M/s Hical Infra Private Limited , Bangalore V. Income Tax Officer Ward-3(1)(3), Bangalore

ITA 1575/BANG/2018

• Counselvise Citation: [2019] 117 COUNSELVISE.COM (IT) 6808 (ITAT-BANGALORE)
• Duration Of Justice: 11 month(s) 14 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 25-04-2019
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: B
• Next Hearing Date: 03-04-2019
• Assessment Year: 2010-2011
• Appeal Filed On: 11-05-2018
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: T N PRAKASH
• Assessee Lawyers: B R SUDHEENDRA
• Keywords: Permanent establishment; Non-deduction of tax; TDS
• Section: 143(3); 142(1); 250; 145

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL B BENCH : BANGALORE BEFORE SHRI ARUN KUMAR GARODIA, ACCOUNTANT MEMBER AND SHRI PAVAN KUMAR GADALE, JUDICIAL MEMBER ITA NO. 1575 / BANG/201 8 ASSESSMENT YEAR : 2 0 1 0 - 1 1 M/S. HICAL INFRA PRIVATE LIMITED, (FORMERLY KNOWN AS HICAL INFRA TECHNOLOGIES PRIVATE LIMITED), SURVEY NO. 46/47, PHASE II, HOSUR ROAD, ELECTRONIC CITY, BANGALORE 560 100. PAN: AAACH3639K VS. THE INCOME TAX OFFICER, WARD 3(1) (3), BANGALORE. APPELLANT RESPONDENT ASSESSEE BY : SHRI B.R. SUDHEENDRA, CA R EVENUE BY : SHRI T.N. PRAKASH, ADDL. CIT (DR) DATE OF HEARING : 0 3 .0 4 .2019 DATE OF PRONOUNCEMENT : 25 .0 4 .2019 O R D E R PER SHRI PAVAN KUMAR GADALE, JUDICIAL MEMBER THE ASSESSEE HAS FILED AN APPEAL AGAINST THE ORDER OF COMMISSIONER OF INCOME-TAX (APPEALS)-3, BANGALORE PASSED U/S. 143(3) AND 250 OF IT ACT. 2. THE ASSESSEE HAS RAISED THE FOLLOWING GROUNDS OF APPEAL. 1. THE ORDER PASSED BY THE LEARNED CIT(A) TO THE EXTENT PREJUDICIAL TO THE APPELLANT IS BAD IN LAW AND LIABLE TO BE QUASHED. GROUND RELATING TO PROVISION FOR NON-MOVING/OBSOLESCENCE STOCK 2. THE LEARNED CIT(A) HAS ERRED IN CONFIRMING THE DISALLOWANCE OF PROVISION FOR NON MOVING OBSOLETE STOCK AMOUNTING TO RS. 19,11,000. 3. THE LEARNED CIT(A), BENGALURU TO THE EXTENT PREJUDICIAL TO THE APPELLANT HAS ERRED IN NOT APPRECIATING THAT: A. THE PROVISION FOR NON-MOVING / OBSOLESCENCE IN STOCK WAS MADE AS PER THE MANDATORY REQUIREMENT UNDER ACCOUNTING STANDARD 2 (I.E. ITA NO. 1575/BANG/2018 PAGE 2 OF 6 VALUATION OF INVENTORIES) PRESCRIBED BY ICAI AND ACCOUNTANT STANDARD 1 PRESCRIBED BY THE CENTRAL GOVT. UNDER SECTION 145 OF THE INCOME-TAX ACT; B. PROVISION FOR NON-MOVING 1 OBSOLESCENCE IN STOCK IS ALLOWABLE AS DEDUCTION IN COMPUTING THE REAL PROFITS AND GAINS. CHARGEABLE TO TAX UNDER SECTION 28(I); C. THE APPELLANT HAS BEEN CONSISTENTLY FOLLOWING THE METHOD OF VALUING THE INVENTORY IN BOOKS OF ACCOUNT WHICH CANNOT BE DISTURBED; D. VARIOUS DECISIONS HAVE HELD THAT PROVISION FOR NON-MOVING STOCK IS ALLOWABLE AS DEDUCTION. 4. ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND LAW APPLICABLE, NO DISALLOWANCE IS TO BE MADE IN RESPECT OF PROVISION FOR NON-MOVING STOCK AND THE DEDUCTION IS TO BE ALLOWED AS CLAIMED. GROUND RELATING TO DISALLOWANCE OF COMMISSION PAID TO NON-RESIDENTS UNDER SECTION 40(A)(I) 5. THE LEARNED CIT(A), BENGALURU HAS ERRED IN: A. DISALLOWING THE COMMISSION PAID TO NON-RESIDENT AGENTS AMOUNTING TO RS. 6,42,000/- FOR NON-DEDUCTION OF TAX AT SOURCE; B. CONCLUDING THAT THE PAYMENTS MADE TO NON-RESIDENT AGENTS CONSTITUTE 'FEES FOR TECHNICAL SERVICES' UNDER SECTION 9(1)(VII) OF THE ACT. 6. THE LEARNED CIT(A), BENGALURU HAS ERRED IN NOT APPRECIATING THAT: A. THE IMPUGNED EXPENDITURE WAS NOT INCURRED FOR PROVIDING TECHNICAL SERVICES OUTSIDE INDIA; B. THE NON-RESIDENT AGENTS, AT NO TIME DURING THE RELEVANT PREVIOUS YEAR, WERE ENGAGED IN PROVIDING TECHNICAL SERVICES OUTSIDE INDIA; C. SERVICES OF NON RESIDENT AGENTS WERE RENDERED OUTSIDE INDIA AND HENCE THE PAYMENT DID NOT CONSTITUTE 'FEES FOR TECHNICAL SERVICES' UNDER SECTION 9(1)(VII)(B) D. PAYMENTS TO NON-RESIDENT AGENTS WERE MADE FOR PROCURING ORDERS WHICH CANNOT BE REGARDED AS MANAGERIAL, TECHNICAL OR CONSULTANCY SERVICES. E. EVEN OTHERWISE, WITHOUT PREJUDICE, COMMISSION PAID TO NON-RESIDENTS WERE FOR THE PURPOSE OF CARRYING BUSINESS OUTSIDE INDIA OR FOR EARNING INCOME FROM SOURCES OUTSIDE INDIA AND CONSEQUENTLY THE IMPUGNED PAYMENTS WERE OUTSIDE THE SCOPE OF SECTION 9( 1)(VII) OF THE ACT. 7. ON FACTS AND CIRCUMSTANCES OF THE CASE AND LAW APPLICABLE, NO DISALLOWANCE OF COMMISSION OF RS. 6,42,000/- IS TO BE MADE AND DEDUCTION IS TO BE FULLY ALLOWED AS CLAIMED BY THE APPELLANT. PRAYER 8. IN VIEW OF THE ABOVE AND OTHER GROUNDS TO BE ADDUCED AT THE TIME OF HEARING, THE APPELLANT PRAYS THAT THE ORDER PASSED BY THE LEARNED ITA NO. 1575/BANG/2018 PAGE 3 OF 6 CIT(A) TO THE EXTENT PREJUDICIAL TO THE APPELLANT BE QUASHED OR IN THE ALTERNATIVE DEDUCTION FOR PROVISION FOR NON MOVING OBSOLETE STOCK AND COMMISSION PAID TO NON RESIDENTS AMOUNTING TO RS. 19,11,000 AND RS. 6,42,000 RESPECTIVELY BE ALLOWED. 3. BRIEF FACTS OF THE CASE ARE THAT THE ASSESSEE IS ENGAGED IN MANUFACTURING AND EXPORT OF ELECTRONIC COMPONENTS AND FILED THE RETURN OF INCOME ELECTRONICALLY FOR THE ASSESSMENT YEAR 2010-11 ON 13.10.2010 DISCLOSING LOSS OF RS. 99,77,695/-. SUBSEQUENTLY THE CASE WAS SELECTED FOR SCRUTINY AND NOTICE U/S. 143(2) AND 142(1) WAS ISSUED ALONG WITH THE QUESTIONNAIRE. IN COMPLIANCE LD. AR OF ASSESSEE TIME TO TIME FURNISHED THE DETAILS WHEREAS THE ASSESSING OFFICER