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TMI Blog2015 (4) TMI 261X X X X Extracts X X X X X X X X Extracts X X X X ..... f Rs. 1.80 crores falls within the ambit of section 14A of the I.T.Act. 2. The CIT(A) erred in deleting the additions of Rs. 28,87,983/- u/s 40(a) under facts and circumstances of the case and failed to appreciate that destination sampling charges are in the nature of technical or consultancy services which come within the ambit of Explanation 2 to sec. 9(1)(vii) and CIT(A) failed to appreciate the Finance Act, 2010 amendment to section 9(1)(vii) according to which the income from technical services is deemed to accrue or arise in India whether the services are rendered within India or outside India and whether the non-resident is having place of business in India or not and therefore, the income from technical/consultancy services rendered outside India is deemed to accrue in India and hence the provisions of TDS are applicable for the above income/expenses. 3. The CIT(A) erred in deleting the addition made of Rs. 68,67,067/- u/s 40(a) by not following the binding decision of Hon'ble Bombay High Court Panaji Bench decision in the case of CIT vs. Orient Goa Pvt. Ltd., which held that the assessee is liable to deduct TDS on the demurrages paid and the facts of the assessee's c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sister concerns is not proved by the assessee and CIT(A) failed to appreciate that the onus is on the assessee to prove the genuineness of the expenditure as held by the Supreme Court in the cases of CIT vs. Calcutta Agency Ltd., 19 1TR 191, Lakshinarayana Cotton Mills Co. Ltd., Vs. CIT (SC), 74 ITR 634 and other judicial decisions viz., CIT Vs. Chandravilas Hotel (Guj), 164 ITR 102, CIT vs. Modi Stone Ltd., (Del). 203 Taxman 123 and CIT Vs. S.G. Exports (P&H), 336 ITR 2 and CIT(A) failed to appreciate that bills raised in this regard are not genuine as these do not contain levy of any service tax or any other taxes which is normal feature of genuine bills. 8. The CIT(A) erred in deleting addition made on account of Transportation charges of Rs. 30,93,640/- paid in cash and these are not supported by any transport bills issued by the Transporters and assessee does not have any details such as names of transporters to whom the cash is paid. 9. The CIT(A) erred in deleting the disallowance of commission amounting to Rs. 53,21,905/- where the assessee failed to prove the nature of services rendered and the basis of payment of commission, paid and the CIT(A) failed to appreciate the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ,71,566/- (21,65,701 + 3,05,865) is disallowed u/s 14A read with Rule 8D as expenditure incurred for earning the exempted income and same is added to the total income." The Assessee went in appeal before the CIT(A). Before the CIT(A) the Assessee contended that the Assessee has not incurred any expenditure to earn the dividend income, the interest is paid for the loan borrowed for business purposes, sum of Rs. 1,63,35,372/- was paid on packing credit and FBD as interest which is for export business, the sum of Rs. 3,22,125/- is paid as interest to VAT authorities under Goa VAT Act and the balance sum of Rs. 40,12,615/- consists of bank charges, interest on overdrawn account, processing of loan for hotel and packing credit limits, interest on secured loan for car, hotel loan taken from LIC for business purposes. The AO while rejecting the claim of the Assessee simply stated that he is not satisfied with the correctness of the claim but did not specify why the accounts are not reliable for the claim of no expenditure made by the Assessee. Alternately it was contended that the disallowance cannot exceed the exempt income i.e. Rs. 45,371/-, no disallowance was made in the preceding as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ant our interference. We, accordingly, confirm the order of CIT(A) on this ground. Thus, this ground stands dismissed. 4. Ground no. 2 relates to deletion of the addition of Rs. 28,87,983/- added by the AO u/s 40(a)(i). The AO noted that the Assessee has paid a sum of Rs. 28,87,983/- towards destination sampling charges to the parties of Hongkong and Singapore but Assessee has not deducted any TDS on the belief that the services are rendered outside India and India is having DTAA with China and Singapore, therefore, these charges are taxable in those countries. The AO did not agree in view of the Explanation 2 to Sec. 9(1)(vii). According to him the interest and fee for technical services/professional services is taxable in the hands of the party who received it outside India as the income is deemed to accrue or arise in India. According to the AO, the Finance Act, 2010 amended Sec. 9(1)(vii) retrospectively w.e.f. 1.6.1976 and as per the amended provisions, income of non-resident shall be deemed to accrue or arise in India under clause (v) or clause (vi) or clause (vii) of sub-section (1) and shall be included in the total income of the