Vildirect: IncomeTax-caselaws-2006-VIL-349-ITAT-DEL

2006-VIL-349-ITAT-DEL

Equivalent Citation: ITD 101, 437, TTJ 104, 911, [2006] 9 SOT 99 (DELHI) (URO)

Income Tax Appellate Tribunal DELHI

I.T.APPEAL NOS. 4943 (DELHI) OF 2002 AND 4944 (DELHI) OF 2002

Date: 16.06.2006

MARUBENI INDIA (P.) LIMITED.

JOINT COMMISSIONER OF INCOME-TAX, SPECIAL RANGE - 23, NEW DELHI.

BENCH

Member(s) : R. V. EASWAR., P. M. JAGTAP.

JUDGMENT

Per R.V. Easwar, Vice President. - The assessee-company, a 100 per cent subsidiary company of Marubeni Corporation ofJapan, was incorporated as a private limited company on21-5-1996. With effect from1-6-1996, the assessee commenced business after taking over the assets and liabilities of the liaison office of Marubeni Corporation, the Japanese company. The main business of the assessee is international trading in various items such as textiles, chemicals, energy, metal etc. It took over eighteen employees of the Japanese company who were working in the liaison office, on deputation basis. These employees were to continue to be also employees of the Japanese company and thus, there was a kind of a dual employment. The salaries and perquisites which these employees were receiving from the Japanese company were continued to be received by them. These salaries and perquisites were paid by the Japanese company not inIndia but outside. For their services to the assessee, they were paid a comparatively small amount of salary and perquisites.

2. In the previous years relevant to assessment years 1997-98 and 1998-99, the assessee claimed to have paid to the aforesaid employees by way of incentives the taxes which they have to pay inIndiain respect of the salary and perquisites received by them from the Japanese company outsideIndia. The taxes amounted to Rs. 4,21,87,756 for the assessment year 1997-98 and Rs. 2,78,28,161 for the assessment year 1998-99. The amounts were claimed as deduction in computing the income for income tax purposes. It would appear that for both the years, the deductions were not claimed in the original returns but were claimed in the revised returns. It further appears that the amounts were claimed as deduction in the profit and loss account relating to assessment year 1999-2000 (year ended 31-3-1999) on payment basis but the tax auditors of the assessee while preparing their report had disallowed the same on the ground that the payments related to assessment years 1997-98 and 1998-99 and on this basis, revised returns would appear to have been filed for the assessment years under consideration. The Assessing Officer did not make an issue out of this but held that the amounts cannot be allowed as a deduction. His reasons are contained in the assessment order for the assessment year 1997-98. They are as under:-

(a) The assessee did not file the copy of the agreement with the staff or other documents to show that it was liable under the terms of employment to pay the aforesaid sums.

(b) The liability to pay the aforesaid amounts was not ascertained and this was admitted by the assessee.

(c) The liability was a contingent liability both at the time of closing the accounts for the years under consideration and at the time of filing the returns. It was, therefore, not an expenditure.

(d) The accounts of the assessee having been duly closed and adopted by the Board of Directors and the shareholders could not be interfered with after a lapse of three years. For the above reasons, the Assessing Officer disallowed the claim for deduction.

3. The CIT(A) held that the assessee had failed to deduct taxes from the salaries paid to the expatriate employees despite clear liability imposed by section 9(1)(ii), that when the Department started enquiries regarding the assessee's failure to deduct taxes and when some of the Japanese companies were also surveyed, the assessee came forward to pay the tax on the salaries of the expatriates received by them outside India and these taxes which were actually paid in discharge of the assessee's liability under section 201 of the Act were attempted to be disguised as payment of incentives to staff and in these circumstances, the amounts cannot constitute deduction in computing the assessee's taxable profits. He relied on the judgment of the Hon'ble Supreme Court in the case of Indian Aluminium Co. Ltd. v. CIT [1971] 79 ITR 514. Without prejudice to the above reasons, the CIT(A) also endorsed the reasons given by the Assessing Officer to the effect that there was no ascertained liability and that the assessee did not adduce any material to show that there was an ascertained liability. He also referred to the assessee's letter of9th September, 2002where it was admitted by the assessee that there was no contract with the expatriate employees regarding payment of the incentive. In the absence of any enforceable contractual liability, the amounts were not allowable as a deduction. In this view of the matter, he dismissed assessee's appeals on this point.

