ALKYL AMINES CHEMICALS LTD, NAVI MUMBAI V. DY CIT (OSD) 10(3), MUMBAI

ITA 1019/MUM/2020

• Counselvise Citation: [2022] 106 COUNSELVISE.COM (IT) 7442 (ITAT-MUMBAI)
• Duration Of Justice: 2 year(s) 5 month(s) 7 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 13-07-2022
• Appeal Filed By: Assessee
• Order Result: PartlyAllowed
• Bench Allotted: A
• Assessment Year: 2011-2012
• Appeal Filed On: 06-02-2020
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Keywords: Capital asset; Double taxation relief; Earning of tax free income; Services rendered outside India; Deemed to accrue or arise in india; Additional evidence; TDS; Rule 8D
• Section: 145; 10; 142(1); 14A; 143(1); 195; 143(2); 48; 9(1); 9(1); 9(1)

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL “A” BENCH, MUMBAI BEFORE SHRI S. RIFAUR RAHMAN, HON'BLE ACCOUNTANT MEMBER AND SHRI SANDEEP SINGH KARHAIL, HON'BLE JUDICIAL MEMBER ITA NO. 1019/MUM/2020 (A.Y: 2011-12) M/s. Alkyl Amines Chemicals Ld., 401-407, Nirman Vyapar Kendra Plot No. 10, Sector – 17 Vashi, Navi Mumbai – 400703 PAN: AAACA6783F v. DCIT (OSD)-10(3) Room No. 517, 4 th Floor Aayakar Bhavan, M.K. Road Mumbai - 400020 (Appellant) (Respondent) Assessee by : Ms. Shruti Agarwal Department by : Shri Mehul Jain Date of Hearing : 07.06.2022 Date of Pronouncement : 14.07.2022 O R D E R PER S. RIFAUR RAHMAN (AM) 1. This appeal is filed by the assessee against order of the Learned Commissioner of Income Tax (Appeals)-24, Mumbai [hereinafter in short “Ld.CIT(A)”] dated 15.11.2019 for the A.Y.2011-12. 2. Brief facts of the case are, assessee filed its return of income on 27.09.2011 declaring total income of ₹.16,18,69,143/-. The case was 2 ITA NO. 1019/MUM/2020 (A.Y: 2011-12) M/s. Alkyl Amines Chemicals Ld., processed u/s. 143(1) of Income-tax Act, 1961 (in short “Act”). The case was selected for scrutiny under CASS and notice u/s. 143(2) and 142(1) of the Act were issued and served on the assessee. In response AR of the assessee attended and submitted the information as called for. 3. Assessee is in the business of manufacture of Amines and Amines Derivatives. During the assessment proceedings Assessing Officer observed that company has made certain payments, outside India, as export commission to foreign commission agents for procuring export orders and testing charges. He observed that total payments made by the assessee are ₹.49,21,372/-. When the assessee was asked to submit details of TDS on these foreign remittances, assessee responded that the payments were made to non-residents of India and they do not have any branch or permanent establishment in India. Therefore, the payments are not deemed to accrue or arise in India. Assessing Officer issued show cause notice as to why these payments should not be added back u/s.40(a)(i) of the Act. Assessee filed detailed submissions by letter dated 30.01.2014, in the above submissions assessee contended that the export commission to foreign commission agents for procuring export orders are not in the nature of fees for technical services and as such cannot be subjected to withholding tax by relying on case laws. After considering 3 ITA NO. 1019/MUM/2020 (A.Y: 2011-12) M/s. Alkyl Amines Chemicals Ld., the submissions of the assessee, Assessing Officer disallowed the payments u/s. 195 of the Act by relying on few case law. 4. Further, Assessing Officer observed that assessee has declared an amount of ₹.69,48,659/- as dividend income which has been claimed as exempt income u/s. 10 of the Act. Assessee was asked to furnish the details of the same and furnish the details of expenditure incurred or attributable for earning the exempt income. Assessee submitted that no expenses incurred for the purpose of earning of exempt income, hence no disallowance u/s. 14A is called for. Assessee also not disallowed any expenditure relating to above income. By relying on certain decisions Assessing Officer invoked Rule 8D of I.T. Rules and accordingly, disallowed ₹.12.87 Lacs u/s. 14A r.w. Rule 8D of I.T. Rules. 5. Aggrieved assessee preferred an appeal before the Ld.CIT(A) and before the Ld.CIT(A) assessee filed detailed submissions which are reproduced below: - “The appellant has filed a written submission on 28.12.2015 in respect of the grounds raised in appeal, relevant part of which is reproduced as under: "Ground No.I The Appellant submits that the commission paid to non-resident agents was for procuring export orders outside India. These agents were rendering services outside India. 4 ITA NO. 1019/MUM/2020 (A.Y: 2011-12) M/s. Alkyl Amines Chemicals Ld., The Appellant also submit that the income would accrue in India only when a business connection involves a relation between a business carried on by a non resident which yields profits or gains and some activity in the taxable territories which contribute directly or indirectly to the earnings of those profits or gains. Thus, if a non-resident does not perform any operation in the taxable territory, i.e. India, which would contribute to his earnings, then there would be no business connection. In the present case, the foreign commission agents are not carrying any activity in India rather their work profile is limited to procurement of orders outside India. Therefore, it cannot be said that the commission income received by the foreign commission agents is deemed to accrue or arise in India. In this regard, the Appellant would lie to place its reliance on the decision of the Hon'ble Supreme Court in the case of CIT Vs. Toshoka Limited (125 ITR 525), wherein it has been held that "that the non-resident did not carry on any business operation in the taxable territories: they acted as selling agents outside India. The receipt in India of the sale proceeds of the tobacco remitted or caused to be remitted by the purchasers from abroad did not amount to an operation carried out by the non- residents in India as contemplated by cl.