AO IS THAT THE ENTRIES MAD E ARE NOT AS PER THE ACCOUNTING STANDARD, IT SHOULD HAVE BEEN CL AIMED AS BAD DEBTS IN THE NEXT YEAR. IN TOTALITY OF FACTS AND CIRCUMSTANCES, IT IS CLEAR THAT BOTH THE COMPANIES HAS MADE REVERSE ENTRIES IN THE BOOKS OF ACCOUNTS ON 31.3.2006 AS PER THE TERMINATION AGREEMENT MUTUALLY AGREED BY THEM. THEREFORE, THE CLAIM OF THE AO THAT IT SHOUL D HAVE BEEN CLAIMED AS BAD DEBTS IN THE NEXT YEAR WITHOUT ANY B ASIS WHEN BOTH THE COMPANIES HAVE CONFIRMED THAT ENTRIES OF R S. 85,04,134/- HAVE BEEN REVERSED AND DULY REFLECTED I N THE BOOKS OF ACCOUNTS, THEN THERE IS NO QUESTION OF ANY DISPU TE. THE AO ITA NO. 5433/M/2010 7 HAS NO OTHER INFORMATION IN HIS EXPLANATION THAT TH E ENTRIES MADE BY BOTH THE COMPANIES ARE ILLEGAL OR MALAFIED. KEE PING IN VIEW ALL THESE FACTS AND CIRCUMSTANCES, IT IS HELD THAT THE AO HAS NOT PROPERLY APPRECIATE THE FACTS OF THE CASE, THEREFOR E, THE ADDITION MADE OF RS. 79,51,827/- IS NOT SUSTAINABLE, HENCE D ELETED. HENCE, DEPARTMENT IS IN APPEAL BEFORE THE TRIBUNAL . 8. THE LD. DEPARTMENTAL REPRESENTATIVE SUBMITTED TH AT ASSESSEE RAISED BILLS FOR PROVIDING FACILITY MANAGEMENT SERVICES TO KWGL FROM APRIL TO SEPTEMBER, 2005 AND THE AMOUNT WAS ALSO CREDITED BY KWGL IN THE NAME OF ASSESSEE COMPANY AFTER DEDUCTING TDS. HE SUBMITTED THAT IF THERE WAS A DISPUTE BETWEEN ASSESSEE AND KWGL AND AGREEMENT WAS TERMINATED, AMOUNT WHICH COULD NOT BE RECOVERED AGAINST THE BILLS RAIS ED AND ALREADY CREDITED IN THE NAME OF ASSESSEE SHOULD HAVE BEEN CLAIMED AS BA D DEBTS AS PER ACCOUNTING STANDARD INSTEAD OF MAKING CONTRA ENTRIE S AND NOT TO SHOW THE SAID AMOUNT AS INCOME. LD. DR SUBMITTED THAT AO WAS JUSTIFIED TO MAKE THE ADDITION OF DIFFERENCE OF RS. 79,51,827/- TO THE IN COME OF THE ASSESSEE. 9. ON THE OTHER HAND, LD. AR MADE HIS SUBMISSIONS O N THE LINES OF SUBMISSIONS MADE BEFORE AUTHORITIES BELOW. HE FURT HER SUBMITTED THAT THERE WAS AN AGREEMENT BETWEEN ASSESSEE AND KWGL FOR PROV IDING FACILITY MANAGEMENT SERVICES AND REFERRED COPY OF AGREEMENT DT. 4 TH AUGUST, 2004 PLACED AT PAGES 43 TO 48 OF PAPER BOOK. HE SUBMITT ED THAT ASSESSEE RAISED BILLS FOR THE MONTH OF APRIL 2005 TO SEPTEMBER, 200 5 AND ENTERED THE AMOUNT OF BILLS IN ITS BOOKS OF ACCOUNT. HE SUBMITTED THA T KWGL ALSO CREDITED SAID BILLS IN ITS BOOKS OF ACCOUNT AND DEDUCTED TDS ON T HE BASIS OF BILLS RAISED BUT ACTUALLY NO PAYMENT WAS MADE FOR BILLS RAISED FOR T HE MONTHS FROM MAY 2005 TO SEPT 2005. THEREFORE, REVERSAL ENTRY WAS PASSED BY ASSESSEE-COMPANY AS WELL AS KWGL IN THEIR BOOKS OF ACCOUNT AS MUTUALLY AGREED BETWEEN THE PARTIES. HE SUBMITTED THAT ULTIMATELY AGREEMENT WA S CANCELLED ON 31.3.2006 AND REFERRED PAGES 49 TO 52 OF PAPER BOOK AT WHICH COPY OF TERMINATION AGREEMENT IS PLACED. LD. AR SUBMITTED THAT AS PER SAID AGREEMENT, IT WAS MUTUALLY AGREED BETWEEN ASSESSEE AND KWGL TO TERMIN ATE THE AGREEMENT OF PROVIDING FACILITY MANAGEMENT SERVICES WITH EFFECT FROM 1 ST MAY, 2005 AND ALL ITA NO. 5433/M/2010 8 RIGHTS AND OBLIGATIONS OF THE PARTIES UNDER THE FAC ILITY MANAGEMENT AGREEMENT STOOD TERMINATED IN ENTIRETY WITHOUT ANY LIABILITIES AND CLAIMS. 