Sundaram Brake Linings Ltd., CHENNAI V. ACIT, CHENNAI

ITA 1434/CHNY/2012

• Counselvise Citation: [2012] 140 COUNSELVISE.COM (IT) 64344 (ITAT-CHENNAI)
• Duration Of Justice: 2 month(s) 25 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 27-09-2012
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: A
• Assessment Year: 2008-2009
• Appeal Filed On: 02-07-2012
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: K E B RENGARAJAN JR
• Assessee Lawyers: M BALASUBRAMANIYANCA
• Keywords: Earning of tax free income; Services rendered outside India; Permanent establishment
• Section: 14A

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL A BENCH CHENNAI BEFORE SHRI ABRAHAM P. GEORGE, ACCOUNTANT MEMBER AND SHRI V. DURGA RAO, JUDICIAL MEMBER ITA NO. 1434/MDS/2012 ASSESSMENT YEAR : 2008-09 M/S. SUNDARAM BRAKE LININGS LTD., B-1, M.T.H. ROAD, PADI, CHENNAI-600 050. (PAN :AADCS4888E) V. THE ASSISTANT COMMISSIONER OF INCOME-TAX, COMPANY CIRCLE-VI(4), CHENNAI (APPELLANT) (RESPONDENT) APPELLANT BY : SHRI M.BALASUBRAMANIYAN,CA RESPONDENT BY : SHRI K.E.B. RENGARAJAN, JR. STANDING COUNSEL DATE OF HEARING : 06.09. 2012 DATE OF PRONOUNCEMENT : 27.09.2012 O R D E R PER V. DURGA RAO, JUDICIAL MEMBER : THIS APPEAL BY THE ASSESSEE IS DIRECTED AGAINST THE ORDER PASSED BY THE COMMISSIONER OF INCOME TAX (APPEALS)- V CHENNAI DATED 30-04-2012 FOR THE ASSESSMENT YEAR 2008-09. 2. THE FACTS IN BRIEF ARE THAT THE ASSESSEE IS A MA NUFACTURER OF FRICTION MATERIALS. THE ASSESSEE FILED A RETURN OF INCOME FOR THE ITA 1434/MDS/ 2012 2 YEAR UNDER CONSIDERATION ADMITTING TOTAL INCOME OF ` 7,92,38,939/-. THE RETURN WAS PROCESSED UNDER SECTION 143(1) OF TH E INCOME TAX ACT, 1961 ('THE ACT' FOR SHORT) INITIALLY AND SCRUT INY ASSESSMENT WAS MADE BY THE ASSESSING OFFICER. DURING THE COURSE O F THE ASSESSMENT PROCEEDINGS, THE ASSESSING OFFICER OBSER VED THAT, IT IS SEEN THAT AS ON 31/03/2008 AND 31/03/2007 T HE ASSESSEE COMPANY IS HAVING INVESTMENTS TO THE TUN E OF ` 52.51 LAKHS AND IS HAVING SECURED LOANS TO THE TUN E OF ` 2,342.72 LAKHS. THE ASSESSEE COMPANY HAS CLAIMED AN EXPENDITURE OF ` 280.77 LAKHS TOWARDS INTEREST AND THE CORRESPONDING INTEREST AS ON 31/03/2007 IS TO THE TUNE OF ` 258.57 LAKHS. THE ASSESSING OFFICER ASKED THE ASSESSEE TO EXPLAIN WHY SEC. 14A OF THE ACT READ WITH RULE 8D SHOULD NOT BE INVOKED. I N RESPONSE TO THAT THE ASSESSEE SUBMITTED THAT THE ASSESSEE ASSESSEE C OMPANY DID NOT RECEIVE ANY DIVIDEND INCOME OR INVESTMENT DURING TH E