(a) of the Explanation to s. 9(1)(1) of the I.T. Act, 1961. The commission amounts which were earned by the non-residents for services rendered outside India could not be deemed to be income which had either accrued or arisen in India." The Appellant further relies on the decision of Hon'ble Mumbai Tribunal in the case of Indo Industries Ltd. v. ITO, Mumbai [2015] 53 taxmann.com 458, wherein it was held that “9. Nothing was brought on record by the AO to establish that the said non resident brokers have their place of establishment in India because they were operating in their respective countries. The said non-resident brokers are not liable to pay any tax in India in so far as it is also not the case of Revenue that services were rendered in India, therefore, neither there was accrual nor receipt of income in India. We found that the non-resident brokers have not rendered any services in India, therefore, commission income neither accrued nor arose in India. In view of the decision of the Hon'ble Delhi High Court in the case of CIT v. Eon Technology (P) Ltd. [2012] 343 ITR 366/2011] 203 Taxman 256/15 taxmann.com 391," The Appellant craves leave to further rely on the decision of the Hon'ble Madras High Court in the case of CIT v. Orient Express [2015] 5 ITA NO. 1019/MUM/2020 (A.Y: 2011-12) M/s. Alkyl Amines Chemicals Ld., 56 taxmann.com 331, wherein the Hon'ble High Court upheld the view taken by the lower authorities that an Assessee, manufacturer and exporter, cannot be fastened with liability to deduct TDS on payment of commission to non-resident agents for procuring export orders outside India. Further, attention may be invited to the decision of Hon'ble Delhi Tribunal in the case of Welspring Universal v. JCI [2010] 153 ITD 495, wherein it was held that where commission paid by assessee to non-resident agent for procuring export orders was not chargeable to tax in hands of said agent, assessee was not liable to deduct tax at source. In the aforesaid decision, it was observed by the Hon'ble Tribunal that "In order to bring any income within the ambit of section 9(1)(i), it is sine que non that the activity resulting into such income should be carried out in India. Notwithstanding the existence of a business connection in India, as even understood in the widest possible amplitude, an income will fall under section 9(1)(i) only to the extent it results from the operations carried out in India. If no operations for earning such income from business connection are carried out in India, the applicability of clause (i) to this extent is ruled out As admittedly, the non-resident payee carried out his operations outside India, the command of clause (1) of section 9(1) cannot apply. The other six clauses of section 9(1). namely, clause (ii) and (ii) dealing with income under the head "Salaries; clause (iv) dealing with 'Dividend; clause (v) with 'Interest; clause (vi) dealing with 'Royalty; and clause (vii) dealing with 'Fees for technical services, have no application the facts and circumstances of the instant case. The amount of commission paid to the non-resident cannot be described as salary or dividend or interest or royalty or fees for technical services." The Appellant further relies on the decision of Hon'ble Madras High Court in the case of CIT v. Fluidtherm Technology (P.) Ltd. [2015] 231 Taxman 259, wherein upon the similar facts that the non-resident agent had rendered all services outside India and payments were also received outside India, having no PE or business connection in India and, thus, there was no reason to hold that the foreign agent had earned any taxable income in India out of the commission paid by the assessee. The Appellant would further place its reliance on the decision of the Hon'ble Delhi High Court in the case of Commissioner of Income-tax, Delhi-IV, New Delhi Vs. EON Technology (P.) Ltd. (343 ITR 366) wherein it has been held that where the commission agent is not rendering any service or performing any activity in India itself, in such 6 ITA NO. 1019/MUM/2020 (A.Y: 2011-12) M/s. Alkyl Amines Chemicals Ld., case, commission income could not be said to have deemed to accrue or arise in India. In light of the foregoing settled legal position, the Appellant submits that the activity of the foreign agents could not be said to have a business connection in India as alleged by the AO and therefore, the question of their income to be deemed to be accrued or arisen in India u/s.9(1)(1) of the Act does not arise. Without prejudice to the above, the Appellant submits that activities performed by the said foreign commission agents does not also fall in the ambit of sec. 9(1)(vii) of the Act. Therefore, the question of deduction of tax at source u/s 195 of the Act does not arise. In this regard, Your Honour's attention is invited to the recent decision of Hon'ble Madras High Court in the case of Commissioner of Income-tax, Chennai v Faizan Shoes (P) Ltd. [2014] 48 taxmann.com 48, wherein it was held that when the assessee engaged in the services of non-resident agent to procure export orders and paid commission, the services rendered by the non-resident agent can at best be called as a definition of fees for technical services. Section 9 is not applicable to the case on hand and consequently, section 195 of the Act does not come into play. (Para 12). Further, reliance may be placed on the decision of Hon'ble Delhi High Court in the case of Director of Income-tax (International Taxation)- II v. Panalfa Autoelektrik Ltd [2014] 49 taxmann.com 412, wherein it was hold that commission paid by assessee to its foreign agent for arranging of export sales and recovery of payments could not be regarded as foo for technical services under section 9(1)(vii). The services rendered by the non-resident agent for the export commitment would not fall within the definition of fees for technical services' and since Section 9 would not be applicable to the case on hand. Section 145 of the Act does not come into play and consequently, disallowance u/s.40(a)(i) would not be warranted. Without prejudice to the above, the Appellant further submits that as per the provisions of the Double Taxation Avoidance Agreement ("DTAA") with the related countries, business profits are taxable only in the contracting state and not in the other contracting state i.e. India, unless the payee has any permanent establishment in India. Since, in the present case, none of the foreign commission agents had any permanent establishment in India during the captioned assessment year, in view of the provisions of DTAA, the income is not deemed to accrue or arise in India. 7 ITA NO. 1019/MUM/2020 (A.Y: 2011-12) M/s. Alkyl Amines Chemicals Ld., With regard to the present case, attention is drawn to the decision of the Hon'ble Income-tax Appellate Tribunal, Mumbai Bench, in the case of Gujrat Reclaim & Rubber Products Ltd. Vs. Additional Commissioner of Income-tax, 10(2) (35 taxmann.com 587), wherein it has been held that: “.............I am of the considered view that even after the withdrawal of Circular No.23 of 1969, the position will remain the same i.e. the commission paid to non resident agents is not liable to tax under the provisions of I.T. Act when the services were rendered outside India, services were used outside India, payments were made outside India and there was no permanent establishment or business connection in India. It cannot be accepted that by virtue of CBDT Circular No.23/1969, the commission paid to non-resident agents become not liable to income-tax in India and on such withdrawal of Circular by the CBDT, such commission paid to non-resident agents become liable to income-tax in India. Irrespective of Circular issued by CBDT, the question of taxability of such commission to income-tax has to be decided as per the provisions of section 9(1) of the Act. I am of the considered view that the provisions of section 9(1) are not applicable to the commission paid to such non-resident agents. Such income (commission) in the hands of Non- resident Commission Agents did not accrue or arise directly or indirectly, through or from any business connection in India. Such income to non-resident commission agents did not accrue or arise in India through or from any property in Indie or through the transfer of capital asset situated in India. In the facts and circumstances, the provisions of section 9(1) were not applicable to such payment of commission by appellant to non-resident agents Attention is also invited to the decision of the Hon'ble Bangalore ITAT in the case of Exotic Fruits (P) Ltd. Vs. Income-tax Officer (International Taxation) Ward-1(1), Bangalore (40 taxmann.com 348) wherein it has been held that export commission paid to non-resident agents would not be taxable in India in view of the fact that services of non-resident agents were rendered outside India and commission was also paid outside India. The Appellant also rely on the decision of the Hon'ble Income-tax Appellate Tribunal, Chennai Bench in the case of ACIT Vs. Capricon Food Products India Ltd. (38 taxmann.com 158) wherein it has been held that any sum paid to a non-resident for canvassing business abroad is not taxable in India as such income is earned outside India in the course of his business or profession carried outside India 8 ITA NO. 1019/MUM/2020 (A.Y: 2011-12) M/s. Alkyl Amines Chemicals Ld., Therefore, in view of the legal precedents and facts of the Appellant's case, the Appellant prays that the claim of commission expenses would not be disallowed u/s. 40(a)(i) of the Act. Without prejudice to the above, the Appellant prays that the AO be directed to adopt the correct figure of Rs.41.80 lacs which was paid to the Non-resident agents. (The same is evident from schedule of Expenditure in Foreign Currency at Paper Book Pg. No. 128). Ground No.III & IV: At the outset, may we point out that the AO failed to appreciate the fact that the Appellant had made the suo moto disallowance of Rs.1.13 lacs in the Return of Income u/s 14A read with Rule 8D of the Act. The same is evident from the Computation of Income and Tax Audit Report in Form 3CD (Refer Pg. No.99). The Appellant submitted requisite details along with the working of Rs.1.13 lacs as disallowed in the Return of Income during the assessment proceedings vide letter dated December 17, 2013. The Appellant had also submitted the working of disallowance as per the provisions of section 14A(2) read with Rule 8D of the Rules showing disallowance of Rs.7,05,876 at the request of the AO by considering interest on borrowed funds. The Appellant submits that the AO had not recorded the satisfaction in the assessment order denying the claim made by the Appellant in the Return of Income for invoking the provisions of Sec.14A(2) of the Act to make the disallowance as per Rule 8D(2) of the Rules. The Appellant submits that the application of Rule 8D is not automatic. To invoke Rule 8D, is duty bound to record his dissatisfaction in relation to the claim made by the Appellant and such dissatisfaction should be having regard to the books of account of the Assessee. Rule 8D is prescribed under sub-section (2) to section 14A of the Act, which reads as under The Assessing