Avon Organics Limited, Hyderabad V. JCIT, Range 8, Hyderabad

ITA 1427/HYD/2010

• Counselvise Citation: [2012] 140 COUNSELVISE.COM (IT) 66403 (ITAT-HYDERABAD)
• Duration Of Justice: 1 year(s) 11 month(s) 7 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 26-10-2012
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: A
• Next Hearing Date: 20-07-2011
• Assessment Year: 2006-2007
• Appeal Filed On: 18-11-2010
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: NIVEDITA BISWAS
• Assessee Lawyers: K A SAI PRASAD
• Keywords: Retrospective amendment; Permanent establishment
• Section: 80HHC; 234B

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL HYDERABAD A BENCH, HYDERABAD BEFORE SHRI CHANDRA POOJARI, ACCOUNTANT MEMBER AND SHRI SAKTIJIT DEY, JUDICIAL MEMBER ITA NO.218 & 223/HYD/2009 ASSESSMENT YEARS: 2005-06 & 2004-05. ACIT, CIR-8(1), HYDERABAD. .... APPELLANT VS. M/S AVON ORGANICS LTD., HYDERABAD. RESPONDENT PAN:AABCA 7422 Q ITA NO.1427/HYD/2010 ASSESSMENT YEAR: 2006-07 M/S AVON ORGANICS LTD., HYDERABAD. APPELLANT PAN:AABCA 7422 Q JCIT, RANGE-8, HYDERABAD. RESPONDENT ASSESSEE BY : SHRI K.A. SAI P RASAD DEPARTMENT BY : SMT. NIVEDIT A BISWAS DATE OF HEARING : 27-08-2012 DATE OF PRONOUNCEMENT : 26-10-2012 ORDER PER SAKTIJIT DEY, J.M.: THESE THREE APPEALS, TWO BY THE DEPARTMENT AND ONE BY THE ASSESSEE ARE DIRECTED AGAINST SEPARATE O RDERS OF CIT (A)-III, HYDERABAD AND THEY PERTAIN TO THE ASSE SSMENT YEARS 2005-06, 2004-05 AND 2006-07 RESPECTIVELY. S INCE COMMON ISSUES ARE INVOLVED IN THESE APPEALS, THESE ARE 2 ITA NOS.218 AND OTHERS OF 2009 AVON ORGANICS LTD., HYD. CLUBBED TOGETHER AND DISPOSED OF BY THIS COMBINED O RDER FOR THE SAKE OF CONVENIENCE. I TA NO. 218/HYD/2009- ASST. YEAR : 2005-06 :- 2. THE ONLY EFFECTIVE GROUND OF THE DEPARTMENT IS G ROUND NO.2 WHICH IS EXTRACTED AS UNDER: THE LD. CIT (A) ERRED IN HOLDING THAT NO DISALLOWA NCE U/S 40(A)(I) IS CALLED FOR ON COMMISSION PAID TO FOREIG N AGENTS, THOUGH NO TDS WAS MADE BY THE ASSESSEE ON SUCH COMM ISSION PAYMENT. 3. BRIEFLY THE FACTS ARE THE ASSESSEE CARRIES ON AC TIVITY OF MANUFACTURE AND SALE OF CHEMICALS AND BULK DRUGS. THE ASSESSEE FILED ITS RETURN FOR THE ASSESSMENT YEAR UNDER CONS IDERATION DECLARING TOTAL LOSS OF RS.1,42,63,470/-. IN COURS E OF ASSESSMENT PROCEEDINGS, THE AO NOTICED THAT THE ASSESSEE HAS C LAIMED EXPENDITURE OF RS.16,81,130/- TOWARDS PAYMENT OF CO MMISSION TO FOREIGN AGENTS BUT NO TAX HAS BEEN DEDUCTED AT SOUR CE. THE AO ASKED THE ASSESSEE TO EXPLAIN AS TO WHY COMMISSION PAYMENT WILL NOT BE DISALLOWED U/S 40 (A) (I) SINCE NO TAX HAS B EEN DEDUCTED AT SOURCE ON THE PAYMENT MADE. THE ASSESSEE IN ITS RE PLY EXPLAINED THAT EXPORT COMMISSION WAS PAID TO FOREIGN AGENTS F OR THE SERVICES RENDERED BY THEM IN CONNECTION WITH EFFECTUATING EX PORTS SALES AND THE PAYMENTS ARE MADE DIRECTLY TO THE BANK ACCOUNT OF THE AGENT 3 ITA NOS.218 AND OTHERS OF 2009 AVON ORGANICS LTD., HYD. THROUGH TELEGRAPHIC TRANSFER. THE ASSESSEE RELYING UPON A CIRCULAR NO.786 OF CBDT DATED 7-2-2000 STATED THAT AS THE FO REIGN AGENTS OPERATE IN THEIR RESPECTIVE COUNTRIES AND NO PART O F THE INCOME ARISES IN INDIA, TAX IS NOT REQUIRED TO BE DEDUCTED AT SOURCE ON THE PAYMENTS MADE TO THE FOREIGN AGENTS. THE AO REJECT ED THE CONTENTION OF THE ASSESSEE BY OBSERVING THAT NON RE SIDENTS WERE PAID BY WAY OF TELEGRAPHIC TRANSFER OBTAINED FROM B ANKS AT HYDERABAD AND THEREFORE THE BANKS ACTED AS AGENTS O F