Zanav Home Collection, V. JCIT,

ITA 1091/BANG/2013

• Counselvise Citation: 109121114 RSA 2013
• Duration Of Justice: 1 year(s) 7 month(s) 5 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 13-02-2015
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: A
• Assessment Year: 2009-2010
• Appeal Filed On: 08-07-2013
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: P DHIVAHAR JT
• Assessee Lawyers: CHERIAN K BABAY
• Keywords: Double taxation relief; Source of fund; Services rendered outside India; Permanent establishment; Bad and doubtful debts; Competent authority

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL A BENCH : BANGALORE BEFORE SHRI N.V. VASUDEVAN, JUDICIAL MEMBER AND SHRI ABRAHAM P. GEORGE, ACCOUNTANT MEMBER ITA NO. 1091/BANG/2013 ASSESSMENT YEAR : 2009-10 ZANAV HOME COLLECTION, NO.38/3, BLOCK-2, LAKSHMI, MADIWALA POST, BANGALORE 560 068. PAN: AAAFZ 1447J VS. THE JOINT COMMISSIONER OF INCOME TAX, RANGE 10, BANGALORE. APPELLANT RESPONDENT APPELLANT BY : SHRI CHERIAN K. BABAY, C.A. REVENUE BY : SHRI P. DHIVAHAR, JT. CIT(DR) DATE OF HEARING : 28.01.2015 DATE OF PRONOUNCEMENT : 13.02.2015 O R D E R PER N.V. VASUDEVAN, JUDICIAL MEMBER THIS APPEAL BY THE ASSESSEE IS AGAINST THE ORDER DATED 1.5.2013 OF THE CIT(APPEALS)-V, BENGALURU RELATING TO ASSESSMEN T YEAR 2009-10. 2. THE FIRST ISSUE THAT ARISES FOR CONSIDERATION I S AS TO WHETHER THE REVENUE AUTHORITIES WERE JUSTIFIED IN DENYING THE C LAIM OF ASSESSEE FOR ITA NO.1091/BANG/2013 PAGE 2 OF 18 DEDUCTION ON ACCOUNT OF BAD DEBTS WRITTEN OFF AMOUN TING TO RS.1,33,28,670 U/S. 36(1)(VII) OF THE ACT. 3. THE FACTS AND CIRCUMSTANCES UNDER WHICH THE AFO RESAID ISSUE ARISES FOR CONSIDERATION ARE AS FOLLOWS. THE ASSESSEE IS A PARTNERSHIP FIRM, ENGAGED IN THE BUSINESS OF EXPORT OF FURNISHING FAB RICS. IN THE COURSE OF ASSESSMENT PROCEEDINGS, THE ASSESSING OFFICER NOTIC ED THAT A SUM OF RS.1,33,28,679 WAS CLAIMED AS DEDUCTION UNDER THE H EAD PROVISION FOR DOUBTFUL DEBTS WHICH WAS DISALLOWED IN THE PREVIOUS YEAR RELEVANT TO A.Y. 2007-08, NOW ALLOWED ON BANKS APPROVAL FOR WRITE O FF. THE UNDISPUTED FACTS ARE THAT THIS BALANCE PERTAINED TO A CUSTOMER M/S. STARKY & ASSOCIATES LOCATED IN U.S.A., FROM WHOM RECOVERY HA D TO BE MADE IN FOREIGN EXCHANGE. OUT OF THE SUM OF RS. 1,33,28,679 /-, RS. 1,29,96,647/- REPRESENTED THE AMOUNTS DUE FROM THE CUSTOMER AND B ALANCE RS. 3,32,032/- IS THE CORRESPONDING CREDIT ALLOWABLE UN DER THE DUTY ENTITLEMENT PASS BOOK SCHEME ( DEPB SCHEME) WHICH WAS TAKEN CREDIT ON ACCRUAL BASIS AT THE TIME OF EFFECTING THE EXPORTS, BUT COU LD NOT BE REALISED AS EXPORT COLLECTIONS WERE NOT REALISED. 4. IN THAT YEAR (AY 2007-08), CONSEQUENT TO THE ABO VE FINDING, THIS SUM WAS FULLY PROVIDED FOR BY DEBITING THE PROFIT AND L OSS ACCOUNT (THROUGH THE EXPENSE LEDGER) AND CREDITING PROVISION FOR DOUBTFU L DEBTS. HOWEVER, THE DEBT IN THE PARTYS A/C. WAS NOT WRITTEN OFF AS THI S PERTAINED TO EXPORT DEBTS AND CERTAIN APPROVALS WERE REQUIRED BEFORE THE SAME COULD BE WRITTEN OFF. ITA NO.1091/BANG/2013 PAGE 3 OF 18 THIS PROVISION FOR DOUBTFUL DEBTS (CREDIT BALANCE) WAS REFLECTED AS A NEGATIVE FIGURE (DEDUCTED FROM THE BALANCE OF DEBTO RS) ON THE ASSETS SIDE OF THE BALANCE SHEET AS AT 3LST MARCH, 2007 (SEE SC HEDULE VI TO THE BALANCE SHEET). THE CORRESPONDING DEBIT IS REFLECTE D ON THE EXPENDITURE SIDE OF THE PROFIT AND LOSS ACCOUNT UNDER THE HEAD ADMINISTRATIVE AND OTHER EXPENDITURE (SEE SCHEDULE XIII TO THE PROFIT AND LOSS ACCOUNT). 