2018 (6) TMI 357 - AT - Income Tax

TDS u/s 195 - Disallowance u/s 40(a)(i) - reimbursement of bank guarantee commission paid to non-residents - Held that - Since the reimbursement of expenses is not taxable in the hands of payee, there is no point in compelling the assessee to still go ahead with the deduction of tax at source. This issue of non-deduction of tax at source from similar payments made to nonresidents has been decided in favor of the assessee right from AY 2003-04. - Decided in favor of assessee. Treatment of interest income - nature of income - Income from other sources or income from business - idle funds usage - Held that - Interest mainly arose on account of fixed deposits kept with banks - since the funds were found to be surplus pending final resolution of disputes the AO had rightly assessed interest income under the head Income from Other sources - Decided against the assessee. Bank guarantee charges, travelling and conveyance of professionals and professional fees paid for the arbitration proceedings - Capital expenditure or revenue expenditure - Held that - Assessee being a single project joint venture it cannot be said that the assessee was not carrying on business in some intervening years but in business in earlier and later years - earning of income during the year is not a prerequisite for coming to the conclusion that business is in fact carried on during the year - thus assessee is very much carrying on business in the years - ground raised by department is dismissed. Exclusion of deemed export business benefits - accrual receipts - Held that - There is no infirmity in the order of CIT(A) for excluding the deemed export benefits which have already been taxed in the A.Y.2003-04 and Tribunal have also confirmed the action of the AO. Accordingly, there is no infirmity in the order of CIT(A) for excluding deemed export business benefits. Disallowance of 20% on travelling expenses - Held that - All the expenses are primarily incurred in connection with the arbitration proceedings and other pending litigations. Keeping no infirmity in the order for restricting disallowance to 20% of expenses.

Issues Involved:

1. Disallowance under Section 40(a)(i) of reimbursement of Bank Guarantee Commission paid to non-resident.
2. Treatment of Interest Income as Income from Business.
3. Allowing certain expenditures as Revenue expenses.
4. Allowance of claim for exclusion of deemed export benefits.
5. Adhoc Disallowance of 20% of travelling expenses.
6. Disallowance under Section 40(a)(i) in respect of fee for included services within the meaning of the double tax avoidance agreement between India and USA.

Detailed Analysis:

1. Disallowance under Section 40(a)(i) of reimbursement of Bank Guarantee Commission paid to non-resident:

The Tribunal observed that this issue had been consistently decided in favor of the assessee in previous years starting from AY 2003-04. The Tribunal had previously held that since the reimbursement of expenses is not taxable in the hands of the payee, there is no requirement for the assessee to deduct tax at source. Consequently, the disallowance made by the AO under Section 40(a)(i) was deleted, and the CIT(A)'s relief to the assessee was upheld.

2. Treatment of Interest Income as Income from Business:

The Tribunal found that the interest income was earned on fixed deposits kept with banks, which were surplus funds from the contract receipts pending final resolution of disputes. The Tribunal agreed with the AO's assessment that such interest income should be treated under the head "Income from Other Sources" rather than "Income from Business," thereby allowing the Department's ground in all the years under consideration.

3. Allowing certain expenditures as Revenue expenses:

The Tribunal noted that the assessee was involved in arbitration proceedings and other contractual obligations, which required maintaining an establishment and incurring various expenses such as bank guarantee charges, professional fees, and travel expenses. The Tribunal upheld the CIT(A)'s decision to treat these expenditures as revenue expenses, considering the business was ongoing and the expenses were necessary for fulfilling contractual obligations. The Tribunal dismissed the Department's ground on this issue for all years under consideration.

4. Allowance of claim for exclusion of deemed export benefits:

The Tribunal examined the facts and found that the deemed export benefits had already been taxed in AY 2003-04. The CIT(A) had allowed the exclusion of these benefits in AY 2011-12 to avoid double taxation. The Tribunal found no infirmity in the CIT(A)'s order and upheld the exclusion of deemed export benefits for AY 2011-12.

5. Adhoc Disallowance of 20% of travelling expenses:

The Tribunal noted that the travelling expenses were incurred primarily in connection with arbitration proceedings and other pending litigations. The CIT(A) had restricted the disallowance to 20% of these expenses. The Tribunal found no infirmity in the CIT(A)'s decision and upheld the order, dismissing the Department's ground on this issue.

6. Disallowance under Section 40(a)(i) in respect of fee for included services within the meaning of the double tax avoidance agreement between India and USA:

The Tribunal observed that payments made to J.R. Knowles, USA, and S.A. Healy & Co., USA, were for services related to arbitration proceedings and did not "make available" any technical knowledge, skill, or know-how to the assessee. Therefore, these payments were not chargeable to tax in India, and there was no obligation to deduct tax at source under Section 195. The Tribunal deleted the disallowance made by the AO under Section 40(a)(i) and allowed the assessee's ground for AY 2007-08 and AY 2008-09.

Conclusion:

The Tribunal allowed the appeals of the Revenue and the assessee in terms indicated above, with specific issues decided in favor of either party based on the detailed analysis of each ground. The order was pronounced in the open court on 31/05/2018.

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