10. LD. AR SUBMITTED THAT AO OBTAINED COPIES OF LED GER ACCOUNT OF ASSESSEE FROM KWGL AND HE HAS ANNEXED SAID LEDGER A CCOUNT AS ANNEXURE-A TO ASSESSMENT ORDER. LD. AR SUBMITTED THAT KWGL HA S ALSO SHOWN REVERSAL OF ENTRIES EVIDENCING THAT NO PAYMENTS WERE MADE TO AS SESSEE AGAINST BILLS RAISED FOR THE MONTH OF MAY, 2005 TO SEPTEMBER, 200 5. HE SUBMITTED THAT AO CONCLUDED THAT PAYMENT WAS RECEIVED MERELY BECAU SE KWGL ALREADY DEDUCTED TDS ON THE BASIS OF BILLS RAISED BY ASSESS EE AND PAID TDS TO GOVERNMENT. THE LD. AR REFERRED TO PAGES 4 OF ASSE SSMENT ORDER WHICH CONTAIN DETAILS OF TDS CERTIFICATE RECEIVED BY ASSE SSEE FROM KWGL AND FILED BY ASSESSEE ALONGWITH RETURN AND SUBMITTED THAT AMO UNT RECEIVED BY ASSESSEE WAS RS. 12,41,000/- AND WHEREAS TDS DEDUCT ED WAS OF RS. 5,24,792/- WHICH IS ABOUT 42.289% OF AMOUNT RECEIVE D. THEREFORE, TDS CERTIFICATE COULD NOT BE CONSIDERED TO CONCLUDE THA T ASSESSEE RECEIVED PAYMENT FROM KWGL FOR BILLS RAISED OF AGGREGATE SUM OF RS. 85,04,134/-. HE FURTHER SUBMITTED THAT AO HAS NOT DOUBTED THE CONTE NTION OF ASSESSEE THAT AGREEMENT ENTERED INTO BETWEEN ASSESSEE AND KWGL WA S CANCELLED W.E.F. 1.5.2005 BUT CONSIDERED THE INCOME ONLY BECAUSE THE RE WAS REVERSAL OF ENTRIES WHICH HE CONSIDERED WAS NOT IN ACCORDANCE W ITH ACCOUNTING STANDARDS. LD. AR SUBMITTED THAT LD. CIT(A) HAS RI GHTLY HELD THAT WHEN BOTH PARTIES I.E. ASSESSEE AND KWGL HAVE CONFIRMED TERMI NATION OF AGREEMENT AND THAT NO PAYMENT WAS MADE TO ASSESSEE AGAINST BILLS RAISED FROM MAY 2005 TO SEPTEMBER 2005, AO WAS NOT JUSTIFIED TO MAKE ADDITI ON OF DIFFERENCE OF AMOUNT. HE SUBMITTED THAT WHEN ACTUALLY AMOUNT WAS NOT RECEIVED BY ASSESSEE AND IS ALSO NOT DOUBTED BY AO, ADDITION MA DE BY AO WAS NOT JUSTIFIED. 11. WE HAVE CAREFULLY CONSIDERED ORDERS OF AUTHORIT IES BELOW AND SUBMISSION OF LD. REPRESENTATIVES OF PARTIES. WE H AVE ALSO CONSIDERED COPIES OF AGREEMENTS AND WRITTEN SUBMISSIONS WHICH WAS FIL ED BY ASSESSEE BEFORE ITA NO. 5433/M/2010 9 LD. CIT(A) AND COPY OF IT IS PLACED AT PAGE 1TO16 O F PAPER BOOK (RELEVANT PAGES ARE 6 TO 10 OF PAPER BOOK). WE OBSERVE THAT AO HAS MADE ADDITION OF DIFFERENCE OF THE AMOUNT BY CONSIDERING THAT AS PER LEDGER ACCOUNT, ASSESSEE PROVIDED FACILITY MANAGEMENT SERVICES TO KWGL BUT T HE ASSESSEE RECEIVED THE PAYMENT OF BILLS FOR THE MONTH OF APRIL, 2005 O F RS. 12,41,000/-. HOWEVER,KWGL ON THE BASIS OF BILLS RAISED BY ASSESS EE DEDUCTED TDS AGGREGATING TO RS. 5,24,792/- BUT ACTUALLY DID NOT MADE PAYMENT TO ASSESSEE. WE OBSERVE THAT AO HAS NOT DOUBTED THE GENUINENESS OF LEDGER ACCOUNTS OF ASSESSEE IN THE BOOKS OF KWGL WHICH WAS OBTAINED BY HIM FROM KWGL AND COPY OF IT ANNEXED AS ANNEXURE-A TO ASSESSMENT ORDE R. THE AO HIMSELF HAS GIVEN IN THE TABULAR FORM THE DETAILS OF PAYMENT AN D TDS IN PARA 3.5 AT PAGE- 4 OF ASSESSMENT ORDER AND IS ALSO STATED HEREIN ABO VE IN PARA-2. IT IS OBSERVED THAT ASSESSEE RECEIVED PAYMENT OF RS. 12,4 1,000/-, BUT TDS DEDUCTED IS AT RS. 5,24,792/-. CONSIDERING THE AMOU NT OF TDS DEDUCTED AND THE PAYMENT RECEIVED BY ASSESSEE, WE FIND SUBSTANCE IN THE CONTENTION OF LD. AR THAT KWGL DEDUCTED TDS ON THE BASIS OF BILLS RAI SED BY ASSESSEE BUT ACTUAL PAYMENT WAS NOT MAKE FOR ALL THE BILLS WHICH WERE RAISED BY ASSESSEE FOR THE MONTHS OF APRIL, 2005 TO SEPTEMBER, 2005. WE OBSERVE FROM THE COPY OF AGREEMENT DT. 31.3.2006 PLACED AT PAGES 49 TO 52 OF PAPER BOOK THAT BOTH PARTIES MUTUALLY AGREED TO TERMINATE THE AGREEMENT OF PROVIDING FACILITY MANAGEMENT SERVICES WITH EFFECT FROM 1 ST MAY, 2005. HENCE, IT IS EVIDENT THAT ASSESSEE DID NOT RECEIVE PAYMENT FOR THE SERVI CES FROM MAY, 2005 ONWARDS. IN VIEW OF ABOVE FACTS, WE ARE OF THE CONSI DERED VIEW THAT AO WAS NOT