NON-RESIDENT AND RECEIVED THE PAYMENT ON THEIR BEHALF IN INDIA. ON THE AFORESAID CONCLUSION, THE AO HELD THAT THE COMMISSION PAID IS DEEMED TO HAVE RECEIVED IN INDIA. THE AO FURTHER HELD THAT R EMITTANCE TOWARDS COMMISSION TO A BANK IN INDIA COUPLED WITH THE FACT THAT THE CREDITS TOWARDS COMMISSION WAS MADE IN THE BOOK S OF ACCOUNTS OF THE ASSESSEE MAINTAINED IN INDIA WILL MAKE THE C OMMISSION LIABLE TO TAX IN INDIA AS PER SECTION 5(2A) OF THE ACT. THE AO ALSO RELIED ON THE DECISION OF SUPREME COURT IN THE CASE OF TRA NSMISSION CORPORATION OF AP LIMITED (239 ITR 587) AND STANDAR D TRIUMPH COMPANY LTD. VS. CIT (201 ITR 391) AND ALSO THE DEC ISION OF THE ITAT IN THE CASE OF CHEMINAR DRUGS LIMITED VS.ITO IN IT A NOS. 10 AND 11 OF 1996 DATED 22-12-99. THE ASSESSEE CHALLENGED TH E DISALLOWANCES BY FILING AN APPEAL BEFORE THE CIT (A). IN COURSE OF HEARING BEFORE THE CIT (A), THE ASSESSEE APART FROM REITERATING HI S STAND TAKEN BEFORE THE AO ALSO RELIED UPON A DECISION OF ITAT, HYDERABAD IN THE 4 ITA NOS.218 AND OTHERS OF 2009 AVON ORGANICS LTD., HYD. CASE OF DR. REDDY LABORATORIES VS. JCIT ITA NO.690/ HYD/10 DATED 24-8-2007. THE CIT (A) FOLLOWING THE DECISION OF I TAT, HYDERABAD BENCH IN THE CASE OF DR. REDDY LABORATORIES LIMITED (SUPRA) HELD THAT COMMISSION PAYMENT TO THE FOREIGN AGENTS OPERA TING OUTSIDE INDIA IS NOT LIABLE TO TAX IN INDIA. THEREFORE, NO DISALLOWANCE COULD BE MADE U/S 40 (A)(I) OF THE ACT. HE THEREFORE DEL ETED THE ADDITION. 4. THE LEARNED DR RELYING UPON THE ASSESSMENT ORDER SUBMITTED THAT THE COMMISSION PAYMENT BEING FOR THE SERVICES RENDERED BY THE FOREIGN AGENTS IN CONNECTION WITH BUSINESS ACTI VITIES ARISING IN INDIA, THE INCOME BECOMES TAXABLE AT THE HANDS OF T HE FOREIGN AGENTS AND THEREFORE THE ASSESSEE WAS REQUIRED TO D EDUCT TAX AT SOURCE. SINCE THE ASSESSEE HAS FAILED TO DEDUCT TA X, DISALLOWANCE U/S 40(A)(I) WAS IN ACCORDANCE WITH LAW. 5. THE LEARNED AR STRONGLY SUPPORTING THE ORDER OF THE CIT (A) SUBMITTED THAT THE DISALLOWANCE U/S 40(A)(1) WAS JU STIFIED SINCE PAYMENT OF COMMISSION SHOULD BE DEEMED TO HAVE ARIS EN IN INDIA AS PER SECTION 5(2)(A) OF THE ACT. IT IS FURTHER SU BMITTED THAT THE FOREIGN AGENTS DID NOT RENDER ANY PART OF THE SERVI CES IN INDIA. THEY DID NOT HAVE AN ESTABLISHMENT IN INDIA. THEREFORE, PAYMENT OF COMMISSION TO THEM NOT BEING CHARGEABLE TO TAX IN INDIA THERE IS NO REQUIREMENT FOR DEDUCTION OF TAX U/S 195(1) OF T HE ACT. THE LEARNED AR FURTHER SUBMITTED THAT ONLY BECAUSE THE COMMISSION 5 ITA NOS.218 AND OTHERS OF 2009 AVON ORGANICS LTD., HYD. AMOUNT WAS TRANSMITTED TO FOREIGN AGENTS THROUGH TE LEGRAPHIC TRANSFER, IT CANNOT BE SAID THAT THE BANKS ACTED A S AGENT ON BEHALF OF THE FOREIGN AGENTS AND RECEIVED PAYMENT ON THEIR BEHALF IN INDIA. IN SUPPORT OF HIS CONTENTION, THE LEARNED AR RELIED UPON A DECISION OF ITAT, MUMBAI BENCH IN THE CASE OF ARMAYESH GLOBA L VS. ACIT (2011) 45 SOT 69 (MUM) AND A DECISION OF ITAT, HYD ERABAD BENCH IN THE CASE OF DCIT VS. DIVIS LABORATORIES LIMITED REPORTED IN (2011) 131 ITD 271. 