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TMI Blog2015 (3) TMI 1320X X X X Extracts X X X X X X X X Extracts X X X X ..... al purposes. Disallowance u/s 14A - Held that:- If there is no exempt income then provisions of section 14A cannot be invoked. Therefore, in our opinion, if there was no income during the year then no disallowance is called for. Since in the case before us investment itself has been written off, therefore, there could not be any income. Accordingly we delete this addition. Disallowance of proportionate interest in terms of provisions of section 36(1)(iii) - Held that:- No particular loan has been taken for the asset which has been shown under the head ‘capital work in progress’ then disallowance could not have been made. However, each loan and its utilization requires fresh examination, therefore, we remand this issue to the file of Assessing Officer with a direction to ascertain details of various loans and how they were fully utilized and then only decide the issue in accordance with law. TDS u/s 194H - non deduction of tds - Held that:- It is not clear from the records whether these amount pertains to bank charges because Schedule 20 simply shows financial charges, therefore, we remit this matter back to the file of Assessing Officer with a direction to verify whether assessee h ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ccount of training expenses - Held that:- In any case when separate disallowance has been made for 14,82,137/- on account of training expenses this would amount to double disallowance. Therefore, in the interest of justice we set aside the order of Assessing Officer and remit the same back to his file for re-examination of the issue and, the same should be decided after considering the contention of double disallowance on account of training expenses as well as after verification of the supporting bills filed before the DRP. Bad debt which are clearly allowable, by writing off such amounts because simply an amount has been shown as discount the same cannot be disallowed. Therefore, we set aside the order of Assessing Officer and delete this addition. TDS u/s 195 - reimbursement of expenses incurred on the training of a particular employee abroad - Held that:- Merely reimbursement of expenses incurred on the training of a particular employee abroad cannot be termed as fee for technical services. Even if, assuming for the argument sake that this would amount to fee for technical services, then it is to be seen that such service was rendered in India, which has not happened. Therefore ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s of ₹ 4,54,744 and ₹ 44,09,664 paid as commission to Malachite Chemicals and Edward Keller (Phils)Inc. 5.2 disallowing commission expense of ₹ 34,20,165 being excessive and unreasonable by arbitrarily fixing an average rate of commission paid to Indian agents at 3%. 6. That the Ld. Assessing officer/DRP erred on facts & in law in making a disallowance of expenditure of ₹ 21,15,375 by invoking the provisions of section 14 A of the Act read with Rule 8 D of the Income Tax Rules, 1962. 7. That the Ld. AO/DRP erred on facts & in law in making a disallowance of interest / finance expenses of ₹ 1,14,75,000 alleging that the borrowed funds were utilized to undertake the capital expansion project on surmises and conjectures. 8. That he Ld. AO/DRP erred on facts & in law in making a disallowance of regular bank charges paid to banks of ₹ 1,20,00,000 under section 40(a)(ia) of the Act alleging that the appellant has an obligation to deduct TDS on bank charges under section 194H of the Act. 9. That the Ld. AO/DRP erred on facts & in law in making a disallowance of ₹ 19,91,953 on the alleged ground that ex-gratia is not covered under section 43B ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t on the alleged ground that the appellant was liable to deducttax under section 195 of the act on expenses incurred towards training of employees, treating the same as professional services. 17. That the Ld. DRP and AO erred on facts and in law in charging interest under sections 234B and 234C of the Act. 18. The Ld. DRP and AO also erred in proposing to initiate penalty proceedings under section271(i)(c) of the Act for concealment of income or funishing inaccurate particulars of income. 19. That the Ld. AO/DRP erred on facts & in law in not adjusting the loss brought forward and unabsorbed depreciation as claimed under clause (iii) of Explanation 1 of Section 115JB ofthe Act while computing book profit in the revised computation of income filed during the course of the assessment proceedings. 20. That the Ld. AO/DRP erred on facts & in law in adding an amount of ₹ 5,00,00,000representing investment written off during the year, to the 'book profits' of the appellant as computed under section 115JB of the Act. 21. That the Ld. AO/DRP erred on facts & in law in adding wealth tax and provision of fringe benefit tax of ₹ 52,493 and ₹ 72,00,000 respectively wh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 2012 for assessment years 2007-08 and 2008-09. He also referred to various paras like 95, 98, 102 & 110 and submitted that Tribunal has given a clear finding in para 110 that payment for total corporate services have to be restricted to the extent of 50% of the financial service benefit received by the assessee because assessee should have retained atleast 50% of the benefits on account of such financial service. He pointed out that assessee has moved an Misc. Application also in this regard and the Tribunal has dismissed that M.A. No. 06 & 07/Chd/2015 arising out of ITA Nos. 1139/Chd/2011 and 1290/Chd/2012 respectively and the Tribunal has given logic of this restriction vide paras 5 & 6 of the Misc. Application order. 