5. THE RESERVE BANK OF INDIAS MASTER CIRCULAR NO.0 9/2008-09 DATED 1ST JULY, 2008 [HEREINAFTER REFERRED TO AS THE RB! CIRCULAR], THE RELEVANT EXTRACTS OF WHICH ARE FURNISHED IN ANNEXURE D IN TH E PAPER BOOK) REQUIRES THAT THE AD CATEGORY-I BANK APPROVE ANY WRITE OFF O F FOREIGN EXCHANGE DEBTORS. ( B21 - WRITE OFF BY AD CATEGORY-I BANKS IN SECTION B OPERATIONAL GUIDELINES FOR AD CATEGORY-I BANKS IN P ART 3 OF THE CIRCULAR). 6. THEREFORE, PENDING THIS APPROVAL, THE ASSESSEE W AS LEGALLY PRECLUDED FROM WRITING OFF THE BALANCE OF RS. 1,33, 28,679/- IN AY 2007-08. HENCE 100% PROVISIONING WAS DONE IN THAT YEAR. THI S PROVISION WAS CREATED WITH THE INTENTION OF COMPLYING WITH THE SA ID RBI CIRCULAR WHILE SIMULTANEOUSLY SEEKING TO ENSURE THAT THE FINANCIAL STATEMENTS PRESENT A TRUE AND FAIR VIEW AS AT THAT DATE (31 ST MARCH 2007). 7. ACCORDINGLY AN APPLICATION WAS MADE TO SYNDICAT E BANK (THE RELEVANT AD CATEGORY-I BANK, [HEREINAFTER REFERRED TO AS THE BANK], (WITH WHOM THE EXPORT DOCUMENTS WERE LODGED FOR COLLECTIO N) ON 23-02-2008 WHO ACCORDED ITS APPROVAL TO THE WRITE OFF AS ON 31.3.2 009 VIDE THEIR LETTER ON ITA NO.1091/BANG/2013 PAGE 4 OF 18 21 ST APRIL, 2009, PRIOR TO THE FINALISATION OF ACCOUNTS FOR THE YEAR ENDED 31 ST MARCH, 2009. THE DEBT WAS THUS WRITTEN OFF AS BAD F OR THE YEAR ENDED 31 ST MARCH, 2009. 8. THE ASSESSEE FOLLOWS THE MERCANTILE SYSTEM OF AC COUNTING. ACCOUNTING PRINCIPLES GENERALLY ACCEPTED IN INDIA ( ISSUED BY THE INSTITUTE OF CHARTERED ACCOUNTANTS OF INDIAS ACCOUNTING STANDAR D 4 CONTINGENCIES AND EVENTS OCCURRING AFTER THE BALANCE SHEET DATE) DEFINE THE CIRCUMSTANCES UNDER WHICH AND THE CONDITIONS UPON T HE SATISFACTION OF WHICH ADJUSTMENTS CAN BE MADE IN THE ACCOUNTS OF A PERIOD BASED ON EVENTS OCCURRING AFTER THE END OF THE PERIOD. THESE CIRCUMSTANCES AND CONDITIONS, BROADLY AND TO THE EXTENT PERTINENT TO THE PRESENT CASE, ARE AS FOLLOWS:- 7.1. AN EVENT OCCURS AFTER THE BALANCE SHEET DATE. 7.2. SUCH SUBSEQUENT EVENT PROVIDES ADDITIONAL INFO RMATION THAT COULD MATERIALLY AFFECT THE DETERMINATION OF AMOUNT S IN THE ACCOUNTS/FINANCIAL STATEMENTS FOR THE PERIOD ENDING ON THE SAID BALANCE SHEET DATE. SO, IF THESE TWO CONDITIONS ARE SATISFIED, ADJUSTME NTS ARE TO BE MADE TO THE ACCOUNTS FOR THE PERIOD ENDING ON THE SAID BALANCE SHEET DATE FOR SUCH EVENTS DESPITE THE FACT THAT THEY OCCUR AFTER THE B ALANCE SHEET DATE. 9. CONSIDERING THAT BOTH THE BALANCES OF THE DEBTOR AND OF THE PROVISION (OF EQUAL AMOUNTS) WERE IN THE ACCOUNTS AS AT 31 ST MARCH, 2009 PRIOR TO THE ADJUSTMENT UNDER DISPUTE, ACCORDING TO THE ASSESSEE IT WAS CLEAR THAT SUCH ITA NO.1091/BANG/2013 PAGE 5 OF 18 APPROVAL MATERIALLY AFFECTED THE DETERMINATION OF T HE AMOUNTS IN THE ACCOUNTS AS AT THAT DATE. MOREOVER THE APPROVAL SPE CIFICALLY MENTIONED THE DATE OF WRITE OFF AS 31 ST MARCH 2009. THE APPROVAL, THUS, ATTAINS THE CHARACTER OF AN EVENT OCCURRING AFTER THE BALANCE S HEET DATE WARRANTING AN ADJUSTMENT IN THE ACCOUNTS AS ON THE BALANCE SHEET DATE. IN FACT, HAD THIS ADJUSTMENT NOT BEEN MADE, THE TRUTH AND FAIRNESS OF THESE FIGURES IN THE FINANCIAL STATEMENTS COULD HAVE COME INTO QUESTION APART FROM NON- COMPLIANCE WITH THE STATUTORY APPROVAL. 