M/s. IVAX Paper Chemicals Ltd, Hyderabad V. Addl.CIT, Range-8, Hyderabad

ITA 1788/HYD/2011

• Counselvise Citation: [2014] 140 COUNSELVISE.COM (IT) 74651 (ITAT-HYDERABAD)
• Duration Of Justice: 2 year(s) 4 month(s) 8 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 26-02-2014
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: B
• Assessment Year: 2007-2008
• Appeal Filed On: 18-10-2011
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: SHRI SOLGY JOSE T KOTTARAM
• Assessee Lawyers: P VINOD
• Keywords: Services rendered outside India

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL HYDERABAD BENCH B', HYDERABAD BEFORE SHRI CHANDRA POOJARI, ACCOUNTANT MEMBER AND SMT. ASHA VIJAYARAGHAVAN, JUDICIAL MEMBER ITA NO. 178 8/HYD/2011 : ASSESSMENT YEAR 200 7 - 0 8 M/S. IVAX PAPER CHEMICALS LTD., HYDERABAD ( PAN - AAACI 2683 G) V/S. ADDL. COMMISSIONER OF INCOME - TAX, RANGE 8, HYDERABAD (APPELLANT) (RESPONDENT) APPELLANT BY : SHRI P.VINOD RESPONDENT BY : SHRI SHRI SOLGY JOSE T.KOTTARAM DR DATE OF HEARING 23 .1.2014 DATE OF PRONOUNCEMENT 26.2.2 014 O R D E R PER SMT. ASHA VIJAYARAGHAVAN, JUDICIAL MEMBER: TH IS APPEAL BY THE ASSESSEE IS DIRECTED AGAINST THE ORDER OF THE COMMISSIONER OF INCOME - TAX(APPEALS) III , HYDERABAD DATED 24.8.2011 FOR THE ASSESSMENT YEAR 2007 - 08. 2. EFFECTIVE GROUNDS O F THE ASSESSEE IN THIS APPEAL ARE AS FOLLO W S - 1. THE ORDER OF LD. CIT(A) IS ERRONEOUS BOTH ON FACTS AND IN LAW. 2. THE LD. CIT(A) ERRED IN SUSTAINING THE DISALLOWANCE OF MADE BY THE ASSESSING OFFICER UNDER SECTION 40A(IA ) IN RESPECT OF SALES COMMISSION PAID TO FOREIGN AGENT. 3. THE FIN D I NG OF THE L D . CIT(A) ARE ENTIRELY BASED ON SUPPOSITIONS AND ASSUMPTIONS FAR FROM THE FACTS AVAILABLE ON RECO R D. 4 . . 3. FACTS OF TH E CASE IN BRIEF A R E THAT THE ASSESSEE COMPANY IS ENGAGED IN MANUFACTURE OF PAPER SIZING CHEMICALS. FO R THE ASSESSMENT YEAR 2007 - 08, IT HAS FIL E D RET U RN OF INCOME, SHOWING INCOME OF RS .1,23,46,630, AF T ER CLAIMING DEDUCTION UNDER S.80IB OF RS.2,56,57,518 AND SHOWIN G THE BOOK PROFIT AT ITA NO. 1788 / HYD/20 11 SHRI IVAX PAPER CHEMICALS LTD. HYDERABAD 2 RS.48,58,887 UN D ER S.115JB OF THE AC T. DURIN G THE ASSESSMENT PROCEEDINGS, THE ASSESSING OFFICER NO T ICED THAT THE ASSESSEE HAS CLAIMED AN AMOUNT O F RS .1,77,948 UN D ER FOREIGN SALES COMMISSION PAID