JUSTIFIED TO MAKE THE ADDITION OF AMOUNT WHICH ASSESSEE ADMITTEDLY HAD NOT RECEIVED AND PARTIES MADE CONTRA ENTRIES IN THE IR BOOKS OF ACCOUNT AS PER TERMINATION AGREEMENT. THE ACTION OF AO TO MAKE AD DITION BY STATING THAT ASSESSEE COULD CLAIM THE AMOUNT NOT RECEIVED AS BAD DEBT AS IT IS NOT IN ACCORDANCE WITH ACCOUNTING STANDARDS IS NOT JUSTIFI ED.WE OBSERVE THAT DEPARTMENT HAS NOT DISPUTED OBSERVATION OF LD. CIT( A) THAT AO HAS NO OTHER INFORMATION IN HIS EXPLANATION THAT ENTRIES MADE BY BOTH PARTIES I.E. ASSESSEE AND KWGL ARE ILLEGAL OR MALAFIED. IN VIEW OF ABOVE FACTS AND THE REASONS AS GIVEN BY LD. CIT(A) IN HIS ORDER, WE UPHOLD THE ORD ER OF LD. CIT(A) TO DELETE ITA NO. 5433/M/2010 10 ADDITION OF RS. 79,51,827/- MADE BY AO. HENCE GROU ND NO. 1 OF THE APPEAL TAKEN BY DEPARTMENT IS REJECTED. 12. GROUND NO. 2 OF THE APPEAL IS AS UNDER: ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE AND IN LAW, THE LD. CIT(A) ERRED IN DELETING THE ADDITION OF RS. 1,34,68,702/- U/S. 40(A)(IA) WITHOUT APPRECIATING T HE FACT THAT THE ASSESSEE HAS FAILED TO DEDUCT THE TDS ON FACILI TY MANAGEMENT SERVICES, WITHOUT APPRECIATING THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW. 13. DURING THE COURSE OF ASSESSMENT PROCEEDING, AO HAS STATED THAT ASSESSEE MADE PAYMENT OF RS. 1,34,68,702/- TO ITS G ROUP CONCERN NAMELY M/S. DATAMATICS TECHNOLOGIES LTD. (HEREIN AFTER TO BE REFERRED IN SHORT DTL). THE BREAK-UP OF SAID PAYMENT IS GIVEN BY AO AT PAGE -8 AS UNDER: (I) SALARY EXPENSES - RS. 13077210 (II) LOCAL TRAVEL, STAFF WELFARE ETC. RS. 391492 ------------------ TOTAL RS. 13468702 ========= 14. THE AO HAS STATED THAT ASSESSEE HAS NOT DEDUCTE D TDS ON SAID PAYMENT OF RS. 1,34,68,702/- MADE TO DTL WHICH IS C OVERED IN THE AMBIT OF SECTION 194J OF I.T. ACT. THE AO DID NOT ACCEPT TH E CONTENTION OF ASSESSEE THAT ALL THE ABOVE PAYMENTS WERE MADE ON ACCOUNT OF THEIR ROUTINE TRANSACTION AND REIMBURSEMENT TO DTL. THE AO HAS A LSO STATED THAT ASSESSEE HAS NOT FURNISHED COPY OF AGREEMENT WITH DTL, SISTE R CONCERN OF ASSESSEE COMPANY FOR REIMBURSEMENT. THE AO HAS STATED THAT THE SAID PAYMENT HAS BEEN MADE BY ASSESSEE DIRECTLY TO SISTER CONCERN DT L AND NOT TO THE EMPLOYEES OF DTL AND THEREFORE THIS PAYMENT IS NOTH ING BUT CONTRACT FOR AVAILING PROFESSIONAL MANPOWER FROM ITS SISTER CONC ERN AND HENCE ASSESSEE WAS REQUIRED TO DEDUCT TDS U/S. 194J OF I.T. ACT. S INCE ASSESSEE HAS NOT DEDUCTED TDS ON THE SAID PAYMENT, AO AS PER PROVISI ONS OF SEC. 40(A)(IA) OF I.T. ACT DISALLOWED SAID CLAIM OF ASSESSEE OF RS. 1, 34,68,702/-. BEING AGGRIEVED, ASSESSEE FILED APPEAL BEFORE FIRST APPEL LATE AUTHORITY. ITA NO. 5433/M/2010 11 15. ON BEHALF OF ASSESSEE, SUBMISSIONS MADE BEFORE LD. CIT(A) ARE STATED IN PARA 6.3 OF IMPUGNED ORDER, WHICH READS AS UNDER : BEFORE ME, THE APPELLANT HAS SUBMITTED AS UNDER: THE APPELLANT COMPANY IS HAVING ON ITS PAYROLL ON LY TWO EMPLOYEES TO WHOM SALARY IS PAID TOTALING TO RS. 19 .50.455/-. FURTHER, TO RENDER THESE SERVICES, THE APPELLANT CO MPANY HAS TAKEN HELP OF SOME OF THE EMPLOYEES OF M/S. DATAMA TICS TECHNOLOGIES LTD. (DTL) AND REIMBURSED A SUM OF RS. 1,30,77,210/ TO M/S. DTL TOWARDS PART OF SALARY WH ICH IS PAID BY THEM TO ALL THE EMPLOYEES, BUT SINCE THEY HAVE RENDERED PART OF THEIR SERVICES TO THE APPELLANT COMPANY, TH IS AMOUNT IS RECOVERED FROM THE APPELLANT COMPANY. M/S. DTL IS H AVING APPROXIMATELY 1500 EMPLOYEES. THE APPELLANT COMPAN Y HAS TAKEN THE SERVICES OF SOME OF THESE EMPLOYEES ONLY. THE APPELLANT COMPANY HAS SUPPLIED THE FULL DETAILS IN RESPECT OF EMPLOYEES, PART OF THE WHOSE SALARY IS REIMBURSED B Y THE APPELLANT COMPANY TO DTL, VIDE THEIR LETTER DT. 16. 