8. We have considered the rival submissions carefully and find that in assessment years 2007-08 and 2008-09 when this issue was being adjudicated by the Tribunal, some force was found in the contention of Ld. DR that basically assessee was receiving corporate services from the Associate Enterprises in the area of Production and Sales, Market Information, Business Intelligence, Safety, Health and Environment and Finance related strategic planning support. The Revenu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... h. It was fairly conceded by the ld. AR for the assessee that under internationally accepted norms, savings are to be shared between the parties in the ratio of 50 : 50. The ld. AR for the assessee further pointed out that the savings on account of guarantee fee in assessment year 2007-08 were ₹ 1.40 Cr and the total savings in assessment year 2008-09 were ₹ 9.29 Cr. The TPO in assessment year 2007-08 has made an adjustment of ₹ 2,91,95,471/- and in the assessment year 2008-09 has made an adjustment of ₹ 6,14,13,983/-. In view of the admission of the assessee, we are of the view that 50% of the benefits arising to the assessee on account of financial benefits is to be retained by the assessee in independent party transaction. However, in the facts of the present case, the assessee has transferred 100% of the said benefits to the AE by way of paying the Corporate Service Charges. Accordingly, we direct the TPO/A.O. to disallow 50% of the benefits arising on account of guarantee fee and interest cost as being not on arm's length and the balance payment is allowable in the hands of the assessee as being on arm's length against which no adjustment is to be made. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ring these two years. The amounts of corporate service charges in various assessment years are as under:- Assessment year Amount (in Rs. ) 2007-09 22,700,000 2008-09 63,970,136 2009-11 79,931,741 2010-12 89,829,606 6. From the above figures the Bench agreed with the contention of the Revenue that service charges paid on account of corporate services had increased manifold in the later years. Therefore, assessee was asked why there is such a huge increase in the total corporate service charges. The assessee in reply had explained that in later years the assessee had started receiving financial services also and because of which the total corporate service charges had increased. In this regard detailed written submissions were filed which are placed on record. We would like to give the following extracts from such written submissions:- "It is respectfully submitted that under the corporate services entered into by the appellant, the associated enterprise inter alia provides guarantee to banks for the benefit of the appellant. It is submitted the guarantee issued by the associated enterprise enabled the appellant to obtain borrowings at cheaper rate of interest and led to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ) 2006-07 52.63 8.10% 10.75% 2.65% 1.39 2007-08 52.63 8.10% 12.75% 4.65% 2.45 Further, the associated enterprise has also provided guarantee to enable the appellant to avail Letter of Credit ('LC') facility from Royal Bank of Scotland ('RBS') without providing any security. During financial year 2007-08 the appellant availed letter of Credit ('LC') facility from Royal Bank of Scotland ('RBS'). The said facility was issued by the bank on the basis of a corporate guarantee amounting to EUR30 million issued by the associated enterprise. As per general banking norms, for obtaining a LC facility, a fixed deposit is required to be pledged by the customer as a security against the facility allowed by the bank. However, in the case of appellant, since the guarantee was provided by the associated enterprise, the facility was allowed by the bank without obtaining any security from the appellant. It is respectfully submitted that in the absence of guarantee provided by the associated enterprises, the appellant would have borrowed money to obtain a fixed deposit for pledging the same with the bank for availing the LC facility. In view of the aforesaid, it is respectfully subm ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uarantee." 7. From the above it become clear that assessee had started receiving some financial services also from the holding company which explained the increase in total payments on account of corporate services. The assessee had tried to justify the payment on account of such financial services but when again it was confronted that if assessee had saved ₹ 100/- and if he pays the entire amount of ₹ 100/- to the holding company and in that case there would be no savings to the assessee. In response to this query, the Ld. Counsel on behalf of the assessee had admitted that there is international practice to pass on 50% of the amount of such financial savings on account of financial services and balance 50% was to be retained by the recipients of the services. This was found to be logical because benefit was being shared on 50 - 50 basis. Therefore, assessee was asked to give amount of total benefit on account of financial services. The details of such benefit as admitted by the Ld. Counsel for the assessee at the time of original hearing was stated to be as under:- Assessment year Amount of benefit or Services obtained by the assessee. 