M/s Euroflex Transmissions (India) Private Limited, Hyderabad V. ACIT, Circle-2(2), Hyderabad, Hyderabad

ITA 1773/HYD/2014

• Counselvise Citation: [2015] 140 COUNSELVISE.COM (IT) 91534 (ITAT-HYDERABAD)
• Duration Of Justice: 4 month(s) 7 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 01-04-2015
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: B
• Next Hearing Date: 25-03-2015
• Assessment Year: 2010-2011
• Appeal Filed On: 24-11-2014
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: RAJAT MITRA
• Assessee Lawyers: A V RAGHURAM
• Keywords: Deemed to accrue or arise in india; Permanent establishment

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL HYDERABAD BENCH B, HYDERABAD BEFORE SHRI B. RAMAKOTAIAH, ACCOUNTANT MEMBER AND SHRI SAKTIJIT DEY, JUDICIAL MEMBER ITA NO. 1773/HYD/2014 ASSESSMENT YEAR: 2010-11 EUROFLEX TRANSMISSIONS (INDIA) PVT. LTD., HYDERABAD. PAN AAACE 5313K VS. ASST. COMMISSIONER OF INCOME TAX OFFICER, CIRCLE 2(2), HYDERABAD (APPELLANT) (RESPONDENT) ASSESSEE BY : SHRI A.V. RAGHU RAM REVENUE BY : SHRI RAJAT MITRA DATE OF HEARING 25-03-2015 DATE OF PRONOUNCEMENT 01-04-2015 O R D E R PER SAKTIJIT DEY, J.M.: THIS APPEAL BY ASSESSEE IS DIRECTED AGAINST THE OR DER DATED 08/09/2014 OF LD. CIT(A)-III, HYDERABAD FOR THE AY 2010-11. 2. THE SOLITARY ISSUE ARISING FOR CONSIDERATION IS RELATED TO DISALLOWANCE OF COMMISSION PAYMENT OF RS. 78,46,489 TO FOREIGN AGENTS BY APPLYING THE PROVISIONS OF SECTION 40(A) (I). 3. BRIEFLY THE FACTS ARE, ASSESSEE AN INDIAN COMPAN Y IS ENGAGED IN THE BUSINESS OF MANUFACTURE AND SALE OF HIGH VALUE TECHNICALLY ADVANCED FLEXIBLE DISC COUPLINGS. FOR THE AY UNDER CONSIDERATION, ASSESSEE FILED ITS RETURN OF INCOME DECLARING TOTAL INCOME OF RS. 31,95,37,980. DURING THE ASSESSMENT PROCEEDING, AO WHILE VERIFYING THE FINANCIAL STATEMENTS, NOTICED THAT ASSESSEE HA S CLAIMED 2 ITA NO. 1773 /HYD/2014 EUROFLEX TRANSMISSION (INDIA) PVT. LTD. EXPENDITURE TOWARDS COMMISSION PAYMENT TO SOME FORE IGN AGENTS AS UNDER: I) M/S COUPLING INTERNATIONAL LTD., U.K. 6 8,50,599 II) M/S MAGNETO ELETROPNEUMATICOS LTD., BRAZIL 2 ,75,250 III) M/S THERMO DYNAMICS ENGINEERING CO.LTD., JAPAN. 7,20,640 TOTAL 78,46,489 ======== HE FURTHER NOTICED THAT ON SUCH PAYMENTS MADE ASSE SSEE HAS NOT DEDUCTED TAX AT SOURCE IN TERMS WITH SECTION 195 OF THE IT ACT. WHEN AO CALLED UPON ASSESSEE TO EXPLAIN THE REASON FOR N OT DEDUCTING TAX ON COMMISSION PAYMENTS, ASSESSEE STATED THAT FOREIG N COMMISSION AGENTS APPOINTED FOR PROCURING ORDERS ON BEHALF OF ASSESSEE HAVE BEEN FROM VARIOUS PLACES OVERSEAS