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TMI Blog2012 (6) TMI 452X X X X Extracts X X X X X X X X Extracts X X X X ..... tails of which are given in para 5.1 of the CIT(A)'s order. Before the Assessing Officer, it was contended that the reasons for non recovery of the amounts from the clients were that :- i) fee claim raised for additional work not covered in the original fee agreement; ii) re-negotiation over agreed fees by clients; iii) non-acceptance/part acceptance of deliverables by the client; and iv) differences over quantum and quality of deliverables. Further, these amounts have been written off only after making the required efforts for recovery. The management ultimately was of the view that legal recourse could not be in the interest of the company. With respect to the allowability of claims of bad debt, it was submitted that firstly, it has complied with requisite condition that the fee amount disclosed as bad debts have been considered as income of the previous years in which the respective invoices were raised and secondly, the company has disclosed the debts as irrecoverable and written off as bad debts in the books of accounts of the previous year ended 31st March, 2001. Reliance was placed to the amendment made to section 36(1(vii) and 36(2) w.e.f. 1-4-1989 that once the bad ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t is enough if the bad debt is written off as irrecoverable in the accounts of the assessee. Thus, following the law settled by the Hon'ble Supreme Court in the aforesaid case, we hold that the claim of bad debts for a sums aggregating Rs. 12,18,732/- is allowable as bad debts and the findings of the CIT (A) on this score is set aside. In the result, ground No.1 is allowed. 7. In ground No.2, the assessee has challenged the ad hoc disallowance of 10% for sums aggregating Rs. 42,20,000/- made under Section 37(1) read with section 40A(2)(b) out of professional fees paid for services paid to KPMG Consulting Private Limited (KCPL) and KPMG firm. The facts are that the assessee company had made a payment of Rs. 4,12,00,000/- to KCPL as professional fee and an amount of Rs. 1,87,50,000/- and Rs. 10,50,000/- to KPMG in the form of support service charges and professional fees. It was submitted by the assessee that the professional fee was paid to KCPL for doing certain specialized work to various concerns like Airport Authority of India, BFL Software Limited, CMC Ltd, FCL Technology India Ltd and SSI Technology. As the assessee did not had sufficient specialized manpower to carry out the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lowing decisions :- i) Upvan International [1986] 15 ITD 215 (Del); ii) Shankar Trading Co.(P) Ltd.[2006] 152 TAXMAN 49 (Del); iii) Girnar Construction Co.[2003] 261 ITR 463 (Raj.); and iv) Voltamp Transformers [1981] 129 ITR 105 (Guj). 10. On the other hand, learned Senior DR relied upon the findings given by the CIT(A) as well as the Assessing Officer and submitted that whether the payment to the non-related parties have been made on the same proportion or on same rate, could not be established from the records as it was not placed before the Assessing Officer as well as the CIT(A). Hence, the disallowance made should be confirmed. 11. We have carefully considered the submission of the rival parties and the findings given by the CIT(A) as well the Assessing Officer. Section 40A (2)(b) provides that :- " (2)(a) Where the assessee incurs any expenditure in respect of which payment has been or is to be made to any person referred to in clause (b) of this sub-section, and the [Assessing] Officer is of opinion that such expenditure is excessive or unreasonable having regard to the fair market value of the goods, services or facilities for which the payment is made or the legiti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the basis for disallowance of 10%, whether there was any some kind of material or some comparable payments to other parties. In absence of such material on record, we are unable to sustain the view taken by the Assessing Officer as well as the CIT(A) that disallowance of 10% should be made on ad hoc basis. Under these facts and circumstances of the case, we find that it would be proper that matter is restored back to the Assessing Officer, who will examine whether the similar payments to other unrelated parties have been made in the same proportion or on similar rates or whether there was any legitimate need for its business. Thus, this matter is restored back to the file of the Assessing Officer for verification from the end of the Assessing Officer to examine similar nature of payments made to unrelated parties are in consonance or are on similar rate and then decide this matter. If it is found that payments made to related parties are in consonance with the payments made to unrelated parties or it is for legitimate needs of the business or profession, no addition or disallowance should be made. In the result, this ground is allowed for statistical purpose. 12. In ground ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ) erred in directing the Assessing Officer to allow the payments made to foreign parties without TDS, disallowed by the Assessing Officer u/s.40(a)(i) on the grounds that the same were in the nature of professional fees not liable to TES as per the provisions of DTAA without appreciating the fact that payments of all kinds including reimbursement of expenses is hit by the provisions of section 40(a)(i) r.w.s. 195 as held by the Mumbai ITAT in the case of DCIT, SPl. Rg. 20 Vs. M/s Arthur Andersen & Co. (ITA No.9125/Mum/1995). 