12.2008. DTL HAS DEDUCTED THE TDS ON THE SALARY PAID TO THE SE EMPLOYEES AND THESE DETAILS WERE ALSO GIVEN TO THE LD. AO VIDE THE LETTER DATED 16-12-2008. IN THE SAID LETTER, ON A SEPARATE SHEET, DETAILS ARE ALSO GIVEN THAT ONLY PART SALARY OF THESE EMPLOYEES IS REIMBURSED BY THE APPELLANT COMPANY. O N TAKING HELP OF THESE EMPLOYEES, THE APPELLANT COMPANY HAVE BOOKED SALES OF RS. 1,65,90,468/-. THE ID. AO HAS DISALLOWED DEDUCTION OF PAYMENT MAD E TO DTL ON ACCOUNT OF SALARY OF RS. 1,34,68,702/-- U /S. 40(A) (IA) AFTER GIVING A FINDING THAT THESE SERVICES SO AVAIL ED FROM DTLIS PASSED ON BY THE APPELLANT COMPANY TO ANOTHER SISTE R CONCERN M/S. KNOWLEDGE WORKS GLOBAL LTD WHICH IS NOT CORREC T. THE FACTS OF SERVICES RENDERED BY THE APPELLANT COMPANY TO M/ S. KNOWLEDGE WORKS GLOBAL LTD ARE ALREADY EXPLAINED IN GROUND NO. 6 ABOVE. THE SERVICES OF EMPLOYEES OF DTL IS TA KEN FOR PROVIDING THE IT ENABLED SERVICES AND BPO SERVICES TO 15 COMPANIES FROM WHOM THE APPELLANT THE APPELLANT CO MPANY HAS EARNED SALES CONSIDERATION OF RS. 1,65,90,468/- (DETAILS OF WHICH ARE GIVEN TO THE LD. AO VIDE LETTER DATED 1 0-11-2008. FURTHER THE LD. AO HAS NEVER ASKED FOR EXPLANATION IN RESPECT OF DISALLOWANCE U/S. 40A(2)(B). THEREFORE, DISALLOWAN CE MADE THEREOF BY THE LD. AO IS NOT CORRECT. THE APPELLAN T HAS RELIED UPON THE FOLLOWING DECISIONS: 1. ITO VS DR. WILLMAN SCHWABE INDIA (P) LTD. 3 SOT 71 (DEL) ITA NO. 5433/M/2010 12 2. ASSOCATED CEMENT CO. LTD. VS CIT AND ANOTHER 201 IT R 435 (SC) 3. HON. SUPREME COURT IN THE CASE OF UPPER INDIA PUBLIS HING HOUSE (P) LTD VS. CIT 117 ITR 569. 16. LD. CIT(A) AFTER CONSIDERING THE ORDER OF AO AN D SUBMISSIONS OF ASSESSEE AND ALSO AFTER SEEKING REMAND REPORT FROM AO AND THE COPY OF AGREEMENT ENTERED INTO BETWEEN ASSESSEE AND DTL DT. 15.4.2004 FILED BY ASSESSEE BEFORE LD. CIT(A), LD. CIT(A) VIDE PARAS 6 .4 TO 6.6 OF IMPUGNED ORDER DELETED THE SAID DISALLOWANCE OF RS. 1,34,68, 702/- MADE BY AO WHICH READ AS UNDER: 6.4. 1 HAVE CONSIDERED THE SUBMISSION OF THE APPELL ANT, ORDER OF THE AO AND FACTS OF THE CASE ARE THAT THE ASSESS EE COMPANY AND M/S. DATAMATICS TECHNOLOGIES LTD.(DTL) HAS ENTE RED INTO AN AGREEMENT DATED 15/4/2004 IN WHICH THE APPELLANT CO MPANY WAS ENTITLED TO USE THE MANPOWER OF DTL AS AND WHEN REQUIRED FOR THEIR ASSIGNMENT. AS PER CLAUSE VII OF THE AGREE MENT, THE ASSESSEE COMPANY HAS TO REIMBURSE THE SALARY FOR TH E SERVICES OF SOFTWARE COURSE TO DTL. IT WAS ALSO AGREED THAT THE ASSESSEE COMPANY WILL ONLY REIMBURSE THE COST THE ONLY PROFI T ELEMENT. FOR THIS PURPOSE, THE ASSESSEE COMPANY HAD MADE A P AYMENT OF RS.L.34.68.702/- TO M/S DTL. THE AO HAS RAISED OBJE CTION THAT WHY TDS AS PER PROVISIONS OF SECTION 194J HAS NOT B EEN DEDUCTED ON THIS PAYMENT. ACCORDINGLY, BY INVOKING THE SECTION 40(A)(IA), THE AO HAS MADE ADDITION OF RS.L,34,68,7 02/-. THE OBJECTION RAISED BY THE AO ARE THAT THE COPY OF AGR EEMENT WAS NOT FURNISHED BEFORE HIM AND THE PAYMENT WAS COVERE D U/S. 194J OF THE I.T. ACT. FINALLY, THE AO HAS CONCLUDED THAT THE AGREEMENT NOTHING BUT THE CONTRACT FOR AVAILING PR OFESSIONAL MAN POWER TO THE SISTER CONCERN TO BE USED WITH OTH ER PARTIES. 