10. THE AMOUNT WAS THUS WRITTEN OFF BY DEBITING TH E PROVISION AND CREDITING THE DEBTOR AS AT 31ST MARCH, 2009 WITHOUT A DEBIT TO THE PROFIT AND LOSS ACCOUNT IN AY 2009-10, SINCE A DEBIT HAD ALREA DY BEEN GIVEN DURING THE YEAR ENDED 31 ST MARCH, 2007 WHILE CREATING THE PROVISION. 11. SINCE SUCH PROVISIONS ARE NOT ALLOWABLE UNDER THE INCOME TAX ACT, 1961, NO CLAIM WAS MADE FOR THE PROVISION MADE IN T HE FINANCIAL YEAR ENDED 31 ST MARCH, 2007 IN AY 2007-08. HOWEVER, BAD DEBTS WRIT TEN OFF ARE ALLOWABLE IN TERMS OF SECTION 36(1)(VII) OF THE ACT . A CLAIM WAS THUS MADE FOR THE AMOUNT ACTUALLY WRITTEN OFF AS BAD DEBT AS AT 31 ST MARCH, 2009 IN AY 2009-10. IT IS THIS CLAIM THAT IS IN QUESTION UNDER CONSIDERATION. 12. THE AO DID NOT ALLOW THE CLAIM OF ASSESSEE FOR THE REASON THAT THERE WAS NO WRITE OFF OF THE DEBT IN QUESTION IN THE PRE VIOUS YEAR RELEVANT TO A.Y. 2009-10, BUT THAT WAS WRITTEN OFF AS BAD DEBTS IN T HE PREVIOUS YEAR 2006-07 RELEVANT TO A.Y. 2007-08. THE SECOND OBJECTION OF THE AO WAS THAT ITA NO.1091/BANG/2013 PAGE 6 OF 18 SYNDICATE BANK PERMITTED THE ASSESSEE FOR WRITE OFF OF THE DEBT AS BAD DEBT BY ITS LETTER DATED 21.4.2009, WHICH DATE FALLS WIT HIN THE PREVIOUS YEAR RELEVANT TO A.Y. 2010-11 AND THEREFORE THE ASSESSEE , IF AT ALL, CAN MAKE A CLAIM FOR DEDUCTION ONLY IN A.Y. 2010-11. 13. ON APPEAL BY THE ASSESSEE, THE CIT(APPEALS) CO NCURRED WITH THE VIEW OF THE AO. 14. AGGRIEVED BY THE ORDER OF CIT(APPEALS), THE AS SESSEE HAS PREFERRED THE PRESENT APPEAL BEFORE THE TRIBUNAL. 15. WE HAVE HEARD THE SUBMISSIONS OF THE LD. COUNS EL FOR THE ASSESSEE, WHO AFTER BRINGING OUT THE UNDISPUTED FACTS AS EXPL AINED IN THE EARLIER PART OF THIS ORDER, PLACED RELIANCE ON THE DECISION OF T HE HONBLE SUPREME COURT IN THE CASE OF TRF LTD. V. CIT, 323 ITR 398 (SC) AND SOUTHERN TECHNOLOGIES LTD. V. JCIT, 320 ITR 577 . IT WAS HIS SUBMISSION THAT THE ASSESSEE SHOULD BE ALLOWED THE DEDUCTION AS THE DEBT IN QUESTION HAS BEEN WRITTEN OFF BY SQUARING OFF THE DEBTORS ACCOUN T IN THE PREVIOUS YEAR RELEVANT TO A.Y. 2009-10 AND IN VIEW OF THE FACT TH AT THE PROVISION FOR BAD AND DOUBTFUL DEBTS MADE IN THE PREVIOUS YEAR RELEVA NT TO A.Y. 2007-08 HAD NOT BEEN CLAIMED AS DEDUCTION IN THE COMPUTATION OF TOTAL INCOME FOR THE A.Y. 2007-08. 16. THE LD. DR RELIED ON THE ORDER OF CIT(APPEALS) . ITA NO.1091/BANG/2013 PAGE 7 OF 18 17. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS AND A RE OF THE VIEW THAT THE CLAIM OF ASSESSEE DESERVES TO BE ACCEPTED. AS THE FACTS GO TO SHOW THAT IN THE PREVIOUS YEAR RELEVANT TO A.Y. 2007-08, THERE WAS A DEBIT IN THE PROFIT & LOSS ACCOUNT AND CREDIT IN THE PROVISION F OR DOUBTFUL DEBTS ACCOUNT, THE DEBTS HAD NOT BEEN WRITTEN OFF IN THE DEBTORS A CCOUNT. THE PROVISION FOR DOUBTFUL DEBTS WAS, HOWEVER, REDUCED FROM THE FIGUR E OF DEBTORS IN THE BALANCE SHEET. THIS MAY AMOUNT TO A TECHNICAL WRIT E OFF IN THE BOOKS OF ACCOUNT IN THE A.Y. 2007-08. THE POINT, HOWEVER, T HAT NEEDS TO BE TAKEN NOTE OF IS THAT THE ASSESSEE DID NOT CLAIM THE BAD DEBTS AS A DEDUCTION IN THE COMPUTATION OF TOTAL INCOME. THE