2016 (6) TMI 98 - AT - Income Tax

Disallowance of interest paid up by applying the provisions of section 36(1)(iii) - Held that - In the present case, there is no dispute about the fact that the amounts have been advanced to the wholly owned subsidiaries of the assessee company and there is no fact brought on record by any of the lower authorities that the amounts have been used by these subsidiary companies for any purpose other than their business purposes. In view of this, we are inclined to hold that the amounts given to subsidiary companies were on account of commercial expediency. Therefore, no disallowance invoking the provisions of section 36(1)(iii) of the Act can be made in this case. - Decided in favour of assessee TDS u/s 195 - Disallowance u/s 40(a)(i) - payment of communication charges, commission charges, legal and professional charges, marketing & selling charges and business development charges - Held that - In the present case, this is not in dispute that the amount is not received or deemed to be received in India. The second situation under which the receipt of non-resident is taxable is if the income accrues or arises or is deemed to accrue or arise in India. Undoubtedly, in the present case no income has accrued to the nonresident person in India. The dispute may be only with regard to the impugned amount being income deemed to accrue or arise in India . Various instances of income considered to be deemed to accrue or arise in India to a non-resident are provided in section 9 of the Income Tax Act. On going through the relevant article provided in the DTAA, we observe that invariably in all the DTAAs to which we are concerned, the income is taxable in India only if that foreign entity carries on business in India through a permanent establishment situated in India. We again observe that no such finding with regard to existence of any permanent establishment in India has been brought on record by any of the lower authorities or even by the learned D.R. at the time of hearing before us. In view of this, the position emerges that the payment to a person who happens to be a resident of country with whom India has entered into DTAA and where the business profits are taxed only in the country and does not have a permanent establishment in India, the said payments are not chargeable to tax in India. In view of this also, even as per DTAA, the income being not exigible to tax in India in the hands of non-resident entity, the assessee is not required to deduct tax at source. Therefore, the provisions of section 40a)(i) of the Act cannot be invoked. - Decided in favour of assessee Whether the payments are in the nature of fees for technical services or not? - Held that - All the relevant agreements and invoices were filed before the lower authorities. In view of this, the assessee cannot be punished at this stage without there being any fault of his, specially in view of the fact that even at the time of hearing before us, the learned D.R. could not bring any material or evidence in support of his claimed that the impugned payments were in the nature of fees for technical services . His only argument is that in the absence of the nature of services being rendered by non residents, coming out from the evidence filed by the assessee, the same should be presumed to be in the nature of fees for technical services . No such presumption exists in the Income Tax Act. No such presumption can be raised without any backing material or evidence on record. The argument of the learned D.R. that even if the provisions of DTAA are applied, in the absence of any services coming out from the evidences, it should be presumed that non-residents have made available certain technical services to the assessee, is too farfetched. We are not inclined to entertain such a plea at this stage. In view of this also, we hold that the services rendered by the non-residents are not in the nature of technical services, no income deemed to have accrued to the non-resident entities, there is no liability on the assessee to deduct tax at source on such payment. Therefore, the provisions of section 40(a)(i) of the Act are not exigible in the present case. - Decided in favour of assessee Allowability of payments made to IMCS as per provision of Explanation 1 to section 37(1) - Held that - In this regard, no clear-cut finding of fact has been arrived at by any of the lower authorities as to what offence or an act prohibited by law has been done by the assessee. Even the Assessing Officer has made just a cursory mention of some search from CBI being carried out at the directors residence only. Even during the course of hearing before us, no clear facts were stated in this regard. In view of all this, we find it proper to send this limited issue to the file of the Assessing Officer to give a clear finding as to whether the provisions of Explanation 1 to section 37(1) of the Act are applicable to the facts of the case or not. The assessee should be given a proper opportunity of being heard in this regard. We would like to clarify here that the outcome of this ground will not effect our findings on other grounds of appeal, as the issue here is the allowability of expenditure while the other issues are disallowance of expenditure in view of the provision of section 40 (a)(i) of the Act. - Decided in favour of assessee for statistical purposes.

Summary

Issues Involved:
1. Disallowance of interest under section 36(1)(iii).
2. Disallowance under section 40(a)(i) for non-deduction of TDS on various payments.
3. Applicability of Explanation to section 37(1) regarding alleged illegal commission payments.

Issue-wise Detailed Analysis:

1. Disallowance of Interest under Section 36(1)(iii):
The primary issue is whether the interest paid on borrowed funds, which were advanced to wholly owned subsidiaries, should be allowed as a deduction under section 36(1)(iii). The assessee argued that these subsidiaries provided marketing support, thus justifying the commercial expediency of the loans. The CIT(A) upheld the disallowance, citing the lack of a direct nexus between the borrowed funds and their application for business purposes. However, the Tribunal accepted the assessee's argument, referencing the Supreme Court's decision in S.A. Builders Limited Vs. CIT, which supports the deduction of interest if the funds are used for business purposes, even if advanced to subsidiaries. Consequently, the Tribunal allowed the deduction, recognizing the commercial expediency of the loans.

2. Disallowance under Section 40(a)(i) for Non-deduction of TDS:
The second issue pertains to the disallowance of expenses amounting to ?5,31,28,742/- for non-deduction of TDS on payments made to non-residents. The Assessing Officer (AO) and CIT(A) held that these payments were deemed income in India, thus necessitating TDS under section 195. The Tribunal examined whether the payments were chargeable under the Act and found that the services were rendered outside India, and the non-residents did not have a business connection or permanent establishment in India. Citing the Supreme Court's decision in G.E. India Technology Centre Pvt. Ltd. Vs. CIT, the Tribunal concluded that the payments were not taxable in India, and hence, no TDS was required. Therefore, the disallowance under section 40(a)(i) was not justified.

3. Applicability of Explanation to Section 37(1) Regarding Alleged Illegal Commission Payments:
The third issue involves the disallowance of commission payments to IMCS under Explanation 1 to section 37(1), which disallows expenses for illegal purposes. The AO and CIT(A) suspected the payments were related to the Augusta Westland helicopter deal under CBI investigation. However, the Tribunal noted the lack of concrete findings or evidence of illegality. Therefore, it remanded the issue to the AO to determine whether the payments violated any law, instructing the AO to provide a clear finding after giving the assessee a proper hearing.

Conclusion:
The Tribunal allowed the appeal on the first and second issues, determining that the interest on loans to subsidiaries was for commercial expediency and that no TDS was required on payments to non-residents as they were not taxable in India. The third issue regarding the alleged illegal commission payments was remanded to the AO for further investigation. The appeal was partly allowed, providing relief to the assessee on significant grounds.