4. The assessee is in further appeal before the Tribunal. Mr. S.D. Kapila, the learned counsel for the assessee did not dispute that there was no contract in writing with the expatriate employees but submitted that there was an oral arrangement with them that whatever taxes they were liable to pay in respect of the salaries and perquisites received by them from the Japanese company outside India would be paid by the assessee-company by way of an incentive. He submits that the salary paid by the assessee to these employees was not much compared with what they were getting from the Japanese company which was their other employer, but since they had the expertise in international trading which was very necessary for the efficient functioning of the assessee-company, they had to be retained by the assessee by offering them attractive incentives which, in the present case, took the form of the tax payments which they were bound to make to the Indian Government in respect of the salaries and perquisites received by them from the other employer (Japanese company) outside India. This, according to Mr. Kapila, was the arrangement under which the services of the employees were seconded by the Japanese company to the assessee-company and it was in the assessee's own interest to pay the incentive and retain the services of the employees. He pointed out that there was no survey in the assessee's case nor was any order passed upon the assessee under section 201(1) or (1A) in respect of the salary paid to the expatriate employees outsideIndiaby the Japanese company. He also contended that the provisions of section 192 were not applicable to the assessee's case in respect of the above salaries. What Mr. Kapila was at pains to point out was that the amount of taxes was paid voluntarily on ground of commercial expediency. He relied on the judgment of the Hon'ble Delhi High Court in CIT v. Tej Quebecor Printing Ltd. [2006] 281 ITR 170.

5. In the alternative, Mr. Kapila submitted that there was a contractual liability on the part of the assessee-company, which was an ascertained liability, which got crystallized the moment the assessee took in the eighteen expatriate employees and there was nothing contingent about the liability and therefore, even on this basis, the assessee would be entitled to the deduction of the liability. Again, he submitted that there is no bar on the liability being undertaken in pursuance of an oral arrangement as held by Hon'ble Supreme Court in the case of CIT v. Chandidal Keshavlal & Co. [1960] 38 ITR 601 and also drew our attention to pages 11 to 13 of the paper book which contains the working of the taxable income of the employees to show the commitment of the assessee to pay the taxes on the salaries paid in India by the assessee. Mr. Kapila submitted that similarly the assessee had undertaken to pay the taxes payable by the employees on the salaries and perquisites received by them outsideIndiafrom Marubeni Corporation ofJapanby way of incentives. Our attention was drawn to section 17(1)(iv) read with section 17(2)(iv) to show that where taxes which are the liability of the employee are paid by the employer, it would be considered as a perquisite and included in the salary and if that is the correct position in law, even if the taxes are taken as part of the perquisites of the employees, they are allowable as part of the salary itself. In this connection, Mr. Kapila also pointed out that the taxes finally paid were grossed up amounts and not merely the amounts deductible under section 192 and that when the assessee paid those amounts during the year ended31-3-1999, the Department accepted them and also dropped the proceedings initiated under section 271C for imposing penalty. The submission was that if the perquisites are part of the salary and if the salary relates to assessment years 1997-98. and 1998-99, the perquisites are also allowable as deduction in those years as it would be incongruous to say that while the salary is allowable as a deduction in those years, the perquisites cannot be so allowed.

6. The alternative prayer of Mr. Kapila was that in case the amounts are not found in law allowable for the years under appeal, a direction should issue that they should be allowed in the year of payment namely assessment year 1999-2000.

7. Mr. Sudhir Chandra, the learned CIT-DR besides strongly relying on the orders of the Income Tax authorities, posed the question as to why the assessee did not pay the taxes in the relevant years if it was really under a contractual liability with the employees to pay the same, but waited till those years went by and chose to pay the same only in the previous year ended 31-3-1999. He also pointed out that it is significant, in the above background, that the claim was not put forth in the original return of income, nor within any reasonable period thereafter, but was made only after the tax auditors pointed out that the payments did not relate to assessment year 1999-2000. Mr. Sudhir Chandra submitted that the assessee in truth and reality was not under any contractual liability to pay the taxes of the employees but was forced to pay them pursuant to the assessee's settlement with the CBDT through the Japanese Chamber of Commerce when the Department had taken steps to unearth the fact that several non-resident companies were not complying with the provisions of the tax deducted at source and the assessee, having been forced to pay the taxes in the year ended 31-3-1999, was now trying to exploit that situation and trying to make a virtue out of necessity by contending that it was actually liable to pay the taxes as an incentive to the employees under the terms of employment. Mr. Sudhir Chandra pointed out that it is significant that there was no written contract when the services of the employees were seconded to the assessee and that situation is also being sought to be taken advantage of by the assessee now by contending that everything was under an oral arrangement. It is thus contended that the amounts were rightly not allowed as deductions.