non-resident whether or not the non-residen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... not have any permanent establishment in India and there has to be territorial nexus with the earning of the income, no services are rendered in India and neither the same is received in India. Therefore, no income accrued in India. Explanation to Sec. 9 inserted by the Finance Act, 2010 is not applicable as all the payments were made when the Finance Act received assent of the President on 8.5.2010. The payment does not constitute fees for technical services as defined under Explanation 2 to Sec. 9(1)(vii) of the Act. Ultimately, the CIT(A) deleted the disallowance by observing as under : 6.4 I have gone through the assessment order and submission of the appellant. The admitted fact is that, the appellant is engaged in the business of export of iron ore. At the destination of export, again the sampling of exported ore has to be done, for which the payment has been made by the appellant. The appellant did not deduct any TDS because, (i) the consultancy firm was a foreign national, no part of whose income was assessable in India, and ii) the services were rendered outside India. On the other hand, the A.O. held that, since the services rendered are of technical in nature and paymen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rendered services in India. The destination sample charges are consultant/technical charges paid for gradation of the iron ore exported and due to explanation-2 to Sec. 9(1)(vii) fee for technical services means any consideration including any lump sum consideration for rendering of any managerial, technical or consultancy services (including the provisions of services of technical or other personnel). The technical services rendered in the case of the Assessee, according to the ld. DR, was taxable in the hands of the party who received it outside India as the said income is deemed to accrue or arise in India. In view of the provisions of Sec. 40(a)(i) any interest or fee for technical services which is payable outside India on which tax is deductible at source under Chapter 17B is not allowable unless TDS is deducted. This is an undisputed fact that in this case the Assessee has not deducted the tax. We are not going on the merits of the taxability of the payments made by the Assessee to the non-resident company as, in our opinion, once the payments made by the Assessee to the non-residents are of the nature of technical fee, the legal position in view of the retrospective amendme ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e considered territorial tax systems are France, Belgium, Hong Kong and the Netherlands, and in those countries also this system comes with certain anti abuse riders. In other major tax systems, the source and residence rules are concurrently followed. On a conceptual note, source rule of taxation requires an income sourced from a tax jurisdiction to be taxed in this jurisdiction, and residence rule of taxation requires income, earned from wherever, to be taxed in the tax jurisdiction in which earner is resident. In the US tax system, this residence rule is further stretched to cover US taxation of all its citizens irrespective of their domicile, and the source rule is also concurrently followed. It is this conflict of source and residence rules which has been the fundamental justification of mechanism to relieve a taxpayer, whether under a bilateral treaty or under domestic legislations, of the double taxation either by way of exclusion of income from the scope of taxability in one of the competing jurisdictions or by way of tax credits. Except in a situation in which a territorial method of taxation is followed, which is usually also a lowest common factor in taxation policies of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... even though rendered outside India were not deemed to accrue or arise in India irrespective of the fact whether the party who rendered the services is having place of residence or place of business in India. It is only due to the retrospective amendment made by the Finance Act, 2010 that the position has become clear. If the income was not taxable in India it cannot be made taxable in view of the tax treaty. This is a fact that as argued by the ld. AR the retrospective amendment brought by the Finance Act, 2010 was not in existence at the time when the Assessee had made the payments. The ld. AR submitted that the Assessee cannot be penalized for performing an impossible task of deducting TDS in accordance with the law which was brought into the statute book much after the point of time when the tax deduction obligation was to be discharged. In this regard, we perused the decision of the co-ordinate bench in the case of Channel Guide India Ltd. vs. ACIT, 139 ITD 49 (Mum.) as relied by the ld. AR. We noted that in this decision the co-ordinate bench of ITAT held as under : "25. In our opinion, the issue involved in the present case however, is relating to disallowance made u/s.40(a) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ct. Since the Assessee was not liable at that time to deduct the tax, the disallowance u/s 40(a)(i) cannot be made. We accordingly confirm the order of CIT(A) deleting the addition though on a different ground pleaded by the ld. AR. Thus, this ground stands dismissed. 