TMI Blog2010 (10) TMI 695X X X X Extracts X X X X X X X X Extracts X X X X ..... ction 40(a)(i) - assessee submission is that the payment is being made for reimbursement of communication expenses incurred on behalf of the assessee by Emery USA - The subject of reimbursement are for EMCON connectivity data circuit expenses and not for the use of any industrial, commercial or scientific equipment provided by SITA. Even the amount charged to the assessee is only a part of the total expenses incurred by the Emery USA on behalf of the various concerns - the payment was made merely for availing communication facility for transmitting data without there being any right conferred upon the assessee for use of any secret process or formula - Decided in favor of the assessee Reduction of income in the revised return - AO observed that assessee was given a number of opportunities to explain the nature of system failure reasons why it was not noticed at the time of audit and how was the system error removed and correct income computed - In reply the assessee submitted that error crept into account while revenue data was transferred from the front end server to the back end accounting system recording the revenue - ld. Counsel of the assessee submitted that company is not ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... written off the same in its books. The Assessing Officer observed that considering the close business connections between the two there is no possibility of Emery, USA demanding the same from its Indian subsidiary any time in future. This would mean that the amount of Rs. 1,08,94,578/is in the nature of remission of liability for this assessee and the same should be added back to the business income u/s 41 of the Income Tax Act, 1961. 2.2 Upon assessee s appeal Ld. Commissioner of Income Tax (Appeals) noted that he agreed with the contention of the assessee s counsel that the facts of the case do not justify invoking the provision of section 41(1) of the Act. This was because of the fact that provision of section 41(1) will not apply unless the assessee has been granted an allowance or deduction in respect of the liability which has ceased. Further, Ld. Commissioner of Income Tax (Appeals) noted that there is another aspect which needs to be examined. It was observed that it is an admitted fact that the assessee had a liability in its books for payment of amount of Rs. 1,08,94,578/to Emery, USA which has now ceased to exist. Thereafter, Ld. Commissioner of Income Tax (Appeals) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in India: For freight collectible on behalf of Emery USA (Origin offices) Customer Account Dr. To emery USA (EWW) Cr. [Being amount receivable from customer and payable to Emery USA (EWW)] Freight collectible on behalf of Emery USA (origin offices) no longer recoverable. Emery USA (EWW) .Dr. To Customer Account Cr. [Being the amount no longer recoverable from the destination customer in India and hence not payable to Emery USA (EWW)] It is to be appreciated that the above journal entry has an effect on two items of Balance sheet (i.e. Sundry Debtors and Sundry Creditors) with no impact on the profit and loss account. The appellant company s profit and loss account is not impacted by the entry at any point of time. The sundry debtors (which were set off against payable to Emery USA) represent freight recoverable from the parties on behalf of Emery USA (origin offices). The appellant company has not claimed the sundry debtors set off against sundry creditors as allowable expenditure for any of the assessment years. The appellant company is only acting as a collection agent to recover the freight and send the same to Emery USA. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... for telecommunicatio n or broadcasting amount to secret process or only process ? (ii) Whether the payment received by the assessee from their customers on account of use of their satellites for telecommunication and broadcasting, amounts to royalty and if so whether the same is liable to tax under section 9(1)(vi) of the Income Tax Act, 1961 ( The Act ) read with the relevant provisions of the DTAA? Issues involved: (i) Whether reimbursement of communication expenses to Emery USA for the sharing the cost of connectivity data circuit in respect of leased lines provided by S.I.T.A. a service provider in the USA can be treated as Royalty income under clause (iva) of explanation 2 to section 9(1)(vi) of the Act? 3. As per the agreement, the satellite company is willing to make available transponder capacity to the customer during the utilization term. The telecasting company is willing to use the transponder capacity in accordance with the terms of the agreement. No such technology is made available to the assessee. 4. The consideration received has been construed as Royalty under clause (iii) to explain 2 to section 91(v ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lowed as a deduction. 