2. On the facts and in the circumstances of the case and in law, the CIT(A) erred in directing the Assessing Officer to exclude the reimbursement costs from the total payments made to sister concerns for working the disallowance at 10% of the total payment made without appreciating the fact that the assessee had not produced any proof to determine the reasonableness of payments made u/s.40A(2)(b) and acceptance of the same by the CIT(A) was in contravention of Rule 46A." 3. On the facts and in the circumstances of the case and in law, the CIT(A) erred in directing the Assessing Officer to allow the late payment of PF contribution u/s.43B without appreciating ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of Rs. 20,89,906/- is not allowed as a deductible expenditure under the provisions of section -40(a)(i) r.w.s.195 r.w.s. 195A and is accordingly included in the total income of the assessee company. For the same reason as discussed in forgoing paragraphs in relation to remittance of professional fees to KPMG Dallas it is held that the company should have deducted tax in respect of amounts payable to KPMG Consultancy LP, Canada of a sum of Rs. 13,37,229/- under the provisions of section 195 r.w.s. 195A on the ground that the amount payable to KPMG Consulting LP, Canada was chargeable to tax in India under Artilce-12(2) and section 9(1)(vi) r.w.s. 115A to the exclusion of Article-7 which for the above reasons are held as not being applicable and relevant to the case of the remittances ot KPMG Consulting LP, Canada who has rendered professional services in connection with developing the transaction strategy/value proposition, etc. to Essar Oil Ltd. Accordingly, the amount of Rs. 13,37,229/- is not allowed as deductible expenditure under the provisions of section 40(a)(I) r.w.s. 195 and is included in the total income of the assessee company." 16. Before the CIT(A), it was submitted ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... LP is a partnership of body corporates. It did not have a fixed base/permanent establishment in India. Pursuant to the provisions of Article 7 of the Indo-Canada DTAA, the income from the services is not taxable in India. Accordingly, there was no requirement of tax deduction at source from the remittance. To sum up, the above mentioned payments are not in the nature of 'royalties' either under section 9(1)(vi) of the Act or under the respective DTAAs. There was no obligation to deduct tax u/s 195 of the Act. Therefore, the subject amounts are not disallowable u/s. 40(a)(i) of the Act. In the result, Ground Nos. 1 to 5 are allowed." 17. Learned Senior AR on behalf of the assessee submitted that it is not a case of royalty under Article 12 of the Indo-US DTAA as the payment was made purely for rendering of professional services to KPMG, US and KPMG Canada. In support of his contentions, he relied upon the following judgments :- i) HEG 130 Taxman 73 (MP); ii) Hindalco 96 TTJ 1009 (Mum); iii) JDIT Vs. Harward Medical International USA [2011] 16 taxman.com 69 (mum); and iv) Standard Chattered Bank vs. DDIT (Intl.tax) [2011] 11 taxman.com 105 (mum). He, thus, finally relie ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , any patent, trade mark, design or model, plan, secret formula or process, or for information concerning industrial, commercial or scientific experience, including gains derived from the alienation of any such right or property which are contingent on the productivity use or disposition thereof: and" 18.1 Looking to the nature of professional services rendered to the KPMG USA, it is evident that it does not fall in any of the terms of definition given for Royalty under Article 12 of Indo US DTAA. It was purely a professional service for consultancy which were rendered outside India and nor for supply of scientific, technical, industrial or commercial knowledge or information. Thus, nature of payment do not fall within the meaning of Article 12 and, therefore, there was no liability to deduct TDS and consequently disallowance made under section 49(ia) is uncalled for. Similarly, in the case of payment made to KPMG, Canada were also purely for professional services and reimbursement of expenses, which in any manner does not fall under Article 12. Thus, on such payment also there was no liability to deduct TDS and consequently Section 40(ia) will not be applicable. The finding of th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... issue has also been decided in the aforesaid appeal and in view of the reasoning given above, this issue is set aside to the file of the Assessing Officer as per the directions given therein. In the result, the ground No.2 is allowed for statistical purpose. 23. ITA No.2379/Mum/2006 (AY 2002-03)(By Department) : In this appeal, the revenue has raised the following ground of appeal:- "1. On the facts and circumstances of the case and in law the CIT(A) erred in restricting the disallowance of Rs. 15,85,00/- us/.40A(2)(b) of the Act to Rs. 2,10,000/- without appreciating the fact that the assessee had not produced any proof to determine the reasonableness of payments made u/s.40A(2)(b) and acceptance of the same by the CIT(A) was in contravention of Rule 46A." This ground has already been decided while deciding the assessee's appeal for the assessment year 2001-2002 and also the department's appeals for the same year. Since, this matter has been restored back to file of the Assessing Officer it is treated as allowed for statistical purposes. This ground is thus allowed for statistical purposes. 24. ITA No.1979/Mum/2007 (AY 2003-04)(By Assessee) : In this appeal, the assessee ha ..... X X X X Extracts X X X X X X X X Extracts X X X X
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