TMI Blog2012 (4) TMI 190X X X X Extracts X X X X X X X X Extracts X X X X ..... ould be deemed to have accrued and arisen in India in view of the provisions of sec. 9(1)(v)(b) of the Act. Taxability in view of DTAA between India and the respective countries – Held that:- Neither the AO nor the CIT(A) had discussed the issue in the light of the relevant DTAA. Therefore, we remand the issue to the AO for fresh consideration. Applicability of Section 40(a)(ia) – In present case, payment is made to to non-residents and in the event of doubt the Assessee ought to have approached the AO for appropriate certificate u/s.195. He cannot plead bonafide belief to stand out of the said provisions. Addition of unutilized Modvat credit to the value of Closing stock – Held that:- Addition made by the AO as modified by the CIT(A) i.e. to allow it under u/s 43B if it is paid before filing of returns, has to be sustained but the AO should be directed to allow corresponding adjustment to the opening stock in respect of unutilized Modvat credit. - Decided partly in favor of assessee. Prior period expenses – mercantile system of accounting – AY 2001-02 - Held that:- No infirmity is found in the order of CIT(A) allowing the claim of the assessee if these expenses are related t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cturing of cables of different types. The assessee purchased raw material from various parties who were all non-residents. As per the terms of supply by the non-residents, the assessee had furnished irrevocable letter of credit payable 180 days from the date of bill of lading. For the period of 180 days for which the assessee availed credit, the assessee had to pay finance charges or what is known in business parlance as "Usance Interest". The assessee had during the previous year paid the following finance charges to the various suppliers of raw material : Sr.No. Party from whom goods are purchased Finance charges Country 1 Hanwha Corporation 1002830 South Korea 2 Outokompu Sweden 178649 Swedem 3 Shiraishi 62673 Japan 4 Universal Cable Malaysia 2292 Malaysia 5 Ashley Polymers 113039 USA 6 Taihan Electric Wire 122908 Taiwan 7 Elson IT Co. 231724 Taiwan Provisions 117320 USA Total 1831435 The ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... suppliers of raw material were tax residents, the amount in question is not chargeable to tax in India in the hands of the suppliers of raw materials and, therefore, there no obligation on the part of the assessee to deduct tax at source while making payment. The assessee in this regard relied on the decision of the Hon'ble Andhra Pradesh High Court in the case of Visakhapatnam Port Trust 144 ITR 146 (AP). 5. The CIT(A), however, did not accept the plea of the assessee and he held as follows : "I have considered the submissions as well as perused the decision and the Double Taxation Avoidance Agreement. The AO is justified in disallowing the interest/finance charges paid to the foreign suppliers as the Assessee has failed to deduct tax u/s.195. The Assessee has made payment to the foreign suppliers for delayed payment for and by way of interest and therefore, in my considered opinion, it is chargeable to tax in India. Accordint to sec. 195, the Assessee should have deducted tax at source before making interest payment to the foreign supplier. Since the Assessee has not deducted tax as per the provisions of sec. 195, the AO is justified in making disallowance of Rs. 18,31,182 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... AAR in the case of ABC International Inc. (2011) 55 DTR 393. Further, reliance was placed also placed on the following decisions : 1. Islamic Investment Co. v. Union of India Anr. 265 ITR 254 (Bom). 2. Bombay Steam Navigation Co. [1953] Pvt. Ltd. v. CIT 56 ITR 52 (SC). 3. Vijay Ship Breaking Corporation v. DCIT 86 ITD 497 (Rajkot). All the aforesaid decisions were referred to in the context of when a payment can be said to be a payment for a debt incurred or amount borrowed. 8. The ld. DR submitted that the question whether payment made towards usance interest could be treated as part of the purchase price or has to be treated as interest was considered by the Hon'ble Gujarat High Court in the case of CIT v. Vijay Ship Breaking Corporation Ors. and the Hon'ble Gujarat High Court was pleased to hold that usance interest paid in connection with the purchase of ships was not part of the purchase price but was interest and the assessee making payment to the nonresident of usance interest was obliged to deduct tax at source on such payment. The ld. DR further brought to our notice that as against the decision of the Hon'ble Gujarat High Court, the a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ? If the answer to this question is in the affirmative, then the same would be deemed to have accrued and arisen in India in view of the provisions of sec. 9(1)(v)(b) of the Act. 2. If the sum in question is treated as interest under the Act, whether the same is liable to tax in India in view of the DTAA between India and the countries of which the persons who supplied raw material to the assessee were tax residents? 3. Whether the disallowance u/s.40(a)(i) cannot be made in view of the decision of the Hon'ble Bombay High Court in the case of Kotak Mahindra Securities ( supra )? 