ASSESSEE ADDE D THE BAD DEBTS WRITTEN OFF IN THE A.Y. 2007-08 TO THE PROFIT AS PE R THE PROFIT & LOSS ACCOUNT IN THE COMPUTATION OF TOTAL INCOME. IN THE PREVIOU S YEAR RELEVANT TO A.Y. 2009-10, THERE HAS BEEN A WRITE OFF IN THE DEBTORS ACCOUNT AND THIS SHOULD BE SUFFICIENT TO CLAIM THE DEDUCTION U/S. 36(1)(VII ) OF THE ACT. AS FAR AS THE APPROVAL OF SYNDICATE BANK FOR WRITE OFF OF THE DEB TS IS CONCERNED BECAUSE THE ASSESSEE WAS A NON-RESIDENT, WE FIND THAT THE B ANK HAD GIVEN APPROVAL FOR WRITE OFF OF THE DEBT AS BAD DEBT BY ITS LETTER DATED 21.4.2009. THE LETTER OF THE BANK PERMITS THE WRITE OFF OF THE DEBT AS ON 31.3.2009. ON THE ONE HAND, THE REVENUE TAKES A STAND THAT WRITE OFF CANN OT BE PERMITTED UNLESS THE COMPETENT AUTHORITY (WHICH IS THE BANK IN THE P RESENT CASE) APPROVES THE WRITE OFF. WHEN THE APPROVAL OF THE COMPETENT A UTHORITY PERMITTING THE WRITE OFF AS ON 31.3.2009 IS PRODUCED, THE REVENUE TAKES A STAND THAT SINCE THE LETTER OF COMPETENT AUTHORITY IS DATED 21.4.200 9, WRITE OFF CAN BE ITA NO.1091/BANG/2013 PAGE 8 OF 18 ALLOWED ONLY IN THE A.Y. 2010-11. THIS CONTRADICTO RY STAND TAKEN BY THE REVENUE CANNOT BE ACCEPTED. 18. THE ACCOUNTING TREATMENT GIVEN BY THE ASSESSEE TO THIS TRANSACTION IS AS FOLLOWS. IN AY 2007-08, THE ASSESSEE DEBITED THE PROFIT AND LOSS ACCOUNT AND GAVE CREDIT TO THE PROVISION FOR DOUBTF UL DEBTS ACCOUNT. THIS WAS DONE AS THE ASSESSEE WAS PRECLUDED FROM WRITING OFF THE DEBT, PENDING COMPLETION OF FORMALITIES AND SO CHOSE TO PROVIDE F OR IT. AT THIS STAGE, ONE OUT OF THE TWO ACCOUNTING REQUIREMENTS FOR A WRITE OFF WAS SATISFIED. THOUGH THE PROFIT AND LOSS ACCOUNT HAD BEEN DEBITED THROUG H THE EXPENSE LEDGER, THE DEBTORS ACCOUNT HAD NOT YET BEEN CREDITED. THE DEBIT BALANCE IN THE DEBTORS ACCOUNT CONTINUED, BUT WAS OFFSET BY AN EQU AL CREDIT BALANCE IN THE PROVISION FOR DOUBTFUL DEBTS ACCOUNT. 19. IN AY 2009-10, ON RECEIVING THE BANKS APPROVAL , THE PROVISION FOR DOUBTFUL DEBTS ACCOUNT WAS DEBITED AND CREDIT WAS G IVEN TO THE DEBTORS ACCOUNT FOR WRITE OFF OF THE AMOUNT I.E., THE DEBTO RS BALANCE WAS NULLIFIED AND THE DEBTORS ACCOUNT CLOSED. AT THIS STAGE, THE SECOND ACCOUNTING REQUIREMENT (CLOSING THE DEBTORS ACCOUNT BY CREDIT ING IT) HAD ALSO BEEN MET AND THE WRITE OFF WAS COMPLETE. 20. THE REVENUES ARGUMENT IS THAT THERE IS NO DEBI T TO THE PROFIT AND LOSS ACCOUNT IN THE RELEVANT PREVIOUS YEAR AND THAT THEREFORE NO AMOUNT HAS BEEN WRITTEN OFF AS SHOWN ABOVE, WHILE THE FACT AS STATED BY THE REVENUE IS CORRECT, ITS CONCLUSION IS ERRONEOUS. ITA NO.1091/BANG/2013 PAGE 9 OF 18 21. CONSIDERING THE ACCOUNTING PRINCIPLES DESCRIBED ABOVE, IT CANNOT BE THE LEGISLATIVE INTENT OF SECTION 36(1)(VII) TO MAN DATE THAT THE DEBIT TO THE PROFIT AND LOSS ACCOUNT BE IN THE SAME PREVIOUS YEA R IN WHICH THE CLAIM IS MADE THERE UNDER. WHILE A DEBIT TO THE PROFIT AND L OSS ACCOUNT IS CERTAINLY A PREREQUISITE FOR A WRITE OFF, SUCH A DEBIT ALONE DO ES NOT CONSTITUTE A WRITE OFF UNTIL THE ASSET BEING WRITTEN OFF IS OBLITERATED BY A CREDIT TO ITS ACCOUNT. WHERE THIS CREDIT HAS OCCURRED IN A SUBSEQUENT YEAR , THE ASSET CAN BE SAID TO HAVE BEEN WRITTEN OFF ONLY IN SUCH SUBSEQUENT YE AR. 22. THERE HAS BEEN A WRITE OFF BY SQUARING OFF THE DEBTORS ACCOUNT ONLY IN THE PREVIOUS YEAR RELEVANT TO A.Y. 2009-10. THI S SHOULD BE SUFFICIENT FOR THE REVENUE TO ALLOW THE CLAIM OF ASSESSEE US/. 