DCIT 5(1)(2), MUMBAI V. DOMINION DIAMOND (INDIA) P.LTD, MUMBAI

ITA 627/MUM/2015

• Counselvise Citation: [2016] 133 COUNSELVISE.COM (IT) 4469 (ITAT-MUMBAI)
• Duration Of Justice: 11 month(s) 7 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 06-01-2016
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: K
• Assessment Year: 2010-2011
• Appeal Filed On: 29-01-2015
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: N PADMANABHAN
• Keywords: Double taxation relief
• Section: 143(3); 37(1)

Judgement Text

M/S DOMINION DIAMOND (INDIA) PVT LTD (FORMERLY KNOWN AS M/S. HARRY WINSTON DIAMOND (INDIA) PVT LTD), IT A NO. 627 / MUM / 2015 1 IN THE INCOME TAX APPELLATE TRIBUNAL MUMBAI BENCH K , MUMBAI , , BEFORE SHRI RAJENDRA , ACCOUNTANT MEMBER AND SHRI AMIT SHUKLA , JUDICIAL ME MBER I TA NO. : 627 / MUM / 2015 ( ASSESSMENT YEAR: 200 9 - 1 0 ) DC I T - 5(1)(2) , ROOM NO. 568, 5 TH FLOOR, AAYAKAR BHAVAN, M K ROAD, MUMBAI - 400 020 VS M/S DOMINION DIAMOND ( INDIA ) PVT LTD (FORMERLY KNOWN AS M/S. HARRY WINSTON DIAMOND ( INDIA ) PVT LTD ), JE 9010, 9 TH FLOOR, TOWER J, BHARAT DIAMOND BOURSE, BKC, BANDRA (EAST), MUMBAI - 400 051 .: PAN: AA F C A 065 2 E (APPELLANT) (RESPONDENT) APPELLANT BY : SHRI N PADMANABHAN RESPONDENT BY : SHRI KIRIT KA M DAR /DATE OF HEARING : 07 - 12 - 201 5 / DATE OF PRONOUNCEMENT : 06 - 01 - 201 5 ORDER , . . : PER AMIT SHUKLA, J M : THE AFORESAID APPEAL HAS BEEN FILED BY THE REVENUE AGAINST THE IMPUGNED ORDER DATED 17.11.2014 , PASSED BY CIT(A) - 9, MUMBAI FOR THE QUANTUM OF AS SESSMENT PASSED U/S 143(3) FOR THE ASSESSMENT YEAR 2010 - 11 , ON FOLLOWING GROUNDS: - 1. WHETHER ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW, THE LD. CIT(A) WAS RIGHT IN DIRECTING THE ASSESSING OFFICER TO DELETE THE DISALLOWANCE MADE U/S 37(1) OF THE I.T. ACT WITHOUT APPRECIATING THE FACT THAT THE SAID PROVISIONS ARE IN NATURE OF CONTINGENT LIABILITY, ON AD - HOC ARRANGEMENT WHICH AWAITS FINALITY ? 2. WHETHER ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW, THE LD. CIT(A) WAS RIGHT IN DIRECTI NG THE ASSESSING OFFICER TO DELETE THE DISALLOWANCE MADE U/S 40(A)(IA) OF THE M/S DOMINION DIAMOND (INDIA) PVT LTD (FORMERLY KNOWN AS M/S. HARRY WINSTON DIAMOND (INDIA) PVT LTD), IT A NO. 627 / MUM / 2015 2 I.T. ACT WITHOUT APPRECIATING THE FACT THAT THE ASSESSEE WAS UNDER AN OBLIGATION TO DEDUCT TAX UNDER SECTION 195(1) IN RESPECT OF PAYMENTS MADE ? 