ASSESSMENT YEAR 2008-09. THE ASSESSEE COMPANY DID NOT RECEIVE ANY INCOME WHICH WAS EXCLUDED FROM CALCULATION OF PROFIT OF TH E COMPANY. THE ASSESSING OFFICER AFTER CONSIDERING THE EXPLANATION OF THE ASSESSEE OBSERVED THAT THOUGH THE ASSESSEE COMPANY HAD NOT R ECEIVED ANY DIVIDEND INCOME IT HAD INCURRED EXPENDITURE AS INTE REST TOWARDS TERM ITA 1434/MDS/ 2012 3 LOANS AND OTHERS AND ACCORDINGLY HE INVOKED SEC. 14 A READ WITH RULE 8D AND DISALLOWED THE INTEREST OF ` 1,28,544/-. 3. THE ASSESSEE CARRIED THE MATTER BEFORE THE CIT(A ), WHO CONFIRMED THE ORDER PASSED BY THE ASSESSING OFFICER . 4. AGGRIEVED, THE ASSESSEE HAS COME UP IN APPEAL BE FORE THE TRIBUNAL. THE LEARNED COUNSEL FOR THE ASSESSEE HAS POINTED OUT THAT THE ASSESSEE COMPANY HAS NOT RECEIVED DIVIDEND INCO ME NOR IT HAS MADE ANY FRESH INVESTMENTS DURING THE YEAR. THE AS SESSING OFFICER WRONGLY ASSUMED THAT INTEREST EXPENDITURE IS INCURR ED IN EARNING THE EXEMPT INCOME. HE FURTHER SUBMITTED THAT INTEREST EXPENDITURE INCURRED DURING THE YEAR PERTAINED ONLY TO LONG TER M BORROWINGS WHOLLY USED FOR ACQUIRING ASSETS OTHER THAN THE INV ESTMENTS (SHARES). THEREFORE, THE ASSESSING OFFICER WAS NOT JUSTIFIED IN INVOKING SECTION 14A READ WITH RULE 8D. HE REFERRED TO PAGES 44 & 4 5 OF THE PAPER BOOK BEING BALANCE SHEET AS ON 31-03-2006 AND 31-03 2 008 RESPECTIVELY AND SUBMITTED THAT THE ASSESSEE HAS NO T BORROWED ANY AMOUNT FOR THE YEAR UNDER CONSIDERATION FOR THE PUR POSE OF INVESTMENTS IN SHARES. 5. ON THE OTHER HAND, THE LEARNED DR SUPPORTED THE ORDER PASSED BY THE AUTHORITIES BELOW. ITA 1434/MDS/ 2012 4 6. WE HAVE HEARD BOTH THE SIDES, PERUSED THE RECORD S AND GONE THROUGH THE ORDERS OF THE AUTHORITIES BELOW. THE CA SE OF THE ASSESSING OFFICER IS THAT THE ASSESSEE HAS INCURRED INTEREST EXPENDITURE TOWARDS TERM LOANS AND OTHERS AND ACCOR DING TO HIM THE INTEREST EXPENDITURE WAS INCURRED ON BORROWINGS WHI CH WERE USED FOR THE PURPOSE OF INVESTMENTS. THE LEARNED CIT(APPEAL S) CONFIRMED THE SAME. ACCORDING TO THE ASSESSEE, NO BORROWINGS WER E USED FOR THE PURPOSE OF INVESTMENTS ON SHARES AND THE LEARNED CO UNSEL FOR THE ASSESSEE RELIED ON PAGES 44 & 45 OF THE PAPER BOOK AND SUBMITTED THAT NO BORROWINGS WERE USED FOR THE PURPOSE OF INV ESTMENTS. AFTER CAREFUL CONSIDERATION OF THE ORDERS OF THE AUTHORIT IES BELOW, WE FIND THAT THE ASSESSING OFFICER HAS NOT EXAMINED THE PAP ER BOOK FILED BY THE ASSESSEE BEFORE US, PARTICULARLY PAGES 44 & 45. WE THEREFORE SET ASIDE THE ORDER PASSED BY THE LEARNED CIT(APPEALS) AND REMIT THE MATTER BACK TO THE ASSESSING OFFICER TO EXAMINE THE PAPER BOOK AT PAGES 44 & 45 AND DECIDE THE ISSUE AFRESH IN ACCORD ANCE WITH LAW. THIS GROUND OF APPEAL FILED BY THE ASSESSEE IS THER EFORE ALLOWED FOR STATISTICAL PURPOSES. 