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2015 (4) TMI 370 - ITAT VISAKHAPATNAM

2015 (4) TMI 370 - ITAT VISAKHAPATNAM - TMI - Non deduction of tax at source on conversion charges under section 194C - CIT (A) deleting the disallowance made under section 40(a)(ia) - Held that:- Contention of the Department, that the ratio laid down by the ITAT Visakhapatnam Special Bench in case of Merilyn Shipping & Transports vs. ACIT [2012 (4) TMI 290 - ITAT VISAKHAPATNAM] is not applicable, cannot be accepted. Since the Department has not controverted the fact that the entire amount of &# .....

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us year, we do not find it necessary to go into the issue whether or not provisions of section 194C is at all applicable to the payments made by assessee claimed to be in the nature of reimbursements. - Decided against revenue.

Revision u/s 263 - non consideration of applicability of section 40(a)(ia) to payment made to M/s. Aditya Spinners Ltd. has made the assessment order erroneous and prejudicial to the interests of the Revenue - Held that:- in the impugned assessment year also, n .....

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terials brought on record, as far as it relates to conversion expenses, has passed the assessment order. Whether provisions of section 194C will be applicable to conversion expenses claimed to be in the nature of reimbursement, in our view, is a debatable issue on which more than one view is possible. That being the case, assessment order passed cannot be considered to be erroneous and prejudicial to the interests of the Revenue so as to empower learned CIT to revise it under section 263 - Decid .....

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assessment years 2008-09 and 2009-10. ITA No.287/Vizag/2012 2. This appeal by the Department is against the order dated 04.05.2012 passed by the learned CIT (A), Guntur for the assessment year 2009-10. 3. Ground Nos. 1 & 7 being general grounds, do not require any specific adjudication. 4. Ground Nos. 2 to 6 are on the common issue of the decision taken by the learned CIT (A) in deleting the disallowance made by the Assessing Officer of an amount of ₹ 5,98,13,357 under section 40(a)(ia .....

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s entered into an agreement with M/s Aditya Spinners Ltd for production of Polyester yarns. On verification of the ledger account, it was found by the Assessing Officer that assessee firm has paid an amount of ₹ 2,89,98,843 towards conversion charges and ₹ 5,98,13,357 towards conversion expenses. He further noticed that though the assessee has made TDS on conversion charges of ₹ 2,89,98,843 in terms of section 194C of the Act, however, he has not deducted tax at source on conve .....

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non payment of dues. As per the conversion agreement the assessee is to pay an amount of ₹ 22.45 per kg of yarn produced as conversion charges which amounted to ₹ 2,89,95,843 on which the TDS was made. As per the very same agreement besides conversion charges, assessee also has to incur various expenditures like power and labour bills etc on its own account and the total expenditure amounted to ₹ 5,98,13,357. It was submitted as the assessee was not having a full fledged offic .....

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rved that as per the agreement assessee has to pay conversion charges to M/s Aditya Spinners Ltd. Assessee has given a job contract to M/s. Aditya Spinners Ltd to do certain work. Therefore, when there is a contractual obligation between two parties, the TDS provisions would attract whatever may be the mode of payment. He further observed the ledger account of the assessee reveal that lump sum payments were made to M/s Aditya Spinners Ltd. On going through the details of the conversion expenses .....

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ttracts the provisions of sec 194C. Accordingly, Assessing Officer by applying the provisions of section 40(a)(ia) of the Act disallowed the amount of ₹ 5,98,13,359. Being aggrieved of such disallowance, assessee preferred appeal before the learned CIT (A). 7. In course of hearing of appeal before the first appellate authority, it was submitted by the assessee that conversion expenditure was reimbursed by the assessee in terms with the agreement entered into with M/s Aditya Spinners Ltd. I .....

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e initially made by the Aditya Spinners Ltd and the exact amount of expenditure incurred on behalf of the assessee was reimbursed to the said company by the assessee. It was further submitted, as the payment made is merely reimbursement of the expenditure incurred on behalf of the assessee, and not for carrying out any work, it will not come within the purview of section 194C. Assessee also relied upon number of decisions to substantiate its claim that provisions of section 194C is not applicabl .....

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in ITA No.3081/Hyd/09 dated 23.10.2009 and ITAT Visakhapatnam Special Bench decision in the case of Meryllin Shipping & Transport vs. ACIT (136 ITD 23). 8. The learned CIT (A) after considering the submissions of the assessee in the context of the facts and materials on record as well as the decisions relied upon by the assessee and more specifically on examining the terms of the agreement found that the amount of ₹ 5,98,13,357 was in the nature of repayment of debt due to M/s Aditya .....

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financial year. However, on verifying the details, the learned CIT (A) found that the entire amount was actually paid by the assessee during the previous year. Therefore, the learned CIT (A) following the decision of the ITAT Visakhapatnam Special Bench in the case of Merilyn Shipping & Transports vs. ACIT (Supra) and the ITAT Hyderabad Bench in the case of M/s Teja Constructions (ITA No.308/Hyd/2009) held that no disallowance under section 40(a)(ia) of the Act can be made. Accordingly, he d .....