2. THE ASSESSEE COMPANY IS ENG AGED IN THE BUSINESS OF WHOLESALE TRADING OF ROUGH DIAMONDS. THE AO NOTED THAT, ASSESSEE HAS SHOWN PROVISION FOR TP STUDY REPORT FOR RS. 4,41,200/ - AND PROVISION FOR TP ACCOUNTANT REPORT OF RS. 88,240/ - , UNDER THE HEAD LEGAL AND PROFESSIONAL FEES . I N RES PONSE TO SHOW CAUSE NOTICE THE ASSESSEE SUBMITTED THAT IT HAD OBTAINED SERVICES FROM M/S PRICE WATER H OUSE COOPERS PVT. LTD . AND CONSULTANCY FIRM , M/S PRICE WATER H OUSE & CO. IN RESPECT OF Y EARLY COMPLIANCE TO BE UNDERTAKEN U/S 92D. THE ASSESSEE FOR THE YEAR UNDER CONSIDERATION HA D INCURRED A COST FOR SERVICES OBTAINED IN RELATED TO THE ISSUE OF TP ACCOUNTANT REPORT IN FORM 3CEB AND FOR THE SERVICES OBTAINED IN RELATION TO THE PREPARATION TP STUDY REPORT. BASED ON THE COST INCURRED BY THE ASSESSEE FOR SIMILAR SERVICES FOR THE PREVIOUS YEAR S FOR RS. 88,420/ - AND RS. 4,41,200/ - , A PROVISION HAS BEEN CREATED FOR THE YEAR UNDER CONSIDERATION FOR THE SIMILAR AMOUNT PAYABLE TO IDENTIFIED PAYEE I.E. PWC P. LTD. AND PRICE WATERHOUSE & CO. FOR THE SERVICES RENDERED IN RELATION TO THE ASSESSMENT YEAR 2010 - 11. FURTHER, THE ASSESSEE HAS DEDUCTED TDS ON SUCH PAYMENT S LIABLE TO BE MADE TO PWC. HENCE, SUCH A PROVISION WA S FULLY ALLOWABLE AND NO DISALLOWANCE C OULD HAVE BEEN MADE U/S 37(1) OR U/S 40(A)(IA). HOWEVER, T HE AO HELD THAT SUCH AN AMOUNT DE B ITED IS PURELY IN THE NATURE OF PROVISION WHICH CANNOT BE ALLOWED UNDER THE INCOME TAX ACT. ACCORDINGLY, HE DISALLOWED RS. 5,92,440/ - AS DEBITED BY THE ASSESSEE. HE FURTHER NOTED THAT, THE ASSESSEE HAD SHOWN SECURITY SUPPORT CHARGES OF RS. 24,97,038/ - UNDER THE HEAD OFFICE EXPENSES. IN RESPONSE TO THE SHOW CAUSE NOTICE, AS TO WHY TDS HAS NOT BEEN DEDUCTED , THE ASSESSEE SUBMITTED THAT IT AVAILS O P E R A TION AND SECURITY SUPPORT SERVICES FROM M/S DOMINON DI A MOND BUILDING SERVICES, C A N AD A T O HELP IN LOSS PREVENTION AND SAFETY OF CUSTOM ERS . THE SERVICES AVAILED ARE IN THE NATURE OF MAINTENANCE OF COMMON SECURITY M/S DOMINION DIAMOND (INDIA) PVT LTD (FORMERLY KNOWN AS M/S. HARRY WINSTON DIAMOND (INDIA) PVT LTD), IT A NO. 627 / MUM / 2015 3 PLATFORM APPLICABLE TO ALL DOMINION GROUP COMPANIES. SINCE SECTION 195 CAS TS AN OBLIGATION ON EVERY PERSON TO DEDUCT TAX AT SOURC E FROM PAYMENT S MADE TO NON - RESIDENTS, W HICH A RE CHARGEABLE TO TAX IN INDIA WHICH HERE IN THIS CASE IS NOT CHARGEABLE, UNDER THE DTAA, B ECAUSE IT MAINLY PROVIDE S SECURITY SUPPORT SERVICE S AND DOES NOT GRANT ANY RIGHT TO USE DESIGN OR MODEL, PLAN OR PROCESS , HENCE IT CANNOT BE TREATED AS PAYMENT OF ROYALTY EITHER IN VIEW OF THE PROVISIONS OF THE ACT OR AS PER THE PROVISIONS OF INDIA - CANADA - DTAA. HOWEVER, THE AO REJECTED THE ASSESSEES CONTENTION AND HELD THAT, ASSESSEE WAS LIABLE TO DEDUCT TDS AS THE SAID AMOUNT WAS TAXABLE UNDER THE ACT. THE AO HAS HOWEVER NOT SPECIFIED , WHETHER SUCH A PAYMENT IS ON ACCOUNT OF ROYALTY OR ON ACCOUNT OF FEE FOR TECHNICAL SERVICES OR IS OTHERWISE TAXABLE IN VIEW OF ANY SPECIFIC PROVISIONS OF THE ACT OR DTAA. 