2.5 Ld. Departmental Representative on the other placed reliance upon the Apex Court decision in the case of TVS Sundaram Iyenger (supra) and also referred the decision of the Hon ble Madras High Court in the case of C.I.T. vs. Aries Advertising P. Ltd. : 255 ITR 510; Allahabad High Court decision in the case of The Manufacturing Co. of India C.I.T. vs. Aries Advertising P. Ltd. : 222 ITR 324; Madras High Court decision in the case of Solid Containers vs. DCIT : 308 ITR 417. These case laws were relied for the proposition that amount though not a revenue in nature, at the time of receipt may become assessee s income subsequently. 2.6 We have carefully considered the submissions and perused the records. We find that Ld. Commissioner of Income Tax (Appeals) has relied upon the decision of the Hon ble Apex Court in the case of TVS Sundaram Iyengar and Sons Ltd. (Supra). In that case the Hon ble Court has held as under: If an amount is received in the course of a trading transaction, even though it is not taxable in the year of receipt as being of revenue character, the amount changes its character when the amount becomes the assessee s own money because ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s 9(1)(vi) read with clause (iva) of Explanation to 9(1)(vi) and ignoring the provisions of Double Taxation Avoidance Agreement between India and USA. b) Under the facts and circumstances of the case in law, the Ld. C.I.T. has erred in confirming the action of the Ld. Assessing Officer to disallow the communication expenses paid by the appellant amounting to Rs. 1,721,464/u/s 40(a)(i) of the Act on the ground that the subject payment is not reimbursement of expenses. 3.1 On this issue the Assessing Officer noted that assessee has made following payments to Emery Airfreight Corporation USA namely communication fees of utilization of a lease line for tracking of freight shipments amounting to Rs. 17,21,464/. In the Tax Audit Report it was mentioned that company was of the opinion that income tax is not to be deducted on this payment. Assessing Officer in this regard referred to the provision of section 40(a)(i) and Section 195. Assessing Officer observed that the nature of service appeared to be that of fee for technical service on which applicable TDS has not been deducted. He held that this squarely falls under the ambit of section 40(a)(i). Hence holding that the payment rem ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... de only if the payment made is chargeable to tax in the hands of the nonresident and tax was not deducted at source. As the payment made being Emery Airfreight Corporation, USA is in the nature of reimbursement of expense which was incurred by Emery USA on behalf of the assessee and the same is not in the nature of income in the hands of the Emery USA and cannot be the subject to tax, under the provisions of this Act. In this regard, he placed reliance upon C.I.T. vs. Dunlop Rubbers Co. Ltd. 142 ITR 493; Rolls Royce India Ltd. vs. ITO 25 ITD 137 and DECTA vs. C.I.T. 103 Taxman 525. 3.6 Ld. counsel of the assessee further submitted that Ld. Commissioner of Income Tax (Appeals) in his order has confirmed the service being rendered cannot be considered as fees for technical services. He further claimed that Ld. Commissioner of Income Tax (Appeals) has also erred in holding that the payments are royalty and fall under the purview of section 9(1)(vi) read with Explanation thereto. He claimed that the said payment cannot be construed payment as royalty. This is because no rights to use any industrial, commercial or scientific equipment has been conferred upon the assessee. The subject ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n made to resident. The provisions of section 40(a)(i) disallows interest, royalty, fees for technical services or other sum chargeable under this Act, which is payable outside India, on which tax has not been paid or deducted under Chapter XVIIB. As per the provisions of section 195 (included in Chapter XVIIB) of the Act any person responsible for paying to a nonresident, not being a company, or to a foreign company, any interest (not being interest on securities) or any other sum chargeable under the provisions of this Act (not being income chargeable under the head Salaries ) shall, at the time of credit of such income to the account of the payee or at the 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 theroen at the rates in force. Thus if tax is not withheld on royalty/ fees for technical services payment to nonresident under section 195 of the Act, disallowance is attracted under the provision of section 40(a)(i) of the Act. However, please note that had the royalty/ fees for technical services been made to resident in India, no disallowance was attracted under the provisions of section ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd sea. 2. Issues involved: (i) Whether the services rendered by the assessee through their satellites for telecommunicatio n or broadcasting amount to secret process or only process ? (ii) Whether the payment received by the assessee from their customers on account of use of their satellites for telecommunication and broadcasting, amounts to royalty and if so whether the same is liable to tax under section 9(1)(vi) of the Income Tax Act, 1961 ( The Act ) read with the relevant provisions of the DTAA? Issues involved: (i) Whether reimbursement of communication expenses to Emery USA for the sharing the cost of connectivity data circuit in respect of leased lines provided by S.I.T.A. a service provider in the USA can be treated as Royalty income under clause (iva) of explanation 2 to section 9(1)(vi) of the Act? 3. As per the agreement, the satellite company is willing to make available transponder capacity to the customer during the utilization term. The telecasting company is willing to use the transponder capacity in accordance with the terms of the agreement. No such technology is made available to the assessee. