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TMI Blog2019 (5) TMI 995X X X X Extracts X X X X X X X X Extracts X X X X ..... ences filed and on giving proper opportunity to the assessee to make any other submission on this issue. Disallowance of interest paid u/s 36(1)(iii) - money advanced to wholly owned subsidiaries of the assessee company - commercial expediency - HELD THAT:- As in SA BUILDERS LTD. VERSUS COMMISSIONER OF INCOME-TAX [ 2006 (12) TMI 82 - SUPREME COURT] endorsed the view that since a holding company has a deep interest in its subsidiary and if the holding company advances borrowed money to a subsidiary and the same is used by the subsidiary for some business purposes, the assessee is entitled to deduction of interest on the borrowed funds. In the present case, there is no dispute about the fact that the amounts have been advanced to the wholly owned subsidiaries of the assessee company and there is no fact brought on record by any of the lower authorities that the amounts have been used by these subsidiary companies for any purpose other than their business purposes. In view of this, we are inclined to hold that the amounts given to subsidiary companies were on account of commercial expediency. Therefore, no disallowance invoking the provisions of section 36(1)(iii) of the Act can be ma ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sessee and cross appeal has been filed by the Revenue against the order of the Ld. CIT(A)-2, Chandigarh dt. 24/01/2018. 2. Assessee has raised the following amended grounds of appeal: 1. That the Ld. Commissioner of Income Tax (Appeals) has erred in law as well as on facts in upholding the addition of ₹ 12,03,535/-- made by the Assessing Officer applying the provisions of Section 37(1) of the Act treating the rental payments for office space and software made to non-resident to be not for the purpose of business which provisions are not attracted and as such the addition upheld is arbitrary and unjustified. 2. That the order of the Ld. Commissioner of Income Tax (Appeals) is erroneous, arbitrary, opposed to law and facts of the case and is, thus, untenable. 2.1 The only issue raised by the assessee pertains to the disallowance of ₹ 12,03,535/- made by the assessee towards the payment of the rent which has been treated to be for non business purpose by the Assessing Officer owing to the absence of any agreements filed before him. 2.2 Before us, the assessee has filed additional evidences under Rule 29 consisting of rent agreements invoices issued by the company. W ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... wn borrowings of ₹ 11,05,97,000/- in the balance sheet. The assessee has advanced loans amounting to ₹ 1,05,89,000/- to related parties and investment amounting to ₹ 1,59,90,000/- in IDS, America. The assessee was specifically asked to provide the business purpose of the investments made and why the proportionate interest u/s 36(1)(iii) of the Act should not be disallowed. However no business purpose and proof of the same was provided by the assessee. No commercial expediency could be established by the assessee for making these investments abroad. The assessee could not fulfill the conditions laid down u/s 36(1)(iii) of the Act and merely stated that investments made in its subsidiaries were used by them for some business purposes. As a result, the assessing officer disallowed the interest paid u/s 36 (1)(iii) of the Act and added ₹ 17,12,967/- to the returned income of the assessee. 3.3 Before the Ld. CIT(A), the assessee filed written submission, the extract of ITAT order in the case of assessee for A.Y 2009-10 on the said matter. The relevant portion of the submission is reproduced as under:- Aggrieved by this, the assessee has come up in appeal befor ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e said that the amount given to the wholly owned subsidiary companies are for commercial expediency. In this view, we would like to refer certain observations made by the Hon'ble Supreme Court in the case of S.A. Builders Limited Vs. CIT (2007) 288 ITR 1 (SC). In this case, while interpreting the meaning of the word 'commercial expediency', the Hon'ble Apex Court held as under: "32. 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 obvious that a holding company has a deep interest in its subsidiary, and hence if the holding company advances borrowed money to a subsidiary and the sam ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and selling expenses, consulting services, software usage expenses to various companies in abroad which are its associated enterprises. AO noted that the assessee has made payments amounting to ₹ 4,84,84,358/- to various companies outside India without deducting TDS.As the assessee company has failed to deduct TDS on the said payments, as a result, the assessing officer disallowed the expenditure of ₹ 4,84,84,358/- u/s 40(a)(ia) on account of commission, legal and professional charges, marketing and selling expenses and outstanding and business development expenses. 