Officer shall determine the amount of expenditure incurred in relation to such income which does not form part of the total income under this Act in accordance with such method as may be prescribed. If the Assessing Officer having regard to the accounts of the assessee, is not satisfied with the correctness of the claim of the assessee in respect of such expenditure in relation to income which does not form part of the total income under this Act." 9 ITA NO. 1019/MUM/2020 (A.Y: 2011-12) M/s. Alkyl Amines Chemicals Ld., Thus, it is not a mechanical procedure that in every case where section 14A would apply, the formula in Rule 8D should be followed to compute the disallowance. To invoke Rule 8D, the AO should after considering the accounts of the Appellant, give a reasoned finding that he is not satisfied with the correctness of the claim of the Appellant in respect of expenditure in relation to income which does not form part of the total income under the Act and such 'non satisfaction' must be objective and judicious. In support of its above contention, the Appellant relies on the decision of the Hon'ble Mumbai Tribunal in the case of JK Investors (Bombay) Ltd. v. ACIT (ITA No.7858/M/2011) has held that the AO has the power to invoke Rule 8D on a condition that he first must examine the accounts of the assessee and then record by giving cogent reasons why he is not satisfied with the correctness of the Assessee's claim. In the absence of an examination of accounts and the recording of satisfaction, Rule 8D cannot be invoked. Further reliance may be placed on the decision of Hon'ble Mumbai Tribunal in the case of Raptakos Brett & Co. Ltd. v. DCIT [2015] 58 taxmann.com 115, wherein it was held that "There has to be some finding of the Assessing Officer that the assessee's claim is prima facie not tenable. The assessee has pointed out that entire investments have been made out of its own capital and internal accruals, therefore, no expenses can be said to be attributable. The claim of the assessee required examination by the AO having regard to the accounts of the assessee and the nature of expenditure which can be said to be attributable for earning of the exempt income. If such an examination has not been done and no satisfaction has been arrived, then the learned Assessing Officer cannot reject the assessee's claim and proceed to disallow u/s. 14A(2)." Thus, the AO shall determine the expenditure in accordance with the prescribed formula only if he is 'satisfied that the method adopted by the assessee is incorrect. If the AO is satisfied by the claim made by the assessee, the question of determining the expenditure incurred in relation to the exempt income in accordance with the prescribed formula in Rule 8D does not arise. Even in respect of indirect expenditure, the AO has not laid down any satisfactory reason and any direct nexus between the earning of exempt income and the expenditure. The Learned AO only drew the conclusion based on the assumption that the appellant must have incurred certain expenditure in relation to earning of such income. 10 ITA NO. 1019/MUM/2020 (A.Y: 2011-12) M/s. Alkyl Amines Chemicals Ld., Further, there was no material on record to show that any expense had been incurred in relation to earning of exempt income. The Appellant further draw Your Honour's attention to the decision of Hon'ble Punjab & Haryana High Court in the case of CIT vs. Hero Cycles [31 DTR 301] wherein it was held that it is not a mechanical procedure that in every case where section 14A would apply, Rule 8D would be followed to compute the disallowance. Rule 8D can be invoked only if the AO, after considering the accounts of the Assessee, is not satisfied with the correctness of the claim of the Assessee in respect of expenditure in relation to income which does not form part of the total income under this Act and such 'non-satisfaction' must be the basis. The Appellant, therefore, humbly prays that the disallowance u/s. 14A of the Act of Rs.12.87 lacs made by the AO be deleted. Without prejudice to the above, assuming without admitting that even if Rule 8D were to apply, no interest would be considered while calculating the disallowance u/r.8D of the Rules The Appellant submits that during the captioned assessment year, it held investment in the equity shares of its subsidiary company Alkyl Speciality Chemicals Limited amounting to Rs.81.91 lacs and another investment in the equity shares of Diamines and Chemicals Limited amounting to Rs.144.11 lacs, dividend income from which was exempt u/s 10(34) of the Act. The Appellant further submits that the aforesaid investments were made out of Appellant's own capital and internal cash accruals and no amount of its borrowing was utilized in making those investments as could be evident from the following table: F.Yr. Net Worth (Rs. In lakhs) Incremental borrowings in previous year (Rs. In lakhs) Investments made in previous year (Rs. In lakhs) 1998-99 3713.28 (408.46) 6.89 1999-00 4598.88 3971.97 72.00 2000-01 3854.48 (42.87) 125.87 2001-02 4118.15 (698.81) 21.98 As can be observed from the table above, the Appellant had more than sufficient funds to make the investments and the borrowings were also not made in line with the investments. Hence, it could be said that the aforesaid investments were made out of interest-free funds of the Appellant. 