7. THE SECOND GROUND OF APPEAL RELATES TO THE DISAL LOWANCE UNDER SECTION 40(A)(IA) OF THE ACT. THE ASSESSEE HAD PAI D AN AMOUNT OF ` 32.93 LAKHS TOWARDS THE EXPORT COMMISSION TO FOREIG N AGENTS. THE ITA 1434/MDS/ 2012 5 ASSESSING OFFICER ASKED THE ASSESSEE TO EXPLAIN WHY TDS HAS NOT BEEN DEDUCTED ON THESE PAYMENTS. IT WAS SUBMITTED BEFORE THE ASSESSING OFFICER THAT AS PER THE DECISION OF THE H ON'BLE SUPREME COURT IN THE CASE OF CIT V. TOSHOKU LTD. (190) 125 ITR 525 (SC), TDS WAS NOT DEDUCTED. IT WAS ALSO SUBMITTED THAT F OR THE ASSESSMENT YEAR 2004-05 THE LEARNED CIT(APPEALS) HA S ACCEPTED THE CONTENTION THAT THE ASSESSEE NEED NOT DEDUCT TDS. THE ASSESSING OFFICER AFTER CONSIDERING THE SUBMISSION OF THE ASS ESSEE, HOWEVER, DID NOT ACCEPT IT AND OBSERVED THAT SECTION 40(A)(I A) HAS BEEN AMENDED BY THE FINANCE ACT, 2004. WITH EFFECT FROM 01-04-2005 ANY INTEREST, COMMISSION, ROYALTY, FEES FOR TECHNICAL S ERVICES OR OTHER SUMS CHARGEABLE UNDER THE ACT ARE PAYABLE OUTSIDE I NDIA OR IN INDIA TO A NON-RESIDENT, THEN SUCH PAYMENT MADE, WITHOUT DEDUCTION OF TDS, CANNOT BE ALLOWED AS A DEDUCTION WHILE COMPUTI NG THE PROFITS AND GAINS OF BUSINESS U/S 30 TO 38. SINCE THESE PA YMENTS HAVE BEEN MADE TO NON-RESIDENTS IN FOREIGN COUNTRIES, PROVISI ONS OF SEC. 195 OF THE ACT ARE ATTRACTED. THE ASSESSEE ALSO FAILED TO FILE AN APPLICATION UNDER SECTION 195(2) AND 195(3) AND IT IS THE STATU TORY OBLIGATION OF THE PERSON RESPONSIBLE FOR PAYING SUCH SUM TO DISCH ARGE THE OBLIGATION OF TAX DEDUCTION AT SOURCE AND THE ONUS IS ON THE ASSESSEE TO PROVE THAT THE PAYMENT IS NOT CHARGEABLE TO TAX. THE ASSESSEE ITA 1434/MDS/ 2012 6 HAS NOT DISCHARGED THE OBLIGATION AS NO APPLICATION WAS FILED UNDER SECTION 195(2) AND 195(3). THEREFORE, THE ASSESSIN G OFFICER DISALLOWED ` 32,93,000/- UNDER SECTION 40(A)(IA) OF THE ACT. 8. THE ASSESSEE CARRIED THE MATTER BEFORE THE CIT(A PPEALS), WHO CONFIRMED THE ORDER OF THE ASSESSING OFFICER. 9. AGGRIEVED, THE ASSESSEE HAS COME UP IN APPEAL BE FORE THE TRIBUNAL. THE LEARNED COUNSEL FOR THE ASSESSEE HAS SUBMITTED THAT THE PAYMENT WAS MADE TO A FOREIGN AGENT AND ON THAT AMOUNT NO TDS HAD TO BE DEDUCTED. HE RELIED ON THE FOLLOWING DECISIONS: 1) DCIT V. DIVIS LABORATORIES LTD. (2010) 10 ITR (TRIB) 0501. 