6.5 ON THE OTHER HAND, THE APPELLANT HAS ARGUED THA T THE CASE OF THE APPELLANT IS ONLY REIMBURSEMENT OF SALARY PA ID TO THE EMPLOYEES OF M/S. DTL FOR USING THEIR SERVICES. THE APPELLANT HAS ALSO FILED THE COPIES OF TDS CERTIFICATES TO PR OVE THAT ACTUALLY THESE WERE EMPLOYEES OF DTL AND THEY HAVE DEDUCTED TAX ON IT. THE APPELLANT HAS ONLY REIMBURSED THE EX PENDITURE INCURRED ON SALARY OF THESE EMPLOYEES. THE APPELLAN T HAS ALSO RELIED ON THE DECISION IN THE CASE OF ITO VS. DR. W ILLMAR SCHWABE INDIA PVT. LTD. 95 TTJ 53 (DEL), WHERE IT I S HELD THAT REIMBURSEMENT OF CONVEYANCE EXPENSES TO CONSULTANTS FOR WHICH BILL WAS SEPARATELY RAISED BY THE CONSULTANT DID NO T ATTRACT SECTION 194J. THE RELIANCE WAS ALSO MADE ON THE DEC ISION OF UNITED HOTEL LTD VS ITO 93 TTJ 822, WHERE IT IS HEL D THAT REIMBURSEMENT OF SALARY OF PERSONAL OF IHC TO IHC W HO WERE ITA NO. 5433/M/2010 13 DEPUTED BY IHC WITH THE ASSESSEE WAS NOT FEES FOR T ECHNICAL SERVICES AND THEREFORE, THE ASSESSEE WAS NOT LIABLE TO DEDUCT TAX AT SOURCE U/S. 194J OR TO PAY INTERESTS U/S. 201(1A ). RELIANCE WAS ALSO PLACED ON THE DECISION OF MUMBAI TRIBUNAL SPECIAL BENCH IN CASE OF MAHINDRA AND MAHINDRA LTD. VS. D CIT 30 SOT 374 (MUM), WHERE IT IS HELD AS UNDER: THE ASSESSING OFFICER HAD NOT DISPUTED THAT THE SUM OF RS. 1.68 CRORES WAS IN THE NATURE OF EXPENSES REIMB URSED BY THE ASSESSEE TO THE LEAD MANAGERS. WHEN A PARTIC ULAR AMOUNT OF EXPENDITURE IS INCURRED AND THAT SUM IS REIMBURSED AS SUCH THAT CANNOT BE CONSIDERED AS HAV ING ANY PART OF IT IN THE NATURE OF INCOME. ANY PAYMEN T, IN ORDER TO BE BROUGHT WITHIN THE SCOPE OF INCOME BY W AY OF FEES FOR TECHNICAL SERVICES UNDER SECTION 9(1)(VII) SHOULD BE OR HAVE AT LEAST SOME ELEMENT OF INCOME IN IT. S UCH PAYMENT SHOULD INVOLVE SOME COMPENSATION FOR THE RENDERING OF ANY SERVICES, WHICH CAN HE DESCRIBED A S INCOME IN THE HANDS OF RECIPIENT. IN OTHER WORDS, T HE COMPONENT OF INCOME MUST BE PRESENT IN THE TOTAL AMOUNT OF FEES PAID FOR TECHNICAL SERVICES TO CONST ITUTE AS AN ITEM FALLING UNDER SECTION 9(1)(VII). WHERE THE EXPENDITURE INCURRED IS REIMBURSED AS SUCH WITHOUT HAVING ANY ELEMENT OF INCOME IN THE HANDS OF THE RECIPIENT, IT CANNOT ASSUME THE CHARACTER OF INCOME DEEMED TO ACCRUE OR ARISE IN INDIA. THEREFORE, THE AMOUNT OF MANAGEMENT COMMISSION IN RESPECT OF FCCB ISSUE AMOUNTING TO PS. 1.62 CRORES AND THE SELLING COMMISSION OF RS. 6.07 CRORES FELL WITHIN THE SCOP E OF INCOME BY WAY OF FEES FOR TECHNICAL SERVICES IN TER MS OF SECTION 9(1)(VIIJ. HOWEVER, THE OTHER TWO AMOUNTS, NAMELY, THE UNDERWRITING COMMISSION AT RS. 2.43 C RORES AND THE EXPENSES REIMBURSED AT RS. 1.68 CRORES WERE NOT INCOME BY WAY OF FEES FOR TECHNICAL SERVICES. 6.6 THE OBJECTION OF THE AO THAT COPY OF AGREEMENT WAS NOT PRODUCED DURING THE ASSESSMENT PROCEEDINGS, THEREFO RE, A REMAND REPORT WAS CALLED FOR FROM THE AO TO EXAMINE THE AGREEMENT AND SPECIFICALLY CLAUSE VII WHICH RELATES T HE PAYMENT OF REIMBURSEMENT OF SALARY TO THE EMPLOYEES OF M/S DTL. THE AO SUBMITTED ITS REMAND REPORT. COPY OF THE SAME WA S ALSO PROVIDED TO THE APPELLANT FOR HIS COMMENTS. THE APP ELLANT HAS ARGUED THAT THE AO HAS NOT GIVEN ITS COMMENT ON CLA USE VII WHICH PROVIDES THAT APPELLANT COMPANY WILL REIMBURS E THE COST INCURRED FOR SERVICES OF SOFTWARE PROFESSIONALS TO M/S DTL WITHOUT ANY PROFIT ELEMENT. SECONDLY, THE AO HAS RE LIED ON THE CIRCULAR ON 715 DATED 8/8/1995. TO