11 ITA NO. 1019/MUM/2020 (A.Y: 2011-12) M/s. Alkyl Amines Chemicals Ld., The Appellant submits that the aforesaid contention of the Appellant was upheld by the Hon'ble Mumbai Tribunal in the Appellant's own case for A.Y.2008-09, the Hon'ble Mumbai ITAT in ITA No.3694/Mum/2011) has held that the Appellant had sufficient own funds and the question of borrowed funds utilized for the purpose of making investment does not arise. The Appellant submits that subsequent to AY 2008-09, it has invested only into the equity shares of its foreign subsidiary, Alkyl Amines Europe SPRL, income from which was includible into the total income. i.e. taxable in the hands of the Appellant. Therefore, there was no new investment made by the Appellant after AY 2008-09, income from which is not includible in the total income, therefore, the decision of the Hon'ble Tribunal for AY 2008-09 is applicable to the assessment year under appeal. Further, attention may be invited to the decision of the Bombay High Court in the case of CIT vs. Reliance Utilities & Power Ltd. (178 Taxman135), wherein. it was held that if there are funds available both, interest-free and overdraft and/or loans are taken, then a presumption would arise that investments would be out of the interest-free fund generated or available with the company, if the interest-free funds are sufficient to meet the investments. Similar view was fortified by the Hon'ble Bombay High Court in the case of CIT V. HDFC Bank Ltd. (ITA No.330 of 2012). Without prejudice to the above, the Appellant submits that aforesaid investments were strategic investments and therefore, the presumption could be made that no expenditure was incurred in making these investments. In this regard, Your Honour's attention is invited on the decision of Hon'ble Mumbai Tribunal in the case of Garware Wall Ropes Ltd. v. ACIT [2014] 46 taxmann.com 18, wherein the Assessee had voluntarily disallowed 0.5% of average investments on which dividend was received and the assessee had contended that no expenditure incurred as no fresh investment was made in the year under consideration and all the investments were made in the earlier years that too long back. It was further pointed out that the investments are in the group concern of the assessee and therefore, these are only passive investments made for the purpose of holding controlling stake in the group concern and not for the purpose of earning any dividend or active investment, and accordingly, the assessee was not required to incur any expenditure in keeping these investments. The Hon'ble Tribunal held that 12 ITA NO. 1019/MUM/2020 (A.Y: 2011-12) M/s. Alkyl Amines Chemicals Ld., "Assessee had utilized interest free funds for making fresh investments and that too into its subsidiaries which were not for the purpose of earning exempt income but for strategic purposes only. No disallowance of interest is required to be made under Rule 8D (i) or (ii) as no direct or indirect interest expenditure has incurred for making investments. Strategic investments have to be excluded for the purpose of arriving at disallowance under Rule 8D(iii). In light of the foregoing facts and legal position, the Appellant prays that the disallowance made w/r. 8D(2)(ii) of the Rules be deleted. Without prejudice to the above, the Appellant submits that the aforesaid investments were made prior to AY 2001-02. Whereas, the borrowed funds held by the Appellant during the year were obtained by the Appellant after the year in which these investments were made. Therefore, the question of the borrowed funds could have gone into the investments could not arise. The Appellant would like to draw Your Honour's attention to the fact that the AO had considered entire interest expenditure of Rs. 1032.26 lacs which was debited to the Profit and Loss Account. In this regard, the Appellant submits that out of the said interest expenditure, Rs.294.97 lacs was charged on the term loans which were obtained by the Appellant after AY 2006-07. The same is evident from the sanction letters and the ledger accounts enclosed in the Application for Additional evidence w/r.46A of the Rules. As submitted above, since the investments held during the year were made prior to AY 2001-02, the question of the said secured loans would have gone into the investments does not arise. Interest expenditure of Rs.274.27 lacs was incurred on cash credit facilities which was temporary in nature and was used in the normal course of business by the Appellant. Therefore, the said cash credit facilities could be said to have gone into the investments. Interest expenditure of Rs.308.34 lacs was incurred on unsecured loans which were obtained by the Appellant subsequent to AY 2001- 02 only. Therefore, the question of the said secured loans would have gone into the investments does not arise. Interest expenditure of Rs.3.77 lacs was on the car loan, therefore, the same could not be relatable to the investments made by the Appellant. Other interest expenditure of Rs.29.12 lacs was incurred on buyer's credit, advance tax, TCS, late payment of various duties and taxes and bank interest etc, which has no nexus with the investments made by the Appellant. In light of the foregoing facts, the Appellant submits 13 ITA NO. 1019/MUM/2020 (A.Y: 2011-12) M/s. Alkyl Amines Chemicals Ld., that no interest expenditure incurred by the Appellant during the captioned year was attributable to the investments held by the Appellant which was made prior to AY 2001-02 (income from which was not includible in the total income). Therefore, the Appellant humbly prays that the disallowance of the interest expenditure made u/r.8D(2)(ii) of the Rules be deleted. The Appellant humbly submits that no expense other than those offered by the Appellant in terms of section 14A(1) were incurred for earning the said tax-free income. Without prejudice to the above As regards to the calculation of disallowance u/r.8D(2) by the AO: (a) Average value of Investments: The Appellant submits that the AO had calculated the average investments after