6. WE HAVE HEARD RIVAL SUBMISSIONS AND PERUSED THE MATERIAL ON RECORD. AS REVEALED FROM THE ASSESSMENT ORDER, THE AO HAS COME TO THE CONCLUSION THAT THE COMMISSION PAYMENTS WERE DEEMED TO HAVE BEEN RECEIVED IN INDIA ONLY BECAUSE THE TELEGR APHIC TRANSFER OF THE REMITTANCES TOWARDS COMMISSION WAS MADE FROM A BANK IN INDIA. APART FROM THESE THINGS, THE AO HAS GOT NO OTHER MATERIAL ON RECORD TO SHOW THAT THE FOREIGN AGENTS EITHER RENDE RED ANY SERVICES IN INDIA OR HAVE ANY PERMANENT ESTABLISHMENT IN IND IA. ONLY BECAUSE THE REMITTANCES TOWARDS COMMISSION WERE TEL EGRAPHICALLY TRANSFERRED TO THE FOREIGN AGENTS FROM THE BANKS IN HYDERABAD WILL NOT LEAD TO THE INFERENCE THAT THE INCOME TO THE F OREIGN AGENTS ACCRUED OR AROSE IN INDIA IN TERMS OF SECTION 5(2A) OF THE ACT. THE ITAT, HYDERABAD BENCH IN THE CASE OF DR. REDDYS LA BORATORIES (SUPRA) TOOK NOTE OF THE DECISION OF THE HONBLE S UPREME COURT IN 6 ITA NOS.218 AND OTHERS OF 2009 AVON ORGANICS LTD., HYD. THE CASE OF TRANSMISSION CORPORATION OF A.P (SUPRA ) AND HELD IN THE FOLLOWING MANNER:- IN THE CASE OF TRANSMISSION CORPORATION (SUPRA), THE FACTS WERE THAT THE ASSESSEE HAD ENTERED INTO CERTAIN AGREEMENTS WITH CERTAIN FOREIGN PARTIES FO R SUPPLY OF EQUIPMENTS. ANOTHER SET OF CONTRACTS ENTERED INTO WERE FOR ASSEMBLING, ERECTION, TESTING AND COMMISSIONING OF THE EQUIPMENT. PURSUANT TO THESE CONTRACTS, PAYMENTS WERE MADE BY THE ASSESSEE TO THE FOREIGN PARTIES WITHOUT DEDUCTING TAX UNDER S. 195 OF THE ACT. THE CONTENTION OF THE ASSESSEE WAS THAT S. 195 WOULD BE APPLICABLE ONLY WHERE THE PAYMENT TO THE NON RESIDENT IS WHOLLY INCOME CHARGEABLE TO TAX AS IT PROVIDES THAT ANY PERSON RESPONSIBLE FOR PAYING TO A NON RESIDENT ANY SUM CHARGEABLE UNDER THE PROVISIONS OF THIS ACT, SHALL , AT THE TIME OF PAYMENT, DEDUCT INCOME TAX THEREON AT T HE RATES IN FORCE. IN OTHER WORDS, THE CONTENTION WAS THAT WHEN THE PAYMENTS MADE TO THE NON RESIDENT WERE NOT ENTIRELY INCOME, BUT A TRADING RECEIPT, T HERE IS NO QUESTION OF DEDUCTION OF INCOME TAX AT THE SOURCE AS THE SECTION DOES NOT PROVIDE FOR IT. TO THIS CONTENTION, THE SUPREME COURT ANSWERED THAT THE ASSESSEE WHO MADE THE PAYMENTS TO THE NON RESIDENTS WAS UNDER AN OBLIGATION TO DEDUCT TAX AT SOURCE U/S 195 OF THE ACT IN RESPECT OF THE SUMS PAID TO THEM UNDER THE CONTRACTS ENTERED INTO. IT FURTHER HELD T HAT THE OBLIGATION OF THE ASSESSEE TO DEDUCT TAX U/S 19 5 IS LIMITED ONLY TO THE APPROPRIATE PROPORTION OF INCOM E CHARGEABLE UNDER THE ACT. THUS, IT CAN BE SEEN THA T THE SAID JUDGMENT IN FACT HELPS THE ASSESSEE. THE SECOND QUESTION ANSWERED BY THE SUPREME COURT CAN 7 ITA NOS.218 AND OTHERS OF 2009 AVON ORGANICS LTD., HYD. BE UNDERSTOOD TO MEAN THAT THE OBLIGATION OF THE AS SESSEE TO DEDUCT TAX U/S 195 IS NOT THERE WHEN THE PAYMENT MADE TO THE NON RESIDENT DOES NOT CONTAIN ANY PROPORTION OF INCOME THEREIN. IN OUR VIEW, RIGHT FROM THE BEGINN ING, NOT ONLY ON THE BASIS OF THE CIRCULARS OF THE BOARD, BU T ALSO ON THE BASIS OF THE DECISION OF THE TRIBUNAL IN ITS OW N CASE, THE ASSESSEE FIRMLY BELIEVED THAT NO PART OF THE IN COME PAID TO THE FOREIGN AGENT WAS TAXABLE IN INDIA. TH EREFORE, THERE WAS NO QUESTION OF DEDUCTING ANY TAX AT SOUR CE ON ANY PROPORTION OF THE PAYMENT MADE TO THE NON-RESID ENTS. THUS, THE JUDGMENT IN THE CASE OF TRANSMISSION CORPORATION (SUPRA) DOES NOT ADVANCE THE CASE OF TH E DEPARTMENT IN THE PRESENT APPEAL. FINALLY, IT MAY BE PERTINENT TO NOTE THAT CIRCULAR NO.786 DATED 7-2-20 00 I.E., THE SAME HAS BEEN ISSUED AFTER THE JUDGMENT WAS REN DERED IN THE CASE OF TRANSMISSION CORPORATION (SUPRA) I.E ., ON 17- 8-1999. THE FACTS IN THE ASSESSEES CASE REMAIN GO VERNED BY THE BOARD CIRCULAR AND HENCE, IN THE FINAL ANALY SIS, RESPECTFULLY FOLLOWING THE EARLIER ORDER OF THE TRI BUNAL IN THE ASSESSEES OWN CASE, WE UPHOLD THE ORDER OF THE CIT (A) DELETING THE DISALLOWANCE. 