AND THEY ARE EXEC UTING CONSIGNMENTS TO COMPANYS INTERNATIONAL CUSTOMER AG AINST ORDERS. ASSESSEE SUBMITTED THAT ALL THE AGENTS ARE NON-RESI DENTS AND THEY ARE OPERATING THEIR BUSINESS ACTIVITIES OUTSIDE INDIA. IT WAS SUBMITTED, COMMISSION PAYMENT IS ALSO TOWARDS SERVICES PROVIDE D OUTSIDE INDIA. ASSESSEE SUBMITTED THAT NONE OF THE COMMISSION AGEN TS HAVE ANY PERMANENT ESTABLISHMENT OR PERMANENT BUSINESS PLACE IN INDIA. IT WAS ALSO SUBMITTED THAT THE COMMISSION AMOUNT WAS REMIT TED TO THE AGENTS DIRECTLY OUTSIDE INDIA. THUS, IT WAS SUBMITT ED, PROVISIONS OF SECTION 195 WOULD NOT BE APPLICABLE TO SUCH PAYMENT S. AO, HOWEVER, DID NOT FIND MERIT IN THE SUBMISSIONS OF ASSESSEE. HE WAS OF THE VIEW THAT AS PER SECTION 195(1) OF THE ACT, ASSESSEE WAS REQUIRED TO DEDUCT TAX AT SOURCE ON COMMISSION PAYMENTS TO EVEN NON-RESIDENTS. AO, IN THIS CONTEXT, RELIED UPON THE DECISIONS OF A UTHORITY OF ADVANCED RULINGS (AAR) IN CASE OF SKF BOILERS AND D RIERS PVT. LTD. (AAR NO. 983-984 OF 2010, 22 ND FEBRUARY 2012) AND IN CASE OF RAJIVE MALHOTRA, 284 ITR 564 WHEREIN IT WAS OBSERVE D THAT EXPRESSION ACCRUE OR ARISE OCCURRING IN SECTION 5 OF THE ACT WOULD MEAN INCOME IS SAID TO ACCRUE OR ARISE WHEN THE RIGHT TO RECEIV E IT COMES INTO EXISTENCE. THEREFORE, COMMISSION PAID TO NON-RESIDE NT AGENTS WOULD BE DEEMED TO ACCRUE OR ARISE IN INDIA. ACCORDINGLY, AO APPLYING THE 3 ITA NO. 1773 /HYD/2014 EUROFLEX TRANSMISSION (INDIA) PVT. LTD. PROVISIONS OF SECTION 40(A)(I) DISALLOWED THE COMMI SSION PAYMENT OF RS. 78,46,489. BEING AGGRIEVED, ASSESSEE PREFERRED APPEAL BEFORE LD. CIT(A). 4. LD. CIT(A), HOWEVER, SUSTAINED THE DISALLOWANCE BY HOLDING AS UNDER: 6. I HAVE CAREFULLY GONE THROUGH THE FACTS AND ISSU ES AND CONSIDERED THE VARIOUS ASPECTS BROUGHT FORTH BY THE APPELLANT. THE APPELLANT HAS NOT DISTINGUISHED THE SPECIFIC DE TAILS BROUGHT OUT IN THE ASSESSMENT ORDER AND HAS MERELY STATED T HAT SECTION 195 IS NOT APPLICABLE AND HENCE, CONSEQUENTLY SECTI ON 40(A)(IA) WAS NOT APPLICABLE. I DO NOT FIND FORCE IN THE APPE LLANTS CONTENTION. THE ASSESSMENT ORDER HAS BROUGHT OUT TH E FACTS AND THE RELEVANT CASE LAW I.E., SKF BOILERS & DRIERS PV T. LTD., (AAR NO. 983-984 OF 2010, 22 ND FEB. 2012) AND DISCUSSED THE VARIOUS FACTS OF THE CASE. I DO NOT FIND ANY REASON TO INTERFERE WITH THE ASSESSMENT ORDER PASSED BY THE AO AND THE ADDITION MADE BY THE AO IS UPHELD. 