COUNTER THIS, TH E APPELLANT HAS RELIED ON THE WILLMAR SCHWABE (SUPRA) IN WHICH THE HONBLE ITA NO. 5433/M/2010 14 TRIBUNAL HAS HELD THAT THIS CIRCULAR IS APPLICABLE ONLY IN THE CASE WHERE THE BILLS ARE RAISED FOR GROSS AMOUNT INCLUSI VE OF PROFESSIONAL FEES AS WELL AS REIMBURSEMENT OF ACTUA L EXPENSE WHICH IS NOT APPLICABLE TO THE FACTS OF THIS CASE. THE DECISION OF MUMBAI TRIBUNAL SPECIAL BENCH IN CASE OF MAHINDRA & MAHINDRA IS SQUARELY COVERED TO THE FACTS OF THIS CASE. KEEP ING IN VIEW ALL THESE FACTS AND CIRCUMSTANCES THAT THE EMPLOYEES O F M/S DTL WHO HAS PAID SALARY AND DEDUCTED TDS, THE APPELLANT COMPANY HAS ONLY REIMBURSED THE SALARY PAID TO THESE EMPLOY EES FOR THE UTILIZATION OF THEIR SERVICES. THEREFORE, IN TOTAL ITY OF FACTS AND CIRCUMSTANCES, THE CASE OF THE APPELLANT IS ONLY RE IMBURSEMENT OF EXPENDITURE AND PROVISIONS OF SEC. 194J ARE NOT APPLICABLE. THEREFORE, THE DISALLOWANCE MADE BY THE AO U/S. 40( A)(IA) IS NOT SUSTAINABLE, HENCE DELETED. HENCE, DEPARTMENT IS IN APPEAL BEFORE THE TRIBUNAL . 17. DURING THE COURSE OF HEARING, LD. DEPARTMENTAL REPRESENTATIVE RELIED ON THE ORDER OF AO. HE SUBMITTED THAT ASSESSEE MAD E PAYMENT TO ITS SISTER CONCERN DTL AND NOT TO EMPLOYEES OF DTL. HE SUBMIT TED THAT ASSESSEE AVAILED SERVICES OF PROFESSIONAL EMPLOYEES OF ITS S ISTER CONCERNS AND THEREFORE ASSESSEE WAS REQUIRED TO DEDUCT TDS AS PER SEC. 194 J OF I.T. ACT. SINCE ASSESSEE FAILED TO DEDUCT TDS, AO WAS JUSTIFIED TO DISALLOW CLAIM OF ASSESSEE AS PER SEC. 40(A)(IA) OF I.T. ACT. 18. ON THE OTHER HAND, LD. AR SUPPORTED ORDER OF LD . CIT(A). HE SUBMITTED THAT ASSESSEE COMPANY IS HAVING ON ITS PA YROLL ONLY TWO EMPLOYEES. THAT ASSESSEE COMPANY IS ENGAGED IN THE BUSINESS OF IT ENABLED SERVICES AND BPO SERVICES IN THE DOMESTIC MARKET. HE SUBMITT ED THAT TO RENDER THESE SERVICES, ASSESSEE COMPANY HAS TAKEN HELP OF SOME E MPLOYEES OF DTL AND AGAINST THAT ASSESSEE REIMBURSED TOWARDS PART OF SA LARY WHICH WAS PAID BY DTL TO ITS EMPLOYEES AGGREGATING RS. 1,30,77,210/- AND FULL DETAILS WERE ALSO FURNISHED BY ASSESSEE TO AO. HE SUBMITTED THAT DTL DEDUCTED TDS ON THE SALARY PAID TO THOSE EMPLOYEES AND THEIR DETAILS WE RE ALSO FURNISHED TO AO. HE SUBMITTED THAT DTL IS HAVING APPROXIMATELY 1500 EMPLOYEES. HE SUBMITTED THAT ASSESSEE BY TAKING THE HELP OF THOSE EMPLOYEES OF DTL BOOKED SALES OF RS. 1,65,90,468/-. LD. AR SUBMITTED THAT ASSESSEE REIMBURSED TO DTL ON ACCOUNT OF SALARY AND LOCAL TRAVEL AND STAFF WELFARE EXPENSES ON ACTUAL ITA NO. 5433/M/2010 15 BASIS AMOUNTING TO RS. 3,91,492/- AGGREGATING TO RS . 1,34,68,702/-, ON WHICH NO TDS WAS REQUIRED TO BE DEDUCTED. LD. AR SUBMITT ED THAT THERE WERE NO PROFIT ELEMENT INVOLVED IN THE SAID REIMBURSEMENT O F EXPENSES AND HENCE TDS WAS NOT REQUIRED TO BE DEDUCTED. LD. AR REFERRED T O AGREEMENT DT. 15.5.2004 ENTERED INTO BETWEEN ASSESSEE AND DTL, COPY PLACED AT PAGE 34 TO 41 OF PAPER BOOK AND SUBMITTED THAT AS PER PARA-7 OF IT, ASSESSEE WAS TO REIMBURSE DTL THE COST INCURRED FOR THE ACTUAL SERVICES REND ERED. THE LD. AR SUBMITTED THAT NO TDS IS REQUIRED TO BE DEDUCTED ON REIMBURSE MENT OF EXPENSES AND TO SUBSTANTIATE HIS SUBMISSION RELIED ON THE FOLLOWING CASES. 