2018 (1) TMI 739 - HC - Income Tax

Addition u/s 40(a)(ia) - ITAT deleted the addition - Fee for Technical Services (FTS) - Held that - Since the ITAT has rendered findings that the amounts paid were not Fee for Technical Services (FTS) under Explanation 7 to Section 9(2), similar treatment would arise. ITAT relied upon the interpretation given to similar provisions of various DTAAs in Cushman & Wakefield Pte. Ltd. in Re. 2008 (7) TMI 8 - AUTHORITY FOR ADVANCE RULINGS ; Dieter Eberhard Gustav v. CIT 1998 (11) TMI 663 - AUTHORITY FOR ADVANCE RULINGS etc. 1998 (11) TMI 663 - AUTHORITY FOR ADVANCE RULINGS and held that since these were not in the nature of FTS, the deduction under Section 40(a)(ia) was not warranted. Reliance by the Revenue upon the retrospective amendment, in the opinion of this Court, is not justified, given the ruling in Director of Income Tax v. New Skies Satellite BV (2016 (2) TMI 415 - DELHI HIGH COURT). Disallowance under Section 36(1)(iii) - ITAT deleted the addition - Held that - the addition was made purely on the basis that the funds were borrowed by a Director and that interest needed to be charged. This was wholly erroneous premise because the amounts were given to the Director for purely business purpose of the entity, i.e. to acquire guest house. The proposal did not materialize and eventually the money was returned. It is not Revenue s case that the amounts were utilized by the Director for her own purpose. In these circumstances, the ITAT appropriately relied under CIT v. Bharti Televentures Ltd. (2011 (1) TMI 326 - DELHI HIGH COURT ). The finding with respect to commercial expediency, in the circumstances, does not call for interference. Revenue appeal dismissed.

Summary

Issues:
1. Disallowances directed by the Assessing Officer (AO) regarding amounts paid to overseas entities.
2. Deletion of &8377; 7,27,532/- under Section 40(a)(ia) of the Income Tax Act, 1961.
3. Addition of interest under Section 36(1)(iii).

Analysis:
1. The appeal under 260A of the Income Tax Act, 1961 raised concerns about the Income Tax Appellate Tribunal's (ITAT) findings on disallowances directed by the Assessing Officer. The issues mainly revolved around the treatment of amounts paid by the assessee to overseas entities. The CIT(A) and ITAT concluded that one overseas recipient was a partnership firm, impacting the treatment under the Indo-Canada Direct Taxation Avoidance Agreement.

2. Regarding the deletion of &8377; 7,27,532/- under Section 40(a)(ia), the Court noted that the ITAT found the amounts were not Fee for Technical Services (FTS) under Explanation 7 to Section 9(2). The Court referenced precedents like Cushman & Wakefield Pte. Ltd. and Dieter Eberhard Gustav v. CIT to support the decision. The Court rejected the Revenue's reliance on retrospective amendments, citing the ruling in Director of Income Tax v. New Skies Satellite BV. Consequently, no question of law was deemed to arise.

3. Concerning the addition of interest under Section 36(1)(iii), the Court found the premise for the disallowance was erroneous as the funds were borrowed by a Director for a business purpose, which did not materialize. The money was returned, and there was no indication that the Director used the amounts for personal purposes. The ITAT's decision was supported by the precedent in CIT v. Bharti Televentures Ltd., and the Court saw no reason to interfere with the finding on commercial expediency.

In conclusion, the Court dismissed the appeal as it found no substantial question of law arising from the issues raised. The appeal was deemed untenable, and the decision was made accordingly.