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TMI Blog2014 (4) TMI 199X X X X Extracts X X X X X X X X Extracts X X X X ..... holding company were in nature of payments covered u/s. 194C/ 194J of Act – Expenditure was Disallowed by A.O. u/s. 40(a)(ia) of Act – Held that: - Agreement in question is a composite agreement - Perusal of clauses of agreement reveals that there is no such clause in agreement from which it can be gathered that services provider i.e. first party in the agreement will provide services on actual cost basis or that no profit element is involved as has been alleged by the ld. Authorized Representative - There is specific clause in agreement regarding payment on service charges - Even assessee has claimed that it has deducted the tax in relation to service fee - It may be observed that sum payable or paid to a contractor for the work, as provided under section 194C, refers to entire payment and not profit element only - Such payment u/s 194C refers to the entire payment i.e. cost to contractor for work carried out plus profit element if any – Decided against Assessee. Disallowance for non-deduction of TDS u/s 40(a)(ia) - Disallowing expenses from business and profession on ground that TDS has not been deducted, amount should be payable and not which has been paid by end of year – H ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sponsible for deduction of tax at source on paying such sum to any resident i.e. to its holding company. Similar provisions were there u/s. 194J of the Act in respect of fees paid for professional or technical services. The A.O. held that the payment made by the appellant company to its holding company were in the nature of payments covered u/s. 194C/ 194J of the Act. The A.O. further observed that that similar issue was there in the case of the assessee for A.Y. 2007-08 wherein also the entire payment was disallowed for want of deduction of tax at source. Since the appellant failed to deduct tax at source on such payments made under different heads, as mentioned above, totaling Rs. 1,12,06,172/- , hence the said expenditure was disallowed by the A.O. u/s. 40(a)(ia) of the Act. In appeal, the ld. CIT(A) confirmed the additions so made by the A.O. on the above noted issues. The assessee is thus in appeal before us. 3. Ld. AR of the assessee, before us, has submitted that assessee is a wholly owned subsidiary. The above expenses were paid by appellant to its holding company as per terms and condition of MOU entered with the holding company. In terms of MOU, the holding company was ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or otherwise. The real intentions of the parties to the agreement can be gathered from going through the terms and conditions of the agreement. We have gone through the various clauses of the sample agreement placed in file before us and a harmonious reading of the whole agreement reveals that the said agreement is essentially an agreement of contract for work and services. The relevant clauses of the sample agreement placed in file before us, for the sake of convenience, are reproduced as under: 'NOW THEREFORE THIS MOU WITNESSETH AS FOLLOWS (1) DEFINITIONS In this MOU: (a) "Facilities" means the fixed assets including but not limited to land and buildings (office premises), capitalized furniture and fittings, computer hardware and software, systems, network connectivity and such other assets held by UTISEL and to be provided in accordance with the terms of this MOU for use by UTISEC COM; (b) "Service Fee" shall have the meaning ascribed to it in Section 3.2 of this MOU; (c) "Support Services" means all services including but not limited to the provision of accounting services, investment and other research, legal and secretarial, dealing ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y the staff of UTISEL rendering support servicesto UTISEC COM (including but not limited to Accounts, Finance, HR Administration, Legal Secretarial, Compliance), Rs.10,000/- per month(Rupees Ten Thousand only). (c) The service fee would be applicable from July 1, 2005 to June 30, 2006. It may be reviewed periodically and shall be subject to such modification as may be mutually settled. (d) However, other related expenditure e.g. Printing Stationery, conveyance ,legal expenses, stamp duty, advertisement etc. shall be borne by UTISEC COM on actual basis.' 