9911796707
TMI Blog2018 (3) TMI 1195X X X X Extracts X X X X X X X X Extracts X X X X ..... round No. 1 of the Revenue's appeal is as under: That on the facts and in the circumstances of the case, the ld. CIT(Appeals) erred in holding that TDS was not applicable on drawing to UAE, Dubai and as such disallowance u/s 40(a)(ia) was not warranted, ignoring that payment of Rs. 63,07,123/- to UAE (Dubai) was fees for technical service in nature on which tax was required to be deducted u/s 195, but not deducted and as such, provision of disallowance u/s 40(a)(ia) was rightly invoked. 2.2 Both these grounds deal with the common issue of the assessee's liability to deduct tax u/s 195 of the Act. In Ground No. 1 of the assessee has objected to disallowance of the cost of purchase of drawings made from M/s ACTA International Pte Ltd, Singapore ('ACTA Singapore'). Ground No. 1 of the Revenue's appeal concerns the relief allowed by CIT (A) in respect of the disallowance of payment for purchase of drawings from Mr. PredagEror of Dubai ('PD, Dubai'). Briefly stated the facts are that the assessee is a joint sector company wherein the Government of West Bengal holds 26% stake. The assessee is engaged in the business of developing residential housing project in East Kolkata. In the rel ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... appeared to be the basis for conclusion of CIT(A), did the payment in question qualify as "fees for technical services". The assessee placed reliance on the decision of coordinate Bench of ITAT, Pune in the case of Brahma Corp Hotels & Resorts Limited (61 taxmann.com 186). 2.5 On the other hand the ld. DR appearing on behalf of the Revenue vehemently supported the order of the lower authorities and argued that the payment indeed qualified as "technical fee" within Article 12(4) of the India-Singapore DTAA. We note that the Ld. CIT(A) had held that the outright purchase of drawings from ACTA, Singapore came within the definition of "fees for technical services" set out in Explanation 2 to Section 9(1)(vii) of the I. T. Act as well as Article 12 of the DTAA between India & Singapore. The Ld. CIT(A) observed that although in the agreements with the non-resident the scope & object was described to be product procurement but from the description of the so-called "product", the Ld. CIT(A) gathered that it was not a case of purchase of readymade product. Rather the assessee had engaged an architect concern to design and customize concept/design as per requirements of the assessee for ex ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the person acquiring the services to apply the technology contained therein ; or (c) consist of the development and transfer of a technical plan or technical design, but excludes any service that does not enable the person acquiring the service to apply the technology contained therein." 2.8 From the above we note that it is the Revenue's case that the payment made by the assessee for purchase of drawings & designs from the architect firm of Singapore came within the ambit of clause (c) of Article 12(4) of the tax treaty. Careful reading of Article 12(4)(c) however shows that in order to bring a payment within its ambit, it is not sufficient that the payment should be towards development; transfer& supply of technical plan or design but additionally as a result of transfer& supply of technical plan or design, the recipient should also be able to apply the technology contained therein. Therefore under the tax treaty with Singapore, supply of drawings & designs simplicitor is not sufficient to qualify as "fees for technical services" but it should also be coupled with transfer of technology so that the recipient can also use technology contained therein without recourse to the pe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r personnel) if such services : (a) are ancillary and subsidiary to the application or enjoyment of the right, property or information for which a payment described in paragraph 3 is received ; or (b) make available technical knowledge, experience, skill, know-how or processes, which enables the person acquiring the services to apply the technology contained therein ; or (c) consist of the development and transfer of a technical plan or technical design, but excludes any service that does not enable the person acquiring the service to apply the technology contained therein. For the purposes of (b) and (c) above, the person acquiring the service shall be deemed to include an agent, nominee, or transferee of such person. 