DCIT, Cochin V. M/s.Tranformers & Electricals Kerala LTD, Cochin

ITA 171/COCH/2014

• Counselvise Citation: [2014] 120 COUNSELVISE.COM (IT) 7206 (ITAT-COCHIN)
• Duration Of Justice: 4 month(s) 28 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 19-09-2014
• Appeal Filed By: Department
• Bench Allotted: DB
• Next Hearing Date: 07-08-2014
• Assessment Year: 2006-2007
• Appeal Filed On: 21-04-2014
• Court: TRIBUNAL
• Department Lawyers: LATHA V KUMAR
• Keywords: Double taxation relief; Permanent establishment; Advance ruling
• Section: 143(3); 147; 148

Judgement Text

IN THE INCOME TAX APPELLA TE TRIBUNAL COCHIN BENCH, COCHIN BEFORE S/SHRI N.R.S.GANESAN, JM AND CHANDRA POOJ ARI, AM I.T.A. NO.171/COCH/2014 ASSESSMENT YEAR : 2006-07 THE DEPUTY COMMISSIONER OF INCOME-TAX, CIRCLE-4(2), KOCHI VS. M/S. TRANSFORMERS & ELECTRICALS KERALA LTD., ANGAMALY SOUTH P.O., ERNAKULAM, KOCHI-683 573. [PAN : AAACT 6205D] (REVENUE -APPELLANT) (ASSESSEE-RESPONDEN T) REVENUE BY SMT. LATHA V. KUMAR, JR. DR ASSESSEE BY SHRI ABRAHAM JOSEPH MARKOS, ADV. DATE OF HEARING 07/08/2014 DATE OF PRONOUNCEMENT 19/09/2014 O R D E R PER CHANDRA POOJARI, ACCOUNTANT MEMBER: THIS APPEAL FILED BY THE REVENUE IS DIRECTED AGAIN ST THE ORDER DATED 11-11-2013 PASSED BY THE LD. CIT(A)-II, KOCHI FOR THE ASSESSMENT YEAR 2006-07. 2. THE REVENUE HAS RAISED THE GROUND WITH REGARD TO ALLOWBILITY OF THE CLAIM OF THE ASSESSEE U/S. 40(A)(IA) R.W.S. 9(1 ) OF THE I.T. ACT TOWARDS PAYMENT OF SALES COMMISSION MADE TO THE SEL LING AGENTS WITHOUT DEDUCTION OF TDS. I.T.A. NO.171/COCH/2014 2 3. THE BRIEF FACTS OF THE CASE ARE THAT THE ASSESSE E IS A PUBLIC SECTOR UNDERTAKING AND IS ENGAGED IN THE MANUFACTURE AND S ALE OF TRANSFORMERS. THE ORIGINAL RETURN OF INCOME FOR TH E A.Y. 2006-07 WAS FILED ON 27-11-2006 DECLARING A NET LOSS OF RS.21,5 9,72,274/- AND THE ASSESSMENT WAS COMPLETED ON 29-12-2008 ON A NET LOS S OF RS.11,92,34,369/-. SUBSEQUENTLY, THE CASE WAS RE-OP ENED U/S. 147 BY ISSUE OF NOTICE U/S. 148 DATED 16-03-2011. THE ASS ESSING OFFICER COMPLETED THE ASSESSMENT VIDE ORDER U/S. 143(3) R.W .S. 147 OF THE I.T. ACT DATED 22-12-2011. WHILE COMPLETING THE ASSESSM ENT THE ASSESSING OFFICER HAS MADE DISALLOWANCE U/S. 40(A)(IA) ON ACC OUNT OF PAYMENTS MADE WITHOUT DEDUCTING TDS TO THE LIAISON OFFICER, PROFESSIONAL CHARGES AND SALES COMMISSION TO SELLING AGENTS. 4. THE ASSESSING OFFICER MADE THE DISALLOWANCE AS I T WAS OBSERVED THAT THE ASSESSEE HAD NOT DEDUCTED TDS ON THE PAYME NTS MADE TO M/S. AL HASSAN ELECTRICALS COMPANY, OMAN. AFTER GOING THR OUGH THE AGENCY AGREEMENT, THE ASSESSING OFFICER HELD THAT M/S. AL HASSAN ELECTRICALS COMPANY, OMAN WAS A DEPENDENT AGENT OF THE ASSESSEE . IT WAS HELD THAT THE AGREEMENT WAS NOT MERELY FOR SELLING OF TH E PRODUCTS BUT INCLUDES VARIOUS MANAGERIAL AND CONSULTANCY SERVICE S LIKE MARKETING, SALES PROMOTION AND COLLECTION OF MARKET INTELLIGEN CE. ACCORDINGLY, IT WAS HELD THAT THE SERVICES RENDERED BY THE AGENT FA LLS WITHIN THE AMBIT I.T.A. NO.171/COCH/2014 3 OF THE EXPLANATION TO SECTION 9 AND HENCE TDS SHOUL D HAVE BEEN DEDUCTED ON THESE PAYMENTS. 