3. THE LD. C IT(A) SO FAR AS DISALLOWANCE OF EXPENDITURE AGGREGATING TO RS. 5,92,440/ - ON ACCOUNT OF PROVISIONS OF TP STUDY REPORT AND TP ACCOUNTANT REPORT PAID TO PWC , HELD THAT IN VIEW OF THE NATURE OF MERCANTILE SYSTEM OF ACCOUNTING, THE ASSESSEE HAS TO DEBIT ALL TH E EXPENSES PERTAINING TO THE CURRENT YEAR IN ITS P&L ACCOUNT AND PROVISION WAS MADE ON THE BASIS OF SIMILAR EXPENDITURE INCURRED IN THE EARLIER YEAR, THEREFORE, IT CANNOT BE SAID THAT IT HAS ONLY A GUESS WORK OR AD - HOC IN NATURE . ACCORDINGLY, H E DIRECT ED T HE AO TO DELETE THE SAID DISALLOWANCE. 4. SO FAR AS DISALLOWANCE OF RS. 24,97,038/ - U/S 40(A)((IA) ON THE PAYMENT OF SECURITY SUPPORT CHARGES TO M/S DOM I NI O N DI AMOND BUILDING SERVICES CANADA IS CONCERNED, THE LD. CIT(A) UPHELD THE CONTENTION OF THE ASSES SEE THAT THE PAYMENT MADE TO THE NON - RESIDENT COMPANY WAS NOT TAXABLE IN INDIA AND HENCE THERE WA S NO QUESTION OF DISALLOWANCE U/S 40(A)(IA). FURTHER, HE HELD THAT IT IS NOT THE CASE OF THE AO THAT THE INCOME EARNED BY THE CANADIAN PARTY FROM THE ASSESSEE IS TAXABLE IN INDIA NOR IT IS THE CASE OF PAYMENT IN RESPECT OF FEE FOR TECHNICAL SERVICES OR IN THE M/S DOMINION DIAMOND (INDIA) PVT LTD (FORMERLY KNOWN AS M/S. HARRY WINSTON DIAMOND (INDIA) PVT LTD), IT A NO. 627 / MUM / 2015 4 NATURE OF ROYALTY . ACCORDINGLY, HE DELETED THE SAID DISALLOWANCE ON THE GROUND THAT ASSESSEE WAS NOT LIABLE TO DEDUCT TDS. 5. AFTER CONSIDERING THE RI VAL CONTENTIONS OF THE PARTIES AND ON PERUSAL OF RELEVANT FINDING GIVEN IN THE IMPUGNED ORDERS , W E FIND THAT , SO FAR AS THE ISSUE OF DISALLOWANCE OF EXPENDITURE AGGREGATING TO RS. 5,92,440/ - , IT IS AN UNDISPUTED FACT THAT THESE WERE THE PROVISIONS MADE FOR TP STUDY REPORT AND T P ACCOUNTANT REPORT PREPARED FOR THE CURRENT ASSESSMENT YEARS AS PER THE STATUTORY REQUIREMENT SUCH A PROVISION FOR PAYMENT WAS MADE ON THE BASIS OF SIMILAR AMOUNT PAID IN THE EARLIER YEAR. SINCE THE ASSESSEE IS FOLLOWING MERCANTI LE SYSTEM OF ACCOUNTING, THE EXPENDITURE PERTAINING TO CURRENT ASSESSMENT YEAR HAS TO BE TAKEN INTO ACCOUNT AND THE ASSESSEE HAS RIGHTLY DEBITED THE EXPENSES PERTAINING TO THE CURRENT YEAR BASED ON SIMILAR PAYMENT MADE IN THE EARLIER YEAR. WE COMPLETELY AG REE WITH THE FINDING OF THE CIT(A) THAT SUCH A PROVISION COULD NEITHER SAID TO BE G U E S S WORK OR AD - HOC IN NATURE. RATHER, IN THESE CIRCUMSTANCES IT IS A KIND OF ASCERTAINED LIABILITY WHICH IS A DEDUCTIBLE EXPENDITURE. ACCORDINGLY, WE AFFIRM THE ORDER OF TH E CIT(A) ON THIS SCORE. 