2016 (3) TMI 640 - AT - Income Tax

TDS u/s 195 - TDS on the bank guarantee commission paid to a foreign bank - Held that - When the Revenue authorities have failed to lay hands on any cogent material that the bank guarantee commission paid by the assessee company paid on account of business transaction between assessee company and VTB bank particularly in the face of the fact that VTB bank has no PE in India, the question of attracting provision contained u/s 195 of the Act does not arise. In other words, when the assessee company has directly made the payments to VTB bank, Russia through its banker in India, no income can be said to have accrued or arisen in India to the VTB bank u/s 4, 5 and 9 of the Act. So, in the given circumstances, Assessee Company was not liable to deduct the tax at source on the bank guarantee commission paid to a foreign bank. - Decided in favour of assessee.

Summary

Issues Involved:
1. Rejection of books of accounts and adoption of best judgment assessment under Section 145(3) of the Income Tax Act.
2. Disallowance of bank guarantee commission under Section 40(a)(1) due to non-deduction of tax at source (TDS).

Detailed Analysis:

1. Rejection of Books of Accounts and Adoption of Best Judgment Assessment:
The Revenue challenged the deletion of an addition of Rs. 6,51,62,584/- made by the Assessing Officer (AO) by rejecting the books of accounts under Section 145(3) of the Income Tax Act. The AO noticed discrepancies in the project accounting and rejected the books, adopting a net profit rate of 10% of the turnover. The discrepancies included variations in profit declaration across different projects and inconsistencies in accounting for closing inventory and project overhead expenses.

The CIT(A) deleted the addition, noting that the assessee had consistently followed the percentage completion method in accordance with AS-7, which had been accepted by the Revenue in previous and subsequent assessment years (except for the year under consideration). The Tribunal upheld the CIT(A)'s decision, emphasizing the rule of consistency and the lack of justification for the AO's rejection of the books. The Tribunal found that the AO's rejection was based on improper appreciation of the percentage completion method and typographical errors, which were rectified by the assessee.

2. Disallowance of Bank Guarantee Commission under Section 40(a)(1):
The Revenue also challenged the deletion of disallowances of Rs. 5,20,56,831/-, Rs. 5,52,49,559/-, and Rs. 4,77,71,123/- for the assessment years 2006-07, 2007-08, and 2008-09, respectively. The AO disallowed these amounts under Section 40(a)(1) due to non-deduction of TDS on bank guarantee commissions paid to a foreign bank (VTB Bank, Russia).

The CIT(A) reversed the AO's decision, and the Tribunal upheld this reversal. The Tribunal noted that VTB Bank had no Permanent Establishment (PE) in India and that the bank guarantee commission could not be treated as interest under Section 2(28A) of the Act. The Tribunal also found that no income accrued or arose in India to VTB Bank under Sections 4, 5, and 9 of the Act, and therefore, the assessee was not liable to deduct TDS under Section 195.

Conclusion:
The Tribunal dismissed the appeals filed by the Revenue, upholding the CIT(A)'s decisions on both issues. The Tribunal emphasized the rule of consistency in accounting methods and clarified the nature of bank guarantee commissions in relation to TDS obligations. The order was pronounced in the open court on 05th February 2016.