5. THE LD. AR BEFORE CIT(A) SUBMITTED THAT THE COMP ANY ENTERED INTO AN AGREEMENT WITH M/S. AL HASSAN ELECTRICALS CO MPANY, OMAN TO RENDER SERVICES FOR MARKETING COMPANYS PRODUCTS IN SULTANATE OF OMAN. ACCORDING TO THE LD. AR, ALL THE SERVICES AS PER AG ENCY AGREEMENT WERE RENDERED OUTSIDE INDIA AND THE AGENT HAS NO PERMANE NT ESTABLISHMENT IN INDIA. THE LD. AR ALSO RELIED ON THE DECISION I N THE CASE OF CIT VS. TOSHOKU LTD. (125 ITR 525) AND THE DECISION OF THE HONBLE SUPREME COURT IN THE CASE OF GE TECHNOLOGY CENTRE PVT. LTD. VS. CIT (327 ITR 456) AND SUBMITTED THAT EVEN IN VIEW OF THE DTAA BE TWEEN THE TWO COUNTRIES, THE AMOUNT CANNOT BE HELD AS TAXABLE IN INDIA. 6. ON APPEAL, THE CIT(A) OBSERVED THAT SINCE THE AS SESSEE HAS MADE PAYMENT TO A COMPANY LOCATED AND ASSESSABLE IN OMAN , THE ASSESSING OFFICER WAS NOT CORRECT IN MAKING DISALLOWANCE HOLD ING THAT THE INCOME HAD ACCRUED IN INDIA AND SINCE THE AGREEMENT WAS FO R PROVIDING MARKETING SERVICES AND THE COMPANY DOES NOT HAVE AN Y PERMANENT ESTABLISHMENT IN INDIA THEREFORE, THE ASSESSING OFF ICERS STAND WAS NOT CORRECT IN MAKING THIS DISALLOWANCE. AGAINST THIS, THE REVENUE IS IN APPEAL BEFORE US. I.T.A. NO.171/COCH/2014 4 7. THE LD. DR SUBMITTED THAT THE SELLING AGENT IN T HIS CASE THOUGH HAD RENDERED SERVICES ABROAD, AND WAS ENTITLED TO R ECEIVE THE COMMISSION ABROAD FOR THE SERVICES RENDERED TO THE ASSESSEE. HOWEVER, HE RECEIVED THE AMOUNT THROUGH OR FROM BUSINESS CON NECTION WHICH HE HAD IN INDIA OR SOURCE OF INCOME IS IN INDIA, BEING SO, THE INCOME SHALL BE DEEMED TO ACCRUE OR ARISE IN INDIA. SINCE THE S OURCE OF INCOME OF THE NON-RESIDENT, WHO IS THE AGENT OF THE ASSESSEE, IT EARNED COMMISSION FROM THE BUSINESS ACTIVITY OF THE ASSESS EE AND THE ASSESSEE HAS NOT DEDUCTED TDS, IT SHOULD BE DISALLOWED U/S. 40(A)(IA) OF THE I.T. ACT. THE SERVICES RENDERED BY THE AGENT FALLS WITH IN THE AMBIT OF EXPLANATION (2) OF SEC. 5 OF THE I.T. ACT. THE FACT THAT THE AGENT HAS RENDERED SERVICES ABROAD IN THE FORM OF SOLICITING ORDERS AND THE COMMISSION IS TO BE REMITTED TO THEM ABROAD IS WHOL LY IRRELEVANT FOR THE PURPOSE OF DETERMINING THE SITUS OF THEIR INCOME. THE LD. DR RELIED ON THE RULING OF THE AUTHORITY FOR ADVANCE RULINGS (IN COME TAX)(NEW DELHI) IN THE CASE OF RAJIVE MALHOTRA IN RE REPORTED IN (2 006) (284 ITR 564) AND ALSO THE JUDGMENT OF AUTHORITY FOR ADVANCE RULI NGS (INCOME TAX)(NEW DELHI) IN THE CASE