7. IN CASE OF DCIT VS. DIVIS LABORATORIES LIMITED (131 ITD 271), THE ITAT, HYDERABAD BENCH WHILE INTERPRETING THE PROVISIONS CONTAINED UNDER S. 195 HELD THAT UNLESS THE INCOME IS LIABLE TO TAX IN INDIA, THERE IS NO OBLIGATION TO DEDUCT TAX. IN ORDER TO DETERMINE WHETHER THE INCOME CAN BE DEEMED TO ACCRUE OR ARISE IN INDIA, IT HAS TO BE CONSISTENT IN THE CONTEXT OF SECTION 9. AS PER SECTION 9, THE BASIC CRITERIA PROVIDED IN THE SECTION IS ABOUT ACC RUAL OF OR ARISING OF INCOME IN INDIA BY VIRTUE OF CONNECTION WITH THE P ROPERTY IN INDIA OR CONTROL OR MANAGEMENT VESTED IN INDIA. UNLESS THES E CONDITIONS WERE SATISFIED, IT CANNOT BE HELD THAT INCOME HAS ACCRUE D OR ARISEN IN INDIA. 8 ITA NOS.218 AND OTHERS OF 2009 AVON ORGANICS LTD., HYD. THIS TRIBUNAL FURTHER HELD THAT SECTION195 HAS TO B E READ ALONG WITH CHARGING SECTIONS 4,5 AND 9 OF THE ACT. THE PROVI SIONS CONTAINED U/S 195 WERE NOT MEANT THAT THE MOMENT THERE IS A REMIT TANCE, THE OBLIGATION TO DEDUCT TDS AUTOMATICALLY ARISE. CONS IDERING THE FACT THAT THE AO HAS NOT BROUGHT ANY MATERIAL ON RECORD TO SH OW THAT THE FOREIGN AGENTS HAVE RENDERED ANY PART OF THE SERVICES IN IN DIA OR HAVE A PERMANENT ESTABLISHMENT AND BUSINESS CONNECTION IN INDIA, IT CANNOT BE SAID THAT ANY PART OF THE COMMISSION PAYMENT M ADE TO THEM ACCRUED OR ARISEN IN INDIA REQUIRING DEDUCTION OF T AX U/S 195(1) OF THE ACT. WE ARE ALSO FORTIFIED BY THE DECISION OF THE ITAT BOMBAY BENCH DISCUSSED ABOVE. IN THE AFORESAID VIEW OF THE MATTE R, WE FULLY AGREE WITH THE FINDING OF THE CIT (A) THAT NO DISALLOWANC E U/S 40(A)(I) COULD BE MADE. WE THEREFORE UPHOLD THE ORDER OF THE CIT (A) AND DISMISS THE GROUND RAISED BY THE DEPARTMENT. 7.1. IN THE RESULT, DEPARTMENTS APPEAL IS DISMISSE D. ITA NO.223/HYD/09 (ASSTT. YEAR 2004-05): - 8. THE REVENUE HAS RAISED SIX GROUNDS BEFORE US. G ROUND NOS. 1 AND 6 ARE GENERAL IN NATURE AND HENCE THEY DO NOT REQUI RE ANY ADJUDICATION. 9. GROUND NO.2 READS AS UNDER:- THE LD. CIT (A) ERRED IN HOLDING THAT THE INTEREST RECEIPT SHOULD BE SET OFF AGAINST SUCH INTEREST PAYMENTS, H AVING DIRECT NEXUS WITH THE INTEREST RECEIPTS, BEFORE EXCLUDING 90% THEREOF 9 ITA NOS.218 AND OTHERS OF 2009 AVON ORGANICS LTD., HYD. IN TERMS OF CLAUSE (BAA) OF EXPLANATION TO SECTION 80HHC OF THE IT ACT, 1961. 10. BRIEFLY THE FACTS ARE IN THE COURSE OF ASSESSME NT PROCEEDINGS WHILE COMPUTING THE DEDUCTION/S 80HHC OF THE ACT, T HE AO NOTICED THAT THE ASSESSEE HAS NOT REDUCED ITS GROSS INTER EST INCOME BY 90% FROM THE PROFIT OF THE BUSINESS AS REQUIRED UNDER CLAUSE (BBA) OF EXPLANATION TO SECTION 80HHC OF THE ACT WHEN THE AO RAISE A QUERY IN THIS REGARD, THE ASSESSEE STATED THAT INTEREST I NCOME OF RS.31,78,211 AND MISC. EXPENSES OF RS.7,63,480 WAS INCURRED FOR SET OFF AGAINST THE INTEREST PAID TO BANK TOWARDS W ORKING CAPITAL. THE ASSESSEE RELIED ON THE DECISION OF ITAT, SPECIA L BENCH IN THE CASE OF LALSONS ENTERPRISES (89 ITD 25) IN THIS REG ARD. THE AO HOWEVER REJECTED THE CLAIM OF THE ASSESSEE AND HELD THAT THE INTEREST INCOME REQUIRED TO BE REDUCED BY 90% FROM THE PROFIT OF THE BUSINESS AS PER CLAUSE (BAA) OF SECTION 80HHC I S NOT NET INTEREST BUT THE INTEREST EARNED BY THE ASSESSEE. HE THEREF ORE RECOMPUTED THE DEDUCTION CLAIMED U/S 80HHC BY RESTRICTING THE DEDUCTION TO RS. 18,22,222/-. THE ASSESSEE BEING AGGRIEVED OF THE DI SALLOWANCE MADE BY THE AO CHALLENGED THE SAME BEFORE THE CIT (A). 