Matrix Cellular International Services Ltd., New Delhi V. JCIT, Special Range- 6, New Delhi

ITA 6916/DEL/2019

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Matrix Cellular International Services Ltd. appealed against the order of the Commissioner of Income Tax (Appeals) which upheld disallowances made by the Assessing Officer under section 40(a)(i) and section 35D of the Income Tax Act, 1961. The disallowances were related to payments made to overseas entities for services that the Assessing Officer deemed required tax withholding under section 195. The Tribunal examined the nature of these payments in light of the Double Taxation Avoidance Agreements (DTAAs) and found that the payments were not taxable in India as the entities did not have a Permanent Establishment in the country. Consequently, the Tribunal deleted the disallowances. However, a disallowance related to a write-off of sundry balances was upheld as the assessee failed to demonstrate that the amount was actually paid during the year.

• Counselvise Citation: [2023] 140 COUNSELVISE.COM (IT) 116242 (ITAT-DELHI)
• Duration Of Justice: 3 year(s) 4 month(s) 29 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 17-01-2023
• Appeal Filed By: Assessee
• Order Result: PartlyAllowed
• Bench Allotted: D
• Next Hearing Date: 19-10-2022
• Assessment Year: 2016-2017
• Appeal Filed On: 19-08-2019
• Other Referred Cases: Dhanaklakshmi Bank Ltd. Vs. CIT
• Laws Referred To: Income Tax Act, 1961
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Keywords: Double taxation relief
• Section: 37; 195; 13

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL DELHI BENCH ‘D’, NEW DELHI Before Sh. G. S. Pannu, Hon’ble President & Sh. Saktijit Dey, Judicial Member ITA No. 6916/Del/2019 : Asstt. Year : 2016-17 Matrix Cellular International Services Ltd., 7, Khullar Farms, Mandi Road, Mehrauli, New Delhi-110030 Vs JCIT, Special Range-6, New Delhi-110003 (APPELLANT) (RESPONDENT) PAN No. AAECM5169M Assessee by : Sh. A. K. Khanna, CA Revenue by : Sh. Sanjay Kumar, Sr. DR Date of Hearing: 20.10.2022 Date of Pronouncement: 18.01.2023 ORDER Per Saktijit Dey, Judicial Member: This is an appeal by the assessee against the order dated 28.06.2019 of learned Commissioner of Income Tax (Appeals)- 37, New Delhi pertaining to Assessment Year 2016-17. 2. In ground no. 1, the assessee has challenged disallowance of Rs.3,09,195/- under section 40(a)(i) of the Income Tax Act, 1961. 3. Briefly the facts are, the assessee a resident corporate entity, is stated to be engaged in the business of providing mobile phone services for international use. For the Assessment year under dispute, the assessee filed its return of income on 30.11.2016 declaring total income of Rs.3,18,77,680/-. In course of scrutiny assessment proceedings, the Assessing ITA No. 6916/Del/2019 Matrix Cellular International Services Ltd. 2 Officer noticed that during the year under consideration, the assessee has debited certain expenditure, being payment made to overseas entities, without withholding tax under section 195 off the Act. Therefore, he called upon the assessee to explain why such payment made should not be disallowed under section 40(a)(i) of the Act. Though, the assessee objected to the proposed disallowance by contending that the overseas entities to whom payments were made are not chargeable to tax in India in terms of the respective Double Taxation Avoidance Agreements (DTAAs), however, the Assessing Officer was not convinced. Ultimately, he disallowed the payment made by invoking the provisions of Section 40(a)(i) of the Act. Though, the assessee contested the disallowance before the First Appellate Authority, however, it was unsuccessful. 4. We have considered rival submissions and perused the material on record. As could be seen from the facts and material available on record, the assessee paid the disputed amount to a Malaysian entity for incorporation of a company in Malaysia. In other words, the fee paid to the Malaysian entity was to facilitate incorporation of the company. Of course, as submitted before us by learned Counsel, the company ultimately was not incorporated. Be that as it may, the issue arising for consideration is, whether the payment made by the assessee to the Malaysian entity is chargeable to tax at the hands of that entity in India. As could be seen from Article 7 of India- Malaysia DTAA, income in the nature of business profit earned by a resident of Malaysia can be taxed in India only if the Malaysian entity carries on business in