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... International (India) (P) Ltd. vs. Addl. C.I.T. in ITA No. 2684/Del/2005 118 TTJ (Del)/652. In the said case it was held as under: Business expenditure Disallowance under s. 40(a)(i) VSAT uplinking charges paid to parent company charges reimbursed by the assessee company to its parent company for VSAT uplinking provided through SITA were not in the nature of fees for technical services and the same were paid merely for availing communication facility for transmitting data without there being any right conferred upon the assessee for use of any secret process or formula same being not liable for deduction of tax at source, disallowance made by the Assessing Officer by invoking the provisions of s. 40(a)(i) was not sustainable Skycell Communication Ltd. Anr. Vs. Dy. C.I.T. Ors. (2001) 170 CTR (mad) 238: (2001) 251 ITR (Mad) and Dy. C.I.T. vs. PanAmSant International Systems Inc. (2006) 103 TTJ (Del) 861 relied on. Business expenditure Disallowance under s. 40(a)(iii) Reimbursement of common expenditure to parent company Amount paid by the assessee company to its parent company on account of reimbursement of expenditure incurred in respect of global accounts ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er book which supports his explanation that what had been made available by SITA was the communication facility essential for the business of the entire group as such. He has also placed on record a statement giving working as to how the charges paid by the parent company to SITA were apportioned amongst the different group companies operating in different countries including the assessee company. All these details furnished by the assessee on record clearly show that the charges reimbursed by the assessee company to its parent company for VSAT uplinking provided through SITA were not in the nature of fees for technical services and the same were paid merely for availing communication facility for transmitting date without there being any right conferred upon the assessee for use of any secret process of formula. In the case of Skycell Communications Limited (supra) cited by the ld. counsel for the assessee, it was held by the Hon ble Madras High Court that mere collection of a fee for use of a standard facility provided to all those willing to pay for it does not amount to the fee having been received for technical services. It was also held that the fact that the service provides ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ind that Assessing Officer has made the disallowance by holding that the payment was liable for deduction of tax at source u/s 40(a)(i) and treating the payment as fees for technical services. Ld. Commissioner of Income Tax (Appeals) on the other hand had found merit in the assessee s submission that payment would not fall under fees for technical services under the purview of section 9(1)(viI). However, Ld. Commissioner of Income Tax (Appeals) opined that the same was coming under the purview of section 9(1)(iva) read with 9(1)(vi) which refers to payment for use or right to use in industrial, commercial or scientific equipment would be chargeable to tax in India. In this connection, we note that assessee submission is that the payment is being made for reimbursement of communication expenses incurred on behalf of the assessee by Emery USA. Furthermore, as per the provisions of section 40(a)(i) the disallowance can be made only if the payment made chargeable to tax in the case of the nonresident and tax was not deducted at source. Now there is considerable cogency in the claim that payment being made to Emery, USA are in the nature of reimbursement of expenses and was incurred by ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... her group companies also and only a part of reimbursement was sought from the assessee. Hence, in the background of the aforesaid discussion and precedent, we hold that the payment involved do not fall within the purview of section 40(a)(i) referred by the Assessing Officer and as discussed by us hereinabove. The action of the Ld. Commissioner of Income Tax (Appeals) in holding that the tax was to be deducted in terms of section 9(1)(iva) or 9(1)(vi) is also not cogent enough. Accordingly, we set aside the orders of the authorities below and decide the issue in favour of the assessee. Assessee s appeal (ITA No. 416/Del/2008) A.Y. 200304: 4. The first issue raised in this appeal filed by the assessee reads as under: 1 (a) Under the facts and circumstances of the case and in law, the ld. CIT(Appeals) has erred in confirming the action of ld. AO of adding back to the returned income an amount of Rs. 13,773,479/on account of errors in revenue booking due to system failure by ignoring the detailed submission and factual details furnished during the appellate proceedings. (b) Under the facts and circumstances of the case in law, the Ld. C.I.T.