2007-08 ₹ 1.40 crore ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nner and the same was determined at B3. • The results of the aforesaid benchmarking are as under:- Nature of facility Amount of facility Equivalent INR Guarantee fee Benefit to the appellant(INR in Cr) Packing Credit EUR to million 68 Crores 2.56% 1.74 LC/Guarantee EUR 30 million 204 Crores 3.50% 7.14 Total 8.88 • Your honour would appreciate from the above that the services availed by DSM India resulted in benefit to the assessee and indeed added economic and commercial value to the business of the assessee. In case these services were not provided by the AEs the assessee would have left with no choice but to pay an independent enterprise (third party) for the activity performed for it or would have performed the activity in house for itself." 14. The above also clearly shows that how assessee has received the financial services which have led to the benefits to the assessee to the tune of ₹ 8.88 crores. Therefore, we set aside the order of Assessing Officer and direct him to re-compute the amount of adjustment by reducing 50% of ₹ 8.88 crores from the total Corporate service charges i.e. ₹ 7,99,31,741/- minus ₹ 4.44 crores ( ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed the production capacity of the appellant would have been reduced considerably because of not receiving the raw material supplied by HMGB Limited in timely manner. In view of the above, it is held that the advance made to HMGB Limited were for the purposes of the business of the appellant." Thereafter following observation has been made in para 8 which is as under:- "8. Applying the above tests to the facts of the case of the assessee, it is seen that undisputedly borrowings have been made by the assessee company from the holding company on which it is praying interest. Now, the claim of Assessing Officer is that the assessee has made advances to HMGB, its subsidiary company by utilizing the borrowings and writing off the internet due to it. In our view, the advances have been made to HMGB for commercial consideration since the assessee company is entitled to purchase raw material from the said company and infact the component of supply from HMGB is substantial. A part from the above, on the advances made, the assessee is also entitled to an interest at the rate of 16.5%. It is no doubt true that a part of such interest pertaining to the instant year and previous year has bee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ircumstances, the interest paid on the borrowings of ₹ 76,21,436/- is an allowable deduction under section 36 (1)(iii) of the Act in terms of the la lders (supra) whrein it has been observed as under:- It is true that the borrowed amount in question was not utilised by the assessee in its own business, but had been advanced as interest free loan to its sister concern. However, in our opinion that fact is not really relevant. What is relevant is whether the assessee advanced such amount to its sister concern as a measure of commercial expediency. We wish to make it clear that it is not our opinion that in every case interest on borrowed loan has to be allowed if the assessee advances it to a sister concern. It all depends on the facts and circumstances of the respective case. For instance, if the directors of the sister concern utilize the amount advanced to it by the assessee for their personal benefit, obviously it cannot be said that such money was advanced as a measure of commercial expediency. However, money can be said to be advanced to a sister concern for commercial expediency in many other circumstances (which need not be enumerated here). However, where it is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e us is that the said commission has been paid against the purchase orders booked by the said concern, who were engaged in trading and were also commission agents. The two transactions were claimed to be different and without any connection to each other. The assessee has placed on record the details of commission paid at pages 291 & 292 of the Paper Book. The abovesaid details reflect commission on export sales paid of ₹ 105,63,783/- and domestic commission of ₹ 155,27,136/-. The assessee had further furnished the details of the parties alongwith the rates of commission, sales made to the said parties and the total commission paid to the said parties, which are placed at pages 293 and 294 of the Paper Book. As against the export commission, the assessee had paid a sum of ₹ 695,475/- on sales of ₹ 2.35 crores to M/s Edward Keller @ 2.950%. Further commission of ₹ 40,97,199/- on sale value of ₹ 13.80 crores has been paid to P.I. Mensangan Sakti. The next item of payment is to M/s Malachite Chemicals, which as per the assessee is ₹ 885,880/- on sale value of ₹ 2.98 crores @ ₹ 2.966%. The Assessing Officer has adopted the commissio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es 291 and 292 of the Paper Book in which the commission to M/s Ace Corporation has been shown at ₹ 13,51,250/-. We are in conformity with the submission of the assessee that the rate of commission paid for the transaction cannot be interfered by the Assessing Officer as it is the understanding between the parties at the relevant time which determines the rate of commission to be paid on a particular transaction. In view thereof, we reverse the order of Assessing Officer in restricting the rate of commission to 3% . In any case, the said restriction was made by the Assessing Officer observing that the rate of commission paid by the assessee was 6.6% whereas the assessee claims that it had paid commission @ 4.48%. The other two parties to whom commission had been paid by the assessee and the same has been restricted by the Assessing Officer are M/s Integrated Technology and M/s Aakaar Engineering & Manufacturing Co. The commission to the said parties, as alleged by the Assessing Officer are paid @ 6.90% and 6.76% respectively. In line with our observations herein above, we find no merit in the disallowance made by the Assessing Officer restricting to rate of commission to 3% a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nterest in terms of provisions of section 36(1)(iii) because the same was required to be capitalized. 