TO ONE PARTY, BUSINESS I N TERNATION A L. T HE ASSESSING OFFICER REFERRED TO THE DETAILS OF SUCH PAYMENTS MADE DURIN G THE PREVIOUS Y E AR IN PARA 2 OF THE ASSESSMENT ORDER, AND OBSERVING THAT THE ASSESSEE HAS NO T DEDUCTED TAX AT SOU R CE BEFO R E MAKING SUCH PAYMENTS, HELD THE VIEW THAT THE SAME CANNOT B E ALLOWED AS DEDUCTION, IN VIEW OF THE P R OVISION S OF S .40A(IA) OF THE ACT. ASSESSEE EXPLAINED BEFORE THE ASSESSING OFFICER THAT SUCH PAYMENTS TOWARDS COMMISSI O N ON SALES WERE MADE TO FO RE IGN AGENTS, AND PL A CIN G RELIANCE ON THE BOARDS CIRCULAR N O .786 DA TED 7.2.2000 AND CIRCULAR NO.23 DATED 23.7.1969, IT WAS SUBMITTED THAT SINCE SUCH PAYM E N T S WE R E REMITTED ABROAD DIRECTLY, THE SAME CANNOT B E SAID TO HAVE BEEN RECEIVED B Y OR ON BEHALF OF SUCH AGENT IN INDIA, AND THEREFORE, THERE IS NO OBLIGATION ON THE ASS ESSEE TO DEDUCT TAX ON SUCH PAYMENTS. ASSESSEE ALSO RELIED ON THE DECISIONS O F THE MUMBAI BENCH O F THE TRIBUNAL IN TH E CA S E OF MAHA RA SHTRA STATE ELECTRICITY BOARD (90 ITD 793); AND HYDERABAD BENCH OF TRIBUNAL IN SOL PHARMACEUTICALS LIMI T ED (83 I T D 72) AND AP GENCO (11 SOT 221), THE ASSESSING OFFICER, HOWEVER, FOUND NO MERIT IN TH E CON T ENTION S OF THE ASSESSEE . REFERRING TO THE PROVISIONS OF S.40A(IA), HE NOTED THAT THE SAID AMOUNT CANNOT BE ALLOWED AS DEDUCTION, ON ACCOUNT OF DEFAULT ON THE PART OF THE ASSESSEE IN EFFECTING TDS BEFORE MAKING PAYMENT. HE ALSO REFERRED TO THE DECISION OF THE APEX COU R T IN THE CA S E OF TRANSMISSION CORPORATION OF A.P. LTD. V/S. CIT(239 ITR 587), AND THE DECISION OF THE TRIBUNAL IN ITA NOS.1 0 AND 11/HYD/1996, WITH REGARD TO THE SCOPE OF THE PROVISION S OF S.195(2) AND 195 ( 3), IN THE CASE OF PAYMENTS TO NON - R E SIDENTS, IT WAS HELD THAT SIN C E THE NON - RESIDENT RECIPIENTS HAVE NOT OBTAINED CERTIFICATE OF EXEMPTION FROM THE ASSESSING OFFICER U ND ER S.195(3), THE ASSESSEE SHOULD HAV E DEDUCTED TAX AT SOU R CE BEFO R E MAKING REMITTANCES TO THE NON - RESIDENT RECIPIENTS, AS PROVIDED UN D ER S.195(1) OF THE A C T. IN THE FACTS OF THE PRESENT CASE, OBSERVING THAT THE ASSESSEE HAS NO T EVEN PRODUCED THE AGRE E MENT ENTERED INTO BY WITH THE FOREIGN PA RTY/PERSON IN QUESTION, TH E ASSESSING OFFICER HELD T HAT TH E SAID AMOUNT O F RS .1,77,948 CANNOT ITA NO. 1788 / HYD/20 11 SHRI IVAX PAPER CHEMICALS LTD. HYDERABAD 3 