4.2 Before the Ld. CIT(A), the assessee filed written submission, the extract of ITAT order in the case of assessee for A.Y 2009-10 on the said matter. The relevant portion of the submission is reproduced as under:- "The basic issue is whether the tax is to be deducted while making these impugned payments. The Assessing Officer has invoked the provisions of section 40(a)(1) of the Act in this regard. The provisions of section 40(a)(1) of the Act to the extent relevant in the present case reads as under: " 40(a)(1) Notwithstanding anything to the contrary in [sections 30 to 38], the following ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he time of payment thereof in cash or by the issue of a cheque or draft or by any other mode, whichever is earlier, deduct income- tax thereon at the rates in force: " 27. The most important terms in this section are "chargeable under the provisions of this Act". From this, it is very clear that only if an amount is chargeable under the Income Tax Act, the liability to deduct tax on the payment of such amount arises. Charge of income tax is provided under section 4 of the Act, while scope of total income is provided in section 5 of the Act. The provisions of section 5 of the Act relating to scope of total income in respect of a non-resident are provided in sub- section (2) of said section, which read as under: "5(2) Subject to the provisions of this Act, the total income of any previous year of a person who is a non- resident includes all income from whatever source derived which- (a) is received or is deemed to be received in India in such year by or on behalf of such person; or (b) accrues or arises or is deemed to accrue or arise to him in India during such year. Explanation 1-lncome accruing or arising outside India shall not be deemed to be receiv ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ns carried out in India; (b) in the case of a non-resident, no income shall be deemed to accrue or arise in India to him through or from operations which are confined to the purchase of goods in India for the purpose of export: [ * * * * ] [(c) in the case of a non-resident, being a person engaged in the business of running a news agency or of publishing newspapers, magazines or journals, no income shall be deemed to accrue or arise in India to him through or from activities which are confined to the collection of news and views in India for transmission out of India;] [(d) in the case of a non-resident, being- (1) an individual who is not a citizen of India; or (2) a firm which does not have any partner who is a citizen of India or who is resident in India; or (3) a company which does not have any shareholder who is a citizen of India or who is resident in India, no income shall be deemed to accrue or arise in India to such individual, firm or company through or from operations which are confined to the shooting of any cinematograph film in India;] [Explanation 2 : For the removal of doubts, it is hereby declared that "business connection" shall include any busin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assessee The payer becomes an assessee in default only when he fails to fulfill statutory obligation under section 195(1) of the Act. If the payment does not have the element of the income, the payer cannot be made liable. The Hon'ble Supreme Court thus rejected the contention of the Department by holding that if the sum paid is not chargeable to tax, then no tax is required to be deducted 31. From the reading of the A.O. 's order, we do not understand his case. Nowhere in the entire order he has given any finding as to whether the nature of income in the hands of the non resident is that of 'income accrued in India' or 'income deemed to have accrued' in India. He just kept on harping the fact that the ultimate beneficiary of the services is the assessee in India. Even the CIT(A) while adjudicating the issue could not give any appropriate finding in this regard. The relevant portion of the CIT(A)'s findings are recorded at page 12 para 10.3, in later part of this paragraph, he states as under: "The payment are made by the appellant company and these are in the nature of marketing support services and selling expenditure for getting more and more ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... agent in India f o r systematic and regular purchase of raw material or other commodities, or for sale of non-resident goods or for other business purposes. iii) Erecting a factory in India where raw produce purchased locally is worked into a firm suitable for sending abroad. iv) Forming local company to sale products of non-resident parent company. v) Having financial association between the resident and non-resident company These activities have been culled out from the judgement by the CBDT itself in its circular No. 23[F.NO. 7A/38/69-IT(A-11)], dated 23.07.1069 33. In the present case, no finding has been brought on record by any of the lower authorities that non- resident entities have any such connection with India as illustrated above. All along the assessee has been maintaining that the non-resident entities to whom it has made the payments do not have any business connection with India. The Assessing Officer as well as the learned CIT (Appeals) had nowhere in their orders recorded any such finding though we must add that they have not even intended to make any investigation in this regard. However, we also observe that this stance has been consistently taken by t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the domestic law itself, there is no need to look into the provisions of the DTAA, even if one exists, to find out if there is any provision under which the nonresident can be brought to tax. In other words, the treaty cannot be used as a taxing statute. The principle is that where the non-resident is taxable under the domestic law but there is a provision in the treaty to exempt the transaction or reduce the rigor of taxation to the benefit of the non-resident, the provisions of the treaty override the provisions of the domestic law. These fundamental principles are well-settled by the judgments of the Supreme Court in P.V.A.L. KulandaganChettiar (2008) 267 ITR 654 (SC) and Azadi Bachao Andalon (2003) 263 ITR 706 (SC). 