36( 1)(VII) OF THE ACT. FOR THE REASONS GIVEN ABOVE, WE DIRECT THE AO TO ALLOW CLAIM OF THE ASSESSEE FOR DEDUCTION FOR THE AMOUNT OF BAD DEBTS. DISALLOWANCE OF PAYMENTS TO NON-RESIDENTS (RS.25,46 ,796) 23. THE NEXT ISSUE THAT ARISES FOR CONSIDERATION I S WITH REGARD TO THE DISALLOWANCE OF RS.25,46,796 WHICH WAS CLAIMED AS A DEDUCTION BY THE ASSESSEE UNDER THE HEAD AGENCY COMMISSION U/S. 40 (A)(I). THE FACTS WITH REGARD TO THE AFORESAID ISSUE ARE AS FOLLOWS. IN T HE RELEVANT PREVIOUS YEAR, THE ASSESSEE MADE PAYMENTS OF EXPORT COMMISSION TO ITS VARIOUS NON- RESIDENT AGENTS AS FOLLOWS:- ITA NO.1091/BANG/2013 PAGE 10 OF 18 24. THE AO CALLED UPON THE ASSESSEE TO SHOW CAUSE A S TO WHY THE ASSESSEE HAD NOT DEDUCTED AT SOURCE U/S. 195 OF THE ACT ON THE PAYMENTS MADE TO THE NON-RESIDENT. IN REPLY, THE ASSESSEE C ONTENDED THAT PAYMENT BY THE ASSESSEE TO THE NON-RESIDENT WAS IN THE NATU RE OF COMMISSION FOR SERVICES RENDERED OUTSIDE INDIA. THE ASSESSEE SUBM ITTED THAT THE AGENTS WERE PAID COMMISSION FOR PROCURING BUSINESS TO THE ASSESSEE AND THAT THERE WAS NO TERRITORIAL NEXUS FOR BRINGING THE COM MISSION RECEIVED BY THE NON-RESIDENT TO TAX IN INDIA. THE ASSESSEE FURTHER SUBMITTED THAT IF THE INCOME OF THE NON-RESIDENT IS NOT CHARGEABLE TO TAX IN INDIA, THEN THERE WAS NO OBLIGATION ON THE PART OF ASSESSEE TO DEDUCT TAX AT SOURCE AND IN THIS REGARD RELIED ON THE CBDT CIRCULAR NO.13 DATED 23.7 .1969. THE AFORESAID CIRCULAR HAS SINCE BEEN WITHDRAWN, BUT NEVERTHELESS , THE ASSESSEE PLACED RELIANCE ON THE AFORESAID CIRCULAR, WHICH LAYS DOWN THE CORRECT POSITION IN LAW. 25. THE AO, HOWEVER, HELD THAT NON-RESIDENT HAS SO URCE OF INCOME AND BUSINESS CONNECTION IN INDIA AND THEREFORE COMMISSI ON INCOME IS ITA NO.1091/BANG/2013 PAGE 11 OF 18 CHARGEABLE TO TAX IN INDIA AND THAT THE ASSESSEE OU GHT TO HAVE DEDUCTED TAX AT SOURCE AT THE TIME OF MAKING PAYMENT TO THE NON-RESIDENT. SINCE THE ASSESSEE FAILED TO DO SO, THE AO DISALLOWED THE CLA IM OF ASSESSEE FOR DEDUCTION OF A SUM OF RS.25,46,796 INVOKING THE PRO VISIONS OF SECTION 40(A)(I) OF THE ACT. 26. ON APPEAL BY THE ASSESSEE, THE CIT(APPEALS) CO NFIRMED THE ORDER OF THE AO. ACCORDING TO THE CIT(APPEALS), SECTION 9(1)(I) OF THE ACT WAS APPLICABLE AND ALL INCOME ACCRUING OR ARISING, WHET HER DIRECTLY OR INDIRECTLY THROUGH OR FROM ANY BUSINESS CONNECTION IN INDIA OR SOURCES OF INCOME IN INDIA, SHALL BE DEEMED TO BE ACCRUE OR ARISE IN IND IA. ACCORDING TO HIM, THE BUSINESS OF THE ASSESSEE FIRM IS BASED IN INDIA AND THE PARTIES TO WHOM PAYMENT HAS BEEN MADE ARE CLAIMED TO BE COMMISSION AGENTS OF THE ASSESSEE FIRM. THE ASSESSEE FIRM HAD BEEN MAKING P AYMENTS TO THESE PARTIES FOR SEVERAL YEARS WHEREBY THE PARTIES GET A REGULAR INCOME FROM INDIAN SHORES RESULTING IN A BUSINESS CONNECTION. AS THE ASSESSEE FIRM DERIVES INCOME FROM CONDUCTING AND RUNNING ITS BUSI NESS IN INDIA AND SINCE THESE PAYMENTS WERE ON ACCOUNT OF COMMISSION TO AGE NTS, THESE PARTIES DEFINITELY HAD BUSINESS CONECTION IN INDIA. ACCORD ING TO THE CIT(A), SINCE THERE WAS A BUSINESS CONNECTION, OBLIGATION ON THE PART OF THE ASSESSEE TO DEDUCT TAX AT SOURCE U/S. 195(1) ON COMMISSION PAYM ENT DEFINITELY AROSE. AS PER EXPLANATION 2 OF SECTION 195, OBLIGATION TO COMPLY WITH SECTION 195(1) AND TO MAKE A DEDUCTION IS APPLICABLE AND TO BE EXTENDED ON ALL PERSONS, RESIDENT OR NON RESIDENT EVEN IF THE NON R ESIDENT HAS NO RESIDENCE ITA NO.1091/BANG/2013 PAGE 12 OF 18 OR PLACE OF BUSINESS OR BUSINESS CONNECTION IN INDI A, OR ANY OTHER PRESENCE IN ANY MANNER WHATSOEVER IN INDIA . 