11. IN COURSE OF HEARING BEFORE THE CIT (A), THE AS SESSEE CONTENDED THAT INTEREST WAS EARNED MAINLY FROM MARG IN MONEY DEPOSITS AND ELECTRICITY DEPOSITS WITH BANKS AND AU THORITIES FOR THE 10 ITA NOS.218 AND OTHERS OF 2009 AVON ORGANICS LTD., HYD. PURPOSE OF BUSINESS. THESE DEPOSITS WERE MADE FROM THE FUNDS BORROWED FROM BANKS FOR WHICH THE ASSESSEE INCURRE D INTEREST EXPENDITURE. HENCE, THE INTEREST RECEIVED BY THE AS SESSEE IS REQUIRED TO BE SET OFF AGAINST THE INTEREST PAID BY THE ASSESSEE BEFORE EXCLUDING 90% THEREOF AS PER CLAUSE (BAA) OF EXPLANATION TO SECTION 80HHC OF THE ACT. IN SUPPORT OF HIS CONTEN TION, THE ASSESSEE FURTHER RELIED ON THE DECISION OF HONBLE DELHI HIGH COURT IN CASE OF SRI RAM HONDA POWER EQUIPMENTS ( 289 IT R 475). THE CIT (A) FOLLOWING THE DECISION OF THE ITAT, SPECIAL BENCH DELHI IN THE CASE OF LALSONS ENTERPRISES(SUPRA) AND THE DECISION OF HONBLE DELHI HIGH COURT IN THE CASE OF SRI RAM HONDA POWER EQUIP MENTS (SUPRA) AND IN THE CASE OF KASHMIR ARTS (166 TAXMAN 237 ), HELD THAT BEFORE ALLOWING NETTING OF INTEREST THE ASSESSEE H AS TO PROVE DIRECT NEXUS BETWEEN THE INTEREST RECEIPTS AND INTEREST PA YMENTS. THE CIT (A) THEREFORE DIRECTED THE AO TO EXAMINE THIS A SPECT BY OBSERVING IN THE FOLLOWING MANNER:- ON DUE CONSIDERATION, I AGREE WITH THE ARGUMENTS O F THE LD. AR. THE ISSUE IS COVERED BY THE DECISION OF SPL. B ENCH IN THE CASE OF LALSONS ENTERPRISE (89 ITD 25). HOWEVER, I T IS HELD THEREIN THAT BEFORE ALLOWING THE NETTING OF INTERES T, THE ASSESSEE HAS TO PROVE THE DIRECT NEXUS BETWEEN THE INTEREST RECEIPTS AND THE INTEREST PAYMENTS. SIMILAR RATIO WAS LAID DOWN BY THE DELHI HIGH COURT IN THE CASE OF KASHMIR ARTS (166 TAXMAN 237) AFTER CONSIDERING ITS DECISION IN THE C ASE OF SRI RAM HONDA EQUIPMENTS (SUPRA). SINCE, THE AO HAS NO T EXAMINED THIS ASPECT; HE IS DIRECTED TO VERIFY THE RELEVANT 11 ITA NOS.218 AND OTHERS OF 2009 AVON ORGANICS LTD., HYD. FACTS SUBMITTED BY THE APPELLANT DURING THE APPEAL PROCEEDINGS. IF THE APPELLANT IS ABLE TO PROVE DIR ECT NEXUS BETWEEN THE INTEREST RECEIPTS AND THE INTEREST PAYM ENTS BEFORE EXCLUDING 90% THEREOF IN TERMS OF CLAUSE (BA A OF EXPLANATION TO SEC. 80HHC. 12. THE LEARNED DR SUPPORTING THE REASONING OF TH E AO SUBMITTED BEFORE US THAT THE CIT (A) WAS NOT JUSTIFIED IN DIR ECTING FOR SETTING OFF THE INTEREST INCOME AGAINST INTEREST PAYMENT BE FORE EXCLUDING 90% THEREFORE FOR COMPUTING DEDUCTION U/S 80HHC. TH E LEARNED DR IN SUPPORT OF HER CONTENTION RELIED UPON THE FOLLOW ING DECISIONS:- I) CIT VS. V. CHINNAPANDI (2006) 282 ITR 389 (MAD) II) CHOUDHARY GARMENTS VS. DCIT (2003) 86 ITD 779 III) CIT VS. LIBERTY FOOTWEAR COMPANY (2006) 287 ITR 3 39 13. THE LEARNED AR STRONGLY SUPPORTING THE FINDING OF THE CIT (A) CONTENDED THAT AS PER CLAUSE BAA OF EXPLANATION TO SECTION 80HHC INTEREST INCOME HAS TO BE SET OFF AGAINST THE INTER EST PAYMENT BEFORE EXCLUDING 90% THEREOF FOR COMPUTING DEDUCTIO N/S 80HHC. IN SUPPORT OF SUCH CONTENTION, THE LEARNED AR FURTHER RELIED ON THE JUDGMENT OF HONBLE SUPREME COURT IN THE CASE OF AC G ASSOCIATED CAPSULES PVT. LIMITED VS. CIT (343 ITR 89). 