5. Notwithstanding paragraph 4, "fees for technical services" does not include payments : (a) for services that are ancillary and subsidiary, as well as inextricably and essentially linked, to the sale of property other than a sale described in paragraph 3 (a) ; (b) for services that are ancillary and subsidiary to the rental of ships, aircraft, containers or other equipment used in connection with the operation of ships or aircraft in international tra ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... with respect to the project on the site. Thus, the designs and plans made by the consultant are projects specific. Therefore, in our considered view there is no transfer of any technology, technical know-how or technical designs which the assessee can utilize subsequently in other projects. The Architectural design/drawings are project specific. The assessee cannot take advantage of same in other projects. 9. The assessee has separately entered into a design agreement with M/s. FBEYE International Pte. Ltd., Singapore. The said agreement also lists the covenants with respect to scope of service and work, payment of fees, liabilities, etc. A perusal of the agreement shows that the firm shall make designs according to the assessee's requirement in respect of a particular project. There has been no transfer of any technology or technical design which would result in enduring benefit to the assessee or the payment of which would take the colour of payment of 'fees for technical services'. Relevant extract of the agreement which deals with development of design and documents reads as under: "Design Development Phase: 1. Based on the approved Conceptual Design and adjus ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ntion placed reliance on the judgment of Hon'ble Madras High Court and various decisions of the Tribunal. The issue whether the payment made to the consultant par take the character of 'fees for technical services' depends on facts and circumstances of each case. Where in rendering of any service there is no transfer of technology, technical know-how or any technical knowledge or skill that assessee cannot apply in furtherance of his business objects, the payments for same in our opinion does not fall within the scope of 'fees for technical services'. Once, the payments are held not to be in the nature of 'fees for technical' services there is no point in travelling to the next step to ascertain whether they are exempt in view of DTAA between the two countries or not. Since, we have held that the payments made to Singapore parties are not in the 'nature of royalties or fees for technical services', we are of the opinion that no purpose would be served by referring to Article 12 of India-Singapore DTAA to see whether such payments are taxable or exempt. In view of the above, both the appeals filed by the assessee are allowed." 2.10 Having regard ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lawyers, engineers, architects, dentists and accountants. 2.12 From plain reading of Article 14, we find that the right to tax the income from professional activities by the resident of Dubai vested with the Contracting State of the payee, i.e. UAE alone and not the Source Country i.e. India. It therefore follows that in the present case the sum of Rs. 63,07,123/- paid for procurement of drawings to PD, Dubai was taxable in UAE alone. Since the payment in question was not liable to tax in India, there is no question of making any disallowance under Section 40(a)(i) of the Act. The Ld. CIT(A)'s action of deleting the disallowance of Rs. 63,07,123/- is therefore upheld, but on modified grounds, as discussed. 3. Ground No. 2 of the assessee's appeal read as under: For that on the facts and in the circumstances of the case, the ld. CIT(Appeals) was wrong in confirming the disallowance of Rs. 45,000/- out of 'advertisement and publicity expenses'. The observation made in this regard are wrong and incorrect. 3.1 In the course of hearing, the Ld. AR of the assessee did not press this ground. Ground No. 2 is there dismissed as not pressed. 4. Ground No. 3 of the assessee's appeal re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 607/- paid to Managing Director was not allowable as deduction from the profits of the business. 4.3 In the course of hearing the Ld. AR of the assessee vehemently opposed the action of the lower authorities. Referring to the communications & correspondences at Pages 75 to 100 of the paper book, the Ld. AR explained that the approval for the terms of appointment was sought from MCA as per Schedule XIV of Companies Act because the assessee did not possess sufficient profits during the project execution period. It was explained that in the letter dated 06.09.2007, the MCA had approved the appointment for a period of 2 years but that did not in any manner suggest that MCA had specifically rejected the terms of appointment of Managing Director for subsequent three years which inter alia included the relevant FY 2009-10. Upon expiry of 2 years, an application for extension for the terms of appointment was filed with MCA in April 2009. In response few more documents were called by MCA, which were furnished by the