1) M/S. UTILITY POWERTECH LTD. VS ACIT (2010-TIOL-545 -ITAT-MUM) 2) M/S. STRATCAP SECURITIES (I) PVT. LTD. VS ACIT (2011 -TIOL-163-ITAT- MUM 3) EMERSONS PROCESS MANAGEMENT INDIA(P) LTD. VS ACIT ( 2011) 47 SOT 157 4) SPECIAL BENCH ITAT MUMBAI IN THE CASE OF MAHINDRA & MAHINDRA LTD VS DCIT-30 SOT 374(MUM)(SB) 5) ITO VS DR. WILLMAR SCHWABE INDIA (P) LTD. 3 SOT 71 (DEL) 6) UNITED HOTELS LTD. VS ITO 2 SOT 267 (DEL) AND 7) DECISION OF JURISDICTIONAL HIGH COURT IN THE CASE O F CIT VS SIEMENS AKTIONGESELLSCHAFT ( 310 ITR 320)(BOM) HE SUBMITTED THAT IF THERE IS A REIMBURSEMENT OF S ALARY OF PERSONNEL DEPUTED WITH ASSESSEE BY SISTER CONCERN AND ALSO RE IMBURSEMENT OF EXPENSES ON TRAVEL ETC, NO ELEMENT OF INCOME IS INVOLVED AN D ASSESSEE IS NOT REQUIRED TO DEDUCT TAX ON THE REIMBURSEMENT AMOUNT AND ACCOR DINGLY PROVISIONS OF SEC. 40(A)(IA) CANNOT BE APPLIED TO MAKE DISALLOWAN CE OF EXPENSES CLAIMED. HE SUBMITTED THAT ORDER OF LD. CIT(A) BE CONFIRMED. 19. WE HAVE CONSIDERED THE ORDERS OF AUTHORITIES BE LOW AND SUBMISSIONS OF LD. REPRESENTATIVE OF PARTIES. WE HAVE ALSO CAREFU LLY CONSIDERED THE CASES CITED BEFORE US (SUPRA) AND HAVE ALSO GONE THROUGH AGREEMENT DT. 15.4.2004 ENTERED INTO BETWEEN ASSESSEE COMPANY AND DTL BY VI RTUE OF IT ASSESSEE AVAILED SERVICES OF MANPOWER OF DTL, COPY PLACED AT PAGES 34 TO 40 OF PAPER BOOK. ITA NO. 5433/M/2010 16 20. WE OBSERVE THAT ASSESSEE MADE PAYMENT OF RS. 1, 34,68,702/- TO DTL AND THE BREAK-UP OF IT IS AS UNDER: (I) SALARY EXPENSES - RS. 13077210 (II) LOCAL TRAVEL, STAFF WELFARE ETC. RS. 391492 ------------------ TOTAL RS. 13468702 ========= 21. THE AO, DURING THE COURSE OF ASSESSMENT PROCEED INGS STATED THAT SAID PAYMENT WAS MADE BY ASSESSEE TO DTL TOWARDS FEE FOR PROFESSION SERVICES AND ASSESSEE WAS REQUIRED TO DEDUCT TDS U/S. 194J O F I.T. ACT. THE AO DID NOT ACCEPT THE CONTENTION OF ASSESSEE THAT SAID PAY MENT AGGREGATING TO RS. 1,34,68,702/- WAS TOWARDS REIMBURSEMENT ON ACCOUNT OF ROUTINE TRANSACTION AND NOT FOR FEE FOR PROFESSIONAL SERVICES. HOWEVER LD. CIT(A) HAS HELD THAT ASSESSEE MADE PAYMENT TO DTL TO REIMBURSE SALARY FO R AVAILING SERVICES OF EMPLOYEES OF DTL AS PER AGREEMENT DT. 15.4.2004 ENT ERED INTO BETWEEN ASSESSEE AND DTL. 22. IN ORDER TO DECIDE THE ISSUE BEFORE US, WE CONSI DER IT PRUDENT TO STATE CLAUSE 7 OF THE AGREEMENT WHICH READS AS UNDER: CLAUSE 7 PAYMENT 7.1 DSPL SHALL REIMBURSE DTL THE COST INCURRED FOR THE SERVICES OF THE SOFTWARE PROFESSIONALS WITHOUT AND PROFIT ELEMENT AS SPECIFIED IN A STATEMENT OF WORK. 7.2. UNLESS OTHERWISE PROVIDED IN THIS AGREEMENT O R A STATEMENT OF WORK, EACH PARTY SHALL BE RESPONSIBLE FOR THE PAYMENT OF TAXES ASSESSED AGAINST IT. 7.3 DTL SHALL RAISE INVOICES FOR THE SERVICES OF S OFTWARE PROFESSIONALS PROVIDED TO DSPL IN TERMS OF THIS AGR EEMENT DTL WILL IN TURN ALSO REIMBURSE EXPENSES. ITA NO. 5433/M/2010 17 23. WE OBSERVE THAT AS PER SAID AGREEMENT, ASSESSEE AVAILED SERVICES OF EMPLOYEES OF DTL AND ASSESSEE REIMBURSED SALARY OF THOSE EMPLOYEES AGGREGATING TO RS. 1,30,77,210/- BESIDES PAYMENTS O F RS. 3,91,492/- TOWARDS LOCAL TRAVEL, STAFF WELFARE ETC. TO DTL. W E OBSERVE THAT ASSESSEE ALSO FURNISHED DETAILS TO AO AS WELL AS BEFORE LD. CIT(A) IN RESPECT OF EMPLOYEES. THE ABOVE FACTS HAVE NOT BEEN DISPUTED BY DEPARTMENT AT THE TIME OF HEARING OF APPEAL. NOW THE QUESTION ARISES AS TO WHETHER ON THE REIMBURSEMENT OF EXPENSES BY ASSESSEE TO DTL, ASSE SSEE WAS REQUIRED TO DEDUCT TDS OR NOT. 24. THE SPECIAL BENCH OF ITAT MUMBAI IN THE CASE OF MAHINDRA & MAHINDRA LTD VS DCIT (SUPRA) HAS HELD THAT REIMBURSEMENT OF EXPENSES DOES NOT HAVE INCOME ELEMENT AND HENCE IT CANNOT ASSUME CHARACTER OF INCOME DEEMED TO ACCRUE OR ARISE. THE DELHI BENCH OF ITAT IN THE CA SE OF ITO VS DR. WILLMAR SCHWABE INDIA (P) LTD.