ACIT, CHENNAI V. Capricorn Food Products India Ltd., CHENNAI

ITA 1247/CHNY/2013

• Counselvise Citation: [2013] 120 COUNSELVISE.COM (IT) 4660 (ITAT-CHENNAI)
• Duration Of Justice: 2 month(s) 23 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 29-08-2013
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: B
• Assessment Year: 2008-2009
• Appeal Filed On: 06-06-2013
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Assessee Lawyers: J PRABHAKAR
• Keywords: Bonafide belief; Retrospective amendment; Permanent establishment; Non-deduction of tax

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL B BENCH, CHENNAI BEFORE SHRI ABRAHAM P. GEORGE, ACCOUNTANT MEMBER AND SHRI V. DURGA RAO, JUDICIAL MEMBER I.T.A. NO. 1247/MDS/2013 (ASSESSMENT YEAR : 2008-09) THE ASSISTANT COMMISSIONER OF INCOME TAX, COMPANY CIRCLE I(3), CHENNAI - 600 034. (APPELLANT) V. M/S CAPRICORN FOOD PRODUCTS INDIA LTD., NO.AH-216, 2 ND STREET, 8 TH MAIN ROAD, SHANTHI COLONY, ANNA NAGAR, CHENNAI - 600 040. PAN : AABCC 1550 B (RESPONDENT) APPELLANT BY : SH. GURU BASHYAM, JCIT RESPONDENT BY : SH. J. PRABHAKAR, FCA DATE OF HEARING : 21.08.2013 DATE OF PRONOUNCEMENT : 29.08.2013 O R D E R PER ABRAHAM P. GEORGE, ACCOUNTANT MEMBER : IN THIS APPEAL FILED BY THE REVENUE, IT IS AGGRIE VED THAT THE CIT(APPEALS) DELETED A DISALLOWANCE OF ` 58,02,597/- MADE BY THE ASSESSING OFFICER UNDER SECTION 40A(I) OF INCOME-TA X ACT, 1962 (IN SHORT THE ACT), FOR WANT OF DEDUCTION OF TAX AT S OURCE ON COMMISSION PAID TO FOREIGN AGENTS. I.T.A. NO. 1247/MDS/13 2 2. ASSESSEE, ENGAGED IN EXPORT OF FOOD PRODUCTS, HAD FILED ITS RETURN FOR IMPUGNED ASSESSMENT YEAR DECLARING AN IN COME OF ` 45,66,550/-. DURING THE COURSE OF ASSESSMENT PROCE EDINGS, IT WAS NOTED BY THE ASSESSING OFFICER THAT ASSESSEE HAD PA ID SALES COMMISSION OF ` 58,02,597/- TO AGENTS ABROAD. AS PER A.O., ASSESSEE FAILED TO DEDUCT TAX AT SOURCE. THOUGH AS SESSEE HAD RELIED ON CIRCULAR NO.786 DATED 7.2.2000 FOR NON-DEDUCTION OF TAX AT SOURCE, THE A.O. WAS NOT IMPRESSED. ACCORDING TO HIM, CIRC ULAR NO.7/2009 DATED 22.10.2009 HAD MADE CIRCULAR NO.23 DATED 23.7 .1969 AND CIRCULAR NO.786 DATED 7.2.2000 REDUNDANT. WHEN THE SOURCE OF INCOME EMANATED FROM BUSINESS ACTIVITIES OF THE ASS ESSEE IN INDIA, THE TAXABILITY OF INCOME WAS GOVERNED BY SECTION 9 OF THE ACT. ASSESSEE HAVING NOT DEDUCTED TAX AT SOURCE ON THE M ANAGERIAL SERVICE RENDERED BY THE FOREIGN AGENTS, ASSESSING O FFICER WAS OF THE OPINION THAT RIGOURS OF SECTION 40A(I) WAS ATTRACTE D. HE DISALLOWED THE CLAIM OF ` 58,02,597/-. 