2) JCIT V. GEORGE WILLIAMSON (ASSAM) LTD. (2009) 1 16 ITD 328 (GAUHATI). 3) INDOPEL GARMENTS (P) LTD. V. DCIT (2003) 86 ITR 102 (MAD). THE LEARNED COUNSEL FOR THE ASSESSEE SUBMITTED THAT UNDER SECTION 195(2) OF THE ACT IT IS NOT NECESSARY FOR THE ASSES SEE TO GET CONCURRENCE OF ASSESSING OFFICER. 10. ON THE OTHER HAND, THE LEARNED DR STRONGLY SUPP ORTED THE ORDER PASSED BY THE LEARNED CIT(APPEALS). 11. WE HAVE HEARD BOTH THE SIDES, PERUSED THE RECOR DS AND GONE THROUGH THE ORDERS OF THE AUTHORITIES BELOW. IN TH IS CASE THE ASSESSEE IS IN THE BUSINESS OF MANUFACTURE OF FRICT ION MATERIALS. IT ITA 1434/MDS/ 2012 7 HAD PAID AGENCY COMMISSION TO THE FOREIGN AGENTS AM OUNTING TO ` 32.93 LAKHS. THE ASSESSEE HAS NOT DEDUCTED ANY TDS . ACCORDING TO THE ASSESSING OFFICER AND THE LEARNED CIT(APPEALS) TDS HAS TO BE DEDUCTED. THE ASSESSING OFFICER HAS NOT DISCUSSED ANYTHING AS TO HOW THE ASSESSEE HAS TO DEDUCT TDS. NOTHING WAS BR OUGHT ON RECORD. THERE IS NOTHING IN THE ASSESSMENT ORDER T HAT THERE IS A BUSINESS CONNECTION AND THAT THE ASSESSEE HAS TO DE DUCT TDS U/S 195 OF THE ACT. UNDER SIMILAR CIRCUMSTANCES, THE H ONBLE DELHI HIGH COURT IN THE CASE OF CIT V. EON TECHNOLOGY P. LTD. (343 ITR 366) HAS HELD AS UNDER: HELD, DISMISSING THE APPEAL, THAT THE ASSESSING OFFICER HAD NOT DEALT WITH OR EXAMINED WHETHER THE COMMISSION INCOME ACCRUED OR AROSE DIRECTLY OR INDIRECTLY FROM ANY BUSINESS CONNECTION IN INDIA BU T HAD MERELY RECORDED THAT THE PAYMENT MADE TO THE U.K. COMPANY WAS TAXABLE IN INDIA BECAUSE OF ITS BUSINESS CONNECTION. THE ASSESSING OFFICER DID N OT ELABORATE OR HAD NOT DISCUSSED ON WHAT BASIS HE HAD COME TO THE CONCLUSION THAT BUSINESS CONNECTION A S ENVISAGED UNDER SECTION 9(1)(I) EXISTED. THE ASSESSEE HAD SUBMITTED THAT THE U.K. COMPANY WAS A NON-RESIDENT COMPANY AND DID NOT HAVE ANY PERMANENT ESTABLISHMENT IN INDIA. THE U.K. COMPANY WAS NOT RENDERING ANY SERVICE OR ITA 1434/MDS/ 2012 8 PERFORMING ANY ACTIVITY IN INDIA ITSELF. THESE FAC TS WERE NOT AND COULD NOT BE DISPUTED. THE STAND OF THE REVENUE WAS CONTRARY TO THE TWO CIRCULARS ISSUE D BY THE CBDT IN WHICH IT WAS CLEARLY HELD THAT WHEN A NON-RESIDENT AGENT OPERATES OUTSIDE THE COUNTRY NO PART OF HIS INCOME ARISES IN INDIA, AND SINCE PAYME NT WAS REMITTED DIRECTLY ABROAD, MERELY BECAUSE AN ENTRY IN THE BOOKS OF ACCOUNT WAS MADE, IT DID NOT MEAN THAT THE NON-RESIDENT HAD RECEIVED ANY PAYMENT IN INDIA. THIS FACT ALONE DID NOT