ACIT, CHENNAI V. Euro Leder Fashions Limited, CHENNAI

ITA 1797/CHNY/2015

• Counselvise Citation: [2015] 140 COUNSELVISE.COM (IT) 96237 (ITAT-CHENNAI)
• Duration Of Justice: 2 month(s) 9 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 16-10-2015
• Appeal Filed By: Department
• Bench Allotted: A
• Next Hearing Date: 08-10-2015
• Assessment Year: 2011-2012
• Appeal Filed On: 07-08-2015
• Court: TRIBUNAL
• Department Lawyers: A B KOLI
• Assessee Lawyers: S SRIDHAR

Judgement Text

, , IN THE INCOME TAX APPELLATE TRIBUNAL A BENCH, CHENNAI , ! ' . #$ , % &' BEFORE SHRI CHANDRA POOJARI, ACCOUNTANT MEMBER AND SHRI DUVVURU RL REDDY, JUDICIAL MEMBER ./ ITA NO. 1797/MDS/2015 / ASSESSMENT YEAR : 2011-12 THE ASSISTANT COMMISSIONER OF INCOME-TAX, CORPORATE CIRCLE-2(1), CHENNAI-34. APPELLANT) V. EURO LEDER FASHIONS LIMITED, NO.99, GST ROAD, PALLAVARAM, CHENNAI 600 001. PAN AAACE0729P RESPONDENT) / APPELLANT BY : SHRI A.B.KOLI, JCIT / RESPONDENT BY : SHRI S. SRIDHAR, ADVOCATE ! / DATE OF HEARING : 08.10.2015 '# ! / DATE OF PRONOUNCEMENT: 16.10.2015 ( / O R D E R PER CHANDRA POOJARI, ACCOUNTANT MEMBER THIS APPEAL BY THE REVENUE IS DIRECTED AGAINST T HE ORDER OF THE COMMISSIONER OF INCOME-TAX(APPEALS) DATED 2 8.1.2015. - - ITA 1797/15 2 2. THE ONLY GROUND RAISED IN THIS APPEAL IS WITH RE GARD TO DISALLOWANCE OF EXPORT SALES COMMISSION OF ` 1,08,45,346/- PAID TO NON-RESIDENT BY INVOKING THE PROVISIONS OF SEC.4 0(A)(I) OF THE ACT. 3. THE ASSESSEE PAID THE ABOVE AMOUNT TO VARIOUS NO N- RESIDENTS WITHOUT DEDUCTION OF TDS IS NOT JUSTIFIED TREATING THE SAME AS EXPORT SALES COMMISSION. THEREFORE, THE ASSESSING OFFICER INVOKED THE PROVISIONS OF SEC.40(A)(I) R.W. SEC.195 AND DISALLOWED THE SAME. 4. THE LD. DR SUBMITTED THAT THE SELLING AGENT IN T HIS CASE THOUGH HAD RENDERED SERVICES ABROAD, WAS ENTITLED T O RECEIVE THE COMMISSION FOR THE SERVICES RENDERED TO THE ASSESSEE AND RECEIVED THE AMOUNT THROUGH OR FROM BUSINESS CONNEC TION WHICH IT HAD IN INDIA AND SOURCE OF INCOME IS IN INDIA. BEING SO, THE INCOME SHALL BE DEEMED TO ACCRUE OR ARISE IN INDIA. SINCE THE SOURCE OF INCOME OF THE NON-RESIDENT, WHO IS THE AG ENT OF THE ASSESSEE, IT EARNED COMMISSION FROM THE BUSINESS AC TIVITY OF THE ASSESSEE AND THE ASSESSEE HAS NOT DEDUCTED TDS, IT SHOULD BE DISALLOWED U/S. 40(A)(I) OF THE I.T. ACT. THE SERV ICES RENDERED BY - - ITA 1797/15 3 THE AGENT FALLS WITHIN THE AMBIT OF EXPLANATION (2) OF SEC. 5 OF THE I.T. ACT. THE FACT THAT THE AGENT HAS RENDERED SER VICES ABROAD IN THE FORM OF SOLICITING ORDERS AND THE COMMISSION IS TO BE REMITTED TO THEM ABROAD IS WHOLLY IRRELEVANT FOR THE PURPOSE OF DETERMINING THE SITUS OF THEIR INCOME. ACCORDING TO THE LD. DR , NON-DEDUCTION OF TDS TOWARDS THIS INCOME IS TO BE DISALLOWED. 