B E ALLOWED AS DEDUCTION IN VIEW OF PROVISION S OF S.40(A)(IA) OF THE AC T. THE ASSESSING OFFICER ACCORDINGLY DISALLOWED THE SAME, WHILE COMPLETING THE ASSESSMENT ON A TOTAL INCOME OF RS.1,29,15,143, VIDE O R DER OF ASSESSMENT DATED 24.12.2009 PASSED UNDER S.143(3) OF THE ACT. 4. ON APPEAL, BEFORE THE CIT(A), THE ASSESSEE FILED A COPY OF THE AGREEMEN T S ENTERED INT O /CORRESPONDENCES MAD E W I T H M/S. BUSIN E SS INTERNAT IONAL. ON EXAMINING THE PAPERS FURNISHED BY THE ASSESSEE THE CIT(A) OB S ERVED THAT IT CANNOT B E SAID THAT THE SAID FOREIGN PARTY HAS NO BRANCH OFFICE OR ANY LIAISON OFFICE IN I NDIA; AND IT CANNO T ALSO BE SAID THAT EMPLOYEES/AGENTS OF THAT PARTY HAVE NO T VISITED INDIA DURING THE PREVIOUS Y E AR. RATHER, THE CIT(A) OBSERV E D, ON A CONSIDERATION OF THE TOTALITY OF THE FACTS AND CIRCUMSTANCES OF THE CASE, THE SAID FOREIGN PARTY H AS MAINTAINING A BRANCH OFFICE IN INDIA, WHICH CAN B E CONSTRUED AS A PERMANENT EST ABLISHMENT IN THIS CASE. UNDER THE CIRCUMSTANCES, THE CIT(A) HELD T HAT THE AMOUNT OF R S .1,77,9 4 8 PAID BY THE ASSESSEE TO THAT PARTY IS CHARGEABLE TO TAX IN INDIA . THE CIT(A) PROCEEDED TO EXAMINE THE FACTUAL ASPECTS AS TO THE SERVICES RENDERED BY THE SAI D FOREIGN PARTY TO THE ASSESSEE, AND ULTIMATELY CONCLUDED THAT THERE WAS NO EVIDENCE OF ANY SERVICE RENDERED BY THE FOREIGN PARTY TO THE ASSESSEE, AND CONSEQUENTLY, THE EXPENDITURE ON ACCOUNT OF COMMISSION CLAIMED BY THE ASSESSEE CANNOT BE SAID TO HAVE BEE N INCURRED WHOLLY AND EXCLUSIVELY FOR THE PURPOSE OF BUSINESS OF THE ASSESSEE. EVEN ON THAT COUNT, THE CIT(A) HELD THAT THE EXPENDITURE IN QUESTION CANNOT BE ALLOWED AS DEDUCTION UNDER S.37(1) OF THE ACT. 5. AGGRIEVED, ASSESSEE IS IN SECOND APPEAL BEFORE US. 6. THE LEARNED COUNSEL FOR THE ASSESSEE, REITERATING THE CONTENTIONS URGED BEFORE THE REVENUE AUTHORITIES SUBMITTED THAT THE SERVICES RENDERED BY THE SAID PARTY TO WHOM COMMISSION WAS PAID, OUTSIDE INDIA AND THE PAYMENT WAS ALSO MADE THROU GH DIRECT REMITTANCE OUTSIDE THE COUNTRY. AS SUCH, IT CANNOT BE SAID THAT THE ASSESSEE HAS ANY OBLIGATION IN TERMS OF S.19 5(3) TO DEDUCT TAX ITA NO. 1788 / HYD/20 11 SHRI IVAX PAPER CHEMICALS LTD. HYDERABAD 4 AT SOURCE ON SUCH COMMISSION PAYMENTS MADE OUTSIDE INDIA. THE LEARNED COUNSEL ALSO SUBMITTED THAT COPY OF THE INV OICE OF THE AGENT ALONGWITH THE PAYMENT