2014 (10) TMI 700 - AT - Income Tax

Non-admissibility of this commission u/s 37 -Applicability of section 9(1)(vii)(b) r.w. section 40(a)(i)(A) Held that - It is noted by the CIT(A) that countries of South America and Europe etc. are new business places which required the help of local agents who could be in close proximity with the customers and who could understand the local language whereas LEG who had big picture and also the authority to be flexible with the rate, was overall coordinator of all the LSAs - This finding of CIT(A) could not be controverted by the Revenue - copy of certain correspondences over internet/e-mail of customers /local sales agents and company in connection with procurement of sale orders/ marketing are submitted by the assessee and it is noted that Mr. Brian Young of LEG was very much involved over and above the local sales agents in procurement of orders - the assessee is in India and the customers and LSAs are in South America and Europe etc. - Therefore, if the assessee is taking the services of LEG for better coordination between the assessee company and LSAs, then it is a business decision of the assessee company which cannot be questioned by the AO. Explanation 2 to section 9(1)(vii) has already been taken into consideration by CIT(A) and by following the Board s Circular No. 786 dated 07/02/2000, it was held that services rendered by LEG are not managerial services falling within Fees for Technical Services (FTS) - commission has been paid by the assessee to LEG for acting in foreign country as selling agent and therefore, the services rendered by LEG are not managerial services to fall in the scope of Fees for technical services (FTS). Retrospective effect of amendment u/s 195(1) w.e.f. 01/04/1962 Held that - As per this explanation, the amendment is this that if the payee is liable to tax in India in respect of the impugned payment than the payer cannot claim that he is not supposed to deduct TDS because the payer is neither a resident of India nor the payer has any place of business in India or business connection in India - since as per Board Instruction, the payment is not taxable in the hands of the payee, TDS is not required to be deducted by the assessee Decided against revenue. Addition of payment of Top UPS made by the company Payment constitute Key Man Insurance Premium Held that - Both the policies were issued on 28/02/2005 and therefore, the issurance of these policies was before the date of this circular dated 27/04/2005 - At the time of issue of these policies in the financial year 2004-05 relevant to assessment 2005-06, the payment made by the assessee company of ₹ 4 crore was claimed and allowed as keyman insurance policy premium - at the time of issuance of these policies, these policies were not keyman insurance policy - the payment is not renewal but top up premium - if any top up premium is paid after 30/06/2006, it will be hit by this circular of IRDA but in the present case, the top up premium has been paid by the assessee and received by insurance company on 31/12/2005 which is before the date of these last two circulars dated 3/01/2006 and 30/06/2006 in which such increase in sum assured in respect of earlier policy was barred the order of the CIT(A) is upheld Decided against revenue. Addition u/s 43B Amount paid in not actual payment of Excise Duty but represents adjustment in Cenvat Receivable A/c Held that - The payment has been done through the CENVAT deposit account before due date of filing of return of income - this is actual payment and therefore, allowable u/s 43B because it was paid before due date of filing of return of income - payment through CENVAT or through PLA both are actual payments and therefore, both are allowable if the same has been paid before the due date of filing of return of income - If payment by way of CENVAT is not actual payment as per the AO - then he should have added all such payments also which were paid during the year but he has added only those such payments which were made after 31st march but before the due date of filing of return of income - This is not the objection of the Revenue that this payment was not made before due date of filing of return of income the order of the CIT(A) is upheld Decided against revenue. Commission paid on domestic sales Held that - CIT(A) rightly was of the view that although the agent i.e. M/s Super Smelters Ltd. had booked its commission income in the F.Y. 2004-2005 for coordinating the sales to M/s Shiva Polymers Pvt. Ltd., the same norm cannot be thrust on the assessee company because the assessee company has booked the commission expenditure because the sales have been effected during the current year i.e. AY 2005-06 only the order of the CIT(A) is upheld Decided against revenue. Commission paid to Managing Director Held that - CIT(A) rightly was of the view that the AO has not brought anything on record to show that the salary paid to the Managing Director is excessive in comparison to other similarly placed Managing Director (CEOs) - the Managing Director gets a fixed salary and a variable pay in the form of commission which is computed @1% of the profit of the assessee company - the payment of commission to the Managing Director is much below this ceiling as per Companies Act because no commission has been paid to any other Director - Since the payment of commission is in line with the resolution passed in Annual General Meeting of the assessee company and also in the line with the provisions of Companies Act and no adverse material has been brought on record to show that the same is excessive, there is no reason to interfere in the order of CIT(A) Decided against revenue. Withdrawal of depreciation on New Aluminum Structure and Water Proofing Held that - CIT(A) rightly noted that the expenditures were incurred in respect of water proofing - these new aluminum structure/doors were got erected for making partitions & dividing walls and the water proofing was done on the existing roof of factory shed and therefore, it is not creating any new asset nor it increased the existing efficiency or capacity - putting dividing walls and doors as partition in the existing shed and water proofing of existing factory shed, does not amount to bringing a new asset in existence and hence, the same is allowable as revenue expenditure Decided against revenue. Interest and expenses disallowed u/s 14A r.w. Rule 8D Held that - Following the decision in Godrej & Boyce Mfg. Co. Ltd. vs. Dy. CIT 2010 (8) TMI 77 - BOMBAY HIGH COURT - Rule 8D is applicable from the AY 2008-09 and therefore, it is not applicable in the present year - But at the same time reasonable disallowance is to be made - Since disallowance was made by the Assessing Officer and confirmed by CIT(A) as per Rule 8D, the matter is liable to be remitted back to the AO for fresh adjudication Decided in favour of assessee. Various expenses disallowed - staff welfare expenses, telephone expenses and vehicle running & maintenance expenses Held that - Ad hoc disallowance out of staff welfare, telephone expenses and vehicle running & maintenance expenses was made by the AO - Following the decision in Sayaji Iron and Engg. Co. vs. CIT 2001 (7) TMI 70 - GUJARAT High Court - no disallowance is to be made out of telephone and vehicle running expenses in the hands of a company on the allegation of personal user of the directors/employees - the part disallowance deleted by CIT(A) under the two heads i.e. telephone expenses and vehicle expenses do not call for any interference - Regarding the part disallowance deleted by CIT(A) in respect of staff welfare, the disallowance was made by the AO for the expenses by alleging that they are not fully verifiable but he has not cited a single instance which is of not verifiable Decided against revenue.

