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TMI Blog2011 (11) TMI 503X X X X Extracts X X X X X X X X Extracts X X X X ..... lowed as a revenue deduction – Decided in favor of assessee. - IT APPEAL NO. 2560 (DELHI) OF 2011 - - - Dated:- 25-11-2011 - G.D. AGRAWAL, C.L. SETHI, JJ. Sumeet Sarin and Asit K. Dass for the Appellant. N.K. Chand for the Respondent. ORDER C.L. Sethi, Judicial Member The assessee is in appeal against the order dated 07.03.2011 passed by the learned Commissioner of Income-tax (Appeals) pertaining to the Assessment Year 2005-06. 2. The various grounds of appeal raised by the assessee mainly revolve around the order of the learned CIT(A) in confirming the following disallowances made by the Assessing Officer:- (i) Rs. 23,96,362/- incurred by the assessee and claimed as deduction under the head "Upfront Fees". (ii) Disallowance of Rs. 20,000/- on account of bank charges. 3. The assessee is a foreign company registered in Bangkok. It has a liaison office in India under the Companies Act. The company was carrying out work Koldam Hydro Electric Power Project at District Mandi, Himachal Pradesh. The assessee had obtained a loan of Rs. 87,00,00,000/- equivalent to US$2 crore from Standard Chartered Bank, India. For obtaining the said loan, the assessee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... between the income-tax paid by the assessee on its own income and the income-tax paid by the assessee on the income of the payee. In my considered view, whatever is not deductible, in the hands of the payee/deductee as a trading liability cannot be allowed as a deduction in the hands of the payer/deductor. By reason of the transfer of the tax liability, the nature and character of the liability cannot change. The plain words of section 40(a)(ii) have to be given effect to. So long as the liability is income-tax liability, no matter how and under what circumstances it is paid and by whom the persons paying it cannot claim it as a permissible deduction. In whatever language it is couched, tax liability is a tax liability and can assume no other character. It is immaterial whether such tax liability was a part of the loan agreement or not. The payer/deductor may be made liable for the liability of the payee/deductee but, if the payer/deductor discharges such liability, it cannot be said that such payment has been made for the preservation and protection of the assessee's business from any process or proceedings which might have resulted in the reduction of its income and profits. In ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n allowable deduction. In this connection, the learned counsel for the assessee has relied upon the following two decisions:- (i) Tata Yadogawa Ltd. v. CIT [2011] 335 ITR 53/196 Taxman 353/[2010] 8 taxmann.com 174 (Jharkhand). (ii) CIT v. Standard Polygraph Machines (P.) Ltd. [2000] 243 ITR 788/[2002] 124 Taxman 669 (Mad.). 8. The learned DR on the other hand, submitted that the assessee had obtained loan for purchasing equipments for Koldam Project. The equipments so purchased by the assessee for Koldam Project are undoubtedly a capital investment. He, therefore, submitted that any upfront fees paid by the assessee for obtaining a loan required for purchasing the capital asset shall also be in the nature of capital expenditure, and, therefore, the authorities below have rightly disallowed the payment of income-tax deducted by the assessee from the payment made to Standard Chartered Bank, Bangkok under sec. 195(1) of the Act. He further supported the orders of the authorities below. 9. We have heard both the parties and have carefully perused the material on record. It is not in dispute that the assessee had obtained loan from Standard Chartered Bank, India to facilitate ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on agreement the know-how was to be provided to the assessee by ESW, in consideration whereof the assessee was to pay a sum of two million Deutsche Marks (hereinafter referred as "DM") overseas, i.e., Austria in three equal instalments in the manner laid down in paragraph 13.1 of the agreement. In addition to the above, the agreement provided that taxes, if any, on the aforesaid payment were to be borne by the assessee vide paragraph 13.5 of the said agreement. After approval of the said technical collaboration agreement by the appropriate authorities, the assessee applied under section 195(2) of the Income-tax Act, 1961 (hereinafter referred to as "the Act" for short) to the Assessing Officer (hereinafter referred to as "the AO"), for grant of permission to remit the said consideration without deduction of tax at source. The Assessing Officer passed orders directing the assessee to deduct TDS under section 195(2) of the Act directing the assessee to deduct TDS while remitting the payments to ESW. As a result the assessee paid certain amounts by way of income-tax on the remittances and also paid some further amounts by way of "research and development cess" before making the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the know-how. On the facts of this case the obligation of the assessee under the agreement with ESW extended not merely to remitting the amount of two million DM to ESW, but also extended to payment of taxes which would include the income-tax as well as the research and development cess. It seems quite obvious that if the assessee had not paid the tax or the research and development cess, and had merely made payment of the two million DM to ESW, the latter would not be obliged to part with the know-how in view of the terms of the collaboration agreement. Therefore, payment of these taxes is as integral a part of the "consideration" as the payment of two million DM. In fact, the Income-tax Department is itself treating not merely the amount of two million DM paid to ESW but also the research and development cess, as part of "consideration". In these circumstances we find no logical reason for not treating the income-tax paid by the assessee in terms of the collaboration agreement as part of the "consideration" for acquisition of the know-how. We hold accordingly and answer the first question as above. A reference in this connection may be made to the decision of the Supreme Court ..... X X X X Extracts X X X X X X X X Extracts X X X X
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