TMI Blog2012 (6) TMI 452X X X X Extracts X X X X X X X X Extracts X X X X ..... le - Decided in favor of assessee. Bad debts - dis-allowance of professional fees and expenses not recoverable from clients claimed as Bad debts on ground of insufficient evidences placed on record - Held that:- After the amendment w.e.f. 1st April, 1989, it is not necessary for assessee to establish that the debt, in fact, has become irrecoverable, it is sufficient that the assessee has written off the bad debts in the account and the same has to be allowed. See T.R.F. Limited Vs. CIT (2010 (2) TMI 211 - SUPREME COURT ) - Deduction allowed - Decided in favor of assessee. Ad-hoc dis-allowance of 10% of sum paid as support service charges and professional fees to KCPL and KPMG u/s 40A(2)(b) - Held that:- In present case, AO has neither inquired nor brought anything on record to show that the payment is excessive as compared to unrelated parties or it was not for the legitimate needs of the business or profession of the assessee. The same does not seem to have been doubted. Thus, this matter is restored back to the file of the AO for verification and decision accordingly. Dis-allowance u/s 43B - contribution to the EPF - assessee contended allowance of expenditure in view of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the previous years in which the respective invoices were raised and secondly, the company has disclosed the debts as irrecoverable and written off as bad debts in the books of accounts of the previous year ended 31st March, 2001. Reliance was placed to the amendment made to section 36(1(vii) and 36(2) w.e.f. 1-4-1989 that once the bad debts has been written off, the same should be allowed. The Assessing Officer did not agreed with the contention of the assessee had held that the assessee cannot write-off any amount arbitrarily or irrationally. The write-off has to be bonafide and reasonable. He held that even after the amendment the basic condition relating to establishing the debt as bad is still effective. He, thus, disallowed the claim of bad debts amounting to ₹ 12,18,732/-. 4. Before the CIT(A), the assessee contended that bad debt has to be allowed if the debt has been actually written off in books of accounts and has been taken into account in computing its income of the previous year in which the debt is written off. There is no onus to establish the debt as bad. Learned CIT(A) too rejected the explanation of the assessee and after relying upon the decision of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... form of support service charges and professional fees. It was submitted by the assessee that the professional fee was paid to KCPL for doing certain specialized work to various concerns like Airport Authority of India, BFL Software Limited, CMC Ltd, FCL Technology India Ltd and SSI Technology. As the assessee did not had sufficient specialized manpower to carry out the job, hence, the service of KCPL was engaged. Besides this, the KPMG had provided support to the company by way of computers, laptops, office space, communication facilities, office supplies for which support service charges of ₹ 1,87,50,000/- was paid and further professional fee of ₹ 10,50,000/-was paid for accounting, secretarial, human resources and technology related services by it. Further, it was submitted that the payments were made as per the standard rates and no excessive or any unreasonable payment has been made. The Assessing Officer rejected the contention of the assessee on the ground that the assessee has failed to furnish any particular which would through light on the exact nature of work done by either KPCL or KPMG and in absence of any verifiable specific details for the ascertainment ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... indings given by the CIT(A) as well the Assessing Officer. Section 40A (2)(b) provides that :- (2)(a) Where the assessee incurs any expenditure in respect of which payment has been or is to be made to any person referred to in clause (b) of this sub-section, and the [Assessing] Officer is of opinion that such expenditure is excessive or unreasonable having regard to the fair market value of the goods, services or facilities for which the payment is made or the legitimate needs of the business or profession of the assessee or the benefit derived by or accruing to him therefrom, so much of the expenditure as is so considered by him to be excessive or unreasonable shall not be allowed as a deduction. From the plain reading of above, it is amply clear that the payments which are made to persons specified in sub-clause b of sub section 2 of Section 40A, if in the opinion of Assessing Officer, is excessive and unreasonable; firstly, having regard to the fair market value of the goods, services or facilities for which the payment is made; secondly, looking to the legitimate needs of the business or profession of the assessee; or thirdly, the benefit derived by or accruing ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... for verification from the end of the Assessing Officer to examine similar nature of payments made to unrelated parties are in consonance or are on similar rate and then decide this matter. If it is found that payments made to related parties are in consonance with the payments made to unrelated parties or it is for legitimate needs of the business or profession, no addition or disallowance should be made. In the result, this ground is allowed for statistical purpose. 12. In grounds No.3 4, the assessee has challenged disallowance of ₹ 1,12,404/- made under Section 43B in respect of the assessee s contribution to the Employees Provident Fund. The assessee has raised additional ground before the CIT(A) for allowing the payments of provident fund contribution by the employer on the ground that the same should be allowed in view of the second proviso to section 43B. The learned CIT(A) dismissed the additional ground as not admitted on the following reasons :- (1) The appellant had suo motto made the disallowance as per the then provision of the second proviso to Section 43B and total income cannot be reduced below the returned income at this stage. