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2021 (10) TMI 1199 - AT - Income TaxDisallowance of supervisory charges paid - ingenuine expenditure - assessee had made a claim for deduction u/s. 40(a)(i) of the 'supervisory charges' paid to the parent company - as per DR CIT(A) has erred in deleting supervisory fees paid by the assessee to its parent company based on fresh evidences submitted for the first time during appellate proceedings without giving any opportunity to the Assessing Officer in violation of Rule 46A of Income Tax Rules, 1962 - HELD THAT - The assessee has furnished necessary evidences, including agreement between the parties, invoices raised by parent company, travel documents of expatriates, who visited India for rendering services, their visa, passport and air tickets. The assessee had also furnished e-mail correspondence between its parent company for exchange of information regarding technological support required for manufacturing and installation of industrial furnaces. The said payment has been made after withholding necessary TDS applicable as per law - supervisory fees paid by the assessee to its parent company M/s. Dong Woo HST Co. Ltd. in pursuant to an agreement dated 25.12.2007 is genuine expenditure incurred wholly and exclusively for the purpose of business of the assessee and which is supported by necessary evidences. AO has disbelieved genuine expenditure incurred by the assessee for the purpose of business only for the reason that said transaction was entered into between the assessee and its parent company. AO had also questioned necessity of making such payments. Therefore, he opined that payment made to its parent company for rendering supervisory fees is nothing but shifting of profit from one tax territory to another tax territory without any actual business expediency and as against which no particular service is received. As gone through reasons given by the AO in light of various evidences filed by the assessee including agreement between parties and we do not ourselves subscribe to reasons given by the Assessing Officer for the simple reason that it is well settled principle of law that the Assessing Officer cannot sit in the armchair of businessman and decide whether particular expenditure is required to be incurred or not. It is also an admitted legal position that the Assessing Officer cannot question rational and necessity of incurring any particular expenditure. What is required to be seen is whether particular expenditure is incurred wholly and exclusively for the purpose of business of the assessee and further such expenditure is supported by necessary evidences. In this case, the assessee has filed all possible evidences including agreement between parties to prove genuineness of expenditure incurred for supervisory services. There is no doubt of whatsoever with regard to genuineness of payment made by the assessee to its parent company, because such payment was made in pursuant to agreement between parties and further, the assessee has deducted applicable TDS as per law. The assessee had also furnished other supporting evidences to prove receipt of services from its parent company - expenditure incurred by the assessee towards payment made to its parent company for rendering supervisory services is genuine expenditure, which was incurred wholly and exclusively for purpose of business of the assessee. AO without appreciating facts has simply disallowed supervisory fees paid to the assessee's parent company. The learned CIT(A), after considering relevant facts has rightly deleted additions made by the Assessing Officer. Hence, we are inclined to uphold findings of the learned CIT(A) and reject grounds taken by the Revenue. Non-deduction tax deducted at source and consequent disallowance of expenditure by the assessee in certain years and claiming deduction for said expenditure in the year of payment is not disputed by the Assessing Officer, because the Assessing Officer has primarily held that expenditure incurred by the assessee under the head supervisory fees is held to be not deductible under section 37 of the Income Tax Act, 1961. But, the ld. CIT(A) has examined suo motu disallowance made by the assessee in earlier years for non-deduction of tax deducted at source and subsequent deduction claimed in the year of payment and held that the assessee has rightly claimed deduction towards expenditure incurred in earlier years in the impugned assessment years, because, it was disallowed in earlier years for non deduction of TDS and further, the same has been claimed as and when TDs has been deducted and remitted to Govt. account. - Decided in favour of assessee.