7. Ground no. 3 relates to deletion of the addition made by the AO u/s 40(a)(i) amounting to Rs. 68,67,067/- as Assessee has not deducted any TDS on the demurrage paid. The brief facts of the case are that the AO noted that the Assessee has paid Demurrage amounting to Rs. 68,67,067/- to various parties but the Assessee did not deduct any TDS. The contention of the Assessee was that Demurrage were paid to the owner of the ship through purchaser of the ore as the contract were FOB. The ships were not hired by the Assessee but were hired by the purchaser of the ore from the owner of the vessel. As per Section 172 the Assessee was not required deduct TDS and the demurrage payments were made to the purchasers of the iron ore from Hong Kong, Dubai, British origin island countries by the Assessee as per sale agreement and was part of the total price adjustment on the final bill. Therefore, no TDS was deductible. The AO in v ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that the Hon'ble Bombay High Court has held as under : "7. We have given anxious consideration to the submission of the learned Senior Counsel. On reading of the entire judgment of the learned Single Bench, it is not possible for us to countenance the submission of the learned Senior Advocate that the ratio of the Judgment is applicable to the facts of the case on hand. In our view, this Judgment does not help the present respondent, i.e., the assessee. Another Judgment relied on by the learned Senior Advocate Mr. Usgaonkar for the respondent-assessee is in the matter of CBDT v. Chowgule & Co. Ltd. [1991] 192 ITR 40 (Kar.). There the learned Division Bench observed that "The question for consideration is whether demurrage payable to a non-resident owner or charterer of a ship for the delay in loading the ore sold to the foreigner is liable to be taxed under the provisions of the Income-tax Act". We have seen the facts obtaining in that case. In our view, the facts are distinguishable. The ratio of this Judgment also does not help the present assessee, i.e., the respondent in this appeal. We have noticed the various dates in the cited judgment. We have also considered the defi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... We have heard the rival submissions in the light of material placed before us. Assessee claimed deduction of Rs. 1,08,53,980 being the amount of demurrage payable to Mitsui Co. Ltd., Japan. The Assessing Officer opined that since the assessee did not deduct tax at source, as such the case of the assessee falls within the mischief of section 40(a)( i) of the Income-tax Act, 1961". Provisions of section 172 are to apply notwithstanding anything contained in the other provisions of the Act. Therefore, in such cases, the provisions of sections 194C and 195 relating to tax deduction at source, are not applicable. The recovery of tax is to be regulated for voyage undertaken from any port in India by a ship, under the provisions of section 172. In this view, these observations of the learned Vice President of Income-tax Appellate Tribunal have no concern with the factual aspect that it is a case of occasional shipping, pleaded or raised by assessee. There is no dispute about interpretation of section 172 or section 195. Crucial point is as to how section 172 applies to the facts of the present case wherein the respondent-assessee is an Indian company, incorporated under the provisions of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Ltd. [1978] 113 ITR 307. This judgment seems to be the basic judgment which is being referred to by the learned Single Bench of the Karnataka High Court. In that case, Gosalia Shipping (P.) Ltd., a company incorporated under the provisions of the Indian Companies Act, 1956 indulged at the relevant time in business of clearing and forwarding and as steamship agents. Gosalia Shipping (P.) Ltd., had acted as the shipping agent of "Aluminium Company of Canada Limited" which was a non-resident company. That non-resident company had chartered a ship "M.V. Sparto" belonging to a non-resident company called Sparto Compania Naviera of Panama. The said ship called at the port of Betul, Goa on 1-3-1970. On 20-3-1970, the ship had left for Canada. The ship was allowed to leave port of Betul on the basis of guarantee bond, executed by the respondent in favour of the President of India. On 15-4-1970, the First Income-tax Officer, Margao, Goa issued a Demand Notice to the respondent Gosalia Shipping (P.) Ltd. for payment of Rs. 51,000 and odd amount, by way of Income-tax. We have noticed all these facts only to say that in the case on hand, there are no pleadings or material brought on record