(A) has erred in confirming the ac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and also whether there was an error at all. Ld. CIT(A) asked the assessee to submit further factual details in this regard. In reply the assessee submitted that error crept into account while revenue data was transferred from the front end server to the back end accounting system recording the revenue. It was further stated that consequent to global takeover the business of the assessee has been taken over by M/s UPS In India. As a result of this take over the assessee had discontinued its operation and most of the employees have left the employment. It was stated that under these circumstances assessee was not in a position to submit further factual details. In absence of the necessary details ld. CIT(A) confirmed the AO s action in this regard. Against this order assessee is in appeal before us. 4.2 The ld. Counsel of the assessee repeated the submissions as made before the authorities below. He conceded that though assessee was not in a position to give the complete detail and reconcile the difference of Rs. 13,773,479/with factual details. He claimed that the accounts of the assessee has been audited and certified by the auditors. Hence, he claimed that assessee s claim shoul ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Under the facts and circumstances of the case and in law, the Ld. Commissioner of Income Tax (Appeals) has erred in confirming the action of the Assessing Officer to disallow the communication expenses paid by the appellant amounting to Rs. 1,742,063/u/s 40(a)(i) of the Act on the ground that the subject payment is not reimbursement of expenses. 6.1 Since the issue is similar in A.Y. 200203 as referred in para 3 of ITA No. 929/Del/2008 above, following the reasoning given hereinabove, we set aside the orders of the authorities below in this case also and decide the issue in favor of the assessee. Revenue s Appeal (ITA NO. 4951/DEL/2007) A.Y. 200304 7. The first issue raised is that Ld. Commissioner of Income Tax (Appeals) erred in deleting addition of Rs. 30,34,169/without appreciating the facts that: i) the said payment being made for the use of specialized technical system to find current location of any package in transit was in the nature of fees for technical services and so liable to TDS. ii) by not deducting TDS on such payment, chargeable to tax, the payment was not an allowable deduction u/s 40(a)(i). iii) the said payment was referred as Handling fees on ai ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and Ld. Commissioner of Income Tax (Appeals) has not also passed a speaking order so as it relates to ascertainment of proper facts. In any case if the submissions of assessee are to be believed then Assessing Officer should have been given the opportunity to meet the same so as to ascertain the facts. Keeping in view the entirety of facts, we are of the opinion that the matter regarding disallowance of Rs. 23,84,192/requires to be restored back to the file of Assessing Officer with a direction to ascertain the facts after giving a reasonable opportunity of hearing to the assessee and thereafter determine the issue as per provisions of law afresh. We direct accordingly. From the above we note that the reasoning given by the Ld. Commissioner of Income Tax (Appeals) for deleting the disallowance in the present assessment year is that he has allowed the same in assessee s own case for assessment year 200203. Since that order of Ld. Commissioner of Income Tax (Appeals) has been set aside by the tribunal and matter remitted to the files of Assessing Officer. Interest of justice demands that we also remit this issues to the files of Assessing Officer, to consider the same after adjud ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 6.2000 and regular assessment u/s 143(3) was completed converting the refund to demand of tax on 21.2.2004, interest could be demanded only from the period from 1.6.2003 to the date of completion of assessment and raising of demand. Thus it is clear that Hon ble Court has opined that irrespective of the assessment year interest could be levied u/s 234D for the period from 1.6.2003 to the further date on which the demand was raised. In the present case, we find that the assessment year involved is 200203 and the inference that the same would not be applicable for assessment year prior to 1.6.2003 cannot hold good in view of the decision of the Hon ble Kerala High Court cited above. The interest involved would be levied from 1.6.2003 till the date of completion of assessment as held by the Hon ble Kerala High Court. Accordingly, we set aside the issue to the files of the Assessing Officer to consider the above Hon ble Kerala High Court decision and give the effect to the calculation of interest accordingly. 9. In the result, the appeals filed by the assessee being ITA No. 929/Del/2008 is allowed (A.Y. 200203) and ITA No. 416/Del/2008 (A.Y. 200304) is partly allowed and Revenue s ap ..... X X X X Extracts X X X X X X X X Extracts X X X X
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