38. On going through the relevant article provided in the DTAA, we observe that invariably in all the DTAAs to which we are concerned, the income is taxable in India only if that foreign entity carries on business in India through a permanent establishment situated in India. We again observe that no such finding with regard to existence of any permanent establishment in India has been brought on record by any of the lower authorities or even by the learned D.R. a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ess of any such payment made by the assessee. Therefore, we do not find this allegation of the Assessing Officer backed by any legal provision. Incidentally, we would like to mention here that even if the Assessing Officer wants to assess the reasonableness of any payment made to any sister concern of the assessee, there is no doubt to the fact that the assessee has done detailed transfer pricing study in the relevant assessment year, which was subject to the reference under section 92CA(1) of the Act to the Transfer Pricing Officer and the Transfer Pricing Officer has suggested no adjustment with respect to the Arm's Length Price on the transaction between the assessee and its associate enterprises. 40. Now the question arises whether the payment made by the assessee can be held to be in the nature of 'fee for technical services'. There is no dispute with respect to the fact that the issue of 'fees technical services' was never raised by the Assessing Officer. In his order running into 22 pages he has nowhere mentioned and even nowhere showed his suspicion as regards the payment being in the nature of 'fees for technical services' that is the reason ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on 9(1)(vii) of the Act. However, even if the argument of the learned D R . is accepted that the learned CIT (Appeals) has given a finding that these payments are 'fees for technical services', nowhere from the order of the learned CIT (Appeals) we see any effort being made by him to come to such a conclusion. It is not to be forgotten that the learned CIT (Appeals) assumes coterminus powers with that the Assessing Officer In fact, he enjoys the powers of enhancement also. Therefore, in case he had any apprehension as to the real nature of the payment, who stopped him to carry out further investigations in this regard? In the absence of any finding given by the Assessing Officer or the CIT (Appeals) in this regard, we are not inclined to examine the case of the assessee with a view whether the payments are in the nature of 'fees for technical services' or not. It is not a case where certain queries were put either by the Assessing Officer or by the learned CIT (Appeals) to the assessee with respect to the payments being 'fees for technical services', which the assessee failed to reply. It is also not a case where the assessee had not co-operated with the l ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e are that assessee company is doing business of export of information technology, technology services and software development, the assessee claim additional deprecation on computers which was disallowed by the A.O on the ground that the definition of block of assets is a group of assets having the same percentage of prescribed depreciation and A.O noted that the assessee have shown plant and machinery and computers and software under to separate blocks in which machinery and plants are untitled to deprecation at 15% and computers and computer software at 60%. A.O held that additional depreciation is available to plant and machinery and not to computer and software as the same h a v e n o t b e e n used in the production/manufacture of an article/things. A.O further held that computers and merely used in processing of date or preparing software which is not manufacture into a new article/things and therefore additional depreciation of ₹ 14,91,858/- was disallowed. 5.2 The extract of CIT(A)-2, Chandigarh's order in the case of assessee for A.Y 2009- 10 on the said matter. The relevant portion of the submission is reproduced as under: "The appellant made submission ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... form and substance. We are, therefore, of the view that the computer division is an industrial undertaking which satisfies the conditions mentioned in section 32A(2)(b)(iii) of the Income Tax Act, 1961. (B) Therefore appellant submitted that the computers and other I. T. equipments are the plant and the machinery of the appellant company and the same are used in the product of the manufacture. The article / things It was also submitted that in the case of the appellant company the Worthy CIT(A), Patiala in appeal No. ROT/CHD/119/IT/CIT(A)/PTA/08-09 for A. Y 2003-04 has held the activities of the appellant as manufacturing or producing an article or things. The order of the CIT(A) was confirmed by the Hon'ble IAT, Chd Bench, Chandigarh. " 5.3 Ld. CIT(A) has held that the order of the AO cannot be sustained on this ground relying on the judgment of Hon'ble Gujarat High Court in the case of CIT vs. Statronics & Enterprises Pvt. Ltd. (2007) 288 ITR 455 . 5.4 Before us, the Ld. AR heavily relied on the order of the Ld. CIT(A) and on the judgment of the Hon'ble High Court quoted above while the Ld. DR argued that the said judgment quoted by the Ld. AR is not applicable ..... X X X X Extracts X X X X X X X X Extracts X X X X
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