2020 (4) TMI 650 - AT - Income Tax

Disallowance u/s. 14A r.w.r. 8D - investments which yielded exempt income during the year for the purpose of computing average value of investment - HELD THAT - Following the Special Bench decision in VIREET INVESTMENT (P.) LTD. 2017 (6) TMI 1124 - ITAT DELHI we direct the AO to compute disallowance u/s. 14A r.w.r. 8D(2)(iii) by considering only those investments which yielded exempt income during the year for the purpose of computing average value of investment and accordingly, recompute the disallowance u/s. 14A r.w.r. 8D(2)(iii). TDS u/s 195 - disallowance u/s. 40(a)(ia) - fees for consultancy services rendered - DTAA between India and Mauritius/Austria/Germany, - HELD THAT - Disallowances made towards the payments made to Mr. John Lyons, Mr. Walter Sturmer Mr. Detlef Hasenfuss, since the relevant materials were not placed before the lower authorities, we deem it fit to remit these issues back to the AO for a fresh examination. The assessee shall lay relevant materials in support of its contention before the AO and comply with the requirements of the AO in accordance with law. AO is free to conduct appropriate enquiry as deemed fit, but he shall furnish adequate opportunity to the assesssee on the material etc to be used against it and decide the matter in accordance with law. With regard to the payment to HSBC, we find merit in the submissions made by the Ld. AR for the reason that this issue is covered by Article 11(3) - Since, the assessee has made out of a case under item (c) of Article 11(3), supra, the corresponding grounds of the assessee are allowed.

Summary

Issues Involved:
1. Disallowance under Section 14A read with Rule 8D.
2. Disallowance under Section 40(a)(ia) for non-deduction of TDS on foreign remittances.
3. Tax exemption on interest payment to HSBC (Mauritius) Ltd under DTAA.

Issue-wise Detailed Analysis:

1. Disallowance under Section 14A read with Rule 8D:
The assessee contested the disallowance of interest expenditure under Section 14A read with Rule 8D, arguing that it had sufficient own funds to cover the investments made, and no part of the borrowed funds was used for these investments. The Tribunal referred to its previous decision in the assessee's case for the assessment year 2010-11, where it was established that the investments were made from surplus funds. The Tribunal upheld the Commissioner of Income Tax (Appeals) [CIT(A)]'s decision, which partly sustained the disallowance to the extent of ?35,18,000/- and deleted the interest component of ?2,66,89,000/-. The CIT(A) had based this decision on the precedent that the assessee's own funds were more than the investments in tax-free securities, following the legal position established by the Bombay High Court in the case of HDFC Bank Ltd. Consequently, the Tribunal directed the Assessing Officer (AO) not to make any disallowance under Section 14A read with Rule 8D(2)(ii).

Further, the Tribunal addressed the disallowance under Rule 8D(2)(iii), directing the AO to consider only those investments that yielded exempt income during the year for computing the average value of investments. This decision was based on the Special Bench ruling in the case of ACIT vs. Vireet Investment Pvt. Ltd.

2. Disallowance under Section 40(a)(ia) for Non-deduction of TDS on Foreign Remittances:
The assessee argued that payments made to three foreign consultants (Mr. John Lyons, Mr. Walter Sturmer, and Mr. Detlef Hasenfuss) were covered under Article 14 of the respective DTAAs (India-Ireland, India-Austria, and India-Germany), which exempts such payments from tax in India if the consultants did not stay in India for 183 days or more and did not have a fixed base in India. The CIT(A) had confirmed the disallowance due to the assessee's failure to provide necessary agreements, correspondence, and documents related to the consultants' stay in India. The Tribunal remitted these issues back to the AO for fresh examination, directing the assessee to furnish relevant materials and comply with the AO's requirements.

3. Tax Exemption on Interest Payment to HSBC (Mauritius) Ltd under DTAA:
The assessee claimed that the interest payment to HSBC (Mauritius) Ltd was exempt from tax in India under Article 11 of the India-Mauritius DTAA, which exempts interest derived and beneficially owned by a bank carrying on a bona fide banking business in the other contracting state. The Tribunal found merit in the assessee's argument, as the payment fell under the exemption provided in Article 11(3)(c) of the DTAA. Consequently, the Tribunal allowed the corresponding grounds of the assessee.

Conclusion:
The Tribunal's order resulted in partial relief for the assessee. The disallowance under Section 14A read with Rule 8D(2)(ii) was deleted, and the AO was directed to recompute the disallowance under Rule 8D(2)(iii) by considering only those investments that yielded exempt income. The disallowances under Section 40(a)(ia) were remitted back to the AO for fresh examination, and the interest payment to HSBC (Mauritius) Ltd was exempted from tax under the DTAA provisions. The appeal was treated as partly allowed for statistical purposes.