considering opening and investments in respect of all the investments, including the value of investment in equity shares of Alkyl Amines Europe SPRL (Foreign Company), income from which was taxable in the hands of the Appellant. The Appellant prays that the value of said investments be excluded and the re-computation of the value of average investments be carried out. (b) Average value of Total Assets: The Appellant submits that the AO had calculated average value of total assets without adding back the current liabilities and provisions from the opening and closing total assets. The Appellant prays that the total assets without reducing the current liabilities and provisions be adopted and the re-computation of the value of average total assets be carried out. Without prejudice to the above, As regards disallowance made by the AO: The Appellant submits that the AO had added back the disallowance of Rs. 12.87 lacs made u/s 14A read with Rule 8D of the Act to the total income of the Appellant without reducing the suo moto disallowance made by the Appellant s. 14A of the Act of Rs. 1.13 lacs. As a result, the disallowance of Rs.1.13 lacs was made twice while computing the assessed income in the assessment order. Therefore, the Appellant prays that the AO be directed to make the net disallowance of Rs. 11.74 lacs after reducing the suo moto disallowance made by the Appellant in the return of income. 14 ITA NO. 1019/MUM/2020 (A.Y: 2011-12) M/s. Alkyl Amines Chemicals Ld., As regards Ground V: The Appellant craves leave to add to, alter, and/or to amend above grounds of appeal at the time of hearing.” 6. During appellate proceedings assessee filed additional evidences under Rule 46A of I.T. Rules and Ld.CIT(A) remitted the matter to Assessing Officer and Assessing Officer filed the report dated 24.10.2019. In the remand report Assessing Officer opposed the acceptance of the additional evidences and he observed that assessee had adequate opportunities to submit the said details in the assessment proceedings and assessee has failed to file such details and evidences during the assessment proceedings. Further, he observed that several hearing opportunities were extended to assessee and assessee has not filed the required details for disallowance u/s. 14A also and Assessing Officer opposed the ledger copies and secured loans and the details submitted by the assessee as additional evidences. 7. After considering the submissions of the assessee and remand report, Ld.CIT(A) dismissed the ground raised by the assessee with regard to export commission and with regard to disallowance u/s. 14A of the Act, he confirmed the additions made by the Assessing Officer. 15 ITA NO. 1019/MUM/2020 (A.Y: 2011-12) M/s. Alkyl Amines Chemicals Ld., 8. Aggrieved assessee is in appeal before us raising following grounds in its appeal: - “1.1 On the facts and in circumstances of the case and in law, the Learned Commissioner of Income Tax (Appeals) - 24, Mumbai ["the CIT(A)"] erred in confirming the action of the Deputy Commissioner of Income Tax (OSD)- 10(3), Mumbai ("the AO") in disallowing Rs. 49,21,372/-, being commission paid to foreign commission agents and importers, u/s 40(a)(i) of the Income-tax Act, 1961 ("the Act") on the alleged ground that the Appellant did not prove that the commission was paid outside India and how did the income accrue or arise outside India. 1.2 The Learned CIT(A) erred in not appreciating the fact that the AO himself, at para 4.5 of his order, accepted that the payment to the agents and the services in form of soliciting orders were, both, made/rendered outside India and as such, indisputably, the subject income had accrued and arisen to them outside India. 1.3 The Learned CIT(A) further erred in not appreciating the fact that the said payments were neither deemed to accrue or arise in India u/s. 9(1) of the Act nor were taxable in India as per the respective Double Tax Avoidance Agreements and as such tax was not deductible at source u/s. 195 of the Act. 1.4 The Appellant prays that the said disallowance of Rs. 49,21,372/- be deleted. Ground II: 2.1 On the facts and in circumstances of the case and in law, the Learned CIT(A) erred in confirming the action of the AO in disallowing a sum of Rs. 12,87,000/- u/s 14A of the Act r.w.r. 8D of the Income tax Rules, 1962 ("the Rules") on the alleged ground that there is no specific need required under the provision to determine whether the computation applied by the Appellant is correct or not. 2.2 The Learned CIT(A) erred in not appreciating the fact that neither any objective dissatisfaction was recorded by the AO nor any deficiency was shown in the books of accounts of the Appellant before invoking Rule 8D(2) and as such the disallowance so made was illegal. 16 ITA NO. 1019/MUM/2020 (A.Y: 2011-12) M/s. Alkyl Amines Chemicals Ld., 2.3 The Appellant prays that the said disallowance u/s 14A r.w.r 8D of the Act be deleted. Without Prejudice to Ground II: Ground III: 3.1 On the facts and in circumstances of the case and in law, the Learned CIT(A) erred in confirming the action of the AO in disallowing the interest expenditure of Rs. 11.70 lakhs u/r. 8D(2)(ii) of the Rules. 3.2 The Learned CIT(A) erred in not appreciating the fact that: a) the Appellant's own funds were sufficient to make investments and as such it could be presumed that the investments were made therefrom; b) the investments held during the year were made prior to the funds borrowed, interest of which was claimed as deductible expenditure. 