India through a Permanent Establishment (PE). In the facts of the present ITA No. 6916/Del/2019 Matrix Cellular International Services Ltd. 3 appeal, admittedly, the Malaysian entity does not have any PE in India. Therefore, the payment made, which is in the nature of business profit is not taxable in India. That being the factual position, there was no obligation on the assessee to withhold tax at source under section 195 of the Act while making such payment. At this stage, we must observe, the Assessing Officer while disallowing the payment under section 40(a)(i) of the Act has made a general observation that payments are covered under Article 12 of the DTAA, without specifying which particular DTAA he is referring to. Article 12 of India-Malaysia DTAA is in relation to income in the nature of royalty. In our view, the payment made by the assessee to the Malaysian entity certainly cannot be considered to be in the nature of royalty under Article 12 of the DTAA. 5. Having held so, it is necessary to examine whether the payment made would qualify as Fees for Technical Services (FTS) under Article 13 of the India-Malaysia DTAA. On a reading of Article 13, it is evident, the source country has the power to tax the income in the nature of FTS at beneficial rate of 10%. However, the service rendered must be managerial, technical or consultancy services. In the facts of the present appeal, the departmental authorities have failed to demonstrate that the payment made was towards rendering of managerial, technical or consultancy services. 6. That being the case, we hold that the assessee was not required to deduct tax at source under section 195 of the Act while making the disputed payment. Accordingly, we delete the disallowance made. This ground is allowed. ITA No. 6916/Del/2019 Matrix Cellular International Services Ltd. 4 7. In ground No. 2, the assessee has challenged disallowance of Rs.2,54,160/- under section 40(a)(i) of the Act. As could be seen from the facts on record, the disputed payment was made to an entity in Bangladesh for rendering legal services. The Assessing Officer disallowed the payment made by applying Section 40(a)(i) of the Act on the ground that the payment made required withholding of tax under section 195 of the Act. 8. In this case also, the reasoning of the Assessing Officer is vague and too general in nature. Neither the Assessing Officer nor learned Commissioner (Appeals) have made any discussion regarding the exact nature of payment made by the assessee to Bangladesh entity. On a perusal of the India-Bangladesh DTAA, it is to be seen that income in the nature of business profit can be taxable in the source country only if the resident of the other country carries on business in the source country through a Permanent Establishment situated therein. In the facts of the present appeal, admittedly, the Bangladesh entity has no PE in India. Therefore, income, if considered to be business profit is not taxable in India. As per Article 13 of the DTAA, the payment made by the assessee cannot be treated as royalty. If at all, the payment can be considered to be towards rendering of independent professional services as per Article 15 of the DTAA. However, the payment made towards independent professional services is taxable in the country of residence of recipient, unless, the recipient has a faxed base regularly available to him in the source country for the purpose of performing his activity. In the facts of the present appeal, there is nothing on record to ITA No. 6916/Del/2019 Matrix Cellular International Services Ltd. 5 demonstrate that the Bangladesh entity had any fixed base in India from which it is carrying on its activities in India. 9. Thus, in our view, the departmental authorities have failed to establish on record that the payment made by the assessee is taxable at the hands Bangladesh entity in India. That being the case, there was no requirement for withholding tax under section 195 of the Act. Accordingly, we delete the disallowance made under section 40(a)(i) of the Act. 10. In ground No. 3, the assessee has challenged disallowance of Rs.1,20,986/- claimed as deduction under section 35D of the Act. 11. Briefly the facts are, in course of assessment proceedings, the Assessing Officer noticed that the assessee had claimed deduction of Rs.1,20,986/- under section 35D of the Act. When called upon to justify the claim, the assessee submitted that the assessee was proposing to issue Initial Public Offering (IPOs). It was submitted, for such purposes, the assessee had paid the amount in dispute to IIFL Holdings Ltd., which is one of the merchant bankers to the issue. It was submitted, these are in the nature of preliminary expenses for business expansion. Hence, has to be allowed. The Assessing Officer, however, did not accept the claim of the assessee on the reasoning that such expenses are not covered within the ambit of Section 35D of the Act. Accordingly, he disallowed the deduction. The disallowance so made was upheld by learned Commissioner (Appeals). 