2019 (11) TMI 1074 - AT - Income Tax

TDS u/s 194C OR 194I - short deduction of TDS - payment of the facility fees - HELD THAT - In S.K. Tekriwal 2012 (12) TMI 873 - CALCUTTA HIGH COURT where tax was deducted by the assessee, though under a bonafide wrong impression under wrong provisions, the provisions of section 40(a)(ia) could not be invoked and that if there was any shortfall due to any difference of opinion as to the taxability of any item or the nature of payments falling under various tax deduction at source provisions, the assessee could be declared to be an assessee in default u/s 201 but no disallowance could be made invoking the provisions of section 40(a)(ia) of the Act. On appeal, the Hon ble High Court held that no substantial question of law arose from the said order of the Tribunal - we delete the disallowance made by the AO u/s 40(a)(ia) and allow the 1st ground of appeal. TDS u/s 195 - Commission paid to foreign parties - HELD THAT - In the case of GE India Technology Centre (P.) Ltd. 2010 (9) TMI 7 - SUPREME COURT it is held that a person paying interest or any other sum to a non-resident is liable to deduct tax u/s 195 only if such sum is chargeable to tax in India and not otherwise. In the instant case, following the above decision we delete the disallowance made by the AO and allow the 2nd ground of appeal. TDS u/s 194C - labour charges payment - HELD THAT - We find that the expenses disallowed by the AO are not debited to the P L account. In fact these expenses are capitalized. As held in case of S.K. Terkriwal 2012 (12) TMI 873 - CALCUTTA HIGH COURT , if there was any shortfall due to any difference of opinion as to the taxability of any item or the nature of payments falling under various tax deduction at source provisions, the assessee could be declared to be in default u/s 201 but no disallowance could be made invoking the provisions of section 40(a)(ia) of the Act. In view of the above position of law, we delete the disallowance. Disallowance of loss on sale of returned goods - HELD THAT - The fact remains that during the AY 2010-11, the assessee had sold goods to the Karnataka Police in February 2010 for ₹ 192,95,306/-. However, the said consignment was rejected by the client vide letter dated 01.03.2010. As the assessee is following the mercantile system of accounting, the AO has rightly made a disallowance of ₹ 12,94,653/- on account of loss on sale of goods returned in AY 2010-11. Thus the 4th ground of appeal is dismissed. Disallowance of the foreign travelling expenses - Allowable revenue expenses - HELD THAT - in the instant case, the assessee failed to file any evidence that it was due to Shri Shambhukumar S. Kasliwal s visit to Switzerland along with his wife to finalize a deal for purchase of Spinning Machinery from M/s Klopman International. Further, we find that during the year under consideration the assessee had paid commission to foreign agents and none of them were in Switzerland but were based in UAE, Kuwait, Saudi Arabia and Lebanon. As the assessee failed to justify the business exigency of the foreign travel, the AO has rightly made a disallowance

Summary

Issues Involved:
1. Disallowance of facility fees due to short deduction of TDS.
2. Disallowance of commission paid to foreign agents due to non-deduction of TDS.
3. Disallowance of labor charges due to non-deduction of TDS.
4. Disallowance of loss on sale of returned goods.
5. Disallowance of foreign travel expenses.

Detailed Analysis:

1. Disallowance of Facility Fees Due to Short Deduction of TDS:
The CIT(A) confirmed the disallowance of ?64,34,560/- made by the AO, alleging short deduction of TDS under Section 40(a)(ia) of the Act. The assessee deducted TDS under Section 194C at 2%, while the AO contended it should have been under Section 194I at 10%. The Tribunal referenced the case of DCIT v. S.K. Tekriwal, where it was held that no disallowance could be made under Section 40(a)(ia) for short deduction of TDS. Consequently, the Tribunal deleted the disallowance and allowed the appeal on this ground.

2. Disallowance of Commission Paid to Foreign Agents Due to Non-Deduction of TDS:
The AO disallowed ?9,17,999/- under Section 40(a)(i) for non-deduction of TDS on commission paid to foreign agents. The CIT(A) upheld this disallowance. The Tribunal referred to the case of GE India Technology Centre (P.) Ltd. v. CIT, where it was held that TDS under Section 195 is required only if the sum is chargeable to tax in India. Since the commission was not deemed to accrue or arise in India, the Tribunal deleted the disallowance and allowed the appeal on this ground.

3. Disallowance of Labor Charges Due to Non-Deduction of TDS:
The AO disallowed ?2,67,803/- for non-deduction of TDS on labor charges. The CIT(A) upheld this disallowance. The Tribunal noted that the expenses were capitalized and not debited to the Profit & Loss account. Following the precedent set in S.K. Tekriwal, the Tribunal held that disallowance under Section 40(a)(ia) could not be made for short deduction of TDS. Consequently, the Tribunal deleted the disallowance and allowed the appeal on this ground.

4. Disallowance of Loss on Sale of Returned Goods:
The AO disallowed ?12,94,653/- claimed as a loss on the sale of returned goods, which was upheld by the CIT(A). The Tribunal noted that the goods were sold and rejected in the same financial year, and since the assessee follows the mercantile system of accounting, the disallowance was justified for AY 2010-11. However, the Tribunal directed the AO to allow the loss in AY 2011-12. Thus, this ground of appeal was dismissed for AY 2010-11 but allowed for AY 2011-12.

5. Disallowance of Foreign Travel Expenses:
The AO disallowed ?7,03,559/- for foreign travel expenses, which was upheld by the CIT(A). The Tribunal found that the assessee failed to provide evidence that the travel was for business purposes. The Tribunal noted that the foreign agents were not located in Switzerland, where the travel occurred. Consequently, the Tribunal upheld the disallowance and dismissed the appeal on this ground.

Conclusion:
The Tribunal allowed the appeals in part, deleting disallowances related to facility fees, commission to foreign agents, and labor charges due to short deduction or non-deduction of TDS. However, it upheld the disallowances related to loss on sale of returned goods (for AY 2010-11) and foreign travel expenses. The Tribunal directed the AO to allow the loss on sale of returned goods in AY 2011-12.