2015 (3) TMI 222 - AT - Income Tax

Diallowance u/s 40(a)(i) - disallowance of production expenses - Held that - expenditures were incurred on production of films. The genuineness of expenditure was not doubted. The CIT(A) also observed that AO has not cited a single instance of non-variable expenditure where self made vouchers existed. Without giving any cogent reason he has restricted the disallowance to 50% of what the AO has made. Since the expenditure was incurred for the purpose of business, considering the similar issue decided by the Tribunal in assessee's own case in earlier and keeping in view the totality of the facts and circumstances of the case, we direct the AO to restrict the disallowance to the extent of 5% of only those expenditure which have been incurred in cash as held by ITAT in assessee's own case in 2013 (11) TMI 309 - ITAT MUMBAI . Payment was for shoot carried on abroad in course of Fast Time's Business and Fast Time has no Permanent Establishment (PE) in India, hence, its profit is taxable only in Thailand as per Article 7 of DTAA between India and Thailand. There is no dispute to the fact that the shoots were held abroad and that Fast Time Ltd. did not have any PE in India. Alternatively, the payments made for shooting, hence, the same was in respect of professional services rendered in abroad. Hence, Article 14 of DTAA will be applicable. Thus, considering the Article 14 and 7 of DTAA, we do not find any merit in the disallowance so made by the CIT(A). Payments were made to individual models for a shoot carried out in Nepal. The said payments were not chargeable to tax in India as per the DTAA between India and UK and there is no tax at source. Thus, the provisions of Section 40(a)(i) were not applicable. Since these payments for professional services of artists, therefore, covered by the Article 15 of the DTAA between India and UK. The CIT(A) has wrongly applied Article 23, which can be applied only for taxing an income i.e. not dealt with the other articles specifically. Similar proposition has been laid down by the ITAT Mumbai Bench in the case of Channel Guide India (2012 (9) TMI 95 - ITAT MUMBAI). We found that in respect of similar payments made to models from Germany, the CIT(A) has accepted the argument that no TDS was to be done on those payments. Accordingly, we do not find any merit in the disallowance made by the CIT(A) under Section 40(a)(i) - Decided partly in favour of assessee.

Summary

Issues Involved:
1. Disallowance of production expenses on an estimated ad hoc basis.
2. Disallowance of payments made to Fast Time Ltd., Bangkok under Section 40a(i).
3. Disallowance of payments made to individual models from the United Kingdom under Section 40a(i).
4. Penalty order passed under Section 271(1)(c) of the Act.

Issue 1: Disallowance of Production Expenses
The appeal was filed against the order of the CIT(A) confirming a disallowance of 5% of production expenses on an estimated ad hoc basis. The AO had initially disallowed 10% of production expenses and 20% of administrative expenses. The CIT(A) partly confirmed the action of the AO and reduced the disallowance to 5% of production expenses. The Tribunal found that the genuineness of the expenditure was not doubted, and the disallowance was reduced to 5% only for those expenses incurred in cash, following a similar decision in the assessee's own case in an earlier year.

Issue 2: Disallowance of Payments to Fast Time Ltd., Bangkok
The CIT(A) made a disallowance under Section 40a(i) for payments made to Fast Time Ltd., Bangkok. The contention was that the payment was not chargeable to tax in India as per the Double Taxation Avoidance Agreement (DTAA) between India and Thailand. The Tribunal found that Fast Time had no Permanent Establishment in India, and its profit was taxable only in Thailand under Article 7 of the DTAA. Therefore, the disallowance made by the CIT(A) was not upheld.

Issue 3: Disallowance of Payments to Individual Models from the UK
The CIT(A) disallowed payments made to individual models from the United Kingdom under Section 40(a)(i). However, the Tribunal found that the payments were not chargeable to tax in India as per the DTAA between India and the UK. The payments were for professional services and covered by Article 15 of the DTAA. The CIT(A) wrongly applied Article 23, which was not applicable in this case. The Tribunal did not find any merit in the disallowance made by the CIT(A) under Section 40(a)(i).

Issue 4: Penalty Order under Section 271(1)(c)
The penalty order passed under Section 271(1)(c) of the Act was related to the quantum addition upheld by the CIT(A). Since the Tribunal had already decided the quantum appeal in favor of the assessee, the AO was directed to rework the amount of penalty after giving effect to the order passed in the quantum appeal.

In conclusion, the appeals filed by the assessee were allowed in part, with the Tribunal providing detailed analysis and reasoning for each issue involved in the judgment, ultimately providing relief to the assessee on various grounds.