3. IN ITS APPEAL BEFORE CIT(APPEALS), ARGUMENT OF T HE ASSESSEE WAS THAT AT THE TIME WHEN ASSESSEE EFFECTED THE PAY MENTS TO THE FOREIGN AGENTS, WHAT WAS APPLICABLE WAS CIRCULAR NO .786 OF 7.2.2000. ASSESSEE COULD NOT FORESEE THAT THE CBDT WOULD WITH DRAW THE I.T.A. NO. 1247/MDS/13 3 BENEFITS GIVEN UNDER CIRCULAR NO.786 DATED 7.2.2000 THROUGH SUBSEQUENT CIRCULARS. DOCTRINE OF PROMISSORY ESTOP PEL APPLIED. ASSESSEE HAVING ACTED ON A BONAFIDE IMPRESSION THAT NO DEDUCTION OF TAX AT SOURCE WAS REQUIRED, COULD NOT BE FASTENED W ITH THE PERIL OF AN INJURY CAUSED DUE TO SUBSEQUENT WITHDRAWAL OF CIRCU LAR. 4. CIT(APPEALS) WAS IMPRESSED BY THE ARGUMENT OF TH E ASSESSEE. HE HELD THAT THERE WAS NO PERMANENT ESTABLISHMENT F OR THE NON- RESIDENTS IN INDIA AND THEREFORE, THERE COULD BE NO LIABILITY IN INDIA FOR SUCH NON-RESIDENTS FOR THEIR BUSINESS EARNINGS. AC CORDING TO HER, ASSESSEE WAS WELL COVERED BY CIRCULAR NO.786. THUS , SHE DELETED THE DISALLOWANCE. 5. NOW BEFORE US, SHRI GURU BASHYAM, APPEARING FOR THE REVENUE, SUBMITTED THAT BY VIRTUE OF AMENDMENT TO S ECTION 9(2) OF THE ACT, THROUGH FINANCE ACT, 2010, WHEREBY AN EXPL ANATION WAS ADDED WITH RETROSPECTIVE EFFECT, THE REQUIREMENT OF HAVING A RESIDENCE OR PLACE OF BUSINESS OR BUSINESS CONNECTI ON IN INDIA FOR NON-RESIDENTS WAS NO MORE THERE. THIS AMENDMENT, A CCORDING TO HIM, HAD RETROSPECTIVE EFFECT FROM 1.6.1976. THE R EQUIREMENT THAT NON-RESIDENTS SHOULD HAVE RENDERED SERVICES IN INDI A FOR BRINGING SUCH NON-RESIDENTS WITHIN THE AMBIT OF INDIAN TAXAT ION, STOOD I.T.A. NO. 1247/MDS/13 4 OBVIATED. ACCORDING TO HIM, THE SERVICES RENDERED BY THE NON- RESIDENT AGENTS TO THE ASSESSEE FITTED WITHIN THE D EFINITION OF FEES FOR TECHNICAL SERVICES GIVEN UNDER EXPLANATION (2) TO SECTION 9(1)(VII) OF THE ACT. THE SAID FOREIGN AGENTS WERE RENDERING MA NAGERIAL SERVICES TO THE ASSESSEE. THEREFORE, ASSESSEE SHOULD HAVE D EDUCTED TAX AT SOURCE AS STIPULATED UNDER SECTION 195 OF THE ACT. HAVING NOT DONE SO, ASSESSING OFFICER WAS JUSTIFIED IN APPLYING SEC TION 40A(I) FOR MAKING A DISALLOWANCE. LEARNED D.R. SUBMITTED THA T THE CIT(APPEALS) FELL IN ERROR BY GIVING BENEFIT OF CIR CULAR NO.786 DATED 7.2.2000 TO THE ASSESSEE DESPITE SUCH CIRCULAR HAVI NG BECOME REDUNDANT BY VIRTUE OF CIRCULAR NO.7/2009 DATED 22. 10.2009. 6. PER CONTRA, SH. J. PRABHAKAR, FCA, LD. COUNSEL F OR THE ASSESSEE, STRONGLY SUPPORTED THE ORDER OF CIT(APPEA LS). 