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2011 (11) TMI 503 - AT - Income TaxTDS on upfront fees paid - Deduction u/s 40(a)(ia) dis-allowed - foreign company - liaison office in India Held that - Upfront fee of US 2 lakh paid to Standard Chartered Bank, Thailand to coordinate all agreement with it with tax on the said upfront fee to be borne by the assessee. US 2,00,000 equivalent to Rs. 89,34,000/- was grossed-up to the tune of Rs. 1,13,30,362/- out of which, a tax of Rs. 23,96,362/- was deducted and deposited by the assessee in the Government account. Thus payment of Rs. 23.96 lacs being amount of TDS and paid to the Government account for and on behalf of SCB, Bangkok is to be treated as a part of upfront fees paid by the assessee, and since the payment of Rs. 89.34 lacs is net of the taxes paid by the assessee has been allowed as a revenue deduction by the AO, the payment of Rs. 23.96 lacs being part of the same consideration shall also be eligible as a revenue deduction. Similarly, the payment of Rs. 20,000/- towards bank charges for remitting the upfront fees from India to Thailand shall also be allowed as a revenue deduction Decided in favor of assessee.
Issues Involved:
1. Disallowance of Rs. 23,96,362/- claimed as deduction under the head "Upfront Fees". 2. Disallowance of Rs. 20,000/- on account of bank charges. Issue-wise Detailed Analysis: 1. Disallowance of Rs. 23,96,362/- claimed as deduction under the head "Upfront Fees": The assessee, a foreign company registered in Bangkok with a liaison office in India, obtained a loan of Rs. 87,00,00,000/- from Standard Chartered Bank, India, for the Koldam Hydro Electric Power Project. To secure this loan, the assessee paid an upfront fee of US$2 lakh to Standard Chartered Bank, Thailand, net of taxes. The assessee approached the Income-tax Department under sec. 195(1) to determine the applicable withholding tax, and it was held that the upfront fee was in the nature of fee for technical services, taxable in India. Consequently, the upfront fee of US$2,00,000 was grossed up to Rs. 1,13,30,362/-, with Rs. 23,96,362/- deducted and deposited as tax. The Assessing Officer disallowed the deduction of Rs. 23,96,362/- on the grounds that it was an income-tax liability, which is not deductible under sec. 40(a)(ii). The CIT(A) upheld this disallowance, stating that the income-tax paid by the assessee on behalf of the payee cannot be claimed as a permissible deduction. Upon appeal, it was argued that the tax payment was an integral part of the upfront fee, and had the tax not been assured, the bank would have charged a higher fee. The assessee cited the cases of Tata Yadogawa Ltd. and Standard Polygraph Machines (P.) Ltd., where similar tax payments were considered part of the consideration for acquiring services or know-how. The Tribunal found that the payment of Rs. 23,96,362/- was indeed an integral part of the upfront fee, as it was a contractual obligation. The Tribunal referenced the Tata Yadogawa Ltd. case, where the Jharkhand High Court held that tax payments under a collaboration agreement were part of the consideration. Similarly, the Madras High Court in Standard Polygraph Machines (P.) Ltd. held that tax payments made under an agreement formed part of the consideration for the agreement. Therefore, the Tribunal concluded that the disallowance of Rs. 23,96,362/- was unjustified and allowed the deduction as it was part of the revenue expenditure. 2. Disallowance of Rs. 20,000/- on account of bank charges: The assessee incurred bank charges of Rs. 20,000/- for remitting the upfront fee to Standard Chartered Bank, Thailand. The Assessing Officer disallowed this amount, and the CIT(A) upheld the disallowance, considering it as not allowable under sec. 40(a)(ii). Upon appeal, the Tribunal noted that the bank charges were incurred for remitting the upfront fee, which was allowed as a revenue deduction. Therefore, the bank charges should also be considered a revenue expenditure. The Tribunal found no reason to disallow the bank charges and concluded that they should be allowed as a deduction. Conclusion: The Tribunal allowed the appeal filed by the assessee, deleting the disallowances of Rs. 23,96,362/- on account of tax deducted at source and Rs. 20,000/- on account of bank charges, treating both as part of the revenue expenditure.
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