5. The ld. AR has submitted that in the MOU, the name of the second party i.e. UTISEC COM refers to the assessee and the name of the first party i.e. UTISEL refers to the holding company of the assessee. Now coming to the clauses of the agreement, a perusal of the clause (1) a reveals that the word facilities includes all type of infrastructural facilities including computer hardware and software systems and other various assets and facilities. The definition given is wide and inclusive definition which includes also any other infrastructural facility which has not been specifically mentioned therein. Similarly ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... zed Representative. Rather it may be observed that there is a specific clause in the agreement regarding payment on service charges. Even the assessee has claimed that it has deducted the tax in relation to service fee. It may be observed that the sum payable or paid to a contractor for the work, as provided under section 194C, refers to the entire payment and not the profit element only. Such payment u/s 194C refers to the entire payment i.e. the cost to the contractor for the work carried out plus profit element if any. 6.1 The related expenditure, the cost of which was to be borne by the assessee on actual basis, have been specifically mentioned under clause 3(d) of the agreement e.g. printing, stationery, conveyance, stamp duty etc. There remains no doubt in our mind, after going through the various clauses of the agreement, that there was an agreed consideration for the services and infrastructural facilities provided by the first party to the second party and further nothing has been mentioned therein that those services would be provided on actual cost basis. Hence, this contention of the ld. Authorized Representative is hereby rejected. 7. The ld. Authorized Representat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Hon'ble ITAT has rightly confirmed the order of the CIT(A) and thereby deleting the disallowance of Rs.1,17,68,621/- made by AO under section 40(a)(ia) of the I.T. Act, 1961 by ignoring the fact that the company M/s. Mercator Lines Ltd. had performed ship management work on behalf of assessee. M/s. Vector Shipping Services (P) Ltd. and there was a Memorandum of Understanding signed between the companies and as per the definition of memorandum of understanding, it included contract also." 9.1 While answering the said question the Hon'ble Allahabad High Court in the concluding paras of the judgment has observed as under : "We do not find that the revenue can take any benefit from the observations made by the Special Bench of the Tribunal in the case of Merilyn Shipping and Transport Ltd. (136 ITD 23) (SB) quoted as above to the effect Section 40(a) (ia) was introduced in the Act by the Finance Act, 2004 with effect from 1.4.2005 with a view to augment the revenue through the mechanism of tax deduction at source. This provision was brought on statute to disallow the claim of even genuine and admissible expenses of the assessee under the head 'Income from Business and Pro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ut it is applicable to such expenditure, which become payable at any time during the relevant previous year and was actually paid within the previous year. The Hon'ble High Court further observed that the Special Bench verdict of the ITAT in Merilyn Shipping Transpots case (supra) is not good law. The Hon'ble Calcutta High Court after making detailed discussion on the issue and relying upon various case laws relating to the interpretation of the statute has finally observed that the key words used in section 40(a)(ia) are: "on which tax is deductible at source under Chapter XVII B". If the question is: "which expenses are sought to be disallowed?" The answer is bound to be: "those expenses on which tax is deductible at source under Chapter XVII B." Once this is realized nothing turns on the basis of the fact that the legislature used the word 'payable' and not 'paid or credited'. Unless any amount is payable, it can neither be paid nor credited. If an amount has neither been paid nor credited, there can be no occasion for claiming any deduction. The Hon'ble High Court further observed that there can be no denial that the provision in question is harsh. But that is no ground to r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Hon'ble Gujarat high Court thus held that 'Merilyn Shipping' (Supra) does not lay down correct law. The correct law is that s. 40(a)(ia) covers not only to the amounts which are payable as on 31th March of a particular year but also which are payable at any time during the year. 13. In view of the law laid down by the Hon'ble Calcutta High Court and further by the Hon'ble High Court of Gujarat as discussed above, there is no merit in the contention of the ld. Authorized Representative on this issue also. It may be observed that the finding of the Hon'ble High Court of Allahabad does not hold binding precedent as Hon'ble High Court of Allahabad did not discuss the legal issue in question rather the appeal was dismissed upholding the finding of fact given by the Tribunal whereas the law laid down by the Hon'ble High Court of Calcutta in the case of Crescent Export Syndicate (Supra) as well as the decision of the Hon'ble High Court of Gujarat in the case of Sikandarkhan N Tunvar (Supra) hold a binding precedent on this specific issue, which has been discussed in detail by respective High Courts and has been answered in favour of the Revenue. In view of our findings given above ther ..... X X X X Extracts X X X X X X X X Extracts X X X X
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