12. Before us, learned Counsel submitted that the assessee had paid fee of Rs.12,09,862/- to IIFL Holdings Ltd. towards ITA No. 6916/Del/2019 Matrix Cellular International Services Ltd. 6 getting approval from SEBI for issue of IPO. He submitted, since these were in the nature of preliminary expenses for business expansion, assessee claimed 1/10 th of such expenses as deduction under section 35D. 13. He submitted, the proposed IPO was ultimately dropped because of adverse market condition. Since, the expenditure was incurred for the business of the assessee, it is otherwise allowable under section 37 of the Act. In support of such contention, he relied upon the following decision: • Dhanaklakshmi Bank Ltd. Vs. CIT in ITA 456/2009 judgment dated 11.12.2018 (Kerala High Court) 14. Learned Departmental Representative relied upon the observation of the Assessing Officer and learned Commissioner (Appeals). 15. We have considered rival submissions and perused material on record. There is no dispute regarding the fact that the assessee has incurred the expenditure under consideration towards issue of IPO. The only reasoning on which assessee’s claim has been rejected is, the expenditure does not fall within the ambit of Section 35D of the Act. 16. Before us, the assessee has made an alternative claim that since the expenditure has been incurred for expansion of its business, it is allowable under section 37 of the Act. 17. Having taken note of the factual position and the nature of expenses, we are of the view that the expenditure is allowable u/s 35D of the Act as it is for the purpose of expansion of its ITA No. 6916/Del/2019 Matrix Cellular International Services Ltd. 7 business. The ratio laid down by the Hon’ble Kerala High Court in the decision cited before us by ld. Counsel for the assessee supports this view. Therefore, we allow the deduction. This ground is allowed. 18. In ground No. 4, the assessee has challenged disallowance of Rs.13,64,357/- representing ESOP expenses. While examining assessee’s claim in this regard in course of assessment proceedings, the Assessing Officer took a view that they are in the nature of provision, hence, unascertained liability. In this regard, he referred to Note 39 of the audited financial statement and observed that the assessee failed to explain the method of valuation. Thus, ultimately he disallowed the amount. 19. Learned Commissioner (Appeals) upheld the disallowance. 20. We have considered rival submissions and perused material on record. Undisputedly, the assessee had granted ESOP to its employee and during the year has booked the expenses in dispute. 21. On perusal of the balance sheet and profit and loss account of the assessee, it is observed that the assessee offered the ESOP to the employees at discounted value and the difference between the actual value and the discounted value was debited to the profit and loss account. It is also observed, the assessee has reversed a part of the expenses booked on ESOP and offered the same for tax in subsequent Assessment Years. Thus, in our view, the deduction claimed by the assessee is allowable. Accordingly, we delete the disallowance. ITA No. 6916/Del/2019 Matrix Cellular International Services Ltd. 8 22. In ground No. 5, the assessee has challenged the disallowance of Rs.21,35,426/- representing write off of sundry balances. 23. We have considered rival submissions and perused material on record. As could be seen, the amount written off represents Swachh Bharat Cess receivable by the assessee. The assessee has failed to demonstrate that the amount was actually paid during the year in terms of section 43B(a) of the Act. Therefore we uphold the disallowance. This ground is dismissed. 24. In the result, the appeal is partly allowed. Order Pronounced in the Open Court on 18/01/2023. Sd/- Sd/- (G. S. Pannu) (Saktijit Dey) President Judicial Member Dated: 18/01/2023 *Subodh Kumar, Sr. PS* Copy forwarded to: 1. Appellant 2. Respondent 3. CIT 4. CIT(Appeals) 5. DR: ITAT ASSISTANT REGISTRAR