ADVICE, IS A CLEAR CUT EVIDENCE OF THE SERVICES RENDERED BY THE PARTY TO THE ASSESSEE OUTSIDE THE COUNTRY, AND CONSEQUENTLY COMMISSION PAYMENT WAS MADE DIRECTLY TO THE FOREIGN AGENT OUTSIDE THE COUNTRY. CONSEQUENTLY, ASSESSEE IS UNDER NO OBLIGATION TO DEDUCT TAX AT SOURCE IN TERMS OF S.195 IN RESPECT OF THE COMMISSION PAYMENT MADE IN THE PRESENT CASE, AND AS SUCH, THE PROVISIONS OF S.40A(IA) ARE NOT APPLICABLE. IN SUPPORT OF THESE CONTENTIONS, LEARNED COUNSEL PLACED RELIANCE ON THE DECISION OF MUMBAI BENCH OF THE TRIBUNAL N THE CASE OF MAHARASHTRA STATE ELECTRICITY BOARD V/S. DY. COMMISSIONER OF INCOME - TAX (SUPRA) AND ALSO THE DECISION IN THE CASE OF HYDERABAD TRIBUNAL IN THE CASE OF SOL PHARMACEUTICALS LTD. (SUPRA) AND AP POWER GENERATION CORPORATION (11 SOT 221). 7. ON THE OTHER HAND, THE LEARNED DEPARTMENTAL REPRESENTATIVE, STRONGLY SUPPORTING THE ORDERS OF THE REVENUE AUTHORITIES, SUBMITTED THAT IT SI EVIDENT FROM THE TERMS OF AGREEMENT THAT IT IS ONLY UPON RECE IPT OF ORDERS IN WRITING FROM THE SAID SELLING AGEEMENT THAT THE ASSESSEE AF T ER ACCEPTANCE OF SUCH ORDER, AND ISSUANCE OF TERMS OF SUCH ACCEPTANCE, IS REQUIRED TO MANUFACRTURE SUCH PRODUCT AND TO ARRANGE FOR THE SHIPMENT OF THE SAME. IN THE PRESENT CA S E, THE ASSESSEE HAS NO T BEEN ABLE TO PRODUCE COPY OF THE ORDER IN WRITING, WHICH HAS BEEN RECEIVED IN TERMS OF THE AGREEMENT FROM THE FOREIGN PARTY DURING THE PREVIOUS YEAR. HENCE, THERE IS NO DOCUMENTARY EVIDENCE PRODUCED BY THE ASSESSEE TO SUPPORT ITS CLA IM OF ANY SERVICE RENDERED BY THE FOREIGN PARTY DURING THE PREVIOUS YEAR. HE ACCORDINGLY, SUPPORTED THE ORDER OF THE CIT(A) THAT THE EXPENDITURE OF RS.1,77,948 CANNOT BE ALLOWED AS A DEDUCTION EVEN UNDER S.37(1), IN THE ABSENCE OF ANY EVIDENCE OF SERVICES RENDERED BY THE PARTY TO WHICH COMMISSION PAYMENT HAS BEEN MADE. 8. WE HEARD BOTH SIDES AND PERUSED THE MATERIAL AVAILABLE ON RECORD. WE HAVE ALSO GONE THROUGH THE DECISIONS CITED BY THE PARTIES BEFORE US. AS ITA NO. 1788 / HYD/20 11 SHRI IVAX PAPER CHEMICALS LTD. HYDERABAD 5 NOTED ABOVE, THE ASSESSING OFFICER HAS MAD E THE DISALLOWANCE IN QUESTION IN TERMS OF S.40A(IA) OF THE ACT, ON ACCOUNT OF NON - DEDUCTION OF TAX AT SOURCE BY THE ASSESSEE BEFORE MAKING THE COMMISSION PAYMENT IN QUESTION. IT WAS THE CONTENTION OF THE ASSESSEE BEFORE THE ASSESSING OFFICER THAT