assessee. Thereafter, the MCA did not any adverse communication rejecting the terms of MD's appointment for the unexpired period and therefore in absence of any negative commun ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... facts. In that case, in the prior years, the assessee did not claim deduction for Managing Agent's remuneration since the terms of its appointment were not approved by Central Government. Upon receiving the approval in the relevant year which was granted with retrospective effect, the assessee claimed the deduction for the remuneration for the relevant year as well as for the prior years. The Ld. AO disallowed the remuneration pertaining to earlier years, treating it to be in the nature of prior period expenditure. On the contrary, it was the assessee's case that until the appointment was approved it could not account for the remuneration of Managing Agent. On appeal the Supreme Court allowed the assessee's case. As such, we find that the dispute between the parties before the Supreme Court pertained to the year of the allowabiltyof expenditure and not aboutallowability of expenditure per se. 4.5 Instead we find that the reliance placed by the assessee on the judgment of the Calcutta High Court in the case of CIT Vs Tinplate India Ltd (207 ITR 729) is relevant. In that case the Central Government had specifically declined to approve the terms of appointment of Director under the C ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ment did not approve his appointment. If one has been rightly or wrongly appointed and such appointment is dependent on the Central Government, remuneration for the services rendered between the time of appointment and the date when the approval was refused cannot be denied to such employee who discharged his duties and responsibilities as the managing director of the company. We are of the view that the Tribunal was justified in allowing the actual salary paid to the managing director. For the reasons aforesaid, we answer the second question in this reference in the affirmative and in favour of the assessee." 4.6 We note that in the present case the appellant company has made all endeavors for approval from the Ministry of Corporate Affairs and the managing director in question has been continued as the managing director from year 2004 onwards and his remuneration has been allowed as deduction from then continuously. In the year 2007 the managing director was appointed for five years of which two years from 2007 to 2009 was in fact approved by the Ministry of Corporate Affairs. When the assessee company took up the matter with the Ministry they in turn asked for certain docum ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . The 1stBilat Bangla Utsav organized in London, was meant to cater to the non-resident Bengali diaspora residing there. The assessee had therefore sponsored the aforesaid programme with a view to advertise and obtain publicity for its residential project in United Kingdom. Having regard to these facts, we find that the assessee had sufficiently discharged its onus to prove that the sponsorship expenses of Rs. 2,00,000/- paid to Bilat Bangla Utsav was incurred in the course of and for the purposes of its business. The order of the Ld. CIT(A) deleting the disallowance of advertisement expenses to the extent of Rs. 2,00,000/- is therefore upheld. Ground No. 2 of the Revenue's appeal is therefore dismissed. 6. Ground No.3 of the Revenue's appeal is as under: That on the facts and in the circumstances of the case, the ld. CIT(Appeals) erred in holding that the expenses of Rs. 61,46,712/- on account of load testing machine was revenue expenditure, ignoring the fact that load testing machine has got benefit of enduring nature which is for a long period hence, this expense was rightly treated as capital expenditure. 6.1 As noted by the Ld. AO in the impugned assessment, the assessee h ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... se. The assessing officer had, in the assessment, treated the expenditure in respect of load testing equipment to be capital in nature. It is true that the expenditure was incurred for purchase of load testing machine. However, as explained by the appellant, it is not the machinery which is used as a fixed asset. Rather it is for one time use, because at the time of testing the machinery gets imbedded in the pile to be tested. In the certificate dated 05.03.2013, Shri S.N.Sil, Chartered Engineer has certified that it was 'one time use machinery', which is imbedded in the pile to be tested at the time of casting. Therefore, he has explained the mode of operation and concluded by observing that such machineries are sacrificial in nature for each pile and are for one time use only, since these get imbedded in the piles shaft and cannot be retrieved. The literature of the machine published by the manufacturer also supports this claim. In my opinion, the assessing officer was not correct in rejecting the certificate issued by Chartered Engineer summarily just because he is not a government approved engineer. There is no requirement anywhere under the I.T. Act or Rules that such evidence ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing 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. The Ld. CIT(A)'s action of deleting the disallowance of Rs. 61,46,712/- is therefore justified & accordingly upheld. Ground No. 3 of the Revenue's appeal is therefore dismissed. 