2014 (9) TMI 312 - AT - Income Tax

Expenses incurred by HO in Thailand for Indian Project Held that - AO was of the view that the expenses are initial startup expenses and are in the capital field AO as well as the CIT(A) have not stated that the expenditure claimed have no nexus with the Project in India - As the photocopy of all the vouchers have been furnished before the bench in the form of a paper book, and as it has been brought to our notice the letter addressed by the assessee, wherein the required details were filed with the AO the matter is remitted back to the AO for verification Decided in favour of assessee. Disallowance u/s 40(a)(ia) Non-compliance u/s 195 Held that - Italian Thai Development Co. Ltd. (ITDL) is a non resident company and that it has provided certain machinery on hire to the assessee company on chargeable basis - ILD has charged hire for the machinery provided to the assessee and raised bills on the assessee towards Hire charges - A perusal of the Clauses does not in any way support the arguments of the assessee that these payments were not, in substance, rental payments made by the assessee to ITDL - Just because certain obligations, terms & conditions etc. have been agreed to between the parties, it does not lead to a conclusion that there is no hirer and hiree relationship - The fact remains that the assessee bills ITDL for the total contract work done and ITDL also bills the assessee for hire charges payable. Method of settlements of accounts is of no consequence - even a credit entry attracts provisions of Sec.195 when services were not rendered in India, the amount shall not be taxable and consequently S.195 is not attracted and consequently the disallowance made u/s 40(a)(ia) is bad in law - Decided partly in favour of assessee.

Summary

Issues Involved:
1. Allowability of expenses incurred by the Head Office for the Indian project.
2. Disallowance under Section 40(a)(i) for non-compliance with Section 195 regarding machinery hire charges.
3. Allowability of legal expenses paid in Thailand for arbitration proceedings.
4. Claim for deduction under Section 40(a)(iii).

Issue-wise Detailed Analysis:

1. Allowability of Expenses Incurred by the Head Office for the Indian Project:
The first issue pertains to the allowability of expenses incurred by the Head Office (HO) located in Thailand for the Indian project during the Assessment Year (AY) 2005-06. The Assessing Officer (AO) disallowed these expenses, categorizing them as initial startup expenses and thus capital in nature. The CIT(A) upheld this disallowance, noting the lack of supporting documents. However, the assessee contended that detailed information, including vouchers and ledger accounts, had been furnished. Upon review, it was found that the expenses were revenue in nature and related to project execution in India. Therefore, the matter was remanded back to the AO for verification, and the ground was allowed for statistical purposes.

2. Disallowance under Section 40(a)(i) for Non-compliance with Section 195 Regarding Machinery Hire Charges:
The second issue, common for all four AYs, involves the disallowance of machinery hire charges under Section 40(a)(i) due to non-compliance with Section 195. The assessee hired machinery from Italian Thailand Development Co. Ltd. (ITDL) and did not deduct tax at source. The AO and CIT(A) upheld the disallowance. The assessee argued that the hire charges were adjusted against contract dues and not actual payments, thus not attracting Section 195. However, the Tribunal found that the relationship between the parties was that of hirer and hiree, and the method of settlement was irrelevant. The provisions of Section 195 were applicable, and the disallowance under Section 40(a)(i) was upheld.

3. Allowability of Legal Expenses Paid in Thailand for Arbitration Proceedings:
For AY 2008-09, the issue of allowability of legal expenses paid in Thailand for arbitration proceedings was raised. The assessee argued that the law firm was a resident of Thailand, with no presence in India, and that services were rendered and payments made in Thailand. The DRP dismissed the assessee's submissions, equating them with the machinery hire charges issue. However, the Tribunal found no comparison between the two issues and noted that services were rendered outside India, making Section 195 inapplicable. Consequently, the disallowance under Section 40(a)(ia) was deemed invalid, and the ground was allowed.

4. Claim for Deduction under Section 40(a)(iii):
The final issue for AY 2008-09 involved a claim for deduction of Rs. 2,79,333 made during assessment proceedings. The assessee had made a suo moto disallowance under Section 40A(iii) in its return of income but did not file a revised return. The AO, following the Supreme Court decision in Geotze India Ltd. v. CIT, disallowed the claim. The Tribunal found no infirmity in the AO's order, and this ground was dismissed.

Conclusion:
The appeals for AY 2005-06 and 2008-09 were allowed in part, while the appeals for AY 2006-07 and 2007-08 were dismissed. The order was pronounced in the Open Court on 04th April, 2014.