11. We will take up for consideration the first issue as to whether the payment in question can be considered as Interest within the meaning of Sec.2(28A) of the Act. Sec.2(28A) of the Act was introduced by the Finance Act, 1976, w.e.f 1-4-1976 and it reads as under: "(28A) "Interest" means interest payable in any manner in respect of any moneys borrowed or debt incurred (including a deposit, claim or other similar right or obligation) and includes any service fee or other charge in respect of the moneys borrowed or debt incurred or in respect of any credit facility which has not been utilis ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and the price of the ship was considered to be separate as certified in the invoice, which reflected its price agreed in the memorandum of agreement, and the buyer in lieu of the credit facility of 180 days from the date of the notice of readiness was required to pay interest at the rate stipulated in the memorandum of agreement and worked out thereunder for which a separate invoice was prepared. There was no nexus between the interest amount and fixation of the price of the ship which was on tonnage basis. The nexus of interest was only with the period from which the purchase price of the ship became due on notice of readiness or delivery. The stipulation in the memorandum of agreement showed that the purchase price became payable on the delivery being effected as per the notice of readiness when the risk passed to the buyer. These were not cases where the total amount payable under the memorandum of agreement included a mere estimate of interest loss made as an integral part of the purchase price on incremental basis. These were cases in which there existed conscious and deliberate stipulations of purchase price of the ship and the interest amount specifically calculated at the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the controversy which arose for determination was whether the assessee was bound to deduct TDS under section 195(1) of the 1961 Act in respect of usance interest paid for purchase of the vessel for ship breaking ? According to the Department, TDS was deductible under section 195(1) whereas, according to the assessee, such interest partook of the character of the purchase price and, therefore, TDS was not deductible. Therefore, the key question which arose for determination was whether the assessee was in default for not deducting TDS under section 195(1) of the 1961 Act. It may be mentioned that we are not required to examine this question in the light of the impugned judgment because after the impugned judgment which was delivered on March 20, 2003, the Income-tax Act was amended on September 18, 2003, with effect from April 1, 1983. By reason of the said amendment, Explanation 2 was added to section 10(15)(iv)(c), which reads as under : " Explanation 2.-For the removal of doubts, it is hereby declared that the usance interest payable outside India by an undertaking engaged in the business of ship-breaking in respect of purchase of a ship from outside India shall be deemed ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ope for contending that the outstanding price was not a "debt incurred" within the meaning of section 2(28A) of the Act. 17. Having reached the above conclusion, we will now deal with the various cases cited by the parties before us, on the issue. The learned counsel for the Assessee placed reliance on the decision of the Hon'ble A.P.High Court in the case of Visakhapatnam Port Trust ( supra ). The assessee in that case viz., Visakhapatnam Port Trust, exported a large amount of iron ore. In order to speed up export operations it decided to install a plant known as "bucket wheel reclaimer". A German company tendered the contract for the supply of the equipment. An agreement was entered into between the German company and the Port Trust whereby the German company undertook to supply the equipment and to delegate an engineer to supervise its installation. Under cl.12(a) of the contract, the purchase price for the equipment was payable in German currency in Germany. Part of it was payable on conclusion of the contract and the balance was payable in twenty semiannual installments. For the credit remaining after payment of each of the installments interest was to be paid by the Por ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on foreign bills under section 40(a)(i) as no tax was deducted at source. The Hon'ble High Court held that the interest pertained to foreign bills and cannot be considered as interest paid on loan. The Hon'ble Court found that the conditions for supply of goods by the nonresident to the assessee were that the payment of purchase price in installments was to be made with the condition that the assessee will compensate the supplier by means of interest on the unpaid installments. The unpaid installment was not the same as loan and therefore, interest paid could not be treated as paid on the loan and hence, deduction of tax at source was not attracted. The Hon'ble Court therefore held that it was not the case of the Revenue that interest was paid with reference to loan so that the requirement of tax deduction at source would have been attracted, no disallowance under section 40(a)(i) can be made. Thus it was a case of purchase where the purchase price was to be paid in installments with an inbuilt clause for payment of interest. The Hon'ble Court held that the payment was part of purchase price and did not have any occasion to examine the question as to whether the payment of interest ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ebt. The next decision relied upon by the learned counsel for the Assessee is the case of Oriental Insurance Co.Ltd. ( supra ), where the question arose as to when the insurance company makes payment of decretal amount comprising of interest on compensation awarded by Motor Accidents claims Tribunal, it was akin to payment of interest by the insurance company necessitating tax deduction at source u/s.194A of the Act. The ITAT Delhi held that the amount paid by the insurance company was decretal amount awarded by the Tribunal and not interest. This decision is therefore rendered on the basis that as far as the insurance company is concerned the payment is of a decretal amount and not interest. The same is therefore not relevant or applicable to the facts of the present case. For the very same reason given above, the decision of the Hon'ble Bombay High Court in the case of Islamic Investment Co. ( supra ) is not relevant to the present case as the issue involved in the said case was also interest on judgment debt can be regarded as interest on which tax had to be deducted at source when making payment. 