7. Ground No.4 of the Revenue's appeal is as under: That on the facts and in the circumstances of the case, the ld. CIT(Appeals) erred in deleting the disallowance of Rs. 8,15,20,814/- relying on the submission of the assessee that the payment of tax on tax on TDS was made but due to inadvertent error as wrong assessment year was quoted on challans, ignoring the fact that the payment of tax on account of TDS was for different period which is evident from the face of challans and as such expenses of Rs. 8,15,20,814/- was rightly disallowed u/s 40(a)(ia). 7.1 In Para 1.1 of the assessment order, the Ld. AO carried out verification with regard to the taxes deducted by the assessee from vario ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... herefore submitted that this Section could be invoked only where taxes were not deducted or after having been deducted were not paid. In the facts of present case, the taxes were deducted from the expenditure of Rs. 8,15,20,814/- and also paid to the credit of Government within the time permitted in Rule 30. Even the payees got the credit of the taxes deducted at source in the relevant AY 2010-11. In the circumstances a mere mistake of mentioning wrong assessment year i.e. AY 2011-12 in place of AY 2010-11, was of no relevance to justify disallowance under Section 40(a)(ia) of the Act. The Ld. AR further submitted that the observations recorded by the Ld. CIT(A) in this context at Para 14.4 of his impugned order may also be taken into consideration. The relevant findings of the Ld. CIT(A) were as follows: "14.4 I have considered the submission made. It is undisputed that the appellant had made TDS of the amounts relating to the payments under consideration. The deducted tax had also been deposited in the government account. However, as explained by the appellant, while depositing the tax, the assessment year on the challan has been wrongly mentioned as AY 2011-12 instead of AY 20 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f the I. T. Dept. the credit for taxes was reflected in AY 2010-11. Even the Assistant Director (Systems), CPC confirmed that the challans were given credit for the AY 2010-11. Having regard to these facts, we are of the considered view that 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 of Rs. 8,15,20,814/- is therefore upheld. Ground No. 4 of the Revenue's appeal is therefore dismissed. 8. Ground No. 5 of the Revenue's appeal is as under: That on the facts and in the circumstances of the case, the ld. CIT(Appeals) erred in holding that the disallowance of expenses under the advertisement of Rs. 3,00,000/- was not warranted as payments were made through account payee cheques, ignoring the fact that the payee had denied rendered any service on account of advertisement and only payment maed through payee cheque does not certify the genuineness of transactions as payee had denied having rendered any services to the assessee. 8.1 Briefly stated, the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ever, if deemed fit, inform the assessing officer of the payee regarding the above payment." Aggrieved, the Revenue is in further appeal before us. 8.2 The Ld. DR appearing on behalf of the Revenue strongly relied on the Ld. AO's order in support of the revenue's case on this issue.The Ld. DR submitted that the fact that the payee had denied of having any transaction with the assessee substantiated the fact that the advertisement expenditure claimed by the assessee was bogus. On the other hand the Ld. AR for the assessee strongly supported the impugned order of the Ld. CIT(A) giving relief to the assessee on this issue and submitted that the observations recorded by the Ld. CIT(A) in Para 7.2 of his impugned order may be taken into consideration. 8.3 We have considered the rival submissions and also perused the relevant material available on record. We find that before lower authorities the assessee had furnished copy of the invoice dated 15.09.2009 raised by M/s Disha Production & Media Pvt Ltd upon the assessee towards cost of full-page advertisement in their publication "IcorEkdin". In discharge of this invoice, the assessee had issued an account payee cheque bearing No. 1805 ..... X X X X Extracts X X X X X X X X Extracts X X X X
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