14. WE HAVE HEARD RIVAL SUBMISSIONS AND PERUSED THE MATERIAL ON RECORD. THE ONLY DISPUTE IN THIS CASE IS AS TO WHE THER 90% OF THE GROSS INTEREST OR THE NET INTEREST IS TO BE DEDUCTE D UNDER CLAUSE (I) 12 ITA NOS.218 AND OTHERS OF 2009 AVON ORGANICS LTD., HYD. OF (BAA) TO SECTION 80HHC FOR DETERMINING THE PROFI TS OF THE BUSINESS. IN CASE OF ACG ASSOCIATED CAPSULES P VT. LIMITED VS. CIT (SUPRA), THE HONBLE SUPREME COURT ON INTERPRETING CLAUSE (BAA) OF SECTION 80HHC HELD IN THE FOLLOWING MANNER:- THE FACTS OF THIS CASE VERV BRIEFLY ARE THAT BHARA T RASAYAN LIMITED FOR SHORT' THE ASSESSEE' FILED AL RETURN OF INCOME- TAX CLAIMING A DEDUCTION OF RS. 72,76,405 UNDER SECTION 80HHC OF THE ACT. IN THE ASSESSMENT ORDER, THE ASSE SSING OFFICER HELD THAT NINETY PER CENT OF THE GROSS INTE REST HAS TO BE EXCLUDED FROM THE PROFITS OF THE BUSINESS OF THE ' ASSESSEE UNDER EXPLANATION (BAA) TO SECTION 80HHC OF THE ACT AND DEDUCTED NINETY PER CENT GROSS INTEREST OF RS. 50,26,284 FRONT THE PROFITS OF THE BUSINESS OF THE ASSESSEE . THE ASSESSEE PREFERRED AN APPEAL CONTENDING THAT ONLY N INETY PER CENT OF THE NET INTEREST SHOULD HAVE BEEN DEDUC TED FROM THE PROFITS OF THE BUSINESS OF THE ASSESSEE UNDER EXPLANATION(BAA) TO SECTION 80HHC, BUT THE COMMISSIONER OF INCOME- TAX (APPEALS) REJECTED THIS CONTENTION O F THE ASSESSEE. AGGRIEVED, THE ASSESSEE FILED AN APPEAL B EFORE THE INCOME APPELLATE TRIBUNAL (FOR SHORT 'THE TRIBU NAL') AND THE TRIBUNAL ALLOWED THE APPEAL OF THE ASSESSEE AND HELD THAT THE ASSESSEE WAS ENTITLED TO DEDUCT THE EXPENS ES FROM THE INTEREST RECEIVED AND ONLY NINETY PER CENT OF T HE NET AMOUNT OF INTEREST COULD BE EXCLUDED UNDER EXPLANATION (BAA)TO SECTION 801IHC AND REMITTED THE MATTER TO THE ASSESSING OFFICER TO EXAMINE WHETHER THERE IS FACTU ALLY AN EXCESS BETWEEN THE INTEREST PAID AND INTEREST RECEI VED AND TAKE A FRESH DECISION. THE REVENUE FILED AN APPEAL AGAINST THE ORDER OF THE TRIBUNAL BEFORE THE HIGH COURT BUT BY THE IMPUGNED ORDER THE HIGH COURT FOLLOWING ITS DECISIO N IN CIT V. SHRIRAIN HONDA POWER IN [2007] 289 ITR 475 (DELHI) SUSTAINED THE ORDER OF THE TRIBUNAL AND DISMISSED THE APPEAL. WE HAVE HELD IN OUR JUDGMENT IN THE CASE OF ACG ASSOCIATES CAPSULES PVT. LTD. VS.CIT THAT NINETY PE R CENT OF NOT THE GROSS INTEREST BUT ONLY THE NET INTEREST, W HICH HAS BEEN INCLUDED IN THE PROFITS OF THE BUSINESS OF THE ASSESSEE AS COMPUTED UNDER THE HEADS 'PROFITS AND GA INS OF BUSINESS OR PROFESSION' IS TO BE DEDUCTED UNDER CLAUSE (1) OF EXPLANATION (BAA) SECTION 80HHC FOR DETERMIN ING THE PROFITS OF THE BUSINESS. SINCE THE VIEW TAKEN BY THE HIGH COURT IN THE IMPUGNED ORDER IS CONSISTENT WITH OUR AFORESAID VIEW, WE FIND NO MERIT IN THIS APPEAL AND WE 13 ITA NOS.218 AND OTHERS OF 2009 AVON ORGANICS LTD., HYD. ACCORDINGLY DISMISS THE SAME. THERE SHALL BE NO ORD ER AS TO COSTS. ' FROM THE AFORESAID DECISION OF THE HONBLE SUPREME COURT IT IS CLEAR THAT 90% OF THE NET INTEREST AND NOT THE GROSS INTE REST WHICH HAS BEEN INCLUDED IN THE PROPERTIES OF THE BUSINESS OF THE ASSESSEE AS COMPUTED UNDER THE HEAD PROFITS AND GAINS OF BUSINE SS OR PROFESSION IS TO BE DEDUCTED UNDER CLAUSE (I) OF EX PLANATION (BAA) TO SECTION 80HHC FOR DETERMINING THE PROFITS OF BUSINE SS. IT IS EVIDENT FROM PARA 2.3 OF THE CIT (A)S WHICH HAS BEEN EXTRA CTED HEREIN ABOVE, THE CIT (A) HAS DIRECTED THE AO TO FIND OUT WHETHER THERE IS NEXUS ON THE INTEREST RECEIPTS AND THE INTEREST PAY MENT AND IF THERE IS A NEXUS, THEN INTEREST RECEIPT SHOULD BE SET OFF AGAINST INTEREST PAYMENT BEFORE EXCLUDING 90% THEREOF IN TERMS OF CL AUSE (BAA) OF EXPLANATION TO 80HHC OF THE ACT. IN OUR VIEW, THE DIRECTION OF THE CIT (A) IS IN ACCORDANCE WITH LAW AND THEREFORE NEE DS NO INFERENCE. WHILE GIVING EFFECT TO THE DIRECTION OF THE CIT (A ), THE AO SHALL ALSO KEEP IN MIND THE PRINCIPLES OF LAW LAID DOWN BY THE HONBLE SUPREME COURT IN THE CASE OF ACG ASSOCIATED CAP SULES PVT. LIMITED (SUPRA). 