THE COMM ISSION PAYMENT HAS BEEN MADE BY THE ASSESSEE TO THE FOREIGN PARTY BY DIRECT REMITTANCE, FOR THE SERVICES RENDERED OUTSIDE INDIA, AND AS SUCH THERE WAS NO OBLIGATION TO DEDUCT TAX AT SOURCE. THE ARGUMENTS OF THE ASSESSEE AND CONSIDERATION BY THE ASSESSING O FFICER DURING THE ASSESSMENT STAGE THEREFORE, CONFINED TO INTERPRETATION OF THE PROVISIONS OF S.195 TO ASCERTAIN THE EXISTENCE OF ANY OBLIGATION ON THE ASSESSEE TO EFFECT TDS, AND CONSEQUENTLY, APPLICABILITY OF PROVISIONS OF S.40A(IA) OF THE ACT TO THE CO MMISSION PAYMENTS IN QUESTION. DURING THE APPELLATE PROCEEDINGS, THE CIT(A) EXAMINED NOT ONLY THE APPLICABILITY OF PROVISIONS OF S.195, AND CONSEQUENTLY, OF S.40A(IA), BUT ALSO THE VERY ALLOWABILITY OF DEDUCTION OF THE COMMISSION PAYMENT UNDER S.37(1) OF THE ACT, IN THE ABSENCE OF ANY EVIDENCE AS TO THE SERVICES RENDERED BY THE PAYEE TO THE ASSESSEE. FROM THE MATERIAL AVAILABLE ON RECORD, WHICH WAS ALSO FURNISHED BEFORE THE REVENUE AUTHORITIES, WE FIND THAT THERE CANNOT BE ANY DISPUTE WITH REGARD TO THE SERVICES RENDERED BY THE FOREIGN PARTY. THE COMMISSION BILL OF M/S. BUSINESS INTERNATIONAL, BANGLADESH FOR USD 3954.38; AND ALSO THE DETAILS OF FOREIGN COMMISSION FROM 1.4.2006 TO 31.3.2007 FURNISHED BY THE ASSESSEE IN THE PAPERS FURNISHED BEFORE US, CLEA RLY SUBSTANTIATE THE CLAIM OF THE ASSESSEE AS TO THE SERVICES RENDERED BY THE FOREIGN PARTY. IN THE ABSENCE OF ANY MATERIAL TO THE CONTRARY BROUGHT ON RECORD BY THE REVENUE, ONE CANNOT DISPUTE THE CLAIM OF THE ASSESSEE IN THIS BEHALF. CONSEQUENTLY, WE F IND NO JUSTIFICATION FOR THE CIT(A) TO DISPUTE THE VERY RENDERING OF SERVICES BY THE FOREIGN PARTY TO THE ASSESSEE, SO AS TO JUSTIFY THE DISALLOWANCE UNDER THE PROVISIONS OF S.37(1) ITSELF. 9. FROM THE LETTER OF THE ASSESSEE DATED 5.3.2007 ENCLOSING THERETO THE DEMAND DRAFT DATED 1.3.2007 FOR USD 3954.38, COPY OF WHICH ALONGWITH ENCLOSURE FURNISHED BEFORE US, ALSO CLEARLY INDICATES THAT THE PAYMENT HAS BEEN MADE BY THE ASSESSEE THROUGH DIRECT REMITTANCE TO THE PARTY OUTSIDE INDIA. THAT ITA NO. 1788 / HYD/20 11 SHRI IVAX PAPER CHEMICALS LTD. HYDERABAD 6 BEING SO, THERE IS NO REASON TO DISPUTE THE CLAIM OF THE ASSESSEE THAT IT IS UNDER NO OBLIGATION TO DEDUCT TAX AT SOURCE IN TERMS OF S.195 OF THE ACT. WE MAY FURTHER OBSERVE THAT THE APPLICABILITY OF PROVISION OF S.195(2), SINCE