Unreported Decisions – March 2019
By Ajay R. Singh, Advocate
1. S. 263 : Commissioner – Revision of orders prejudicial to revenue – Held, mere fact that the AO did not make any reference to the issues in the assessment order cannot make the order erroneous when the issues were indeed looked into – Held, AO made enquiries and was satisfied with the replies of the assessee, order of revision was held to be invalid.
The assessee-company is engaged in the business of shipping and forwarding agent. After taking the submission and explanation on record, the assessment was completed u/s. 143(3) of the Act.
The assessment order was revised by ld. PCIT by exercising the power u/s. 263 on 28-02-2018. The ld. PCIT concluded that the AO passed the assessment order without making enquiry that should have been made, which has rendered the assessment order erroneous and so far as prejudicial to the interest of revenue and that Explanation 2 of section 263(1) is clearly attracted. The ld. PCIT set-aside the assessment order and directed the AO to make fresh assessment order after making the detailed enquiry.
The Tribunal held that in the assessment order, the AO has not discussed the issue, which is sought to be revised by ld. PCIT. However, the AO during the assessment vide its notice dated 18-12-2015 raised the specific enquiry vide question no. 19, which we have reproduced below: “19. Please file copies of service tax return along with the enclosures. It is observed that higher turnover reported in service tax return than the IT Return please reconcile.” The assessee vide its reply dated 29-01-2016 furnished re-conciliation income as per income tax return as well as service tax return. The assessee also furnished the complete details of service tax return. The assessee furnished note on return filed with service tax authority and has clearly mentioned that assessee is an agent of various foreign shipping lines. Thus, it can be seen that the assessee has furnished complete details to the AO. The AO after his satisfaction and without mentioning anything about the issue accepted the contention of assessee. The Hon’ble jurisdictional High Court in CIT vs. Gabriel India  [203 ITR 108 (Bom)], held that when the A.O made enquiries with regard to the expenditure incurred by assessee. The assessee furnished detailed explanation in this regard by a letter in writing. All are part of the record of the assessee and the claim was allowed by ITO on being satisfied with the explanation of assessee. Such decision of ITO cannot be held to be erroneous in his order; he has not made elaborate discussion in this regard. Similarly, the ITAT relied on Hon’ble Gujarat High Court in CIT vs. Arivind Jewellers [259 ITR 502 (Guj)] and the Hon’ble Delhi High Court in CIT vs. Ashish Rajpat  [320 ITR 674(Del.) and held that merely because the assessment order does not refer to query raised by A.O during the scrutiny and response of the assessee thereto it cannot be said that there was no enquiry and the assessment order is erroneous and prejudicial.
Held that the Assessing Officer made specific enquiry with regard to service tax return and receipt of income in the original assessment and accepted the same, therefore, the order passed by assessing officer is not erroneous. Therefore, appeal of the assessee is allowed.
M/s. Poseidon Shipping Agency P. Ltd. vs. Pr. CIT-5, ITA No. 2446/Mum/2018, DOH: 14/12/2018 (Mum)(Trib.)
2. S. 9(1)(vii) : Income deemed to accrue or arise in India – Fees for technical services – Testing & Certification service – TDS – DTAA – India – USA.[Art. 12(4)][ u/s 40(a)(i) & 195 of the Act] : PRINCIPLE OF CONSISTENCY EXPLAINED :
The assessee is engaged in the business of manufacturing of switch mode power supplies and other computer peripherals in its factory located in SEEPZ and the products were being mainly exported to US and European countries. The assessee availed certification services from non residents in US for certifying its products to be sold in USA and Europe which was a pre condition for selling the products in those markets as the assessee has to ensure that the products meet the minimum quality standard. For the said purpose the assessee paid ₹ 29,77,958/- to five parties as mentioned above and to the remaining two parties assessee paid professional charges for compilation of documents in USA for the purpose of transfer pricing requirements. The assessee made the payment towards the services rendered out in USA by these certification agencies and professional firms.
The AO was of the view that the said testing and certification was required to be utilized in the manufacturing activity of the assessee company. The appellant, while making the payment to the foreign entities, had not deducted TDS. Accordingly, the AO has made the disallowance to the income of the appellant u/s. 40(a)(i). The AO treated the same as fees for technical services and stated the same to be covered under Article 12(4) of the DTAA between India and USA and accordingly held that withholding of tax was required under section 195 failing which the provisions of section 40(a)(i) of the Act were invoked and the expenditure was disallowed.