8. We have carefully considered the facts and the rival contentions and have also gone through the paper book filed by the assessee. The first question is whether there was a liability on the part of the assessee to pay the amount of taxes which the employees were liable to pay in respect of the salaries received by them outsideIndiafrom Marubeni Corporation, the Japanese company. As admitted by the assessee, there was no contract between the assessee and the employees in writing. However, the case is put forth on the footing that the arrangement was oral. If the arrangement is oral, then we are unable to appreciate as to why the assessee or the employees chose to wait for more than two years before making the payment of the taxes. Even from the inception, the employees were employed also by the Japanese company on substantial salaries and perquisites which were paid to them outsideIndia. Their services were merely seconded to the assessee and compared to the salaries which they were receiving from the Japanese company, what the assessee was paying them was very little. For instance, the salary paid to an employee by name Tomoiya Tomota for the period from1-4-1996to31-3-1997by the assessee-company was Indian Rupees 5,50,892 compared to the salary of Rs. 38,67,789 paid by the Japanese company outsideIndia. The taxes payable on the salary paid by the Japanese company would, therefore, amount to a substantial amount which the employees would not like to delay. Further, if the employees were so important to the assessee because of their expertise in international trading, it stands to reason and probabilities that the assessee would employ them under clear terms and conditions reduced to writing. We have not been informed 3 as to whether even the salary paid by the assessee-company to the expatriates was only under oral arrangement or whether there was a contract in writing. Considering the fact that we are dealing with people involved in business and professionals who come from Japan all the way to India, it is difficult to believe that the entire arrangement was not formalized or reduced into writing and was merely oral. The inference is that there was no such arrangement either in writing or oral. The assessee merely agreed to pay the salary to the employees when their services were seconded by the Japanese company. If there is no contractual liability, then the amounts cannot be claimed as a deduction for the years under appeal. It is also difficult to imagine that the assessee-company, well advised in its income tax matters, would not have claimed the liability as a deduction in the returns for the years filed originally since the amounts were quite substantial. What seems to have happened, as pointed out by the CIT(A) in rather strong terms, is that the assessee was compelled to pay the taxes in respect of the salaries of the employees received by them outside India from the Japanese company, which the Japanese company ought to have deducted and paid to the Indian Government under section 192 of the Act. Since it failed to do so and since it was a non-resident company, and since the assessee was its 100 per cent subsidiary, there was pressure brought upon the assessee-company to settle the matter with the Income-tax Department by paying the tax component referable to the salaries paid to the employees by the Japanese company outsideIndia. This is borne out by the letter dated21-12-1998written by the assessee-company to the Joint Commissioner of Income-tax, TDS Range-23, Mayur Bhawan,New Delhi. This letter is as under:-

"Dear Sir,

Please refer to the discussions between the Commissioner of Income-tax, Delhi-VI and the President of the Japanese Chamber of Commerce and Industry inDelhi. Accordingly, we have calculated the total tax and interest that may be payable by the employees, posted at our various offices inIndiacommencing from the financial year 1996-97.

We have paid the amount, as per the commitment on our behalf, by the President of the Japanese Chamber of Commerce & Industry inNew Delhi.

Thanks for your kind understanding on this matter.

Yours sincerely,

Marubeni India Pvt. Ltd.,

Sd/-

A. KATO, General Manager

                           Original Challan filed in salary

                           TDS file for year 1996-97.

CC.

1. CIT, Delhi-VI.

2. ACIT, Circle 23(3).

Enl.: 4th Counterfoil of Challans worth Rs. 8,09,37,466."

There is no need to refer to any commitment on behalf of the assessee, as has been mentioned in the aforesaid letter, to pay the taxes if really the assessee was under a contractual liability with the employees to pay the taxes as incentive and thus as part of their salary. There was also no reason to hold any discussions with the CIT, Delhi-VI and the President of the Japanese Chamber of Commerce & Industry inDelhi. The letter shows that the amounts were paid not under any contract with the employees, but in order to settle some controversy arising out of non-deduction of tax under section 192 of the Act in respect of the salaries paid by the Japanese company to the expatriate employees outsideIndia. It seems to us that the amount that was to be deducted and paid by the Japanese company as taxes on the salaries was paid by the assessee-company under an arrangement or settlement with the Income-tax authorities. We are unable to accept the assessee's claim that they are paid under a contractual liability. It appears to us that there was no liability at all in the first place.

9. In the above view taken by us, it is not necessary for us to consider whether the Income-tax authorities were right in saying that the liability was contingent. It is also not necessary for us to consider the question whether the taxes allegedly paid as incentives formed part of the salary of the employees for the assessment years 1997-98 and 1998-99 and consequently constituted deduction for those years.