15. IN THE RESULT, WE DISMISS THE GROUNDS RAISED BY THE REVENUE. 16. GROUND NOS. 4 AND 5 ARE AS FOLLOWS:- 4. THE LD. CIT (A) ERRED IN HOLDING THAT THE INTER EST U/S 234B AND 234C OF THE ACT, 1961 SHOULD BE COMPUTED AFTER ALLOWING THE MAT CREDIT. 14 ITA NOS.218 AND OTHERS OF 2009 AVON ORGANICS LTD., HYD. 5. THE DECISION OF THE LD. CIT (A) IS ERRONEOUS IN VIEW F THE PROVISION OF SECTION 219 OF THE IT ACT AS PER WHICH , MAT CREDIT IS NOT IN THE NATURE OF ADVANCE TAX. 17. GROUND NOS. 4 AND 5 RELATE TO COMMON ISSUE AS TO WHETHER INTEREST U/S 234B AND 234C OF THE ACT JUST COMPUTED AFTER ALLOWING MAT CREDIT. BRIEFLY, THE FACTS ARE THE AO WHILE CO MPLETING THE ASSESSMENT COMPUTED THE TAX PAYABLE BY THE ASSESSEE AND CHARGED INTEREST UNDER SECTIONS 234B AND 234C OF THE ACT. BEFORE ALLOWING MAT CREDIT U/S 115JAA OF THE ACT. 18. THE ASSESSEE CHALLENGED THE SAME BEFORE THE CIT (A). THE CIT (A) FOLLOWING THE DECISION OF THE ITAT, CHENNAI BEN CH IN THE CASE OF CHEMPLAST SANMAR LTD. VS. DCIT (83 TTJ 427), SYNTHE TIC INDUSTRIAL CHEMICALS LTD (90 ITD 851 (COCHIN), PHILIPS INDIA L TD., (92 ITD 441 (CHANDIGARH) DIRECTED THE AO TO RE-COMPUTE INTEREST U/S 234B AND 2324C AFTER ALLOWING MAT CREDIT. 19. THE LEARNED DR SUPPORTING THE ORDER OF THE AO A ND RELYING ON A DECISION OF HONBLE SUPREME COURT IN THE CASE OF JCIT VS. ROLTA INDIA L:IMITED (2011) 330 ITR 470 SUBMITTED THAT I NTEREST UNDER SECTIONS 234B AND 2324C ARE PAYABLE ON FAILURE TO P AY ADVANCE TAX IN RESPECT OF TAX PAYABLE U/S 115JAA. 20. THE LEARNED AR ON THE OTHER HAND, WHILE SUPPORT ING THE DIRECTION OF THE CIT (A) SUBMITTED THAT THE ISSUE I S SQUARELY COVERED 15 ITA NOS.218 AND OTHERS OF 2009 AVON ORGANICS LTD., HYD. BY THE DECISION OF THE HONBLE SUPREME COURT IN THE CASE OF CIT VS. TULSYAN NEC LTD. (2011) 330 ITR 226. 21. WE HAVE HEARD RIVAL SUBMISSIONS AND PERUSED THE MATERIAL ON RECORD. WE HAVE ALSO EXAMINED THE DECISIONS CITED AT THE BAR. THERE IS NO DISPUTE TO THE FACT THAT THE HONBLE SU PREME COURT IN THE CASE OF JCIT VS. VOLTA INDIA LIMITED (SUPRA) HA S HELD THAT THE EXPRESSION ASSESS TAX WOULD MEAN THE TAX ASSESSED IN REGULAR ASSESSMENT AND WILL INCLUDE THE TAX DETERMINED ON A PPLICATION OF SECTION 115J/115JA IN THE REGULAR ASSESSMENT. THER EFORE, INTEREST U/S 234B IS PAYABLE ON FAILURE TO PAY ADVANCE TAX IN RESPECT OF TAX PAYABLE U/S 115JA. HOWEVER, THE DISPUTE IN THE PRE SENT APPEAL IS NOT WITH REGARD TO THE PAYMENT OF ADVANCE TAX ON PR OFIT U/S 115JA BUT IS CONFIRMED TO THE ISSUE IS TO WHETHER MAT CRE DIT SHOULD BE ALLOWED BEFORE COMPUTING INTEREST U/S 234B AND 2324 C OF THE ACT. WE FIND THAT THE ISSUE IS SQUARELY COVERED BY THE D ECISION OF HONBLE SUPREME COURT IN THE CASE REPORTED IN 330 I TR 226 (SUPRA). THE HONBLE SUPREME COURT HELD THAT INTEREST U/S 23 4B AND 234C HAS TO BE COMPUTED AFTER GIVING MAT CREDIT. IN VIE W OF THE AFORESAID LAW LAID DOWN BY THE HONBLE SUPREME COUR T, WE UPHOLD THE ORDER OF THE CIT (A) AND THE GROUNDS RAISED BY THE REVENUE ARE DISMISSED. 22. IN THE RESULT, THE APPEAL IS DISMISSED. 