OF SKF BOILERS AND DRIE RS (P) LTD., IN RE. REPORTED IN 343 ITR 3. ACCORDING TO THE LD. DR, NO N DEDUCTION OF TDS TOWARDS THIS INCOME IS TO BE DISALLOWED. I.T.A. NO.171/COCH/2014 5 8. ON THE OTHER HAND, THE LD. AR SUBMITTED THAT M/S . AL HASSAN ELECTRICALS COMPANY, OMAN HAS BEEN ACCRUING INCOME O UTSIDE INDIA FOR THE SERVICES RENDERED FOR MARKETING ASSESSEES PROD UCTS IN SULTANATE OF OMAN AND M/S. AL HASSAN ELECTRICALS COMPANY, OMAN HA S NO BUSINESS CONNECTION IN INDIA, WHAT IS PAID TO THE AGENT IS N OT TAXABLE IN INDIA, HENCE, THERE IS NO QUESTION OF DEDUCTION OF TAX AT SOURCE FROM THAT PAYMENT AND NO ASSESSMENT OF M/S. AL HASSAN ELECTRIC ALS COMPANY, OMAN HAS BEEN MADE IN INDIA. FURTHER, HE SUBMITTED THAT ONLY WHEN THE INCOME OF THE AGENT IS CHARGEABLE TO TAX UNDER THE PROVISIONS OF THE ACT, THEN ONLY THE ASSESSEE IS LIABLE TO DEDUCT TDS AS PER SEC. 195C OF THE I.T. ACT. THE PERSON PAYING THE COMMISSION TO A NON-RESIDENT IS NOT LIABLE TO DEDUCT TAX IF SUCH SERVICES ARE NOT CHARG EABLE TO TAX UNDER THE ACT. SEC. 195 CONTEMPLATES NOT MERELY AMOUNTS, THE WHOLE OF WHICH ARE PURE INCOME PAYMENTS; IT ALSO COVERS COMPOSITE PAYM ENTS WHICH HAVE AN ELEMENT OF INCOME EMBEDDED OR INCORPORATED IN TH EM. THE OBLIGATION TO DEDUCT TAX AT SOURCE, IS HOWEVER, LIM ITED TO APPROPRIATE PROPORTION OF INCOME CHARGEABLE UNDER THE ACT FORMI NG PART OF THE GROSS SUM OF MONEY PAYABLE TO THE NON-RESIDENT. HE RELIE D ON THE JUDGMENT OF THE SUPREME COURT IN THE CASE OF GE INDIA TECHNOL OGY CENTRE P. LTD. VS. CIT (2010) (327 ITR 456) (SC). HE ALSO DREW OU R ATTENTION TO THE AGENCY AGREEMENT DATED 24 TH FEBRUARY 2000 ENTERED WITH M/S. AL HASSAN ELECTRICALS COMPANY, OMAN, SPECIFICALLY CLAUS E 6 OF THE SAID I.T.A. NO.171/COCH/2014 6 AGREEMENT. AS PER THIS CLAUSE, THE AGENT SHALL PRO VIDE ADVICE ON THE SALES PROMOTION AND MARKETING WITH REFERENCE TO THE PRODUCT IN THE TERRITORY. THE AGENT SHALL PROVIDE ASSISTANCE IN T HE PROMOTION OF PRODUCTS AND EXECUTION OF THE PROJECTS INVOLVING TH E PRODUCTS IN THE TERRITORY ON BEHALF OF THE PRINCIPAL IN VARIOUS STA GES OF THE CONTRACTS. 9. HE ALSO DREW OUR ATTENTION TO CLAUSE 8.1 & 8.2 O F THE AGREEMENT WHEREIN IT WAS STATED THAT AS A CONSIDERATION OF T HE ABOVE SERVICES TO BE PERFORMED BY THE AGENT UNDER THIS AGREEMENT, THE PRINCIPAL SHALL PAY TO THE AGENT A COMMISSION AT THE RATE OF 3 PERCENTA GE FOR ALL F.O.B. VALUE OF ORDERS, DIRECTLY RECEIVED BY THE PRINCIPAL IN THE TERRITORY. IN THE CASE OF DIRECT ORDERS IN THE TERRITORY RECEIVED BY THE PRINCIPAL, THE PRINCIPAL SHALL INCLUDE COMMISSION AS PER PARAGRAPH 8.1 ABOVE IN THE PRICES. THE AGENT SHALL BE ENTITLED TO THE COMMISS ION ON ALL SUCH DIRECT ORDERS IN THE TERRITORY RECEIVED BY THE PRINCIPAL. 