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2019 (2) TMI 781 - AT - Income TaxDisallowance u/s. 14A - Held that - As perused the balance sheet for the year ended 31.03.2011 and found that assessee had sufficient own funds being shareholder s funds & reserves and surplus, far more than the investments made. Therefore, the presumption is that the assessee made investments from its own funds. The Hon ble Jurisdictional High Court in the case of CIT v. HDFC Bank Ltd 2014 (8) TMI 119 - BOMBAY HIGH COURT held that if the assessee s capital, profit, reserves and surplus and current account deposits were higher than the investments in the tax free securities, it would have to be presumed that the investment made by the assessee would be out of the interest free funds available with the assessee. Therefore, respectfully following the said decision, we hold that the no interest can be disallowed under Rule 8D(2)(ii) of the I.T. Rules. Disallowance under Rule 8D(2)(iii) being administrative expenses following the decision of the Coordinate Bench in the case of M/s. Pest Control India Pvt. Ltd. 2017 (10) TMI 1287 - ITAT MUMBAI , we direct the Assessing Officer to restrict the disallowance under Rule 8D(2)(iii) to the exempt income of ₹.7,32,781/- and delete the balance disallowance. Grounds raised by the assessee are partly allowed on this issue. TDS u/s 195 - Disallowance u/s. 40(a)(i) - remittance to M/s. Phora Capital Advisors in France for professional services rendered - no tax has been deducted by the assessee on such remittance - Held that - As seen from the definition of the expression Fees for Technical Services appearing in the DTAA between India and U.K. that the scope and ambit of the term Fees for Technical Services is more restrictive than the definition of the said expression in the DTAA between India and France. The DTAA between India and UK contains a make available clause, for a service to constitute Technical Service . The interpretation of the Article on Fees for Technical Services appearing in the DTAA between India and France has been considered in CIT vs. ISRO Satellite Centre 2011 (10) TMI 617 - KARNATAKA HIGH COURT . The Court finds no warrant for the restrictive interpretation placed on Clause 7 of the Protocol. The purpose of Clause 7 of the Protocol is to afford to a party to the Indo-France Convention the most beneficial of the provisions that may be available in another Convention between India and another OECD country. The AAR appears to have failed to notice that the wording of Clause 7 of the Protocol makes it self-operational. It is not in dispute that the India- France DTAA was itself notified by the Central Government by issuing a notification under Section 90 of the Act. It is also not in dispute the separate Protocol signed between India and France simultaneously forms an integral part of the Convention itself. The preamble in the Protocol, which states the undersigned have agreed on the following provisions which shall form an integral part of the Convention , makes this position clear. Once the DTAA has itself been notified, and contains the Protocol including para 7 thereof, there is no need for the Protocol itself to be separately notified or for the beneficial provisions in some other Convention between India and another OECD country to be separately notified to form part of the Indo- France DTAA. We hold that under the DTAA between India and France, the definition of Fees for Technical Services has to be given a restrictive meaning similar to that of the expression Fees for Technical Services appearing in the DTAA between India and U.K. Thus, reading the definition of Fees for Technical Services appearing in the DTAA between India and France, the advisory services rendered by Phora Capital Advisers to the Assessee do not make available any technical knowledge, experience, skill, knowhow or processes to the Assessee company since, the Assessee company would have to go back to Phora Capital Advisors even in the future for availing similar advisory services. Consequently, in the absence of the professional services provided by Phora Capital Advisors making available any technical knowledge, experience, skill, knowhow, etc. to the Assessee Company, the remittance made to them was not chargeable to tax in view of the beneficial provisions under the DTAA and no tax was deductible at source on the said remittance. In the circumstances, the remittance made to Phora Capital Advisors being not chargeable to tax in India, there was no requirement to deduct tax at source on the said remittance. Hence Assessing Officer is directed to delete the disallowance made section 40(a)(i) of the Act. Disallowance in respect of business promotion expenses - AO while completing the assessment disallowed 10% of the business promotion expenses on adhoc basis for want of supporting evidences - Held that - We have heard the rival submissions, perused the orders of the Authorities below. On a perusal of the order of the Tribunal for the Assessment years 2008-09 & 2009-10, we find that identical issue has been decided in favour of the assessee wherein the Tribunal deleted the adhoc disallowance made towards business promotion expenses observing that the ad hoc disallowance on the basis of estimation is not justifiable, therefore, We allowed the claim of the assessee and set aside the finding of the CIT(A) on this issue.
Issues Involved:
1. Disallowance under section 14A of the Income Tax Act. 2. Disallowance under section 40(a)(i) of the Income Tax Act. 3. Disallowance of business promotion expenses. 4. Disallowance of service tax (not pressed). Detailed Analysis: 1. Disallowance under section 14A of the Income Tax Act: The assessee appealed against the disallowance made under section 14A read with Rule 8D by the Assessing Officer (AO), which was sustained by the Commissioner of Income Tax (Appeals) [CIT(A)]. The AO disallowed ?23,10,532, comprising ?7,85,532 as interest and ?15,25,000 as administrative expenses. The assessee's counsel argued that the assessee had sufficient own funds for investments and cited the case of CIT v. HDFC Bank Ltd [366 ITR 505] to support that no interest disallowance was warranted. For administrative expenses, the counsel suggested limiting the disallowance to the exempt income earned, relying on the judgment in Joint Investment Pvt. Ltd. v. CIT and the ITAT decision in Pest Control India Pvt. Ltd. The tribunal examined the balance sheet and found sufficient own funds, thus ruling no interest disallowance under Rule 8D(2)(ii). For administrative expenses, the tribunal directed the AO to restrict the disallowance to the exempt income of ?7,32,781 and delete the balance disallowance. 2. Disallowance under section 40(a)(i) of the Income Tax Act: The AO disallowed ?25,97,275 paid to Phora Capital Advisors in France for professional services, citing non-deduction of tax at source under section 195. The CIT(A) agreed but reduced the disallowance to ?13,04,364, considering a recovery from Bennett, Coleman & Co. Ltd. The assessee argued that the services were not technical and cited the DTAA between India and France, which includes a "make available" clause, implying that technical knowledge must be transferred to the recipient. The tribunal referred to judgments from the Karnataka High Court in CIT v. ISRO Satellite Centre and the Delhi High Court in Steria (India) Ltd. v. CIT, which supported the assessee's view. The tribunal concluded that the advisory services did not "make available" technical knowledge, thus no tax was deductible, and directed the AO to delete the disallowance. 3. Disallowance of business promotion expenses: The AO disallowed 10% of the business promotion expenses on an ad-hoc basis due to lack of supporting evidence, which was upheld by the CIT(A). The assessee's counsel pointed out that similar disallowances for previous years were deleted by the tribunal. The tribunal reviewed the details and previous tribunal orders, concluding that ad-hoc disallowances without rejecting the books of account were unjustifiable. The tribunal directed the AO to delete the ad-hoc disallowance. 4. Disallowance of service tax (not pressed): The assessee did not press this ground, and the tribunal dismissed it as not pressed. Conclusion: The tribunal partly allowed the appeal, directing specific deletions and adjustments as per the detailed analysis above. The order was pronounced in the open court on December 21, 2018.
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