ON PERUSAL OF THE FINANCIAL STATEMENTS, CONFIRMATIONS AND LEDGER ACCOUNTS OF SUNDRY CREDITORS, BILLS AND VOUCHERS FOUND THAT THE ASSESSEE HAS DEBITED TO THE P&L ACCOUNT PROVISION FOR NON-MOVING / OBSOLESCENCE OF RS. 19,11,000/- AND THE EXPLANATIONS WERE CALLED FOR. WHEREAS THE ASSESSEE FILED THE LETTER DATED 27.02.2013 AND PLACED RELIANCE ON THE JUDICIAL DECISION AND ACCOUNTING STANDARDS. WHEREAS THE ASSESSING OFFICER IN RESPECT OF PROVISION FOR NON-MOVING / OBSOLESCENCE GOODS DEALT ON THE JUDICIAL DECISIONS ON PROVISION FOR WARRANTY AND THE JURISDICTIONAL HIGH COURT DECISIONS. THE LD. AO IS OF THE OPINION THAT THE ASSESSEE COULD NOT PROVIDE REASONS FOR PROVISIONS AND DISALLOWED THE CLAIM. 4. SIMILARLY THE ASSESSING OFFICER FOUND THAT THE ASSESSEE HAS ENTERED INTO AN AGREEMENT WITH THE NON-RESIDENT AGENTS AND HAS CLAIMED THE EXPENDITURE OF EXPORT COMMISSION OF RS. 6,42,000/- AND ALSO NO TDS WAS MADE. THE ASSESSING OFFICER FOUND THAT THE ASSESSEE HAS ENTERED INTO AGREEMENT WITH PAN SERVICES SAS AND LIVE ADVANCED TECHNOLOGIES LTD. AND AFTER VERIFYING THE AGREEMENT AND CLAUSES THE ASSESSING OFFICER IS OF THE OPINION THAT THEY ARE NOT AT ALL AGENT OR BROKER, AS PER THE SERVICES BEING PROVIDED BY THEM AS CONSULTANT AND HAVE AGREED TO PLACE ORDERS ON BEHALF OF THE VARIOUS CUSTOMERS, COORDINATE AND CHECK THE QUALITY OF THE GOODS ORDERED FROM THE ASSESSEE. THEREFORE THE ASSESSING OFFICER IS OF THE OPINION THAT THE COMMISSION PAID IS IN NATURE OF FEE FOR TECHNICAL SERVICES AND THE PERSONS ENGAGED ARE NOT AGENTS BUT BROKERS WHO ARE CONSULTANTS. THE LD. ASSESSING OFFICER FOUND THAT THE COMMISSION IS PAID IN THE GUISE OF THE FEE FOR TECHNICAL SERVICES AND LIABLE TO TDS SINCE NO TDS IS DEDUCTED THE ASSESSING OFFICER ITA NO. 1575/BANG/2018 PAGE 4 OF 6 MADE DISALLOWANCE WITH OTHER ADDITIONS AND DETERMINED TAXABLE INCOME BEING LOSS RS. 41,89,695/-. 5. AGGRIEVED BY THE ASSESSMENT ORDER, THE ASSESSEE FILED AN APPEAL BEFORE CIT(A). THE LD. CIT(A) HAVING CONSIDERED THE GROUNDS OF APPEAL AND SUBMISSIONS OF THE ASSESSEE ON THIS DISPUTED ISSUE FOUND THAT THE ASSESSEE HAS NOT FURNISHED DETAILED WORKING OF BEFORE THE AO AND NOT LISTED THE ITEMS WHICH ARE ABSOLUTE. THE CIT(A) MADE OBSERVATIONS IN PARA 4.2 OF THE ORDER AND HAS CONFIRMED THE ADDITION OF RS. 19,11,000/- AND SIMILARLY IN THE CASE OF NON-DEDUCTION OF TDS ON THE PAYMENTS MADE TO NON-RESIDENTS APPLYING THE PROVISIONS OF SECTION 40(A)(I) THE CIT(A) HAS DEALT WITH ON THE ISSUES IN PARA 5.5 AND CONFIRMED THE ADDITION AND GRANTED RELIEF IN RESPECT OF OTHER ADDITIONS AND PARTLY ALLOWED THE APPEAL. AGGRIEVED BY THE ORDER, THE ASSESSEE HAS FILED AN APPEAL BEFORE THE TRIBUNAL. 