10. FROM THAT, THE LD. AR SUBMITTED THAT INCOME THO UGH ACCRUED IN INDIA, AS PER THIS AGREEMENT, THE SERVICES WERE REN DERED TO THE ASSESSEE ABROAD AND THE PAYMENTS WERE ALSO RECEIVED BY HIM A BROAD, THEREFORE, NO INCOME WOULD ARISE UNDER THE PROVISIONS OF SEC. 5(2)(B) R.W.S 9(1) OF THE ACT. THE LD. AR RELIED ON THE ORDER OF THE CIT (A) AND SUBMITTED I.T.A. NO.171/COCH/2014 7 THAT THERE IS NO QUESTION OF DEDUCTION OF TDS ON TH E ABOVE PAYMENTS MADE TO THE NON RESIDENT AGENT. 11. WE HAVE HEARD THE PARTIES AND PERUSED THE RECOR D. AT THE OUTSET, CERTAIN PROVISIONS OF THE ACT NEEDS TO BE LOOKED IN TO SECTION 40(A)(I) WHICH READS AS UNDER:- 40 NOT WITHSTANDING ............. (A) IN THE CASE OF ANY ASSESSEE (I) ANY INTEREST (NOT BEING INTEREST ON A LOAN ISS UED FOR PUBLIC SUBSCRIPTION BEFORE THE 1 ST DAY OF APRIL, 1938) ROYALTY, FEES FOR TECHNICAL SERVICES OR OTHER SUM CHARGEABLE UNDER T HIS ACT, WHICH IS PAYABLE A. OUTSIDE INDIA B. IN INDIA TO A NON RESIDENT, NOT BEING A COMPANY OR TO A FOREIGN COMPANY, ON WHICH TAX IS DEDUCTIBLE AT SOURCE UNDE R CHAPTER VII- B AND SUCH TAX HAS NOT BEEN DEDUCTED OR, AFTER DED UCTION, HAS NOT BEEN PAID DURING THE PREVIOUS YEAR, OR IN THE SUBSEQUENT YEAR BEFORE THE EXPIRY OF THE TIME PRESCRIBED UNDER SUB -SECTION (1) OF SECTION 200: 12. THE AFORESAID CLAUSE MAKES IT CLEAR THAT THE DISALLOWANCE SHALL BE MADE IN CASE OF ANY PAYMENT MADE WHICH IS CHARGEABL E UNDER THIS ACT AND IS PAYABLE OUTSIDE INDIA OR IN INDIA TO A NON R ESIDENT NOT BEING A COMPANY OR TO A FOREIGN COMPANY ON WHICH TAX IS DED UCTIBLE AT SOURCE. THEREFORE, THE FIRST CONDITION REQUIRED TO BE FULFI LLED IS THE PAYMENT MUST BE CHARGEABLE UNDER THE ACT, THEREAFTER THE QUESTIO N OF DEDUCTION OF TAX WILL ARISE. SECTION 195 (1) OF THE ACT ALSO PRESCRI BES THAT TAX HAS TO BE I.T.A. NO.171/COCH/2014 8 DEDUCTED WHILE MAKING PAYMENT TO NON RESIDENT WHICH IS CHARGEABLE UNDER THE PROVISIONS OF THE ACT. THEREFORE, THE CON DITION PRECEDENT FOR DEDUCTION OF TAX IS THE INCOME MUST BE CHARGEABLE U NDER THE PROVISIONS OF THE ACT. IN THE FACTS OF THE PRESENT CASE, THE A GREEMENT ENTERED INTO BY THE ASSESSEE WITH FOREIGN AGENTS REVEALED THAT T HEY HAVE BEEN APPOINTED TO ACT AS COMMISSION AGENTS OUTSIDE INDIA IN THEIR RESPECTIVE COUNTRIES. THE AO HAS DISALLOWED COMMISSION PAYMENT U/S 40(A)(I) SINCE THERE WAS NO TDS MADE ON THIS PAYMENT. 13. AS IS EVIDENT FROM THE ASSESSMENT ORDER, EXCEPT ING THIS INFERENCE BY THE AO, THERE IS NOTHING ON RECORD TO SUGGEST TH AT THE INCOME IS CHARGEABLE TO TAX IN INDIA OR THE PAYMENT HAS BEEN RECEIVED BY THE NON RESIDENT AGENTS IN INDIA OR BY ANY OTHER PERSON ON THEIR BEHALF. THERE IS ALSO NO FINDING BY THE AO THAT THE NON RESIDENT AGE NTS HAVE A PERMANENT ESTABLISHMENT IN INDIA OR HAVE ANY BUSINE SS CONNECTION IN INDIA, BY VIRTUE OF