2017 (9) TMI 573 - AT - Income Tax

Allowable business expenditure - demurrages on shipment for which NMDC is liable to pay as per understanding between NMDC & MMTC - Held that - Allowability of the expenditure of port charges as well as the demurrage charges have to be determined having regard to the above two clauses of the agreement. On plain reading of the above two clauses, it is manifest that the appellant has to bear the expenditure of port charges relating to export of cargo and the demurrage charges and therefore, we hold that the AO as well as the CIT(A) mis-construed the provisions of clauses governing the port charges and demurrage charges and erroneously held that expenditure was reimbursable to the appellant. In these circumstances, we direct the AO to allow this expenditure. - Decided in favour of assessee. Disallowance of expenditure incurred on Corporate Social Responsibility expenditure - Allowable business expenditure - whether this expenditure was incurred voluntarily there was no business expediency? - Held that - the entire expenditure incurred on corporate responsibility cannot be allowed as deduction. While coming to this conclusion, we also draw our support from the decision of the Co-ordinate Bench of Bangalore in the case of Kanhaiyalal Dudheria Vs. JCIT, Bellary 2017 (6) TMI 779 - ITAT BANGALORE , wherein one of us (Accountant Member) is the Author and in that case, involving identical fact situation and it was held that on failure of assessee to discharge onus of proving that expenditure was incurred for the purpose of business, it amounts to application of income voluntarily towards charity which cannot be allowed as deduction. - Decided against assessee Disallowance of commission expenditure on account of non-deduction of tax at source - appellant had not deducted tax at source on the commission paid @ 2.8% of the FOB price paid to the MMTC - Held that - No doubt, there is no direct payment in the form of commission payment to the MMTC by the appellant. But the mode of payment and the treatment in the Books of Account has no relevance to determine the nature of transaction. It is a case of the AO that the appellant had paid commission @2.8% of FOB value of the exports for acting as canalising agent to the MMTC. This commission was paid in the form of reduction from the value of the invoices. The AO also referred to the discussion note between the appellant and MMTC on 31-03-2007 and also examined the Director (Marketing) and had come to the conclusion that commission payment was made without deducting tax at source. The appellant had not filed any evidence either before the lower authorities or before us controverting the findings of the AO. He merely placed reliance on the orders of the Co- ordinate Bench for the earlier years. Needless to mention that this issue requires to be adjudicated having regards to the facts of the case. Therefore, placing reliance on the orders of the Co-ordinate Bench in earlier years is totally misplaced and in fact absence of any evidence brought on record indicating that no commission paid to the MMTC, we uphold the action of the AO, holding that the assessee is liable to deduct tax at source on commission payment. Accordingly, the AO was justified in disallowing the same in invoking the provision of section 40(a)(ia). - Decided against assessee.

Summary

Issues Involved:
1. Addition of ?65,25,000 as demurrages on shipment.
2. Addition of ?17,39,00,000 on Corporate Social Responsibility (CSR) expenditure.
3. Disallowance of ?7,64,20,400 on account of non-deduction of tax on commission paid.

Issue-wise Detailed Analysis:

1. Addition of ?65,25,000 as Demurrages on Shipment:
The appellant challenged the addition of ?65,25,000 as demurrages on shipment. The Assessing Officer (AO) disallowed this expense, arguing that as per the agreement between NMDC and MMTC, the shipment charges should be borne by MMTC. The appellant contended that the AO and the Commissioner of Income Tax (Appeals) [CIT(A)] misinterpreted the terms of the Memorandum of Understanding (MoU), which stipulated that the appellant was responsible for port charges and demurrages. The Tribunal examined the agreement clauses and concluded that the appellant was indeed liable for these charges. Consequently, the Tribunal directed the AO to allow this expenditure, thereby ruling in favor of the appellant.

2. Addition of ?17,39,00,000 on Corporate Social Responsibility (CSR) Expenditure:
The AO disallowed the CSR expenditure on the grounds that it was not related to the business of the appellant. The appellant argued that CSR is a crucial part of business operations, enhancing corporate reputation and stakeholder confidence. The CIT(A) partially upheld the AO's decision, treating ?17,39,00,000 as capital expenditure. The Tribunal noted that the provisions of the Companies Act, 2013, mandating CSR expenditure were not applicable for the AY 2012-13. It emphasized that for an expenditure to be deductible under Section 37(1) of the Income Tax Act, it must be incurred wholly and exclusively for business purposes. The Tribunal found that the appellant failed to establish the business expediency of the CSR expenditure and did not provide detailed evidence. Therefore, the Tribunal upheld the disallowance, dismissing the appellant's claim.

3. Disallowance of ?7,64,20,400 on Account of Non-Deduction of Tax on Commission Paid:
The AO disallowed ?7,64,20,400 for non-deduction of tax at source on commission paid to MMTC. The AO's investigation revealed that the appellant paid a commission of 2.8% of the FOB price to MMTC, which was not directly paid but adjusted in the invoice value. The CIT(A) upheld the AO's decision but deleted the addition based on the Special Bench decision in Merilyn Shipping and Transport Ltd. The appellant argued that there was no commission payment and that the relationship with MMTC was on a principal-to-principal basis. The Tribunal, however, found that the appellant did not provide any evidence to counter the AO's findings and upheld the disallowance, stating that the appellant was liable to deduct tax at source on the commission payment. The Tribunal also noted that the reliance on the Merilyn Shipping case was misplaced as it was not upheld by the Supreme Court in the Palam Gas Service case.

Conclusion:
The appeal was partly allowed. The Tribunal ruled in favor of the appellant regarding the demurrage charges but upheld the disallowance of CSR expenditure and commission payment due to non-deduction of tax at source.