to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hases and obtained Form 'H' from the sellers, as the purchases were made for the purpose of export. On the basis of these facts, the A.O. jumped to conclusion regarding genuineness of these purchases prematurely, in my opinion. The A.O. has not doubted the correctness of books of accounts of the appellant. The A.O. has also not commented on the gross-profit ratio of the appellant. The books of accounts of the appellant are audited. It has paid VAT and has obtained Form H. In my opinion, the A.O. has taken a very narrow view, regarding the decision, relied upon by him. Indeed, the primary onus, of proving genuineness of the expenses claimed, is on the assessee but at same time, if one is not able to produce the party, does not mean that he has failed to discharge its onus. There are other means and evidences to prove the genuineness of such transactions. In my opinion, the A.O. jumped to the conclusion prematurely without examining other cogent evidences available with the assessee in forms of entries in the books of accounts, VAT Returns, Stock (quantitative) details, Form No. H, cash book, reflecting the payment made, etc. In view of the fact, that the A.O. did not call f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the addition to the extent of 10% should have not been sustained by the CIT(A). In our opinion, it is a case where the whole of the addition made by the AO does not have any leg to stand. Since the Assessee has not come in appeal nor filed cross objection, we confirm the order of CIT(A) sustaining the addition to the extent of Rs. 6,02,808/-. Thus, this ground stands dismissed. 11. Ground no. 5 relates to deletion of the addition amounting to Rs. 3,07,61,558/- u/s 41(1) of the Income Tax Act. The AO added sum of Rs. 3,07,61,558/- u/s 41 of the Income Tax Act in the income of the Assessee mentioning that as per the details furnished by the Assessee it is seen that almost all the creditors are more than 4 years old and till date the Assessee has not paid the above liabilities. The Assessee went in appeal before the CIT(A) and filed the detailed submission alongwith the copy of the submissions as filed before the AO. CIT(A) deleted the addition by observing as under : "9.4 Perusal of assessment order shows that the A.O. has made this addition in a summary manner only on the ground that the appellant did not file balance confirmation. The A.O. has made addition U/S 41(1) saying that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssions alongwith the orders of the tax authorities and carefully considered the same. We have also gone through the documents and papers which were referred to during the course of hearing. We noted that the AO has taken the list of the Sundry Creditors as on 31.3.2011 and, on the basis of that, the AO made the addition in the income of the Assessee u/s 41(1) on the basis that there has been cessation of liability as the Assessee has not made the payment of the Sundry Creditors over a period of 3 years. Sec. 41(1) is applicable only where an allowance or deduction has been made in the assessment for any year in respect of loss, expenditure or trading liability incurred by the assessee and subsequently during any previous year the Assessee has obtained, whether in cash or in any other manner whatsoever, any amount in respect of such loss or expenditure or some benefit in respect of such trading liability by way of remission or cessation thereof. The amount so obtained by the Assessee or the value of benefit accruing to the Assessee shall be deemed to be profits and gains of business or profession and shall be charged to income tax as income of that previous year. This section create ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rm view that there is no cessation of liability in terms of Sec. 41(1) of the Income Tax Act. We, accordingly, confirm the order of CIT(A) deleting the addition. Thus, this ground stands dismissed." Respectfully following our aforesaid order, in our opinion, this is not a fit case which warrants our interference. The onus is on the AO to prove that the liability stands ceased or remitted. No legal enforcement cannot mean cessation of liability. We accordingly confirm the order of CIT(A). Thus, this ground stands dismissed. 