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ement costs from the total payments made to sister concerns for working the disallowance at 10% of the total payment made without appreciating the fact that the assessee had not produced any proof to determine the reasonableness of payments made u/s.40A(2)(b) and acceptance of the same by the CIT(A) was in contravention of Rule 46A. 3. On the facts and in the circumstances of the case and in law, the CIT(A) erred in directing the Assessing Officer to allow the late payment of PF contribution u/s.43B without appreciating the fact that the grace period is solely for the purpose of section 14B of the P.F. Act and the due date under both the Acts remains the same. 15. The facts apropos ground No.1 is that, the assessee company had made the following payments to non-residents towards professional charges for services rendered and for reimbursement of expenses. a) KPMG LLP, USA ₹ 20,89,906 (USD46,248.00) -Professional fees b) KPMG Consulting LP, Canada -Professional fees and ₹ 13,37,229 (USD 30,678,08) Reimbursement of expenses The payments were made without deduction of tax at source. The Assessing Officer held that these payments were in th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Consulting LP, Canada was chargeable to tax in India under Artilce-12(2) and section 9(1)(vi) r.w.s. 115A to the exclusion of Article-7 which for the above reasons are held as not being applicable and relevant to the case of the remittances ot KPMG Consulting LP, Canada who has rendered professional services in connection with developing the transaction strategy/value proposition, etc. to Essar Oil Ltd. Accordingly, the amount of ₹ 13,37,229/- is not allowed as deductible expenditure under the provisions of section 40(a)(I) r.w.s. 195 and is included in the total income of the assessee company. 16. Before the CIT(A), it was submitted that the none of the case laws as have been relied upon by the Assessing Officer are applicable and further in order to be covered under the definition of the term royalty used in the DTAA, it has to fulfil certain criteria which in this case is not applicable at all. The Assessee also relied upon the decision of the M.P. High Court in the case of CIT V HEG Ltd., reported in [2003] 130 Taxman 72 (MP). The CIT(A) agreed with the contention of the assessee and held that the payments were not in the nature of royalties either under Section 9( ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Act. Therefore, the subject amounts are not disallowable u/s. 40(a)(i) of the Act. In the result, Ground Nos. 1 to 5 are allowed. 17. Learned Senior AR on behalf of the assessee submitted that it is not a case of royalty under Article 12 of the Indo-US DTAA as the payment was made purely for rendering of professional services to KPMG, US and KPMG Canada. In support of his contentions, he relied upon the following judgments :- i) HEG 130 Taxman 73 (MP); ii) Hindalco 96 TTJ 1009 (Mum); iii) JDIT Vs. Harward Medical International USA [2011] 16 taxman.com 69 (mum); and iv) Standard Chattered Bank vs. DDIT (Intl.tax) [2011] 11 taxman.com 105 (mum). He, thus, finally relied upon the findings of the CIT(A). On the other hand learned CIT DR relied upon the findings given by the Assessing Officer. 18. We have carefully considered the rival submissions and also gone through the findings given by the Assessing Officer as well as the CIT(A). The relevant facts are that the assessee company was engaged as a consultant by Essar Oil Limited to provide consultancy services in connection with sale of its energy business. Such a sale was expected to re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n given for Royalty under Article 12 of Indo US DTAA. It was purely a professional service for consultancy which were rendered outside India and nor for supply of scientific, technical, industrial or commercial knowledge or information. Thus, nature of payment do not fall within the meaning of Article 12 and, therefore, there was no liability to deduct TDS and consequently disallowance made under section 49(ia) is uncalled for. Similarly, in the case of payment made to KPMG, Canada were also purely for professional services and reimbursement of expenses, which in any manner does not fall under Article 12. Thus, on such payment also there was no liability to deduct TDS and consequently Section 40(ia) will not be applicable. The finding of the CIT(A) is, thus, upheld. Accordingly, ground No.1 as raised by the department is dismissed. 19. At the outset, as admitted by both the parties that ground No.2 is similar to ground No.2 of the assessee s appeal in ITA No.8824/M/2004. Therefore, in view of the finding given in the aforesaid appeal, the matter has to be examined by the Assessing Officer in the light of the directions given above in para 11. Thus, this ground is treated as al ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... peal:- 1. On the facts and circumstances of the case and in law the CIT(A) erred in restricting the disallowance of ₹ 15,85,00/- us/.40A(2)(b) of the Act to ₹ 2,10,000/- without appreciating the fact that the assessee had not produced any proof to determine the reasonableness of payments made u/s.40A(2)(b) and acceptance of the same by the CIT(A) was in contravention of Rule 46A. This ground has already been decided while deciding the assessee s appeal for the assessment year 2001-2002 and also the department s appeals for the same year. Since, this matter has been restored back to file of the Assessing Officer it is treated as allowed for statistical purposes. This ground is thus allowed for statistical purposes. 24. ITA No.1979/Mum/2007 (AY 2003-04)(By Assessee) : In this appeal, the assessee has raised the following ground of appeal:- 1. On the facts and circumstances of the case and in law the Commissioner of Income tax (Appeals) erred in upholding the disallowance made by the Assessing Officer us/.40A(2)(b) of the Income tax Act, 1961 of ₹ 2,10,000/- being 10% of professional fees amounting to ₹ 21,00,000/- paid to KPM ..... X X X X Extracts X X X X X X X X Extracts X X X X
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