6. SO FAR AS THE DISALLOWANCE U/S 40(A)(IA) ON SECURITY CHARGES OF RS.24,97,038/ - , IT IS NOT IN DISPUTE THAT THE SAID PAYMENT HAS BEEN MADE TO NON - RESIDENT COMPANY , M/S DOMINION DIAMOND BUILDING SERVICES, CANADA. SUCH PAYMENTS ARE ON ACCOUNT OF SERVICES AVAILED IN THE NATURE OF MAINTENANCE ON COMMON SECURITY PLATFORM APPLICABLE TO ALL THE GROUP COMPANIES. SUCH A SECURITY RELATED TO SERVICES PROVIDED BY THE CANDIAN COMPANY W AS AS BELOW : - I ) SECURITY SURVEILLANCE SERVICES II ) ANALYSIS OF U NEXPECTED OR SUSPICIOUS OCCURRENCES III ) SECURITY AUDIT PROCESS TO ENSURE THAT PROPER SECURITY REQUIREMENT ARE IN PLACE IV ) EMERGENCY COMMUNICATION SERVICES AND V ) SECURITY RELATED TECHNICAL SUPPORT SERVICES. M/S DOMINION DIAMOND (INDIA) PVT LTD (FORMERLY KNOWN AS M/S. HARRY WINSTON DIAMOND (INDIA) PVT LTD), IT A NO. 627 / MUM / 2015 5 EXPENSES INCURRED BY THE SAID COMPANY TOWARDS SECURITY SU RVEILLANCE SERVICES PROVIDED TO THE ASSESSEE ARE RE CHARGED TO THE ASSESSEE WITH THE MARK - UP OF 5%. THE ASSESSEES CASE HAS BEEN THAT, IT HAS AVAILED BENEFIT AND AS PER THE DTAA PROVISIONS, THE FEE FOR INCLUDED SERVICES WOULD BE TREATED RENDERING O F TECHN ICAL , OR CONSULTANCY SERVICES AND SUCH SERVICES SHOULD MAKE AVAILABLE TECHNICAL KNOWLEDGE, EXPERIENCE, SKILL, KNOW - HOW OR PROCESS ES TO THE ASSESSEE F OR A DEVELOPMENT AND TRANSFER OF TECHNICAL PLAN OR TECHNICAL DESIGN. HERE IN THIS CASE, THERE IS NO MAKE AV AILABLE OF ANY SUCH KIND OF TECHNICAL SERVICES. ONCE SUCH A PAYMENT DO NOT FALL WITHIN THE CATEGORY OF TECHNICAL SERVICES UNDER THE TREATY, THEN IT CANNOT BE HELD THAT THE ASSESSEE WAS LIABLE TO DEDUCT TDS U/S 19 5 . BEFORE US, LD. COUNSEL ALSO POINTED OUT T HAT , IN THE ASSESSMENT YEAR 2011 - 12, THE AO HIMSELF HAS NOT MADE ANY DISALLOWANCE U /S 40(A)(IA) ON SIMILAR PAYMENT MADE TO THE SAID FOREIGN ENTITY. THUS, UNDER THE SE FACTS AND CIRCUMSTANCES OF THE CASE PROCESS WHEN AO HIMSELF HAS NOT MENTIONED AS TO HOW SU CH AN AMOUNT IS TAXABLE IN INDIA EITHER UNDER THE PROVISION OF THE ACT OR UNDER THE PROVISIONS OF THE DTAA , HENCE , DISALLOWANCE MADE BY THE AO ON THE GROUND THAT ASSESSEE HAS NOT DEDUCTED TDS CANNOT BE UPHELD. ACCORDINGLY, THE FINDING OF THE CIT(A) ON THIS SCORE ALSO IS AFFIRMED. ACCORDINGLY , GROUND RAISED BY THE REVENUE IS DISMISSED. 7 . IN THE RESULT, APPEAL OF THE REVENUE STANDS DISMISSED. ORDER PRONOUNCED IN THE OPEN COURT ON 6 TH JANUARY, 201 6 . SD/ - SD/ - ( ) ( ) ( RAJENDRA ) ( AMIT SHUKLA ) ACCOUNTANT MEMBER JUDICIAL MEMBER MUMBAI, DATE: 6 TH JANUARY, 2016 M/S DOMINION DIAMOND (INDIA) PVT LTD (FORMERLY KNOWN AS M/S. HARRY WINSTON DIAMOND (INDIA) PVT LTD), IT A NO. 627 / MUM / 2015 6 / COPY TO: - 1 ) / THE APPELLANT. 2 ) / THE RESPONDENT. 3) THE CIT (A) - 9 , MUMBAI . 4 ) THE CIT 5 , MUMBAI . 5 ) , , / THE D.R. K BENCH , MUMBAI. 6 ) \ COPY TO GUARD FILE. / BY ORDER / / TRUE COPY / / / , DY. / ASSTT. REGISTRAR I.T.A.T., MUMBAI * . . *CHAVAN, SR.PS