3.3 The Appellant prays that the disallowance so made u/r. 8D(2)(ii) of the Rules be deleted. Without Prejudice to Ground II: Ground IV: 4.1. On the facts and in circumstances of the case and in law, the Learned CIT(A) erred in upholding the action of the AO in making disallowance u/r. 8D of the Rules by considering those investments income from which was taxable or was not earned during the year. 4.2. The Appellant prays that the AO be directed to exclude such investments while computing the disallowance u/r. 8D(2) of the Rules. Without Prejudice to Ground II: 5. Ground V: 5.1. On the facts and in circumstances of the case and in law, the Learned CIT(A) erred in confirming the action of the AO in not excluding the investments made in group companies which are strategic in nature while calculating disallowance of disallowance u/r. 8D(2) of the Rules. 17 ITA NO. 1019/MUM/2020 (A.Y: 2011-12) M/s. Alkyl Amines Chemicals Ld., 5.2. The Appellant prays that the AO be directed to exclude such investments while computing the disallowance u/r. 8D(2) of the Rules. Without Prejudice to Ground II: 6. Ground VI: 6.1. On the facts and in circumstances of the case and in law, the Learned CIT(A) erred in confirming the action of the AO in calculating "total assets' after reducing value of current liabilities for the purpose of making disallowance u/r. 8D(2)(ii) of the Act. 6.2. The Appellant prays that the AO be directed to re-determine disallowance u/r. 8D(2) by calculating value of 'total assets' without reducing current liabilities. Without Prejudice to Ground II: Ground Vii. 7.1. On the facts and in circumstances of the case and in law, the Learned CIT(A) erred in confirming the action of the AO in making double disallowance of Rs. 1,13,000/- by not reducing the suo-motu disallowance made by the Appellant in its return of income from the disallowance as determined by the AO u/s. 14A r.w.r. 8D. 7.2. The Appellant prays that the AO be directed to reduce the suo-motu disallowance made by the Appellant from the disallowance as upheld u/s. 14A r.w.r. 8D. Ground VIII: The Appellant craves leave to add to, alter, and/or to amend above grounds of appeal at the time of hearing.” 9. At the time of hearing, Ld. AR of the assessee submitted that assessee has remitted commissions to overseas agents for the services rendered outside India and no income can be said to be accrued or arises in India. She brought to our notice details of commission made by the assessee and in the Paper Book, she has also submitted detailed 18 ITA NO. 1019/MUM/2020 (A.Y: 2011-12) M/s. Alkyl Amines Chemicals Ld., submissions of each and every commission made by the assessee along with respective Form 15CB under Rue 37BB as per which before remittance assessee has to get certificate of Accountant and she brought to our notice all the certificates acquired by the assessee from the Accountant. She prayed that these are the payments made exclusively for the services rendered by these agents outside India. In support of the above contentions she relied on the following cases: - (i). CIT v. Toshoku Ltd. [1980] (125 ITR 525) (SC) (ii). Gujarat Reclaim & Rubber Products Ltd. v. ACIT [2013] (35 taxmann.com 587) (ITAT Mumbai) (iii). Ind Telesoft (P.) Ltd [2004] (140 taxman 463) (AAR-New Delhi) (iv). Indo Industries Ltd. v. ITO [2015] (53 taxmann.com 458) (ITAT Mumbai) (v). CIT v. Eon Technology (P.) Ltd. [2011] (15 taxmann.com 391) (Delhi) (vi). CIT v. Orient Express [2015] (56 taxmann.com 331) (Madras) (vii). Welspring Universal v. JCIT [2015] (56 taxmann.com 174) (ITAT Delhi) (viii). CIT v. Fluidtherm Technology (P.) Ltd. [2015] (57 taxmann.com 87) (Madras) (ix). PCIT v. Puma Sports India (P.) Ltd. [2021] (127 taxmann.com 169) (Karnataka) [SLP submitted by the Revenue is dismissed by the Apex Court-134 taxmann.com 60 (2022)] (x). DCIT v. Inox India (P.) Ltd. [2021] (126 taxmann.com 163) (ITAT Ahmedabad) (xi). ACIT v. Kapoor Industries Ltd. [2021] (125 taxmann.com 271) (ITAT Delhi) 19 ITA NO. 1019/MUM/2020 (A.Y: 2011-12) M/s. Alkyl Amines Chemicals Ld., (xii). Device Driven (India) P. Ltd. v. CIT [2021] (126 taxmann.com 25) (Kerala) (xiii). Modern Threads India Ltd. v. ACIT [2021] (126 taxmann.com 27) (ITAT Jaipur) (xiv). ACIT v. Meru Impex [2011] (16 taxmann.com 219) (ITAT Mumbai) (xv). Tata Consultancy Services Ltd. v. ACIT [2019] (111 taxmann.com 42) (ITAT Mumbai) (xvi). DIT (Int Tax) v. Panalfa Autoelektrik Ltd. [2014] (49 taxmann.com 412) (Delhi) (xvii). Exotic Fruit (P.) Ltd. v. ITO [2013] (40 taxmann.com 348) (ITAT Bangalore) 10. With regard to disallowance u/s. 14A of the Act, she brought to our notice Page No. 1 of the Paper Book and she drawn our attention to the shareholder’s fund and investments made by the assessee. She submitted that shareholders’ funds are far more than the investments made by the assessee, therefore she submitted that sufficient own funds are available in the business for making the investments. Therefore, disallowance made by the Assessing Officer u/s. 8D(2)(ii) of I.T. Rules is not proper 11. She relied on the case law of Maxopp Investments Ltd. v. CIT (2018) 91 taxmann.com 154 (SC) and CIT v. Reliance Industries Ltd., [2019] (102 taxmann.com 52) (SC). 20 ITA NO. 1019/MUM/2020 (A.Y: 2011-12) M/s. Alkyl Amines Chemicals Ld., 12. With regard to disallowance made 8D(2)(iii) of I.T. Rules, she submitted that only those investments shall be considered which yielded exempt income during the year. 13. On the other hand, Ld.DR relied on the orders passed by the lower authorities. 