Summary

Issues Involved:

1. Deletion of addition related to commission payments to M/s Lohia Europe GmbH (LEG).
2. Deletion of addition related to commission payments to the Managing Director.
3. Deletion of addition related to commission payments to Industrial Marketing Corporation.
4. Deletion of addition related to Keyman Insurance Premium.
5. Deletion of addition related to disallowance under Section 43B.
6. Deletion of addition related to disallowance of commission on domestic sales.
7. Deletion of addition related to disallowance under Section 35(2) for R&D expenditure.
8. Deletion of addition related to disallowance of exhibition expenses.
9. Deletion of addition related to disallowance under Section 14A.
10. Deletion of addition related to disallowance of staff welfare, telephone, and vehicle running expenses.

Issue-wise Detailed Analysis:

1. Deletion of Addition Related to Commission Payments to M/s Lohia Europe GmbH (LEG):

The Revenue contended that the payment of Rs. 1,05,70,057 to LEG was disallowed due to non-deduction of TDS under Section 195 and that it was a sham transaction. The CIT(A) deleted the addition, referencing Board's Circular No. 786 and stating that the services rendered by LEG were not managerial services falling under "Fees for Technical Services" as per Section 9(1)(vii). The Tribunal upheld the CIT(A)'s decision, noting that the commission was at arm's length and that the retrospective amendments to Section 9 and Section 195 did not apply as the services were rendered outside India.

2. Deletion of Addition Related to Commission Payments to the Managing Director:

The Revenue argued that the commission paid to the Managing Director was excessive. The CIT(A) found that the commission was in line with the resolution passed in the Annual General Meeting and within the limits prescribed by the Companies Act. The Tribunal agreed, noting that the Assessing Officer had not provided evidence to show that the payment was excessive.

3. Deletion of Addition Related to Commission Payments to Industrial Marketing Corporation:

The Revenue contended that the commission paid to Industrial Marketing Corporation was not justified as DLW Varanasi is a government organization where no middleman is required. The CIT(A) found that the services were rendered, as evidenced by direct confirmations from the payee and the purchaser. The Tribunal upheld this decision, noting that the Assessing Officer had not disproven the services rendered.

4. Deletion of Addition Related to Keyman Insurance Premium:

The Assessing Officer disallowed the top-up premium on Keyman Insurance policies, citing IRDA circulars. The CIT(A) found that the top-up premium was paid before the relevant IRDA circulars came into effect and hence was allowable. The Tribunal upheld this finding, noting that the payment was made before the circulars barring such top-ups were issued.

5. Deletion of Addition Related to Disallowance Under Section 43B:

The Revenue argued that the payment of Rs. 35,44,195 was not actual payment but an adjustment in the CENVAT account. The CIT(A) found that the payment was made through the CENVAT deposit account before the due date of filing the return. The Tribunal agreed, stating that payment through CENVAT is an actual payment.

6. Deletion of Addition Related to Disallowance of Commission on Domestic Sales:

The Assessing Officer disallowed Rs. 15,00,000 on the basis that there was no evidence of services rendered. The CIT(A) found that the services were rendered, as evidenced by direct confirmations from the payee and the purchaser. The Tribunal upheld this decision, noting that the Assessing Officer had not disproven the services rendered.

7. Deletion of Addition Related to Disallowance Under Section 35(2) for R&D Expenditure:

The Assessing Officer disallowed various expenditures related to R&D, alleging no new construction. The CIT(A) found that the expenditures were based on a scientific method of allocation and were justified. The Tribunal upheld this decision, noting that the Assessing Officer had not provided contrary evidence.

8. Deletion of Addition Related to Disallowance of Exhibition Expenses:

The Assessing Officer disallowed exhibition expenses, claiming they were not related to the relevant assessment year. The CIT(A) found that the expenses crystallized in the relevant year and were allowable. The Tribunal upheld this decision, noting that the TDS was deducted in the relevant year.

9. Deletion of Addition Related to Disallowance Under Section 14A:

The Assessing Officer made a disallowance under Section 14A read with Rule 8D. The CIT(A) found that investments in shares of foreign companies should not be included in the average value of investments for disallowance purposes. The Tribunal upheld this decision, noting that the dividend from foreign companies is taxable.

10. Deletion of Addition Related to Disallowance of Staff Welfare, Telephone, and Vehicle Running Expenses:

The Assessing Officer made ad hoc disallowances under these heads. The CIT(A) reduced the disallowances, finding them to be excessive. The Tribunal upheld this decision, noting that no specific instances of non-verifiable expenses were provided by the Assessing Officer.

Conclusion:

The Tribunal upheld the CIT(A)'s decisions on all issues, rejecting the Revenue's appeals and allowing the assessee's appeal for statistical purposes. The Tribunal emphasized the importance of evidence and reasonableness in making and justifying disallowances.