27. THE CIT(A) NOTED THAT IN THE INSTANT CASE, THE SE NON-RESIDENTS DEFINITELY HAD BUSINESS CONNECTION IN INDIA. ACCOR DING TO HIM, EVEN IF IT WAS ASSUMED FOR A MOMENT, THAT THESE PAYMENTS ARE NOT T HROUGH BUSINESS CONNECTION AND THAT THESE PARTIES DO NOT HAVE A RES IDENCE OR PLACE OF BUSINESS IN INDIA OR PERMANENT ESTABLISHMENT (AS CLAIMED IN THE GROUNDS OF APPEAL) IN INDIA, STILL, IN VIEW OF EXPLANATION 2 OF SECTION 195, THE ASSESSEE HAD AN OBLIGATION TO DEDUCT TAX AT SOURCE FROM THE SAID PAYMENTS. 28. THE CIT(APPEALS) ACCORDINGLY CONFIRMED THE ORD ER OF THE AO. 29. AGGRIEVED BY THE ORDER OF CIT(APPEALS), THE AS SESSEE HAS FILED THE PRESENT APPEAL BEFORE THE TRIBUNAL. 30. THE LD. COUNSEL FOR THE ASSESSEE SUBMITTED THA T THE FACTS REGARDING THE TRANSACTIONS ARE AS FOLLOWS:- (1) AGREEMENTS WITH ALL THE AGENTS HAVE BEEN ENTERE D INTO ON SIMILAR LINES. THESE AGREEMENTS ARE IN ANNEXURE H O F THE PAPER BOOK. (2) BRIEFLY, THE TERMS OF THE AGREEMENT ARE THAT TH E AGENTS ARE GRANTED THE RIGHT TO SELL THE MERCHANDISE SPECIFIED IN THE AGREEMENT AND PRODUCED BY THE PRINCIPAL (THE ASSESS EE) WITHIN THE TERRITORIAL JURISDICTION DEFINED BY THE AGREEME NTS. ITA NO.1091/BANG/2013 PAGE 13 OF 18 (3) IN ALL THESE CASES, THE TERRITORIAL JURISDICTIO N OF THESE AGENCY RIGHTS IS RESTRICTED TO ONE COUNTRY OR, IN SOME CAS ES, THREE COUNTRIES. (4) NO AGENT IS GRANTED RIGHTS IN INDIA. (5) IN CONSIDERATION FOR THESE SALES, COMMISSION ( USUALLY OF 5% OR 6%) ON THE FOB PRICES OF THE ORDERS ACTUALLY BOOKED IS PAID BY THE ASSESSEE TO THE AGENTS. (6) THE AGREEMENTS HAVE BEEN ENTERED INTO ON VARIO US DATES AND ARE FOR PRELIMINARY TERMS OF THREE YEARS EACH BUT A UTOMATICALLY RENEW FROM YEAR- TO- YEAR. (7) THE SUMS ATTRACTING DISALLOWANCE REPRESENT THE COMMISSION PAID UNDER THESE AGREEMENTS. 31. IT WAS SUBMITTED THAT IN THE LIGHT OF THE ABOVE FACTS, THREE QUESTIONS ARISE FOR CONSIDERATION BEFORE THE TRIBUNAL AS FOLL OWS:- (1) IS THE COMMISSION PAID TO THE AGENTS BY THE AS SESSEE CHARGEABLE TO TAX IN INDIA EITHER IN FULL OR IN PAR T AT THE HANDS OF THE AGENTS IN THE LIGHT OF THE PROVISIONS OF SECTION 9 AND THE RELEVANT DOUBLE TAXATION AVOIDANCE AGREEMENTS (DTAAS)? (2) IF THE INCOME IS SO CHARGEABLE, IS TAX DEDUCTI BLE AT SOURCE THERE FROM UNDER SECTION 195? (3) DID THE ASSESSEE ACT AGAINST THE LAW BY NOT AP PROACHING THE INCOME TAX DEPARTMENT IN TERMS OF SECTION 195(2 )? ITA NO.1091/BANG/2013 PAGE 14 OF 18 32. IT WAS FURTHER SUBMITTED THAT AS REGARDS CHARGE ABILITY UNDER SECTION 9 OF THE ACT, IT IS AN UNDISPUTED FACT THAT ALL THE A GENTS ARE NON-RESIDENTS. AT THE HANDS OF NON- RESIDENTS, THE CHARGE OF INCOME T AX UNDER THE ACT IS ATTRACTED ONLY IN THE FOLLOWING CASES:- (I) THE INCOME IS RECEIVED IN INDIA; (II) THE INCOME IS DEEMED TO BE RECEIVED IN INDIA; (III) THE INCOME ACCRUES IN INDIA; OR (IV) THE INCOME IS DEEMED TO ACCRUE IN INDIA IN TE RMS OF SECTION 9. 