5. LD. AR SUBMITTED BEFORE US, NEITHER AO NOR LD. C IT(A) WERE JUSTIFIED IN DISALLOWING THE COMMISSION PAYMENTS TO NON-RESIDENTS BY APPLYING THE PROVISIONS OF SECTION 40(A)(I). IT WAS SUBMITTED, WHEN THERE IS NO DISPUTE TO THE FACT THAT THE NON-RESIDE NTS HAVE PROVIDED SERVICES OVERSEAS AND HAVE NO BUSINESS ACTIVITIES A S SUCH IN INDIA AND THE PAYMENTS MADE WERE FOR SERVICES PROVIDED OV ERSEAS, THEN, THERE IS NO REQUIREMENT TO DEDUCT TAX U/S 195 OF TH E ACT. LD. AR SUBMITTED, RELIANCE PLACED BY THE DEPARTMENTAL AUTH ORITIES ON THE DECISIONS OF AAR IS ALSO NOT CORRECT AS THOSE DECIS IONS CANNOT BE SAID TO BE LAYING DOWN THE CORRECT PROPOSITION OF L AW. LD. AR SPECIFICALLY REFERRING TO THE DECISIONS OF AAR IN C ASE OF RAJIVE MALHOTRA (SUPRA) SUBMITTED BEFORE US, WHILE COMING TO ITS CONCLUSION AAR HAS COMPLETELY OVERLOOKED THE PROVISIONS CONTAI NED UNDER EXPLANATION 1 TO SECTION 9(1). LD. AR SUBMITTED THA T THE ISSUE IN DISPUTE IS MORE OR LESS COVERED BY NOT ONLY THE DEC ISION OF THE HONBLE SUPREME COURT IN CASE OF M/S G.E. INDIA TEC HNOLOGY CENTRE PVT. LTD., VS. CIT AND ANOTHER, 327 ITR 456, BUT, M ANY OTHER DECISIONS OF DIFFERENT HIGH COURTS AS WELL AS ITAT . HE SUBMITTED, 4 ITA NO. 1773 /HYD/2014 EUROFLEX TRANSMISSION (INDIA) PVT. LTD. THOUGH, THE DECISION OF HONBLE SUPREME COURT AND A DECISION OF ITAT, DELHI BENCH WERE CITED BEFORE LD. CIT(A), BUT , HE COMPLETELY IGNORED/OVERLOOKED THEM. IN SUPPORT, HE RELIED UPON THE FOLLOWING DECISIONS: 1. CIT VS. MODEL EXIMS KANPUR, [2013] 358 ITR 72 ( ALL.) 2. CIT VS. FAIZAN SHOES PVT. LTD., [2014] 367 ITR 155 (MAD.) 3. CIT VS. HYDERABAD INDUSTRIES LTD., 24 SOT 98 4. INDO COURT INDUSTRIES LTD. VS. DCIT, ITA NO. 123 /DEL/2011, DT. 08/07/2011. 5. M/S AUROBINDO PHARMA LTD. VS. ADDL. CIT, ITA NO. 1096/HYD/11 AND OTHERS, ORDER DATED, 31/01/2014. 6. LD. DR, ON THE OTHER HAND, RELIED UPON THE ASSES SMENT ORDER AS WELL AS ORDER OF CIT(A). 7. WE HAVE CONSIDERED THE SUBMISSIONS OF THE PARTIE S AND PERUSED THE ORDERS OF THE REVENUE AUTHORITIES AS WELL AS OT HER MATERIALS ON RECORD. WE HAVE ALSO CAREFULLY APPLIED OUR MIND TO THE DECISIONS CITED AT THE BAR. ON A PERUSAL OF THE ASSESSMENT ORDER, I T IS VERY MUCH EVIDENT THAT AO HAS NOT DISPUTED THE FACT THAT COMM ISSION PAYMENTS WERE MADE TO NON-RESIDENT AGENTS WHO NOT ONLY WERE CARRYING ON THEIR BUSINESS ACTIVITIES OUTSIDE INDIA, BUT, THE COMMISS ION PAYMENTS WERE ALSO RELATED TO SERVICES PROVIDED BY THOSE AGENTS O UTSIDE INDIA. IT IS ALSO NOT DISPUTED THAT NONE OF THE COMMISSION AGENT S HAVE ANY PERMANENT ESTABLISHMENT OR PERMANENT BUSINESS PLACE IN INDIA. AO HAS ALSO NOT DISPUTED THE FACT THAT COMMISSION AMOU NTS WERE REMITTED TO NON-RESIDENTS DIRECTLY OUTSIDE INDIA. HOWEVER, A O HAS HELD THAT ASSESSEE IS LIABLE TO