THE SUM PAID TO NON - RESIDENT IS OUTSIDE THE SCOPE OF INCOME TAXABLE UNDER THE INCOME TAX ACT. THE HONBLE SUPREME COURT IN THE CASE OF GE INDIA TECHNOLOGY CENTRE P. LTD. VS. CIT (327 ITR 456), WHILE EXAMINING THE SCOPE AND AMBIT OF S.1 95 OF THE ACT. HELD THAT A PERSON IS LIABLE TO DEDUCT TAX UNDER S.195(1) ONLY WHEN THE PAYMENT IS MADE BY HIM IS CHARGEABLE UNDER THE PROVISIONS OF THE ACT. THE PAYER BECOMES AN ASSESSEE IN DEFAULT ONLY WHEN HE FAILS TO FULFIL THE STATUTORY OBLIGATION UNDE R S.195(1) AND IF PAYMENT DOES NOT CONTAIN THE ELEMENT OF INCOME, THE PAYER CANNOT BE MADE LIABLE. IN THE FACTS OF THE PRESENT ASSESSEE, THE COMMISSION PAID BY THE ASSESSEE DOES NOT CONTAIN ANY ELEMENT OF INCOME TAXABLE IN INDIA, THE PROVISIONS OF S.195 D OES NOT APPLY. AS FOR THE ABSENCE OF ANY CERTIFICATE WITH REGARD TO NON - TAXABILITY OF THE COMMISSION TO INCOME - TAX IN INDIA, AS HELD BY THE DELHI BENCH OF THE TRIBUNAL IN THE CASE OF MILLINIUM INFOCOM (21 SOT 152), SUCH A CERTIFICATE FROM THE DEPARTMENT I S NOT ESSENTIAL, AS THE PAYER HAS AN OPTION TO OBTAIN SUCH A CERTIFICATE FROM THE ACCOUNTANT INSTEAD OF APPROACHING THE REVENUE AUTHORITIES, BEFORE MAKING A PAYMENT TO NON - RESIDENTS. IN THIS VIEW OF THE MATTER, AND CONSIDERING TOTALITY OF FACTS AND CIRCUM STANCES OF THE CASE AND THE EVIDENCE ON RECORD THAT THERE IS NO JUSTIFICATION FOR ANY DISALLOWANCE IN RESPECT OF COMMISSION PAYMENTS MADE BY THE ASSESSEE TO ITS FOREIGN AGENT, EITHER IN TERMS OF S.40A(IA) OR UNDER S.37(1) OF THE ACT. WE DELETE THE IMPUGN ED DISALLOWANCE MADE BY THE ASSESSING OFFICER AND SUSTAINED BY THE CIT(A), ALLOWING THE GROUNDS OF THE ASSESSEE IN THIS APPEAL. ITA NO. 1788 / HYD/20 11 SHRI IVAX PAPER CHEMICALS LTD. HYDERABAD 7 10. IN THE RESULT, APPEAL OF THE ASSESSEE IS ALLOWED. ORDER PRONOUNCED IN THE COURT ON 26.2.2014 SD/ - SD/ - (CHANDRA POOJARI ) (ASHA VIJAYARAGHAVAN) ACCOUNTANT MEMBER JUDICIAL MEMBER DT/ - FEBRUARY, 2014 COPY FORWARDED TO: 1. M/S. IVAX PAPER CHEMICALS LTD., C/O. S/SHRI A.V. RAGHU RAM, P.VINOD, B.PEDDI RAJULU, ADVOCATES, FLAT NO.610, 6TH FLOOR, BABUKHAN ESTATE, BASHEERBAGH, HYDERABAD - 1. 2 . ADDL . COMMISSIONER OF INCOME - TAX RANGE 8, HYDERABAD 3. COMMISSIONER OF INCOME - TAX(APPEALS) III HYDERABAD 4. COMMISSIONER OF INCOME - TAX II HYDERABAD 5 DEPARTMENTAL REPRESENTATIVE, ITAT, HYDERABAD. B.V.S