33. IT IS NOT THE CONTENTION OF THE REVENUE THAT TH E INCOME IS RECEIVED, DEEMED TO BE RECEIVED OR EVEN THAT IT ACCRUES IN IN DIA. THE REVENUE ONLY CONTENDS THAT THE INCOME IS DEEMED TO ACCRUE IN IND IA IN TERMS OF SECTION 9 AS THE AGENTS HAVE SET UP A SOURCE OF INCOME IN IND IA BY ENTERING INTO THE AGENCY AGREEMENTS WITH THE ASSESSEE. 34. A READING OF SECTION 9(1)(I) REVEALS THAT IT DO ES NOT COVER AGENCY COMMISSION OF THE NATURE UNDER CONSIDERATION HERE A ND THAT, ONLY IF IT ARISES FROM ANY BUSINESS CONNECTION IN INDIA OR FROM A SOU RCE IN INDIA, SUCH COMMISSION WOULD ATTRACT THE CHARGE OF INCOME TAX. 35. IN CONCLUDING THAT THE SOURCE OF THE COMMISSIO N IS IN INDIA, THE LEARNED CIT (A) HAS PRESUMED THAT THE SOURCE OF THI S COMMISSION INCOME IS THE PRINCIPAL (THE ASSESSEE). THE RATIO APPLIED BY THE LEARNED CIT(A) IS THAT THE COMMISSION INCOME ARISES ONLY BECAUSE OF THE PR INCIPAL GRANTING THE ITA NO.1091/BANG/2013 PAGE 15 OF 18 AGENCY RIGHTS TO THE AGENT AND FINALLY MAKING THE S ALES. THE LEARNED CIT(A) HAS CONCLUDED, THEREFORE, THAT THE SOURCE IS THE SA LE CONTRACT ARISING FROM THE PRINCIPAL AND THAT THE SOURCE IS, THEREFORE, WI THIN INDIA. IT WAS SUBMITTED THAT THIS CONCLUSION IS ERRONEOUS AND DESERVES TO B E STRUCK DOWN. THE COMMISSION IS CONSIDERATION FOR THE SERVICES RENDER ED BY THE AGENT IN IDENTIFYING CUSTOMERS AND OBTAINING ORDERS FOR THE PRINCIPAL. THE SOURCE OF THIS COMMISSION INCOME, THEREFORE, LIES IN THE MARK ETS IN WHICH THESE SERVICES ARE BEING RENDERED. CONSIDERING THAT THESE SERVICES ARE RENDERED IN MARKETS OUTSIDE INDIA, THE SOURCE OF THIS COMMIS SION INCOME IS CLEARLY OUTSIDE INDIA. 36. THE LD. COUNSEL FOR THE ASSESSEE ALSO MADE SUB MISSIONS WITH REGARD TO THE FACT THAT, ASSUMING THE INCOME IS TRE ATED AS HAVING ACCRUED TO THE NON-RESIDENT IN INDIA, IN VIEW OF DTAA BETWEEN INDIA AND COUNTRIES OF WHICH THE NON-RESIDENT OR TAX RESIDENCE, INCOME CAN BE TAXED ONLY IF THERE IS A PERMANENT ESTABLISHMENT IN INDIA AND SINCE THE RE IS NO PERMANENT ESTABLISHMENT IN INDIA, THE AMOUNT IN QUESTION CANN OT BE BROUGHT TO TAX IN THE HANDS OF THE NON-RESIDENT AND CONSEQUENTLY THER E WOULD BE NO LIABILITY ON THE PART OF ASSESSEE TO DEDUCT TAX AT SOURCE. 37. THE LD. DR RELIED ON THE ORDER OF THE CIT(APPE ALS). 38. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS. THE C OPIES OF THE AGREEMENT BETWEEN THE ASSESSEE AND THE NON-RESIDENT (7 OUT OF THE 10 NON-RESIDENTS LISTED IN THE EARLIER PART OF THIS OR DER) HAS BEEN FILED BEFORE US ITA NO.1091/BANG/2013 PAGE 16 OF 18 AS ANNEXURE-H IN THE PAPER BOOK FILED BY THE ASSESS EE. THE MAIN CLAUSES IN THE AGREEMENT NEEDS TO BE SEEN TO APPRECIATE THE CONTENTIONS OF THE PARTIES BEFORE US.(AGREEMENT BETWEEN ASSESSEE AND M /S.DUO TEXTILES) CLAUSE-1, 3 AND 4 OF THE AGREEMENT READS AS FOLLOWS : 1. APPOINTMENT: PRINCIPAL GRANTS AGENT THE RIGHT TO SELL THE MERCHA NDISE (STIPULATED IN ARTICLE 2) IN THE TERRITORY (STIPULA TED IN ARTICLE 3) AND AGENT ACCEPTS SUCH APPOINTMENT. 3. TERRITORY: THE TERRITORY COVERED UNDER THIS AGREEMENT IS CONFI NED TO SOUTH AFRICA. 