31. Before us Ld. Counsel for the assessee referred to various documents and pointed out that whatever fresh loans were taken were foreign loans for specific investment which are not part of the capital work in progress, therefore, proportionate disallowance is not justified. 32. On the other hand Ld. DR supported the order of Assessing Officer. 33. After considering the rival submissions principally we find force in the submissions of Ld. Counsel for the assessee that if no particular loan has been taken for the asset which has been shown under the head 'capital work in progress' then disallowance could not have been made. However, each loan and its utilization requires fresh examination, therefore, we remand this issue to the file of Assessing Officer with a direction to ascertain details of various loans and how they were fully utilized and then only decide the issue in accordance with law. 34. Ground No.8 : After hearing both the parties we find that the assessee has shown expenditure of ₹ 1,20,00,000/- and had not deducted TDS on the same. Assessing Officer has inv ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a disallowance of ₹ 9,890,766/- claimed by the assessee company on payment basis under section 43B of the Act on the alleged ground that ex.gratia is not covered under section 43B read with section 36(1)(ii) of the Act and treating the same as being prior period expense. 9.2 The Ld. Assessing Officer has erred in wrongly proposing the above mentioned disallowance of ₹ 9,890,766 ignoring the fact that only ₹ 1,991,953 has been actually claimed by the assessee company under section 43B of the Act while computing the taxable income. 9.3 The Ld. Assessing Officer has erred in proposing a disallowance of ₹ 9,890,766 without giving the assessee company an opportunity of explaining the facts of the case. 9.4 Without prejudice to the above grounds, the Ld. Assessing Officer should have allowed ₹ 2,123,841/- being the amount of ex.gratia payable to the employees during assessment year 2009-00, sue motto disallowed by the assessee company on account of non payment by applying the provisions of section 43B of the Act." 40. The DRP simply rejected these contentions by observing that ex.gratia is not covered by the provisions of section 43B. The Assessing Offi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... claimed as expenditure and, therefore, could not be made taxable now. The DRP simply held that this amount was taxable and accordingly Assessing Officer made addition of ₹ 1,05,26,246. 45. Before us Ld. Counsel for the assessee reiterated the submissions made and emphasized that this amount was never claimed as expenditure when the provision was created. At best, this amount could have been made taxable u/s 41(1) if deduction was allowed earlier. In this regard he referred to page 568 of the paper book which is copy of the Audit Report. 46. On the other hand Ld. DR strongly supported the assessment order. 47. After considering the rival submissions we find that if expenditure was not allowed in the earlier years when provision was created then no addition could be made when such provision is written back. However, no details are available in assessment order. We have also gone through page 568 of the paper book but do not find any detail therein, therefore, in the interest of justice we set aside the order of Assessing Officer and remit the same back to his file to examine whether any claim of expenditure was allowed in the earlier years when this provision was created. I ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ition. 52. Ground No.12: After hearing both the parties we find that during assessment proceedings it was noticed by Assessing Officer that assessee has claimed the expenditure to the tune of ₹ 4,67,30,000/- on account of payment for royalty. It was further noticed that in the earlier years the deduction under the same head was only ₹ 4,15,10,000, therefore, assessee was asked to justify the claim of the royalty payment. In response, it was stated that assessee has entered into a license agreement with DSM Anti Infective BV (in short 'DAI BV'). According to this agreement DAI BV had agreed to give a license to the assessee company for the use of the patent and technology for the produce of a product known as "Purimox®" it was further explained that this agreement was non divisible, non exclusive and non transferable and non sub-licensable. The owner of the patent i.e. DAI BV remains the owner along with improvement made to this patent. The Agreement provides that assessee shall use the technology solely for manufacture of the product of "purimox®' and for not any other purpose. Therefore, such expenses could not be termed as expenditure for acquisition of a cap ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he Technology solely for the manufacture of the Product at the Purimox Plant and the sale of the Product in accordance with the terms of conditions contained herein. Any other use of the Technology by DAI-INDIA shall be deemed a material breach of DAI-INDIA hereunder and shall entitle DAIBV to terminate the Agreement pursuant to Article 8.3 below, in addition to any other remedies available to it by law. Further some other important clauses are as under:- "4. The title to the Patents and the Technology shall remain with DAIBV, Title to any and all improvements of the Patents and Technology shall vest exclusively in DAIBV. 