Issues Involved:
1. Reopening of Assessment. 2. Disallowance of Supervisory Charges. Detailed Analysis: Reopening of Assessment: 1. Jurisdiction and Tenability: The assessee argued that the reopening of assessment under section 147 by notice issued under section 148 dated 28.3.2018 is without jurisdiction and untenable in law. The CIT(A) ought to have seen that the first Proviso to section 147 would apply as the assessment was completed under section 143(3) vide order dated 26.3.2014, and there was no failure on the part of the assessee to disclose any material facts warranting the reopening of assessment beyond the period of four years. 2. Reason to Believe: The assessee contended that there was no reason to believe that income had escaped assessment, and in the absence of any fresh material pointing to failure on the part of the assessee to disclose particulars of income, the reopening is not in accordance with law and needs to be annulled. The CIT(A) should have appreciated that the reopening is based on material already available on record and constitutes a mere change of opinion, which does not authorize the officer to initiate reassessment proceedings by issuing a notice under section 148 of the Act. Disallowance of Supervisory Charges: 1. Supervisory Fees: The assessee had made a claim for deduction under section 40(a)(i) of the 'supervisory charges' paid to the parent company amounting to ?3,13,07,498. The CIT(A) was not justified in confirming the disallowance. The CIT(A) failed to appreciate that sustaining the disallowance of the 'supervisory charges' to the extent of ?1,31,30,658/- is wholly arbitrary, unjust, and unsustainable on the facts of the case. 2. Nature of Services: The assessee argued that the supervisory charges are paid to the parent company as consideration for the services rendered by Dongwoo HST Co. Ltd., by dispatching its employees to the factory site in rendering the technical know-how for the manufacture and maintenance of furnace machines and machine parts. This payment was made wholly and exclusively for the purpose of business, thus satisfying the parameters for allowance of the amount under section 37 of the Act. 3. Evidence and Commercial Expediency: The CIT(A) appreciated that the assessee had provided various details, including travel orders, visa, and other supporting bills in respect of Korean expatriates who had come and rendered services in India. The assessee had also furnished extracts of email communication with respect to work instructions and draft plans made during the relevant period and a copy of the agreement entered into with its parent company for supervisory services. The CIT(A) noted that the assessee had tested its transactions with Associated Enterprises by adopting the Transactional Net Margin method, as per which transactions of the assessee with its AEs are at arm's length price. Therefore, the CIT(A) opined that the expenditure incurred under the head supervisory charges and paid to its parent company is supported by necessary evidence and accordingly deleted the additions made by the Assessing Officer. 4. Revenue's Argument: The Revenue argued that the CIT(A) erred in giving relief to the assessee by deleting the supervisory fee based on fresh evidence submitted for the first time before the CIT(A) without giving an opportunity to the AO under Rule 46A of the Income Tax Rules, for verifying the said claim of the assessee based on evidence filed afresh during appellate proceedings. The Revenue contended that the AO had disallowed the supervisory fee under section 37 of the Income Tax Act for lack of genuineness and commercial expediency. 5. Tribunal's Decision: The Tribunal found that the assessee had filed all possible evidence, including the agreement between parties, invoices raised by the parent company, travel documents of expatriates, who visited India for rendering services, their visa, passport, and air tickets. The Tribunal held that the supervisory fees paid by the assessee to its parent company M/s. Dong Woo HST Co. Ltd. in pursuance of an agreement dated 25.12.2007 is a genuine expenditure incurred wholly and exclusively for the purpose of the business of the assessee and which is supported by necessary evidence. The Tribunal upheld the findings of the CIT(A) and rejected the grounds taken by the Revenue. 6. Non-Deduction of TDS: The Tribunal noted that the assessee had remitted supervisory fees after deducting necessary withholding tax as per law. The Tribunal found that the CIT(A) had examined the suo motu disallowance made by the assessee in earlier years for non-deduction of tax deducted at source and subsequent deduction claimed in the year of payment. The CIT(A) recorded categorical findings that the assessee had rightly claimed the deduction towards expenditure incurred in earlier years in the impugned assessment years, as it was disallowed in earlier years for non-deduction of TDS and subsequently claimed as and when TDS was deducted and remitted to the Government account. Conclusion: The appeals filed by the Revenue for assessment years 2014-15 and 2015-16 were dismissed, and the appeals filed by the assessee for assessment years 2011-12 and 2013-14 were allowed. The Tribunal upheld the findings of the CIT(A) and rejected the grounds taken by the Revenue, confirming that the supervisory fees paid by the assessee to its parent company were genuine expenditures incurred wholly and exclusively for the purpose of the business of the assessee.
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