RICH GRAVISS PRODUCTS P LTD. Vs. THE ADDL. COMMISSIONER OF INCOME TAX
LAWS(IT)-2014-8-34
INCOME TAX APPELLATE TRIBUNAL
Decided on August 28,2014

Rich Graviss Products P Ltd. Appellant
VERSUS
The Addl. Commissioner Of Income Tax Respondents

JUDGEMENT

B.R.Baskaran, Member (A) - (1.) THE present appeal has been filed by the assessee against the order of the CIT(A) -13, Mumbai, dated 06.06.2011 relevant to Assessment Year 2007 -08. The assessee has taken the following grounds of appeal: "1. (i) Commissioner of Income Tax (Appeals) -13, Mumbai [hereinafter referred to as CIT(A)] erred in confirming disallowance of professional fees of Rs. 41,84,737 u/s. 40(a)(i) of the I.T. Act on the ground that tax has not been deducted on the said payment made to RPC a Non -resident Your appellant submits that fees paid to RPC are not chargeable under the I.T. Act and hence provision u/s. 195 is not applicable to the said payment. (ii) The CIT(A) erred in not adjudicating the grounds in appeal relating to disallowance of legal/professional fees of Rs. 41,84,737/ - paid to M/s. Rich Products Corporation (RPC), USA made by AO treating the same as capital in nature not allowable u/s. 37(i) of the I.T. Act. Your Appellant submits that professional fee paid to RPC is for the purpose of its business activity and same shall be allowed as deductible business expenditure.
(2.) THE CIT(A) erred in confirming the disallowance of architect fees of Rs. 45,000/ - on the ground that the expenditure incurred is capital in nature. Your Appellant submits that the architect fee is incurred in the normal course of carrying on the business activity and same shall be allowed as business expenditure. (i) The CIT(A) erred in confirming the disallowance of software expenses of Rs. 97,968/ - by holding that the Appellant has not deducted tax u/s. 194J of the Act on software expenses and hence covered by sec. 40(a)(ia) of the I.T. Act. Your appellant submits that on the fact and circumstances of the case, no TDS is deductible on the software expenses and the AO ought to have allowed the same as deductible expenditure. (ii) In the alternative and without prejudice to the above, the CIT(A) erred in not a lowing depreciation on the computer software expenses of Rs. 97,968/ - as the TDS has not been deducted on the same.
(3.) (i) The CIT(A) erred in making addition of Rs. 2,29,980/ - being difference between opening Cenvat of Rs. 80,102/ - and closing Cenvat of Rs. 310,082/ - u/s. 145A of the I.T. Act. (ii) The CIT(A) erred in confirming the addition of Rs. 2,36,021/ - on protective basis to the total income on account of the alleged adjustments of excise duty and VAT on closing stock of raw material u/s. 145A of the I.T. Act. Your Appellant submits that on the facts of the case, no adjustments was required to be made u/s. 145A of the Act and that AO shall be directed to delete the addition made to total income." 2. Vide ground no. 1 the assessee has objected to the confirmation of disallowance of professional fees of Rs. 41,84,737/ - u/s. 40(a)(i) of the Act. The assessee had paid consultancy services fee of Rs. 41,84,737/ - to M/s. Rich Products Corporation (hereinafter "RPC"), USA, for exploring the export market without making any TDS on the payment. The AO held that the expenditure was for exploring new market was a legal/professional fee and it was a capital expenditure, since exploring export market would give an advantage of enduring benefit. Accordingly, the AO held that the above payment was not allowable u/s. 37(1) of the Act. He further held that the expenditure was also in the nature of "Fees for technical services" on which the assessee was required to make TDS. Since the assessee did not deduct TDS, the AO held that the expenditure was not allowable u/s. 40(a)(i) also. However, it was contended by the assessee that the TDS was not deductible on the said payment since the payee was a foreign resident and the same was not taxable in India. The AO did not accept the said contention of the assessee by placing reliance upon the decision of the Hon'ble Karnataka High Court in the case of CIT (Intl. Taxation) v. Samsung Electronics Co. Ltd. [ITA No. 2808 of 2005] (320 ITR 209). Accordingly he disallowed the said expenditure and added the same into the income of the assessee. 3. The learned CIT(A) also held that the expenditure incurred on exploring new market was capital expenditure. In this regard, he relied upon the judgment of the Hon'ble Bombay High Court in the case of J K Chemicals Ltd. : 207 ITR 985 (Bom). He further observed from the agreement of the assessee entered with the said M/s. Rich Products Corporation that the said agreement did not state that the services would not be provided in India. He, therefore, held that the income of M/s. Rich Products Corporation was taxable in India as "fees for technical services" "made available" in India. Referring to the Explanation inserted below sec. 9(2) by Finance Act 2007 with retrospective effect from 1.6.1976, the Ld CIT(A) held that the fee for technical services would be deemed to accrue or arise in India in the hands of Non -residents, whether or not the nonresident had a residence or place of business or business connection in India. The Ld CIT(A) further held that since the technical services were utilised/made available to the assessee in India, the income of M/s. Rich Products Corporation (M/s. RPC) was taxable in India. Accordingly he held that the assessee should have deducted tax at source and since the assessee had failed to deduct the tax at source, he confirmed the disallowance made u/s. 40(a)(i) of the Act. 4. We have heard the representatives of the parties and have also gone through the record. Both the tax authorities have taken the view that (a) the above said expenditure was capital expenditure, since it was having enduring benefit and (b) the income of the recipient non -resident was taxable in India and hence the assessee was liable to deduct tax at source, apparently u/s. 195 of the Act. With regard to the nature of expenditure, the Ld A.R. has submitted that the assessee had paid the charges in connection with promoting the sale of assessee's new product line -"Frozen Desserts and Veggie Magic". He has further submitted that the said amount was neither paid in connection with setting up of any new unit, nor it was paid for acquiring any tangible or non -tangible asset. He has also submitted that the said expenditure did not bring any new asset into existence for the use of assessee. Accordingly he has contended that the said expenditure cannot be categorized as capital expenditure on any count. On the contrary, the Ld D.R. has placed reliance on the order passed by Ld CIT(A).;


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