10. The learned counsel for the assessee took us through the letter dated18-1-2000written by the assessee to the Assessing Officer giving justification for the late claiming of the incentive paid to the expatriate employees in the form of taxes. The letter vaguely refers to the eligibility of the employees for incentives for working in India and goes on to say that there was no clear idea as to whether the incentive is to be paid to them or not and if it is to be paid, what would be the amount. This letter is actually a give-out. If there was no clear idea at all as to whether the assessee was liable to pay the incentive, it really means that there was no ascertained liability at all. We are not merely referring to the difficulty in ascertaining the amount of the incentive. Even the very question whether the assessee was liable to pay the taxes as incentive was not clear, according to the assessee. The statement that the employees were eligible for "some bonus and incentive for working inIndia" in the letter is quite ambiguous and non-committal. Nothing can be inferred therefrom in favour of the assessee.

11. For the above reasons, we hold that the Income-tax authorities were right in saying that there was no ascertained liability for payment of the taxes as incentives.

12. That takes us to the question whether the amounts can be allowed on grounds of commercial expediency. We do not see how they can be so allowed. A sum of money expended not out of necessity and with a view to a direct and immediate benefit to the trade, but voluntarily and on grounds of commercial expediency and in order indirectly to facilitate the carrying on of the business, may yet be expended wholly and exclusively for the purpose of the company's business. The argument based on the principle of commercial expediency does not, however, accord with the facts of the case. We have already seen that there was no contractual liability undertaken by the assessee at the time when the services of the employees were seconded to it by the Japanese company to pay the tax in question as incentive to them and as p part of their salary payable by the assessee-company. If such a liability had been undertaken, it was not necessary for the assessee to put forth its claim on the principle of commercial expediency at all. The company cannot, at the same time, say that there was a contract - oral arrangement - with the employees to pay the taxes and, at the same time, contend that the taxes were paid not under any oral arrangement but voluntarily on grounds of commercial expediency and indirectly to facilitate the carrying on of the business. The argument based on the principle of commercial expediency is in any cost available to the assessee only in the year of payment i.e., assessment year 1999-2000. It is only in that year that the amount was actually paid without any pre-existing liability and therefore, this argument is open to the assessee to be raised only in that year. We, therefore, do not see how the amounts can be allowed as a deduction on the principle of commercial expediency for the years under consideration. Actually Mr. Kapila, perhaps realizing this difficulty, prayed only for a direction to be issued that the amounts should be allowed as a deduction in the assessment year 1999-2000. That year is not before us and therefore, we are unable to accede to the prayer.

13. For the aforesaid reasons, we are unable to allow the amount of taxes paid by the assessee as incentive, as a deduction in the assessment years 1997-98 and 1998-99.

14. In respect of the assessment year 1998-99, there are two other grounds. The first is against the disallowance of the employer's contribution of Rs. 1,77,477 to the provident fund by invoking section 43B. This issue is now covered by the order of the Special Bench, Chennai dated16-3-2006in the case of Kwality Milk Foods Ltd. v. Asstt. CIT [IT Appeal No. 856 (Mad.) of 2005]. In this order, the Special Bench has held that the amendments made to section 43B by the Finance Act, 2003 were curative in nature and accordingly, they take retrospective effect and if so any amount paid by the employer as contribution to the provident fund up to the due date for filing the return of income under section 139(1) can be allowed as a deduction. Respectfully following the order of the Special Bench, we direct the Assessing Officer to verify the details of the payment made up to the aforesaid date and allow the same as deduction. The ground is disposed of in these terms.

15. The other ground is against the disallowance of Rs. 1,96,204 being the employees' contribution to the provident fund. The amount was assessed as income under section 2(24)(x) of the Act. The claim is that any amount deposited by the assessee with the provident fund authorities within the grace period as provided under the provident fund law may be directed to be allowed. In respect of this issue, namely, whether amounts paid within the grace period can be allowed as a deduction, there is a judgment of the Hon'ble Madras High Court in CIT v. Salem Cooperative Spg. Mills Ltd. [2002] 258 ITR 360 which says that such amounts should be allowed as a deduction whereas the Hon'ble Kerala High Court in CIT v. South India Corpn. Ltd. [2000] 242 ITR 114 has held that even then no deduction is allowable. Adopting the view in favour of the assessee, in the absence of any judgment of the Hon'ble Jurisdictional High Court on the question, we direct the Assessing Officer to verify the dates of payment and allow those payments which fall within the grace period given as per the provident fund law. This ground is disposed of in these terms.

16. In the result, the appeal for assessment year 1997-98 is dismissed and the appeal for assessment year 1998-99 is partly allowed.

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