4. COMMISSION: PRINCIPAL SHALL ALLOW THE AGENT 5% COMMISSION FOR A LL MERCHANDISE (BASED ON FOB PRICES) COMMISSION ARE NO T PAYABLE LATER THAN 2 (TWO) MONTHS AFTER MERCHANDISE HAVE BEEN SHIPPED IN RESPECT OF ALL ORDERS WHICH HAVE BE EN ACCEPTED AND EXECUTED BY PRINCIPAL. HOWEVER, THAT NO SUCH COMMISSIONS SHALL BE PAYABLE UNTIL PRINCIPAL RECEIV ES THE FULL AMOUNT OF PAYMENT DUE TO HIM. 39. THE TERMS OF THE AGREEMENT IN THE CASE OF ALL T HE AGENTS ARE IDENTICAL. IT IS CLEAR FROM THE AGREEMENTS THAT TH E NON-RESIDENTS RENDERED SERVICES OUTSIDE INDIA AND THE NATURE OF SERVICES R ENDERED BY THEM IS AS AGENT OF AND INDIAN EXPORTER OPERATING IN HIS OWN C OUNTRY. THERE IS ABSOLUTELY NO TERRITORIAL NEXUS WITH INDIA AS FAR A S THE NON-RESIDENTS ARE CONCERNED. THE NON-RESIDENTS SOURCE OF INCOME OUT SIDE INDIA AND ACCRUES AND ARISES OUTSIDE INDIA. THE HONBLE SUPREME COUR T IN THE CASE OF ITA NO.1091/BANG/2013 PAGE 17 OF 18 CARBORANDUM CO. V. CIT (1977) 108 ITR 335 , HAS HELD THAT THE CARRYING ON OF ACTIVITIES OR OPERATIONS IN INDIA IS ESSENTIAL TO MAKE THE NON- RESIDENT HAVE BUSINESS CONNECTION IN INDIA IN ORDER THAT HE MAY BE LIABLE TO TAX IN RESPECT OF THE INCOME ATTRIBUTABLE TO THAT B USINESS CONNECTION. THE CBDT IN CIRCULAR NO. 17(XXXVII) OF 1953 DATED 17TH JULY, 1953 HAS STATED AS FOLLOWS:- FOREIGN AGENTS OF INDIAN EXPORTERS A FOREIGN AGE NT OF AN INDIAN EXPORTER OPERATES IN HIS OWN COUNTRY AND NO PART OF HIS INCOME ARISES IN INDIA. USUALLY, HIS COMMISSION IS REMITTED DIRECTLY TO HIM; AND IS, THEREFORE, NOT RECEIVED BY OR ON HIS BEHALF IN INDIA. SUCH AN AGENT IS NOT LIABLE TO INDIAN INC OME-TAX. THE CBDT CIRCULAR NO.786 DATED 07/02/2000 REGARDING TAXABILITY OF EXPORT COMMISSION PAYABLE TO NON-RESIDENT AGENTS RENDERING SERVICES ABROAD HAS STATED THAT NO TAX IS THEREFORE DEDUCTIBLE UNDER S ECTION 195 AND CONSEQUENTLY THE EXPENDITURE ON EXPORT COMMISSION A ND OTHER RELATED CHARGES PAYABLE TO A NON-RESIDENT FOR SERVICES REND ERED OUTSIDE INDIA BECOMES ALLOWABLE EXPENDITURE. THE CONCLUSIONS OF THE AO AND CIT(A) THAT THE NON-RESIDENT HAD A BUSINESS CONNECTION IN INDIA IN OUR VIEW IS WITHOUT ANY BASIS AND CANNOT BE SUSTAINED. 40. ON APPLICABILITY OF EXPLN-2 TO SEC.195(1) OF T HE ACT WHICH WAS INTRODUCED BY THE FINANCE ACT, 2012 W.E.F. 1.4.1962 , WE ARE OF THE VIEW THAT THE SAID EXPLANATION IS APPLICABLE ONLY WHEN THERE IS ACCRUAL OF INCOME IN INDIA. WHEN THE CONCLUSION REACHED IS THAT THERE I S NO ACCRUAL OF INCOME IN INDIA, WE FAIL TO SEE HOW EXPLN.2 TO SEC.195(1) OF THE ACT ARE ATTRACTED. ITA NO.1091/BANG/2013 PAGE 18 OF 18 41. IN VIEW OF THE ABOVE CONCLUSIONS, WE ARE OF THE VIEW THAT THERE WAS NO OBLIGATION ON THE PART OF THE ASSESSEE TO DEDUCT TAX AT SOURCE WHILE MAKING PAYMENT TO THE NON-RESIDENT. CONSEQUENTLY, NO DISALLOWANCE OF COMMISSION EXPENSES PAID TO NON-RESIDENT COULD BE M ADE INVOKING THE PROVISIONS OF SEC.40(A)(I) OF THE ACT. WE HOLD ACC ORDINGLY AND DIRECT THE AO TO DELETE THE DISALLOWANCE SO MADE. 42. IN THE RESULT, THE APPEAL BY THE ASSESSEE IS AL LOWED. PRONOUNCED IN THE OPEN COURT ON THIS 13 TH DAY OF FEBRUARY, 2015. SD/- SD/- ( ABRAHAM P. GEORGE ) ( N.V. VASU DEVAN ) ACCOUNTANT MEMBER JUDICIAL M EMBER BANGALORE, DATED, THE 13 TH FEBRUARY, 2015. /D S/ COPY TO: 1. APPELLANT 2. RESPONDENTS 3. CIT 4. CIT(A) 5. DR, ITAT, BANGALORE. 6. GUARD FILE BY ORDER ASSISTANT REGISTRAR / SENIOR PRIVATE SECRETARY ITAT, BANGALORE.