21. The next decisions relied upon by the learned counsel for the Assessee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the Income Tax Act, 1922 equivalent to Sec.36(1)(iii) of the Act. The Hon'ble Court held that unpaid purchase price cannot be said to be monies borrowed for the purpose of business and therefore deduction claimed cannot be allowed u/s.10(2)(iii) of the Income Tax Act, 1922. The decision was rendered on totally different facts and the Hon'ble Court never had any occasion to examine whether provisions of Sec. 2(28A) of the Act, which were never part of the Act till 1-4-1976. 24. The learned DR placed reliance on the decision of the Hon'ble Bombay High Court in the case of British Bank of Middle East ( supra ) where it was held that the definition of interest u/s.2(28A) of the Act is a word of wide import. It means "interest payable in any manner" in respect of moneys borrowed or debt incurred and includes even service fees or other charges in respect of the moneys borrowed. The other decisions relied upon by the learned DR are not being referred to in greater detail for the reason that on the facts of the present case, we have come to the conclusion that the usance interest is in the nature of Interest within the meaning of Sec.2(28A) of the Act. 25. We therefore hold th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lue of the closing stock and the closing stock should be valued accordingly. The AO accordingly added the unutilized Modvat credit to the total income of the assessee. On appeal by the assessee, the CIT(A) held as follows : "I have considered the submissions as well as the amended provisions of sec. 145A. The action of the AO in making addition of Rs. 2,51,713/- being unutilized modvat credit to the income is justified. However, the Assessing Officer may consider the alternate submission of the Assessee that if the modvat credit has been subsequently utilized in next year upto-the due date of filing of return, the same may be allowed u/s.43B after verification. Subject to the above, this ground is partly allowed." 29. Aggrieved by the order of the CIT(A), the Assessee has raised Gr.No.IV and V before the Tribunal. We have heard the rival submissions. We are of the view that the addition made by the AO as modified by the CIT(A) has to be sustained but the AO should be directed to allow corresponding adjustment to the opening stock in respect of unutilized Modvat credit as laid down by the Hon'ble Bombay High Court in the case of CIT v. Mahalaxmi Glass Works P. Ltd. [318 IT ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... his Tribunal had upheld similar direction given by the CIT(A) in assessment year 1999-2000 and 2003-04. In ITA No.6407/Mum/2003 for assessment year 1999-2000, this Tribunal in assessee's own case held as follows : "2.2.2 We have heard both the parties perused the records and considered the matter carefully. The Learned AR for the assessee submitted that in case the assessee was allowed relief as granted by the CIT(A) amounting to Rs. 37,53,810/-, the assessee will not press the addition of Rs. 44,19,279/-. The Learned DR on the other hand placed reliance on the order of Assessing Officer. We have considered the matter carefully. There is no dispute that the assessee is following mercantile system of accounting. Therefore expenditure incurred in the earlier year cannot be allowed as deduction in this year. The order of CIT(A) confirming the addition of Rs. 44,19,270/- is therefore upheld. As regards the relief granted by the CIT(A) amounting to Rs. 37,53,810/- we find that the Assessing Officer in A.Y. 2000-01 has himself given a finding that the expenses to the above extent related to this assessment year i.e. 1999-2000. In view of the mercantile system of accounting being follow ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... wever, it is seen that the stand taken by the assessee in claiming the write off of leasehold premium as a deductible revenue expenditure was based on the decision of the Hon'ble Karnataka High Court in the case of HMT Ltd. (203 ITR 820) wherein a view was taken that the lease premium paid in lump-sum was equivalent to rent paid in advance and should be treated as revenue expenditure. It is also not in dispute before us that the issue as to whether the write off of leasehold premium is revenue expenditure or capital expenditure was subject matter of debate and was ultimately settled by a decision of the Special Bench of ITAT in the case of Mukand Ltd. [109 TTJ 172 (Bom)] wherein it was held that the same was capital expenditure as it gives enduring benefit to an assessee. It is not in dispute before us that when the assessee filed the return for assessment year 1999-2000 the issue was debatable and therefore no penalty could be imposed in respect of this addition. Another addition in respect of which penalty was imposed on the assessee by the AO was disallowance of Rs. 51,000/- on account of provision for gratuity. In respect of this addition, the assessee accepted the addition mad ..... 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