6. BEFORE US, THE LD. AR SUBMITTED THAT THE ASSESSEE HAS MADE PROVISION FOR NON-MOVING / OBSOLESCENCE GOODS AND SUBMITTED THAT THESE FACTS HAVE BEEN CONSIDERED IN LIEU OF THE ACCOUNTING POLICY AND REFERRED TO THE NOES ON ACCOUNTS. THE ASSESSING OFFICER HAS DEALT ON THIS ISSUE IN PARA 3.1. THE CONTENTION OF THE LD. AR THAT THE ASSESSEE IS FOLLOWING THE VALUATION OF THE GOODS AT COST OR NET REALIZED VALUE AND SUBMITTED THE PAPER BOOK. THE ASSESSEE IS ALSO ENTITLED TO WRITE OFF THE NON-MOVING / OBSOLESCENCE GOODS IN THE BOOKS OF ACCOUNTS. SIMILARLY IN RESPECT OF DISALLOWANCE OF COMMISSION FOR NON-DEDUCTION OF TDS ON THE PAYMENTS MADE TO NON-RESIDENTS, THE LD. AR REFERRED TO THE CIT(A) ORDER AND AGREEMENTS AT PAGE NO. 24 AND THE ASSESSEE HAS REFERRED TO THE WRITTEN SUBMISSIONS MADE BEFORE THE CIT(A) AT PAGE NO. 139 OF THE PAPER BOOK WHERE THE PAYMENTS MADE BY THE ASSESSEE ARE IN THE NATURE OF COMMISSION AND NOT FOR FEE FOR TECHNICAL SERVICES AND RELIED ON THE JUDICIAL DECISIONS AND PRAYED FOR ALLOWING THE APPEAL. CONTRA, THE LD. DR SUPPORTED THE ORDERS OF CIT(A) AND PASSED THE SUBMISSIONS. 7. WE HEARD THE RIVAL SUBMISSIONS AND PERUSED THE RECORD. PRIMA FACIE ON THE FIRST DISPUTED ISSUE, THE LD. AR SUBMITTED THAT THE GOODS ARE OBSOLESCENCE AND NON-MOVING AND CLAIMED AS EXPENDITURE IN THE P&L ACCOUNT. THE FACT ITA NO. 1575/BANG/2018 PAGE 5 OF 6 REMAINS THE LD. AR HAS NOT DEMONSTRATED THE NATURE OF THE GOODS WHICH BECAME OBSOLESCENCE AND WHAT IS THE COST AND NET REALIZABLE VALUE. THE DECISION RELIED UPON BY THE ASSESSING OFFICER IS ON THE PROVISION FOR WARRANTY WHEREAS IN THE PRESENT CASE THE DISALLOWANCE IS FOR NON-MOVING / OBSOLESCENCE GOODS. THE LD. AR CONTENTION THAT THEY ARE SLOW MOVING. THE FACT REMAINS THAT THE ASSESSEE COULD NOT SUBSTANTIATE AND THE CIT(A) HAS REFERRED IN THE OBSERVATIONS THAT THE ASSESSEE COULD NOT SUBSTANTIATE WITH THE DETAILED WORKING OF PROVISIONS AND NO DETAILS OF LISTED ITEMS OF OBSOLETE HAVE BEEN PRODUCED AND THE BASIS OF VALUE AND COMPARABLES AT COST OR MARKET VALUE AND ALSO THERE IS NO POLICY DECISION IN RESPECT OF SUCH NON-MOVING / OBSOLESCENCE GOODS. WE ARE OF THE SUBSTANTIATE OPINION THAT SINCE BOTH THE ASSESSING OFFICER AND THE ASSESSEE COULD NOT SUBSTANTIATE WITH THE INFORMATION AND CIT(A) ALSO DEALT ON THIS ISSUE, WE RESTORE THE DISPUTED ISSUE TO THE FILE OF THE ASSESSING OFFICER TO VERIFY AND EXAMINE THE METHOD OF ACCOUNTING TREATMENT OF OBSOLESCENCE GOODS AND EXAMINE THE STATEMENTS FILED IN THE COURSE OF HEARING. WE MAKE IT CLEAR THAT ASSESSEE SHOULD COOPERATE IN SUBMITTING THE INFORMATION FOR EARLY DISPOSAL OF THE CASE. IN THE RESULT, THE GROUNDS OF APPEAL OF THE ASSESSEE IS ALLOWED FOR STATISTICAL PURPOSES. 