WHICH THE PAYMENT OF COMMISSION WOULD HAVE ACCRUED OR AROSE IN INDIA. THE FACTS AVAILABLE ON R ECORD CLEARLY SUGGEST THAT THE NON RESIDENT AGENTS DID NOT CARRY OUT ANY BUSINESS OPERATIONS IN INDIA AND HAS ACTED AS SELLING AGENTS OF THE ASSESS EE OUTSIDE INDIA. THEREFORE, THE COMMISSION EARNED BY THEM FOR SERVIC ES RENDERED BY THEM OUTSIDE INDIA CANNOT BE CONSIDERED AS INCOME C HARGEABLE TO TAX IN INDIA. THAT APART THE SUBMISSION OF THE LEARNED AR THAT DTAA BETWEEN I.T.A. NO.171/COCH/2014 9 INDIA AND CONCERNED COUNTRIES STIPULATES THAT THE I NCOME OF AN ENTERPRISE OF CONTRACTING STATE SHALL BE TAXABLE ON IN THAT STATE UNLESS ENTERPRISE CARRIES ON BUSINESS IN THE ORDER CONTRAC TING STATE THROUGH PERMANENT ESTABLISHMENTS ALSO REQUIRES CONSIDERATIO N. THE AO HAS NOT ESTABLISHED THE FACT ON RECORD THAT ANY ONE OF THE NON RESIDENT AGENTS IS CARRYING ON BUSINESS THROUGH A PERMANENT ESTABLISHM ENTS. THEREFORE, WHEN THE COMMISSION PAID TO THE NON RESIDENTS ARE N OT CHARGEABLE TO TAX UNDER THE PROVISIONS OF THE ACT, NO DEDUCTION O F TAX IS REQUIRED TO BE MADE U/S 195(1) OF THE ACT. 14. IN THE PRESENT CASE, THE AO HAS FAILED TO BR ING ANY MATERIAL ON RECORD ON THE BASIS OF WHICH IT COULD BE CONCLUDED THAT COMMISSION PAID TO FOREIGN AGENTS IS CHARGEABLE TO TAX IN INDIA. UN LESS THE INCOME IS CHARGEABLE TO TAX IN INDIA, THEN TAX IS NOT REQUIRE D TO BE DEDUCTED U/S 195(1). FROM THE FACTS AND MATERIALS AVAILABLE ON R ECORD, NO DEFINITE CONCLUSION CAN BE MADE THAT THE COMMISSION PAID TO FOREIGN AGENTS IS CHARGEABLE TO TAX IN INDIA. I.T.A. NO.171/COCH/2014 10 15. IN THE PRESENT CASE, THE FOREIGN CONCERN, NAME LY M/S. AL HASSAN ELECTRICALS COMPANY, OMAN WAS ACTING AS THE SELLING AGENT FOR THE ASSESSEE AND FOR THAT THE ASSESSEE HAD OUTSIDE INDI A AND NO SERVICES RENDERED BY IT WITHIN THE TAXABLE TERRITORY , THE A MOUNT PAYABLE AS COMMISSION WAS NOT LIABLE TO TAX AND AS THE INCOME IS ARISING OR ACCRUING TO A FOREIGN CONCERN IN INDIA, THEREFORE, NO DISALL OWANCE U/S. 40(A)(IA) OF THE ACT ON THE GROUND THAT THE TAX IS NOT DEDUCT ED AT SOURCE U/S. 195 OF THE ACT OR REMITTANCES MADE TO A FOREIGN CONCERN . 16. IN THE RESULT, THE APPEAL FILED BY THE REVENU E IS DISMISSED. PRONOUNCED ACCORDINGLY ON 19-0 9-2014. SD/- SD/- (N.R.S.GANESAN) (CHANDRA POOJARI) JUDICIAL MEMBER ACC OUNTANT MEMBER PLACE: KOCHI DATED: 19TH SEPTEMBER, 2014 GJ COPY TO: 1. M/S. TRANSFORMERS & ELECTRICALS KERALA LTD., ANGA MALY SOUTH P.O., ERNAKULAM, KOCHI-683 573. 2. THE DEPUTY COMMISSIONER OF INCOME-TAX, CIRCLE-4( 2), KOCHI. 3. THE COMMISSIONER OF INCOME-TAX(APPEALS)-II, KOCH I. 4. THE COMMISSIONER OF INCOME-TAX, KOCHI. 5. D.R., I.T.A.T., COCHIN BENCH, COCHIN. 6. GUARD FILE. BY ORDER (ASSISTANT REGISTRA R) I.T.A.T. C OCHIN I.T.A. NO.171/COCH/2014 11