2018 (3) TMI 1195 - AT - Income Tax

Liability to deduct tax u/s 195 - disallowance of drawing expenses in respect of purchase of drawings from ACTA International PTE Ltd Singapore - Held that - The purchase of drawings it could not be retrieved. Having regard to these peculiar facts we are of the considered view that the payment made by the assessee for purchasing load bearing equipment for conducting test regarding load bearing capacity of the piles was constructing was in the nature of revenue expenditure and therefore formed part of the land development cost. Disallowance made u/s 40(a)(ia) - payment of tax on tax on TDS was made but due to inadvertent error as wrong assessment year was quoted on challans - Held that - As the assessee had duly deducted and paid the taxes on expenses of Rs. 8, 15, 20, 814/- and therefore no disallowance was warranted under Section 40(a)(ia) of the Act as there was no violation as contemplated in the said provision. The action of the Ld. CIT(A) deleting the disallowance is therefore upheld. Disallowance of expenses under the advertisement - Held that - The assessee had provided impeachable evidence before the Ld. AO to substantiate the incurrence of the advertisement expenses. We agree with the finding of the Ld. CIT(A) that the fact that the payee had denied having any transaction with the assessee did raise doubt on the genuineness of the transaction but that statement alone could not be sufficient to treat the expenses as bogus particularly in the light of the specific evidence substantiating the incurrence of expenditure furnished by the assessee. In such case the duty was cast on the Ld. AO to make further enquiries in the matter which we find was not carried out by the Ld. AO either in the course of assessment or in the remand proceedings. Thus expenditure allowed.

Summary

Issues Involved:
1. Disallowance of Rs. 1,11,19,501/- for purchase of drawings from ACTA International PTE Ltd, Singapore.
2. Disallowance of Rs. 63,07,123/- for purchase of drawings from PD, Dubai.
3. Disallowance of Rs. 45,000/- out of advertisement and publicity expenses.
4. Disallowance of Rs. 16,72,607/- out of payment of Director’s remuneration.
5. Disallowance of Rs. 2,00,000/- on account of advertisement expenses.
6. Disallowance of Rs. 61,46,712/- on account of load testing machine.
7. Disallowance of Rs. 8,15,20,814/- due to incorrect assessment year mentioned on TDS challans.
8. Disallowance of Rs. 3,00,000/- for advertisement expenses paid to M/s Disha Production & Media Pvt Ltd.

Issue-wise Detailed Analysis:

1. Disallowance of Rs. 1,11,19,501/- for purchase of drawings from ACTA International PTE Ltd, Singapore:
The assessee contended that the payment for drawings did not qualify as "fees for technical services" under Article 12 of the DTAA between India and Singapore. The CIT(A) had held that the payment was for technical services and thus required TDS under Section 195. However, the Tribunal found that the payment was for project-specific designs without transfer of technology, thus not falling under "fees for technical services" as per Article 12(4) of the DTAA. Consequently, the disallowance of Rs. 1,11,19,501/- was deleted.

2. Disallowance of Rs. 63,07,123/- for purchase of drawings from PD, Dubai:
The CIT(A) deleted the disallowance, stating that the payment was not taxable in India under Article 14 of the DTAA between India and UAE. The Tribunal upheld this view, noting that the income from professional services by a resident of UAE was taxable only in UAE, thus no TDS was required in India. The disallowance of Rs. 63,07,123/- was upheld as deleted.

3. Disallowance of Rs. 45,000/- out of advertisement and publicity expenses:
The assessee did not press this ground during the hearing. Consequently, this ground was dismissed as not pressed.

4. Disallowance of Rs. 16,72,607/- out of payment of Director’s remuneration:
The Tribunal found that the Managing Director's remuneration was consistently allowed in prior years and that the Ministry of Corporate Affairs had not expressly rejected the terms of appointment. The Tribunal relied on the Calcutta High Court's decision in CIT Vs Tinplate India Ltd, allowing the remuneration paid to the Managing Director. The disallowance of Rs. 16,72,607/- was deleted.

5. Disallowance of Rs. 2,00,000/- on account of advertisement expenses:
The Tribunal noted that the expenses were incurred for sponsoring a program aimed at marketing the residential project to non-resident Indians. The Tribunal found that the assessee had sufficiently demonstrated the business purpose of the expenses. The disallowance of Rs. 2,00,000/- was deleted.

6. Disallowance of Rs. 61,46,712/- on account of load testing machine:
The Tribunal agreed with the CIT(A) that the load testing machine was a one-time use item, embedded in the pile and not recoverable, thus qualifying as revenue expenditure. The disallowance of Rs. 61,46,712/- was deleted.

7. Disallowance of Rs. 8,15,20,814/- due to incorrect assessment year mentioned on TDS challans:
The Tribunal found that the taxes were deducted and paid within the permitted time, and the error in mentioning the wrong assessment year on the challans did not justify the disallowance under Section 40(a)(ia). The disallowance of Rs. 8,15,20,814/- was deleted.

8. Disallowance of Rs. 3,00,000/- for advertisement expenses paid to M/s Disha Production & Media Pvt Ltd:
The Tribunal found that the assessee had provided sufficient evidence, including invoices and bank statements, to substantiate the expenditure. The Tribunal held that the AO should have conducted further enquiries instead of solely relying on the payee's denial. The disallowance of Rs. 3,00,000/- was deleted.

Conclusion:
The assessee's appeal was partly allowed, and the Revenue's appeal was dismissed. The Tribunal's detailed analysis led to the deletion of several disallowances, reinforcing the importance of substantial evidence and proper interpretation of tax treaties and provisions.