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up is his profit. Therefore, these two amounts cannot be segregated artificially as has been done by the assessee. 11. The learned Departmental Representative submitted that the entire payment made by the assessee towards conversion charges as well as conversion expenses is to be treated as one as the payment was towards manufacturing/processing activity only. Therefore, when the assessee deducted tax on conversion charges by applying the provisions of sec 194C, the same should also have been do .....

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ITAT Special Bench in case of Merilyin Shipping & Transports vs. ACIT (Supra) has been stayed by the Hon'ble jurisdictional High Court, the ratio laid down therein will not apply. 12. The learned Authorised Representative on the other hand reiterated the submissions made before the first appellate authority. He submitted before us that as per the terms of the agreement, M/s Aditya Spinners Ltd is entitled to receive an amount of ₹ 22.45 kg towards conversion charges. All other exp .....

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ount of the assessee, then there is certainly a debt due in favour of the said party. Therefore, there is nothing wrong in the observations made by the learned CIT (A) that the payments made by the assessee is towards discharge of debt to M/s. Aditya Spinners Ltd. The learned Authorised Representative submitted, even otherwise also provisions of section 40(a)(ia) cannot be invoked to disallow the expenditure claimed as the entire amount has been paid during the relevant previous year. The learne .....

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upon by the parties. At the outset we propose to deal with the issue whether provisions of section 40(a)(ia) of the Act would be applicable, if the payments have been made during the relevant previous year and nothing remained outstanding/payable as on the last date of the relevant previous year. ITAT Visakhapatnam Special Bench in case of Merilyn Shipping & Transports (Supra) has held that if the assessee has paid the amounts to which TDS provisions are applicable, within the relevant previ .....

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ourt while considering the issue whether the effect of the decision in case of Merilyn Shipping & Transports (Supra) has been completely obliterated by operation of the stay order, in case of CIT vs. Jayapriya Engineering (Supra) held as under: 4. We are of the view that until and unless the decision of the Special Bench is upset by this Court, it binds smaller Bench and coordinate Bench of the Tribunal. Under the circumstances, it is not open to the Tribunal, as rightly contended by Mr. Nar .....

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ial Bench decision or not to follow. If the special Bench decision is not followed, obviously remedy lies elsewhere. 5. The appeal is thus allowed only on the point of remand. We direct the Tribunal to decide the matter on remand afresh within a period of two months from the date of communication of this order. No cost . 14. Following the aforesaid decision of the Hon'ble jurisdictional High Court, ITAT Hyderabad Bench in a recent order in the case of Ushodaya Enterprises vs. Dy.Commissioner .....

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dy been paid before the end of the relevant accounting year, out of the amounts disallowed which have been upheld by the CIT (A). This ground is partly allowed for statistical purposes . 15. In view of the aforesaid, contention of the Department, that the ratio laid down by the ITAT Visakhapatnam Special Bench in case of Merilyn Shipping & Transports vs. ACIT (Supra) is not applicable, cannot be accepted. Since the Department has not controverted the fact that the entire amount of ₹ 5, .....

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us year, we do not find it necessary to go into the issue whether or not provisions of section 194C is at all applicable to the payments made by assessee claimed to be in the nature of reimbursements. As in our view, it is of mere academic interest, hence should be left open to be decided in an appropriate case. 17. In the result Departmental appeal is dismissed. C.O.No.29/Vizag/212 18. The grounds raised in the cross objections are merely supporting the order of the learned CIT (A). In view of .....

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the Act determining the total income at ₹ 8,32,070 vide assessment order dated 29.12.2010. The assessment records of the assessee for the year under consideration came up for examination by the learned CIT in exercise of power under section 263 of the Act. On going through the assessment order the learned CIT was of the view that the assessment order passed is erroneous and prejudicial to the interests of the Revenue, as the assessment Assessing Officer has failed to apply the provisions .....

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submitted by the assessee that as the payments made were in the nature of reimbursement of expenditure incurred by M/s Aditya Spinners Ltd on account of the assessee, it will not attract TDS provisions of section 194C. It was submitted the payments made were not towards any work executed under the terms of the contract. Therefore, payments made will not come within the purview of section 194C. Alternatively it was also argued by the assessee that as the entire amount of ₹ 5,26,58,980 was .....

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ditya Spinners Ltd to manufacture yarns out of raw materials to be supplied by the assessee by way of job work. It was observed by the learned CIT that as the conversion activity would include various activities such as manufacturing process, purchase and usage of stores and spares and consumables, loading and unloading of raw materials, packing materials, stores and spares and finished goods, the carrying out of such activities falls within the scope of the job conversion agreement. Therefore, .....

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e manner in which the consideration for the contract is specified, the entire amount paid in pursuance of contract falls under the scope of section 194C as the said section refers to any sum paid in pursuance of the contract for the work done. Therefore, the reimbursement expenses will form part of the consideration for contract and liable for TDS under section 194C. As far as the alternative contention of the assessee that section 40(a)(ia) as the entire amount was paid within the relevant fina .....

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erused the materials on record. While deciding Department s appeal in ITA No.287/Vizag/2012, we have held that no disallowance can be made under section 40(a)(ia) of the Act, if the payments on which tax was required to be deducted were paid during the relevant previous year and nothing remained payable on the last day of the previous year. Following the same, we hold that in the impugned assessment year also, no disallowance can be made under section 40(a)(ia) of the Act as the entire payment, .....

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