(SUPRA) HAS HELD THAT WHEN TH E BILLS ARE RAISED FOR REIMBURSEMENT OF ACTUAL EXPENSES, THE REIMBURSEMENT OF SUCH EXPENSES DO NOT ATTRACT PROVISIONS OF SEC. 194J OF THE ACT AND ASSESSEE COMPANY IS NOT LIABLE TO DEDUCT AT SOURCE FROM SUCH REIMBURSEMENT. FURTHER FACTS OF THE CASE OF UNITED HOTELS LTD. VS ITO (SUPRA) ARE AKIN TO THE FACTS OF THE CASE BEFORE US. IN THE SAID CASE, ASSESSEE COMPANY AVAIL ED SERVICES OF THE PERSONNEL LIKE ACCOUNTS EXECUTIVE, ENGINEER, CHEF. ETC. OF ITS GROUP HOTELS EMPLOYED BY INDIAN HOTELS CO. LTD. (IHC) PURSUANT T O AN AGREEMENT ENTERED INTO BY ASSESSEE AND IHC AND ASSESSEE REIMBURSED SAL ARY OF THE PERSONNEL TO ITS GROUP HOTEL VIZ IHC. THE QUESTION AROSE AS TO WH ETHER ASSESSEE WAS REQUIRED TO DEDUCT TDS U/S. 194J OF THE ACT ON THE AMOUNT OF REIMBURSEMENT OF SALARY OF PERSONNEL DEPUTED BY IHC LTD. WITH ASSE SSEE OR NOT. IT WAS HELD BY ITAT, DELHI BENCH THAT REIMBURSEMENT OF SALARY O F PERSONNEL OF IHC LTD WHO WERE DEPUTED BY IHC WITH ASSESSEE, WAS NOT FEE F OR TECHNICAL SERVICES, THEREFORE ASSESSEE WAS NOT LIABLE TO DEDUCT TAX AT SOURCE U/S. 194J OF I.T.ACT. ITAT MUMBAI BENCH IN THE CASE OF M/S. UTI LITY POWERTECH LTD. VS ACIT (SUPRA) HAS ALSO HELD BY FOLLOWING THE DECISIO N OF HONBLE DELHI HIGH COURT IN THE CASE OF CIT VS SIEMENS AKTIONGESELLSCH AFT (SUPRA) THAT ITA NO. 5433/M/2010 18 REIMBURSEMENT OF EXPENSES CANNOT BE REGARDED AS REV ENUE IN THE HANDS OF PAYEE AND THEREFORE NO TDS WAS REQUIRED TO BE DEDUC TED. ACCORDINGLY, IT WAS HELD THAT NO DISALLOWANCE COULD BE MADE U/S. 40 (A)(IA) OF I.T. ACT. SIMILAR VIEW HAS ALSO BEEN TAKEN BY MUMBAI BENCH IT AT IN THE CASE OF M/S. STRATCAP SECURITIES (I) PVT. LTD. VS ACIT (SUPRA) AN D IN THE CASE OF EMERSONS PROCESS MANAGEMENT INDIA(P) LTD. VS ACIT (SUPRA). IN THESE CASES IT WAS HELD THAT WHEN THERE WAS REIMBURSEMENT OF EXPENSES BY ASSESSEE TO A GROUP CONCERN UNDER A COST SHARING ARRANGEMENT , AS SESSEE WAS NOT REQUIRED TO DEDUCT TDS WHILE MAKING SAID PAYMENTS AND THEREF ORE NO DISALLOWANCE U/S. 40(A)(IA) OF I.T. ACT IS TO BE MADE. 25. CONSIDERING THE ABOVE DECISIONS AND THE FACTS O F THE CASE BEFORE US, WE HOLD THAT ON REIMBURSEMENT OF EXPENSES BY ASSE SSEE TO DTL ON ACCOUNT OF AVAILING SERVICES OF EMPLOYEES OF DTL AS PER AGR EEMENT DT. 15.4.2004, ASSESSEE WAS NOT REQUIRED TO DEDUCT TDS AND ACCORDI NGLY AO WAS NOT JUSTIFIED TO MAKE DISALLOWANCE U/S. 40(A)(IA) OF AC T, PARTICULARLY, WHEN DTL ACTUALLY PAID THE SALARY TO ITS EMPLOYEES AND DEDUC TED TDS ON THE AMOUNT PAID BY IT TO ITS EMPLOYEES. THE ASSESSEE ONLY REI MBURSED THE EXPENSES TOWARDS PART OF SALARY AND CONVEYANCE EXPENSES ETC. TO DTL AND THEREFORE PROVISIONS OF SEC. 194J DOES NOT APPLY TO IT. THER EFORE LD. CIT(A) HAS RIGHTLY HELD THAT DISALLOWANCE MADE BY AO U/S. 40(A)(IA) IS NOT SUSTAINABLE. ACCORDINGLY, WE UPHOLD THE ORDER OF LD. CIT(A) BY R EJECTING GROUND NO. 2 OF APPEAL TAKEN BY DEPARTMENT. 26. IN THE RESULT, APPEAL OF DEPARTMENT IS DISMISSED . ORDER PRONOUNCED ON 4 TH APRIL , 2012 SD/- SD/- (RAJENDRA SINGH) (B.R. MITTAL ) ACCOUNTANT MEMBER JUDICIAL MEMBER MUMBAI, DATED 4 TH APRIL, 2012 RJ ITA NO. 5433/M/2010 19 COPY TO : 1. THE APPELLANT 2. THE RESPONDENT 3. THE CIT-CONCERNED 4. THE CIT(A)-CONCERNED 5. THE DR D BENCH TRUE COPY BY ORDER ASSTT. REGISTRAR, I.T.A.T, MUMBAI