14. Considered the rival submissions and material placed on record, with regard to overseas agents’ commissions, we observe that assessee has remitted overseas agency commission outside India for procuring orders by the overseas agents, before making remittances assessee has acquired the Form 15CB certificates from the Accountant and they certified that these remittances were made to the overseas agents. It clearly indicates that assessee has procured the business from the overseas agents and they remitted the payments for the services rendered by the overseas outside India. Further, Assessing Officer has not brought anything on record that these payments are chargeable to tax in India under any provisions. Therefore, no part of the income is chargeable to tax as the services rendered outside India. 21 ITA NO. 1019/MUM/2020 (A.Y: 2011-12) M/s. Alkyl Amines Chemicals Ld., 15. In the similar case, in the case of CIT v. Toshoku Ltd., (supra), it is held as under: - “The second aspect of the same question is whether the commission amounts credited in the books of the statutory agent can be treated as incomes accrued, arisen, or deemed to have accrued or arisen in India to the non-resident assessees during the relevant year. This takes us to section 9 of the Act. It is urged that the commission amounts should be treated as incomes deemed to have accrued or arisen in India as they, according to the Department, had either accrued or arisen through and from the business connection in India that existed between the non-resident assessees and the statutory agent. This contention overlooks the effect of clause (a) of the Explanation to clause (i) of sub-section (1) of section 9 of the Act which provides that in the case of a business of which all the operations are not carried out in India, the income of the business deemed under that clause to accrue or arise in India shall be only such part of the income as is reasonably attributable to the operations carried out in India. If all such operations are carried out in India, the entire income accruing therefrom shall be deemed to have accrued in India. If, however, all the operations are not carried out in the taxable territories, the profits and gains of business deemed to accrue in India through and from business connection in India shall be only such profits and gains as are reasonably attributable to that part of the operations carried out in the taxable territories. If no operations of business are carried out in the taxable territories, it follows that the income accruing or arising abroad through or from any business connection in India cannot be deemed to accrue or arise in India. (See Commissioner of Income-tax, Punjab v. R. D. Aggarwal & Co. & Anr.(1) and M/s. Carborandum Co. v. C.I.T., Madras(2) which are decided on the basis of section 42 of the Indian Income-tax Act, 1922, which corresponds to section 9(1)(i) of the Act.) In the instant case the non-resident assessees did not carry on any business operations in the taxable territories. They acted as selling agents outside India. The receipt in India of the sale proceeds of tobacco remitted or caused to be remitted by the purchasers from abroad does not amount to an operation carried out by the assessees in India as contemplated by clause (a) of the Explanation to section 9(1)(i) of the Act. The commission amounts which were earned by 22 ITA NO. 1019/MUM/2020 (A.Y: 2011-12) M/s. Alkyl Amines Chemicals Ld., the non-resident assessees for services rendered outside India cannot, therefore, be deemed to be incomes which have either accrued or arisen in India. The High Court was, therefore, right in answering the question against the Department. For the foregoing reasons, the appeals fail and are hereby dismissed with costs. (Hearing fee one set). 16. Respectfully following the above said decision, we are inclined to allow the ground raised by the assessee. 17. Coming to the disallowance made u/s. 14A of the Act, we observe from the record that assessee has sufficient interest free funds in the company and has brought to our notice by the Ld. AR the shareholders’ funds as on 31.03.2011 stood at ₹.7646.19 lacs and the assessee has made investments to the extent of ₹.234.27 lacs. It clearly indicates that assessee has sufficient interest free funds in the business to make the above investment. Therefore, there is sufficient interest free funds available in the business, therefore we are inclined to accept the submissions of the assessee and accordingly, disallowance made by the Assessing Officer under Rule 8D(2)(ii) of I.T. Rules is deleted. 18. With regard to disallowance under Rule 8D(2)(iii) of I.T. Rules, the Assessing Officer has taken the average investments for the year to make the disallowance, However, as held in the case of Vireet Investment (P) 23 ITA NO. 1019/MUM/2020 (A.Y: 2011-12) M/s. Alkyl Amines Chemicals Ld., Ltd [82 taxmann.com 415] and as per rules the Assessing Officer should have considered those investments which actually yielded the exempt income and other investments which did not yield income should not be considered for calculating the disallowance under this Rule. Accordingly, we direct the Assessing Officer to consider only those investments which actually yielded the exempt income and accordingly, we direct the Assessing Officer to recompute the disallowance under rule 8D(2)(iii) of I.T. Rules. Accordingly, Ground No. 3 raised by the assessee is allowed. 19. Rest of the grounds i.e. Ground No. 2, 4, 5, 6 and 7 are dismissed as no submissions were made and treated as not pressed. 20. In the result, appeal filed by the assessee is partly allowed. Order pronounced in the open court on 14 th July, 2022 Sd/- Sd/- (SANDEEP SINGH KARHAIL) (S. RIFAUR RAHMAN) JUDICIAL MEMBER ACCOUNTANT MEMBER Mumbai / Dated 14.07.2022 Giridhar, Sr.PS 24 ITA NO. 1019/MUM/2020 (A.Y: 2011-12) M/s. Alkyl Amines Chemicals Ld., Copy of the Order forwarded to: 1. The Appellant 2. The Respondent. 3. The CIT(A), Mumbai. 4. CIT 5. DR, ITAT, Mumbai 6. Guard file. //True Copy// BY ORDER (Asstt. Registrar) ITAT, Mum