8. IN RESPECT OF THE SECOND GROUND OF APPEAL IN RESPECT OF NON-DEDUCTION OF TDS ON PAYMENTS MADE TO NON-RESIDENTS. THE LD. AR SUBMITTED THAT THE COMMISSION IS PAID OUTSIDE THE COUNTRY AND AGENTS ONLY PROCURE ORDERS. BUT ON THE PERUSAL OF THE CIT(A) ORDER AND ALSO THE SUBMISSIONS OF THE ASSESSEE IN THE COURSE OF HEARING ON 09.01.2017 WE FIND THE CIT(A) HAS CONSIDERED THE AGREEMENTS OF THE NON-RESIDENTS AND FOUND THAT THE COMMISSION IS PAID TO THE NON-RESIDENTS FOR PROCURING ORDERS FOR THE ASSESSEE TO PROMOTE THE PRODUCTS MANUFACTURED BY THE ASSESSEE, PLACING ORDERS WITH THE ASSESSEE ON BEHALF OF VARIOUS CUSTOMERS, TO COORDINATE AND CHECK THE QUALITY OF GOODS ORDERED BY THE CUSTOMERS AND TO RENDER PROMPT AND COMPLETE SALES AND SERVICING TO THE CUSTOMERS AT ITS SOLE COST AND EXPENSE. WHEN WE READ THE CLAUSES AND FINDINGS OF CIT(A), THE FACT REMAINS THAT THE NON-RESIDENT SHOULD HAVE THE SOME TECHNICAL EXPERTISE TO CHECK QUALITY OF PRODUCTS. WE FOUND SECTION 9(1)(VII) DEALS WITH FEE FOR TECHNICAL SERVICES, IN THE PRESENT CASE. WE ARE OF ITA NO. 1575/BANG/2018 PAGE 6 OF 6 THE SUBSTANTIATE OPINION THAT THE SUBMISSION OF THE ASSESSEE CANNOT BE ACCEPTED BECAUSE THE NON-RESIDENT AGENT HAS TO CHECK THE QUALITY OF GOODS ORDERED BY THE CUSTOMERS WITH SOME EXPERTISE IN INTERNATIONAL MARKET AND THE LD. AR COULD NOT PROVE THAT THERE IS NO PERMANENT ESTABLISHMENT AND SUPPORTED THE ARGUMENTS WITH JUDICIAL DECISION AND EXPLAINS THAT THE ASSESSEE HAS PAID ONLY COMMISSION AND THE WORKS ARE IN THE NATURE OF PROCUREMENT OF GOODS BUT IT CONFLICTS CLAUSES OF THE AGREEMENT ENTERED BY THE ASSESSEE WITH THE NON-RESIDENTS. FURTHER THE ASSESSEE COULD NOT SUBSTANTIATE WITH REASONS THAT HOW THE QUALITY OF GOODS CAN BE CHECKED BY THE NON-RESIDENTS WHEN THEY DO NOT HAVE ANY EXPERTISE IN THE INTERNATIONAL MARKET. THEREFORE WE ARE OF THE OPINION THAT THE CIT(A) AFTER CONSIDERING THE PROVISIONS, FACTS AND FINDING HAS TAKEN A REASONED DECISION AND WE UPHOLD THE SAME AND DISMISS THE GROUND OF APPEAL OF THE ASSESSEE. 9. IN THE RESULT, THE APPEAL FILED BY THE ASSESSEE IS PARTLY ALLOWED FOR STATISTICAL PURPOSES. ORDER PRONOUNCED IN THE OPEN COURT ON THE DATE MENTIONED ON THE CAPTION PAGE. SD/- SD/- (ARUN KUMAR GARODIA) (PAVAN KUMAR GADALE) ACCOUNTANT MEMBER JUDICIAL MEMBER BANGALORE, DATED, THE 25 TH APRIL, 2019. /MS/ COPY TO: 1. APPELLANT 4. CIT(A) 2. RESPONDENT 5. DR, ITAT, BANGALORE 3. CIT 6. GUARD FILE BY ORDER ASSISTANT REGISTRAR, INCOME TAX APPELLATE TRIBUNAL, BANGALORE.