5.1 DAI-INDIA shall pay a lump sum royalty for the License granted hereunder royalty payable in installments as follows:- 2006 : US$ 0 2007 : US$ 1.0 mio (one million) 2008 : US$ 1.0 mio (one million) 2009 : US$ 1.0 mio (one million)" 57. The perusal of the license agreement and particularly the above clauses clearly shows that assessee has obtained the right to use the patent for production of purimox® and this right is non exclusive and cannot be used for other purposes other than the production of the particular product. Further, the ownershi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... unity but assessee could not furnish the proper bills etc. The details of these expenses has been incorporated by Assessing Officer at page 104 of the assessment order. 61. On appeal, it seems that assessee filed additional evidence before the DRP which has not been considered and DRP confirmed the action of the Assessing Officer, therefore, the Assessing Officer disallowed a sum of ₹ 65,13,383/-. 62. Before us Ld. Counsel for the assessee submitted that this issue cropped up in the assessment at the fag end of the proceedings and assessee could not file the requisite details because of paucity of time. Majority of the bills amounting to ₹ 61,14,688/- were filed before the DRP by way of additional evidence but the same was not considered. As far as a sum of ₹ 14,82,137/- is concerned, the same has been separately disallowed as training expenses and this would be a case of double disallowance. 63. On the other hand Ld. DR strongly supported the assessment order. 64. After considering the rival submissions we agree with the contention of the Ld. Counsel. It seems that DRP has not bothered to consider the additional evidence filed before it without assigning any ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rties we find that during assessment proceedings the Assessing Officer noticed that assessee has incurred expenses of ₹ 14,82,137/- on training of its employee at Netherlands by the holding company. On enquiry it was explained that a special course meant to enhances the professional skill of the employee of the assessee was undertaken at Netherlands. According to Assessing Officer, this would amount to rendering of professional services by holding company and, therefore, TDS was deductible u/s 195 of the Act. The assessee was asked to explain why this amount should not be disallowed because of non deduction of TDS. In response, it was mainly stated that expenditure was incurred on training of the employee and assessee has simply reimbursed the holding company expenses incurred on such training. Further, the holding company did not have any presence in India and even if it amounts to rendering of services they were rendered abroad and are not taxable in India and there was no requirement for deducing the tax. Reliance was also placed on various case laws. The Assessing Officer was not satisfied with this explanation and proposed to made addition in the draft assessment order. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed the issue of charging of interest u/s 234B and 2234C which is consequential in nature and therefore, we direct the Assessing Officer to charge the interest as per the provisions of law. 75. Ground No.18: Through this ground the issue of initiation of penalty proceedings u/s 271(1)(c) has been raised. 76. Both the parties agreed that this is pre-mature and does not require separate adjudication. Therefore, we hold that this is premature issue and does not require any adjudication. 77. Ground No.20: After hearing both the parties we find that a sum of ₹ 5 crores was added by the Assessing Officer to the book profits because the same was in the nature of provision for diminution of investment. In fact there is no discussion in the assessment order and this amount has been added as "provision of diminution' of investment being in cash flow and is shown as provision at para 21 of the order. 78. Before us, Ld. Counsel for the assessee submitted that it is a case of total loss of investment and in this regard he referred to page 82 of the assessment order where a discussion has been made while disallowing the write off of the investment. It is a case of total loss of inves ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tentions of Ld. Counsel for the assessee. The Special Bench of the Tribunal in the cases of JCIT v Usha Martin Industries Ltd, Balmer Lawrie and Co. Ltd vs ACIT & ACIT v Balmer Lawrie and Co. Ltd (supra) has clearly held that provision for Wealth Tax is not enumerated in the provision to section 115JB, therefore, the same cannot be added to the book profits. This position was also confirmed by the Hon'ble Bombay High Court in the case of CIT v Echjay Forgings Pvt. Ltd (supra). In our opinion, the same logic would apply in case of FBT. Therefore, we set aside the order of Assessing Officer and direct him to reduce the provision for wealth tax and provision for FBT from the book profit. 84. Ground No.22: After hearing both the parties we find that Assessing Officer has added a sum of ₹ 21,15,375/- to the book profits which was disallowed u/s 14A. 85. Before us Ld. Counsel for the assessee submitted that this ground has become consequential lo ground No.6 which has already been contended and shall depend upon the outcome of the decision of that ground. 86. On the other hand Ld. DR supported the order of Assessing Officer 87. After considering the rival submissions we not ..... X X X X Extracts X X X X X X X X Extracts X X X X
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