The Tribunal held that the payments were made to non residents for rendering services outside India and the recipients were not having any PE in India and thus income does not accrue or arise in India as there was no business transactions in India. Since the recipients do not have any PE in India and under Article of “Business Profit” of Double Taxation Avoidance Agreement such payments are not chargeable to tax in India unless the services were made available to the assessee in India. Article 12(4) of DTAA between India and USA, such fee is chargeable to tax in India if such services “make available”, technical knowledge, experience, skill, knowhow and a process or transfer of technical plans or designs. However, all these certification agencies and professional firms have not made available such services to the assessee such as knowhow. Therefore, service rendered by them outside India is not chargeable to tax in India and the provisions of section 195 of the Act are not applicable and consequently the assessee is not liable to deduct TDS at source. Therefore disallowance under section 40(a)(i) of the Act is not correct. The ITAT relied on the decision in the case of DIT vs. TUV Bayren India Ltd. (2015) 234 Taxman 388 Bom wherein the Hon’ble Bombay High Court has held that audit work and certification would not come within the realm of fees for technical services under section 9(1)(vii) and under 12(4) of Indo-German DTAA. In the case of Diamond Services International P. Ltd. vs. UOI (2008) 304 ITR 201 (Bom.) it was held by the Hon’ble Bombay High Court that payment without TDS made for grading certificate issued by foreign company to Indian clients involving no transfer of technical knowledge or skill. There was no imparting of its experience by the institute in favour of client. Similarly, in the case of Inspectorate International Ltd. vs. Asst. CIT (2018) 95 taxmann.com 229 (Delhi Trib.) it was held by the co-ordinate bench of the Tribunal that where inspection and testing services rendered by a UK based company to Indian customers but no technical knowledge, etc. were made available so as to enable recipients to use those services independently, payments received could not be termed as fee for technical services.
Moreover, on the principle of consistency also the Hon’ble Bombay High Court has held in the case of Pr. CIT vs. Quest Investment Advisors Pvt. Ltd (2018) 409 ITR 545 held that on the principle of consistency no disallowance is warranted when a fundamental aspect is accepted in other years. There is no change in facts and in law in the present case also. The expenses were allowed under similar facts by the Revenue in the earlier and succeeding years. Therefore, on this ground also disallowance is not called for. Accordingly, the order of Ld. CIT(A) was set aside and the AO was directed to allow the deduction. In the result, appeal of the assessee was allowed.
M/s. EOS Power India P. Ltd. vs. DCIT-9(1)(1), ITA No.1043/Mum/2017, DOH: 15/01/2019 (Mum)(Trib.)
3. S. 40A (3) : Expenses or payments not deductible – Aggregate cash payments exceeding prescribed limits – Payment made to same person in a day was less than ₹ 20,000 – Provision restricting payment in excess of ₹ 20,000 to a person in a day applicable from A.Y. 2009- 10 only. [40A (3)]
Cash payments exceeding prescribed limits – payment to transporter is more than ₹ 20,000/- – the assessee has furnished the particulars of parties to whom the payment was made – parties are identifiable – set aside the finding of the CIT(A) on this issue and direct the A.O to examine the claim of the assessee.
During the assessment proceeding the A.O noticed that the assessee made the payment in cash to transporters in excess of ₹ 20,000/- in violation of provisions of Sec. 40A(3) of the I.T. Act. There were two categories of such payments in which one category is in connection with the aggregate payment to a single party in a single day exceeded ₹ 20,000/-. The other category is where the single payment was made in excess of ₹ 20,000/-.
The Tribunal held that regarding the first category of the payment in which the assessee paid the aggregate amount more than ₹ 20,000/- paid to a single party in a single day was prospectively amended w.e.f. 01-10-2009 i.e., from A.Y.2009-10 in view of the amendment made in provision of section 40A(3) of the Act by Finance Act 2008, therefore, the addition raised by the A.O and confirmed by the CIT(A) is not liable to be sustainable because the present assessment year is A.Y. 2005-06, therefore, undoubtedly, the provision of aggregate payment to a single party in a single day would not applied in the present assessment year of the assessee i.e.2005-06. In support of the claim, the assessee placed reliance upon the decision of the Hon’ble High Court of Karnataka in case titled as A. N. Swarna Prasad Vs/ Additional Commissioner of Income Tax Range – 2  230 taxman 536/56 taxman.com 138 and decision of ITAT, Hyderabad ‘A’ Bench in case titled as Sonali Castings (P.) Ltd. vs. Deputy Commissioner of Income tax  88 taxmann.com 869. The addition made by the A.O and confirmed by the CIT(A) on account aggregate payment to a single party in a single day is not liable to be sustainable in the eyes of law.
Regarding the other category of the payment the assessee has explained the payment and also furnished the particulars of parties to whom the payment was made and the parties are identifiable and the list of the parties are given, therefore, the payment of amount is well explained. It is not in dispute that the assessee made the payment is in excess of ₹ 20,000/- in cash, it is noticed that the assessee has given the PAN Nos. of some parties to whom the payment was made. Since the claim of the assessee has not been verified on the basis of evidence given by the assessee, therefore, issue was set aside and directed the AO to examine the claim of the assessee afresh after providing an opportunity of being heard to the assessee in accordance with law.
M/s. Regent Steel Ltd. vs. ACIT-7(2), ITA No.2061-2062/Mum/2016, DOH: 30/01/2019 (Mum) (Trib.)