16 ITA NOS.218 AND OTHERS OF 2009 AVON ORGANICS LTD., HYD. ITA 1427/HYD/2010:- (ASASESSEES APPEAL) :- 23. THE ASSESSEE HAS RAISED THE FOLLOWING EFFECTIVE GROUNDS:- 1. THE ORDER OF THE CIT (A) IS CONTRARY TO FACTS AND LAW. 2. THE CIT (A) ERRED IN CONFIRMING THE DISALLOWANCE OF RS.9,87,042/- IN RESPECT OF FOREIGN COMMISSION PAID TO FOREIGN AGENTS ON THE GROUND THAT TAX HAS NOT BEEN DEDUCTED ON THE SAME. 24. FACTS ARE IDENTICAL WITH THE FACTS INVOLVED I N GROUNDS NO.2 RAISED IN ITA NO.218/HYD/09 AND GROUND NO.3 IN 223/ HYD/09. THE AO DISALLOWED THE COMMISSION PAID TO FOREIGN AGENTS U/S 40A(1) BY OBSERVING THAT THE REMITTANCES MADE TO FOREIGN AGEN TS THROUGH TELEGRAPHIC TRANSFER OBTAINED FROM BANKS, HYDERABAD WOULD AMOUNT TO ACCRUAL OR ARISING OF INCOME AT THE E HA NDS OF THE NON- RESIDENT IN INDIA. THE ASSESSEE CHALLENGED THE DIS ALLOWANCE BEFORE THE CIT (A). THE CIT (A) OBSERVING THAT THERE BEI NG NO MATERIAL WITH REGARD TO NATURE OF SERVICES RENDERED BY FOREIGN AG ENTS THE SERVICES RENDERED BY THEM HAVE TO BE TREATED AS PER THE NA TURE OF TECHNICAL SERVICES FOR FACILITATING THE EXPORT SALE S. THE CIT (A) FURTHER HELD THAT IN VIEW OF THE AMENDMENT BROUGHT TO SECTION 9(2) BY THE FINANCE ACT 2010 BY INSERTING AN EXPLANATION WITH RETROSPECTIVE EFFECT FROM 1-6-1976 THE PAYMENT MADE TO THE FOREIGN AGENTS HAS TO BE TREATED AS INCOME ARISING IN INDIA. THE CIT 17 ITA NOS.218 AND OTHERS OF 2009 AVON ORGANICS LTD., HYD. (A) THEREFORE HELD THAT SINCE THE ASSESSEE HAS NOT DEDUCTED ANY TAX, THE SAME HAS TO BE DISALLOWED AS PER SECTION 40A(1) OF THE ACT. 25. WE HAVE HEARD RIVAL SUBMISSIONS AND PERUSED THE MATERIAL ON RECORD. APART FROM OUR DETAILS REASONS WHILE CONSI DERING THE AFORESAID ISSUE IN ITA NO.218/HYD/09 IN PARAS 6 AND 7, WE ARE FURTHER OF THE VIEW THAT THE OBSERVATION OF THE CIT (A) THAT IN VIEW OF THE AMENDED PROVISION OF SECTION 9(2A) HE PAYMEN T OF COMMISSION MADE TO THE FOREIGN AGENTS HAS BECOME TA XABLE IN THEIR HANDS IN INDIA AND THEREFORE THE ASSESSEE WAS REQU IRED TO DEDUCT TAX AT SOURCE APPEARS TO BE FETCHED. FOR THE SIMP LE REASON, THAT THE AFORESAID AMENDED PROVISION WAS BROUGHT TO THE STATUTE IN THE FINANCE ACT, 2010 GIVING RETROSPECTIVE EFFECT FROM 1-6-1976. WHAT IS THE COMMISSION PAYMENTS TO THE FOREIGN AGENTS WE RE MADE BY THE ASSESSEE DURING THE FINANCIAL YEAR 2005-06. TH EREFORE, THE ASSESSEE COULD NOT HAVE DEDUCTED TAX AT SOURCE ON T HE BASIS MADE TO FOREIGN AGENTS BY ANTICIPATING THE AMENDMENT BRO UGHT TO THE STATUTE BY THE FINANCE ACT, 2010. THAT APART, IN AB SENCE OF ANY MATERIAL BROUGHT ON RECORD BY THE AO THAT THE FOREI GN AGENTS WERE RENDERING TECHNICAL SERVICES, THE INFERENCE DRAWN B Y THE CIT (A) IS WITHOUT ANY BASIS. EVEN ASSUMING FOR SAKE OF ARGUM ENT THAT IN VIEW OF THE RETROSPECTIVE AMENDMENT TO SECTION 9(2) OF THE ACT, THE COMMISSION PAYMENT TO THE FOREIGN AGENTS IS TO BE T REATED AS TAXABLE INCOME IN INDIA EITHER AT THEIR HANDS. HOW EVER, NO 18 ITA NOS.218 AND OTHERS OF 2009 AVON ORGANICS LTD., HYD. DISALLOWANCE COULD BE MADE OF THE COMMISSION PAYMEN T U/S 40 (A)(I) OF THE ACT IN CASE OF THE ASSESSEE. WE THER EFORE DIRECT FOR DELETING THE ADDITION OF RS.9,87,042/-. 26. IN THE RESULT, THE APPEAL FILED BY THE ASSESSEE IS ALLOWED. ORDER PRONOUNCED IN THE COURT ON 26-10-2012. SD/- SD /- (CHANDRA POOJARI) ACCOUNTANT MEMBER (SAKTIJIT DEY) JUDICIAL MEMBER HYDERABAD, DATED THE 26 TH OCTOBER, 2012. COPY TO:- 1) ACIT, CIR-8(1), IT TOWERS, NEAR MASAB TANK, AC G UARDS, HYDERABAD.. 2)M/S. AVON ORGANICS LIMITED, MADHUPALA TOWERS, OPP . GREEN LANDS APARTMENTS, AMEERPET, HYDERABAD. 3) THE CIT (A)-III HYDERABAD. 4) THE CIT CONCERNED, HYDERABAD 5) THE DEPARTMENTAL REPRESENTATIVE, I.T.A.T., HYDERABA D. JMR*