7. WE HAVE PERUSED THE ORDERS AND HEARD THE RIVAL S UBMISSIONS. THE A.O. HAD MADE DISALLOWANCE UNDER SECTION 40A(I) FOR A REASON THAT ASSESSEE COULD NOT TAKE BENEFIT OF CIRCULAR NO .786 DATED 7.2.2000. HOWEVER, THE SUBSEQUENT CIRCULAR NO.7/20 09 DATED 22.10.2009, WHICH ALLEGEDLY WITHDREW THE BENEFITS G IVEN TO AN ASSESSEE UNDER CIRCULAR NO.786 DATED 7.2.2000 AND C IRCULAR NO.23 DATED 23.7.1969, WERE NOT THERE, WHEN ASSESSEE MADE PAYMENTS TO I.T.A. NO. 1247/MDS/13 5 NON-RESIDENT AGENTS SINCE THE RELEVANT PREVIOUS YEA R WAS 2007-08. ASSESSEE THEREFORE WAS DEFINITELY SAVED BY THE DOCT RINE OF PROMISSORY ESTOPPEL. AT THE TIME WHEN IT HAD EFFEC TED THE PAYMENTS TO FOREIGN AGENTS, IT COULD REASONABLY HAVE HELD TH E BONAFIDE BELIEF THAT SUCH PAYMENTS WERE NOT INCOME OF THE NON-RESID ENTS, EXIGIBLE FOR TAX IN INDIA. ONCE ASSESSEE HELD A BONAFIDE BELIEF THAT THE PAYMENTS MADE TO NON-RESIDENTS, WERE NOT TAXABLE IN INDIA, T HEN IT COULD NOT BE FASTENED WITH A LIABILITY TO DEDUCT TAX UNDER SECTI ON 195 OF THE ACT. IN ANY CASE, ASSESSING OFFICER HAS NOT GIVEN ANY FINDI NG THAT THE NON- RESIDENTS HAD RENDERED ANY SERVICES WHICH WERE IN T HE NATURE OF TECHNICAL SERVICES. THERE IS NOTHING ON RECORD TO SHOW THAT ANY TECHNICAL KNOWLEDGE WAS MADE AVAILABLE TO THE ASSES SEE THROUGH THE SERVICES RENDERED BY THE NON-RESIDENTS, WHICH ASSES SEE COULD MAKE USE OF IN FUTURE. IN ANY CASE, SUB-CLAUSE (B) OF C LAUSE (VII) OF SECTION 9(1) OF THE ACT CLEARLY MENTIONS THAT FEES PAID IN RESPECT OF SERVICES UTILIZED IN A BUSINESS OR PROFESSION CARRIED ON BY SUCH PERSON OUTSIDE INDIA OR FOR THE PURPOSE OF MAKING OR EARNING INCOM E FROM ANY SOURCE OUTSIDE INDIA, WOULD NOT COME WITHIN THE PURVIEW OF INCOME BY WAY OF FEES FOR TECHNICAL SERVICES. ADDITION OF EXPLANATI ON TO SUB-SECTION (2) TO SECTION 9 THROUGH FINANCE ACT, 2010 WITH RETROSP ECTIVE EFFECT FROM 1.6.1976 WILL THEREFORE HAVE NO EFFECT ON TAXABILIT Y OF INCOME EARNED I.T.A. NO. 1247/MDS/13 6 BY NON-RESIDENT OUTSIDE INDIA IN THE COURSE OF HIS BUSINESS OR PROFESSION CARRIED OUT OUTSIDE INDIA BY HIM. THERE IS NO CASE FOR THE REVENUE THAT THE FOREIGN AGENTS WERE NOT ENGAGED IN A BUSINESS OF EARNING COMMISSION BY CANVASSING MARKET OVERSEAS. WE ARE, THEREFORE, OF THE OPINION THAT LD. CIT(APPEALS) WAS JUSTIFIED IN DELETING THE DISALLOWANCE. NO INTERFERENCE IS REQUIRED. 8. IN THE RESULT, APPEAL FILED BY THE REVENUE IS DI SMISSED. ORDER WAS PRONOUNCED IN THE COURT ON THURSDAY, THE 29 TH OF AUGUST, 2013, AT CHENNAI. SD/- SD/- (V.DURGA RAO) (ABRAHAM P. GEORGE) JUDICIAL MEMBER ACCOUNTANT MEMBER CHENNAI, DATED THE 29 TH AUGUST, 2013. KRI. COPY TO: (1) APPELLANT (2) RESPONDENT (3) CIT(A)-III, CHENNAI (4) CIT, CHENNAI-I, CHENNAI (5) D.R. (6) GUARD FILE