ESTABLIS H BUSINESS CONNECTION. IN CIRCULAR NO. 786, DATED FEBRUARY 7, 2000, IT HAD BEEN STATED THAT IN SUCH CASES, THE INDIAN ASSESSEE WAS NOT LIABLE TO DEDUCT TAX AT SOURCE UNDER SECTION 195 FROM THE COMMISSION AND OTHER RELATED CHARGES PAYABLE TO SUCH A NON- RESIDENT HAVING RENDERED SERVICE OUTSIDE INDIA. TH E ASSESSING OFFICER DID NOT MAKE OUT A CASE OF BUSINE SS CONNECTION AS STIPULATED IN SECTION 9(1)(I) OF THE ACT. HE HAD NOT MADE ANY FOUNDATION OR BASIS FOR HOLDING THAT THERE WAS BUSINESS CONNECTION AND, THEREFORE, SECTION 9(1)(I) OF THE ACT WAS APPLICABLE. THE APPELLATE AUTHORITIES, ON THE BASIS OF MATERIAL ON RECORD, HAD RIGHTLY HELD THAT BUSINESS CONNECTION WAS NOT ESTABLISHED. 12. WE FIND THAT THE FACTS IN THE PRESENT CASE ARE IDENTICAL TO THE FACTS IN THE DECISION OF THE HONBLE DELHI HIGH COU RT IN THE CASE OF ITA 1434/MDS/ 2012 9 CIT V. EON TECHNOLOGY P. LTD. (SUPRA). THE HONBLE DELHI HIGH COURT WHILE CONSIDERING SECTION 40(A)(IA) OF THE AC T AND THE CBDT CIRCULAR NO. 23 DATED 23-7-1969 AND CIRCULAR NO. 78 6 DATED 7-2- 2000 HAS HELD THAT BUSINESS CONNECTION WAS NOT ESTA BLISHED AND THEREFORE NO TDS HAS TO BE DEDUCTED. IN THE PRESEN T CASE ALSO, THE ASSESSING OFFICER HAS FAILED TO ESTABLISH THE B USINESS CONNECTION. WE, THEREFORE, RESPECTFULLY FOLLOWING THE DECISION OF THE HONBLE DELHI HIGH COURT IN THE CASE OF EON TEC HNOLOGY P. LTD. (SUPRA) HOLD THAT THE ASSESSEE HAS NO LIABILITY TO DEDUCT TDS. 13. INSOFAR AS THE CONCURRENCE FROM THE ASSESSING O FFICER U/S 195(2) AND 195(3) IS CONCERNED, IN VIEW OF THE DECI SION OF THE MADRAS BENCH OF THE TRIBUNAL IN THE CASE OF INDOPEL GARMENTS (P.) LTD. V. DCIT (SUPRA), PAYMENT TO NON-RESIDENT, WHER E THERE IS NO CHARGEABLE INCOME IT IS NOT NECESSARY FOR AN ASSESS EE TO GET CONCURRENCE OF ASSESSING OFFICER UNDER SECTION 195( 2) OF THE ACT. WE THEREFORE HOLD THAT WHEN THERE IS NO BUSINESS CO NNECTION ESTABLISHED, THE ASSESSEE WAS UNDER NO OBLIGATION T O DEDUCT TDS. IT IS NOT NECESSARY FOR THE CONCURRENCE OF THE ASSE SSING OFFICER U/S 195(2) OF THE ACT. ACCORDINGLY, THIS GROUND OF THE APPEAL FILED BY THE ASSESSEE IS ALLOWED. ITA 1434/MDS/ 2012 10 14. IN THE RESULT, THE APPEAL OF THE ASSESSEE IS PA RTLY ALLOWED FOR STATISTICAL PURPOSES. ORDER PRONOUNCED ON THURSDAY, THE 27 TH OF SEPTEMBER, 2012, AT CHENNAI. SD/- SD/- (ABRAHAM P. GEORGE) ( V.DURGA RAO ) ACCOUNTANT MEMBER JUDICIAL MEMBER CHENNAI, DATED THE 27 TH SEPTEMBER, 2012. H. COPY TO: ASSESSEE/AO/CIT (A)/CIT/D.R./GUARD FILE