14. Ground no. 6 relates to deletion of the addition of Rs. 1,18,26,320/-. The AO made addition on the ground that the sales to sister concern at rate lower than the rate adopted for valuation of the closing stock is not genuine and therefore he added the difference between the two rates. The Assessee went in appeal before the CIT(A). CIT(A) deleted the addition by observing as under : "10.4. The A.O. has made addition to the value of closing stock. The A.O. has himself said that, the stock was transferred by way of sale to the sister concern. When stock was already transferred, how can any addition be made to the value of non-existing stock. The appellant has ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rial on record nor any allegation that the Assessee has received more than what has been recorded. The closing stock of iron ore was lying at jetty and Assessee had to incur transport cost to bring it to jetty thereby increasing the cost at which the goods are brought upto the jetty. Same being direct cost has to be added while valuing the closing stock. Since M/s. Karishma Impex has purchased the goods from store yard therefore the value was less to the extent of the transport and loading and unloading cost which was around Rs. 250-300/MT. The Assessee has also received advance payment for the sale of these goods. Once the transportation cost is added, the value is comparable to the closing stock. The Assessee has obtained Form-H as required under Goa VAT. Unless the sale is genuine, it is incomprehensible to think that the export authorities will allow the exports. On the one hand, the AO has doubted the sale and on the other hand stated that there is undervaluation of the stock. Both these are contradictory. 16. We heard the rival submissions and carefully considered the same alongwith the order of the tax authorities below. We noted that the addition has been made on account o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... urns of Income and have disclosed these receipts as income. viii) The A.O has made the addition on presumptions and surmises and has mis-applied the judicial pronouncements relied upon by him. In view of the above reasons, the disallowances of expenses amounting to Rs. 2,19,49,850/- is hereby deleted. This ground of appeal of the appellant is allowed." 18. We heard the rival submissions and carefully considered the same alongwith the order of the tax authorities below. We noted that similar type of services has been rendered by sister concern to the Assessee in the earlier year and no such disallowance was ever made. M/s. Karishma Goa Mineral Trading Pvt. Ltd. had rendered similar type of services to M/s. Karishma Global Mineral Exports Pvt. Ltd. during A.Y 2010-11 and the said expenditure has not been disallowed in the assessment of M/s. Karishma Global Mineral Exports Pvt. Ltd. even though assessment has been completed u/s 143(3). This itself proves that M/s. Karishma Goa Mineral Trading Pvt. Ltd. had rendered services not only to the Assessee but to other parties also. We perused the copy of the invoice and we noted that even though the invoice has been raised at the end of t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e appellant. The A.O. has confirmed that each payment of transportation charges are recorded as less than Rs. 20,000/- and the appellant has not maintained addresses of these transporters. On the basis of these facts, the A.O. derived a conclusion that the appellant has not been able to prove genuineness of these transactions and disallowed entire amount of Rs. 30,93,640/- as bogus claim of expenditure. In my opinion, the conclusion drawn by the A.O. is premature as the same has been reached without appreciating full facts of the case. In fact, the assessee has paid a total amount of Rs. 8.33 crores on transportation and cash payment is Rs. 30 lakhs only which works out to a paltry 3.6% of the total expenses. The appellant claimed that on every voucher truck no. is mentioned and signature of the driver/cleaner has been obtained and therefore, the same is verifiable. The cash transportation charges have been paid for goods received, which has been part of the stock and subsequently sold. The quantitative details of stock is a sufficient testimony of the fact that material has indeed been received for which transport charges have been paid. In my opinion, the appellant has maintained ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oncerns of the Assessee in which commission was found to be an allowable expenditure. We have also confirmed the order of CIT(A) allowing the commission to Radhakrishnan in the case of M/s. Karishma Global Mineral Exports Pvt. Ltd. Similarly, Arham Mines and Minerals has also rendered services to M/s. Karishma Impex and M/s. Karishma Goa Mineral Trading Pvt. Ltd. and payment of the commission was allowed as deduction. 22. We noted after hearing the rival submissions and considering the same that the Assessee has paid commission to the following parties : i) S.G. Radhakrishnan Rs. 28,56,206/- ii) Arham M&M Rs. 5,25,629/- iii) Mr. Rane Rs. 15,00,000/- iv) Durga Sawkar Rs. 4,40,000/- Total Rs. 53,21,905/- We also noted that Radhakrishnan has been paid commission by the Assessee in the earlier A.Ys 2007-08 and 2008-09 and the commission paid was not disallowed even though assessments were completed u/s 143(3). Similarly, in the case of Arham Mines and Minerals we noted that commission has been paid to Arham Mines and Minerals for procuring export orders. These very parties have rendered services to the sister concerns, M/s. Karishma Impex and M/s. Karishma Goa Miner ..... X X X X Extracts X X X X X X X X Extracts X X X X
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