DEDUCT TAX U/S 195(1) ON THE REASONING THAT AS PER THE DECISIONS OF THE AAR, REFERRED TO BY HIM, I NCOME IS DEEMED TO ACCRUE OR ARISE IN INDIA WHEN RIGHT TO RECEIVE IT C OMES INTO EXISTENCE. LD. CIT(A) HAS CONFIRMED THE VIEW EXPRESSED BY AO W ITHOUT ASSIGNING 5 ITA NO. 1773 /HYD/2014 EUROFLEX TRANSMISSION (INDIA) PVT. LTD. ANY REASON OF HIS OWN. IT IS TO BE NOTED THAT INCAS E OF RAJEEV MALHOTRA(SUPRA), AAR HAS COME TO ITS CONCLUSION BY REFERRING TO THE PROVISIONS CONTAINED U/S 6 AND 9 OF THE IT ACT. HOW EVER, A CAREFUL READING OF SECTION 9 OF THE ACT WOULD MAKE IT CLEAR THAT UNDER EXPLANATION 1(A) TO SECTION 9(1), IT HAS BEEN PROVI DED THAT IN CASE OF A BUSINESS OF WHICH ALL THE OPERATIONS ARE NOT CARRIE D OUT IN INDIA, THE INCOME OF SUCH BUSINESS ONLY RELATING TO SUCH PART OF THE INCOME AS IS REASONABLY ATTRIBUTABLE TO THE OPERATIONS CARRIED O UT IN INDIA SHALL BE DEEMED TO ACCRUE OR ARISE IN INDIA. IN THE PRESENT CASE, AO HAS NOT BROUGHT ANY MATERIAL ON RECORD TO ESTABLISH THAT NO N-RESIDENT AGENTS HAVE CARRIED OUT ANY PART OF THEIR BUSINESS IN INDI A. 8. MOREOVER, SECTION 195(1) ENVISAGES THAT TAX IS T O BE DEDUCTED AT SOURCE ON INCOME WHICH IS CHARGEABLE UNDER THE P ROVISIONS OF IT ACT. THE HONBLE SUPREME COURT WHILE INTERPRETING T HE EXPRESSION CHARGEABLE UNDER THE PROVISIONS OF THIS ACT AS EM PLOYED U/S 195(1) OF THE ACT HAS HELD IN CASE OF GE INDIA TECHNOLOGY CENTRE P. LTD. (SUPRA) THAT THE SAID EXPRESSION WOULD MEAN THAT TH E REMITTANCE HAS GOT TO BE OF A TRADING RECEIPT, THE WHOLE OR PART O F WHICH IS LIABLE TO TAX IN INDIA. HOWEVER, IF THE PAYMENTS MADE TO NON- RESIDENTS ARE NOT CHARGEABLE TO TAX UNDER THE PROVISIONS OF IT ACT, T HEN, THE PROVISIONS OF SECTION 195 WOULD NOT APPLY. THE HONBLE SUPREME COURT FURTHER OBSERVED THAT IF THE SCOPE OF SECTION 195 IS ENLARG ED TO THAT EXTENT, THEN, IT WOULD RESULT IN A SITUATION WHERE, EVEN TH OUGH, THE INCOME WILL HAVE NO TERRITORIAL NEXUS WITH INDIA OR IS NOT CHAR GEABLE IN INDIA, THE GOVT. WOULD NONETHELESS COLLECT TAXES. IN THE PRESE NT CASE, ON A PERUSAL OF THE ASSESSMENT ORDER OR THE ORDER OF LD. CIT(A), WE DO NOT FIND ANY CONCLUSIVE FINDING GIVEN BY THE AUTHORITIE S CONCERNED THAT THE PAYMENTS MADE TO NON-RESIDENTS ARE CHARGEABLE TO TA X UNDER THE IT ACT. APPLYING THE PRINCIPLES LAID DOWN BY THE HON BLE SUPREME COURT AS AFORESAID, IT IS TO BE HELD THAT THE PROVISIONS OF SECTION 195 WOULD NOT BE APPLICABLE TO PAYMENTS MADE BY ASSESSEE TO N ON-RESIDENT AGENTS. THIS VIEW IS ALSO SUPPORTED BY THE FOLLOWIN G DECISIONS: 6 ITA NO. 1773 /HYD/2014 EUROFLEX TRANSMISSION (INDIA) PVT. LTD. 1. CIT VS. MODEL EXIMS KANPUR, [2013] 358 ITR 72 (A LL.) 2. CIT VS. FAIZAN SHOES PVT. LTD., [2014] 367 ITR 155 (MAD.) 9. FURTHER, THE COORDINATE BENCH WHILE EXAMINING ID ENTICAL NATURE OF DISPUTE IN CASE OF AROBINDO PHARMA LTD. (SUPRA) HELD IN THE FOLLOWING MANNER: 25. AS FAR AS THE AMOUNT PAID AS SALES COMMISSION I S CONCERNED, THIS ISSUE HAS ALREADY BEEN DECIDED BY THE COORDINATE BENCH IN ASSESSEE'S OWN CASE FOR THE A.Y. 2002- 2003 AND 2004-2005 IN ITA.NO.415 & 999/HYD/2007 BY ORDER DATED 25.06.2010. THE COORDINATE BENCH HAS HELD AS UNDER : '2. . . .. . WE FIND THAT AS PER CIRCULAR 786 DATED 17.2.2000, COMMISSION PAID BY THE ASSESSEE COMPANY DIRECTLY TO NON-RESIDENT AGENTS FO R RENDERING SERVICES ABROAD ARE NOT LIABLE FOR DEDUCTION OF TDS UNDER SECTION 195 O F THE ACT. ACCORDINGLY, THE PROVISIONS OF SECTION 40(A)(IA) OF THE ACT ARE NOT APPLICABLE. THE CASE LAW RELIED ON BY THE LEARNED DEPARTMENTAL REPRESENTATIVE IN THE CASE OF TRANSMIS SION CORPORATION OF A.P. LIMITED REPORTED IN 239 ITR 587 (SC) AND THE DECISION OF TH IS TRIBUNAL IN THE CASE OF CHEMINOR DRUGS VS. ITO IS NOT APPLICABLE TO THE FACTS OF THE CASE UNDER CONSIDERATION, AS IN THIS CASE, THE ASSESSEE MADE THE PAYMENT DIRECTLY TO THE NON-RESIDENT AGENTS FOR RENDERING SERVICES ABROAD. IN VIEW OF THE ABOVE, WE DO NOT SE E ANY INFIRMITY IN THE ORDER OF THE CIT(A) ON THIS ISSUE AND THE SAME IS UPHELD.' 10. THE RATIO LAID DOWN BY THE COORDINATE BENCH SQU ARELY APPLIES TO THE FACTS OF THE PRESENT CASE. RESPECFTULLY FOLLOWI NG THE PROPOSITIONS LAID DOWN IN THE JUDICIAL PRECEDENTS REFERRED TO HE REINABOVE, WE, THEREFORE, HOLD THAT THE PROVISIONS OF SECTION 195 WOULD NOT BE APPLICABLE TO THE COMMISSION PAYMENTS MADE BY ASSES SEE TO NON- RESIDENT INDIANS, AS SUCH INCOME IS NOT CHARGEABLE TO TAX UNDER THE PROVISIONS OF THE ACT. CONSEQUENTLY, DISALLOWANCE M ADE U/S 40(A)(I) WOULD ALSO NOT SURVIVE. ACCORDINGLY, WE DELETE THE ADDITION OF RS. 78,46,484 MADE BY AO AND SUSTAINED BY LD. CIT(A). 7 ITA NO. 1773 /HYD/2014 EUROFLEX TRANSMISSION (INDIA) PVT. LTD. 11. IN THE RESULT, APPEAL OF THE ASSESSEE IS ALLOWE D. PRONOUNCED IN THE OPEN COURT ON 1 ST APRIL, 2015. SD/- SD/- (B. RAMAKOTAIAH) (SAKTIJIT DEY) ACCOUNTANT MEMBER JUDICIAL MEMBER HYDERABAD, DATED: 1 ST APRIL, 2015 KV COPY TO:- 1) M/S EUROFLEX TRANSMISSIONS (INDIA) PVT. LTD., C/ O M/S MAHESH, VIRENDER & SRIRAM, CAS, 6-3-788/36 & 37A, AMEERPET, HYDERABAD. 2) ACIT, CIRCLE 2(3),, HYDERABAD 3 CIT(A)-III, , HYDERABAD 4) CIT-II, HYDERABAD 5) THE DEPARTMENTAL REPRESENTATIVE, I.T.A.T., HYDE RABAD.