5. ON THE OTHER HAND, T HE LD. AR SUBMITTED THAT THE INCOME ACCRUED OUTSIDE INDIA FOR THE SERVICES RENDE RED FOR MARKETING AND THE RECIPIENT OF THE COMMISSION HAS N O BUSINESS CONNECTION IN INDIA, WHAT IS PAID TO THE NON-RESIDE NT IS NOT TAXABLE IN INDIA. HENCE, THERE IS NO QUESTION OF T DS FROM THAT PAYMENT. ACCORDING TO THE LD. AR, THIS ISSUE IS S QUARELY COVERED BY THE JUDGMENT OF THE MADRAS HIGH COURT IN THE CAS E OF CIT V. FAIZAN SHOES P. LTD. (367 ITR 155), WHEREIN IT WAS HELD, DISMISSING THE APPEAL, THAT ON A READING OF SECTIO N 9(1)(VII), COMMISSION PAID BY THE ASSESSEE TO THE NON-RESIDENT AGENTS WOULD NOT COME UNDER THE TERM FEES FOR TECHNICAL S ERVICES. FOR PROCURING ORDERS FOR LEATHER BUSINESS FROM OVERSEAS BUYERS. WHOLESALERS OR RETAILERS, AS THE CASE MAY BE, THE N ON-RESIDENT AGENT WAS PAID 2.5 PER CENT COMMISSION ON FREE ON B OARD BASIS. - - ITA 1797/15 4 THIS WAS A COMMISSION SIMPLICITER. WHAT WAS THE NA TURE OF TECHNICAL SERVICE THAT THE NON-RESIDENT AGENTS HAD PROVIDED ABROAD TO THE ASSESSEE WAS NOT CLEAR FROM THE ORDER OF THE ASSESSING OFFICER. THE OPENING OF LETTERS OF CREDI T FOR THE PURPOSE OF COMPLETING THE EXPORT OBLIGATION WAS AN INCIDENT OF EXPORT AND, THEREFORE, THE NON-RESIDENT AGENT WAS U NDER AN OBLIGATION TO RENDER SUCH SERVICES TO THE ASSESSEE, FOR WHICH COMMISSION WAS PAID. THE NON-RESIDENT AGENT DID NO T PROVIDE TECHNICAL SERVICES FOR THE PURPOSES OF RUNNING OF T HE BUSINESS OF THE ASSESSEE IN INDIA. THEREFORE, THE COMMISSION P AID TO THE NON-RESIDENT AGENTS WOULD NOT FALL WITHIN THE DEFIN ITION OF FEES FOR TECHNICAL SERVICES AND THE ASSESSEE WAS NOT LIABLE TO DEDUCT TAX AT SOURCE ON PAYMENT OF COMMISSION . 5.1. THE LD. AR, FURTHER SUBMITTED THAT THE SERVICES RENDERED BY THE NON-RESIDENT AGENT COULD AT BEST BE CALLED A S A SERVICE FOR COMPLETION OF THE EXPORT COMMITMENT AND WOULD NOT F ALL WITHIN THE DEFINITION OF FEES FOR TECHNICAL SERVICES AND , THEREFORE, SECTION 9 WAS NOT APPLICABLE AND, CONSEQUENTLY, SEC TION 195 DID NOT COME INTO PLAY. THEREFORE, THE DISALLOWANCE MA DE BY THE - - ITA 1797/15 5 ASSESSING OFFICER TOWARDS EXPORT COMMISSION PAID BY THE ASSESSEE TO THE NON-RESIDENT TO BE DELETED. 5.2. ACCORDING TO THE LD. A.R., THE INCOME HAS BEEN ACC RUING OUTSIDE INDIA FOR THE SERVICES RENDERED FOR MARKETI NG ASSESSEES PRODUCTS IN ABROAD AND RECIPIENT HAS NO BUSINESS CO NNECTION IN INDIA, WHAT IS PAID TO THE AGENT IS NOT TAXABLE IN INDIA, HENCE, THERE IS NO QUESTION OF DEDUCTION OF TAX AT SOURCE FROM THAT PAYMENT AND NO ASSESSMENT OF RECIPIENT HAS BEEN MAD E IN INDIA. FURTHER, HE SUBMITTED THAT ONLY WHEN THE INC OME OF THE AGENT IS CHARGEABLE TO TAX UNDER THE PROVISIONS OF THE ACT, THEN ONLY THE ASSESSEE IS LIABLE TO DEDUCT TDS AS PER SE C. 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 NO T CHARGEABLE TO TAX UNDER THE ACT. SEC. 195 CONTEMPLATES NOT MERELY AMOUNTS, THE WHOLE OF WHICH ARE PURE INCOME PAYMENTS; IT ALS O COVERS COMPOSITE PAYMENTS WHICH HAVE AN ELEMENT OF INCOME EMBEDDED OR INCORPORATED IN THEM. THE OBLIGATION TO DEDUCT TAX AT SOURCE, IS HOWEVER, LIMITED TO APPROPRIATE PROPO RTION OF INCOME CHARGEABLE UNDER THE ACT FORMING PART OF THE GROSS SUM OF MONEY PAYABLE TO THE NON-RESIDENT. - - ITA 1797/15 6 5.3. THE LD. AR FURTHER SUBMITTED THAT INCOME THOUG H ACCRUED IN INDIA, THE SERVICES WERE RENDERED TO THE ASSESS EE ABROAD AND THE PAYMENTS WERE ALSO RECEIVED BY THEM ABROAD, THE REFORE, NO INCOME WOULD ARISE UNDER THE PROVISIONS OF SEC. 9(1 ) OF THE ACT. 6. WE HAVE HEARD THE PARTIES AND PERUSED THE RECOR D. AT THE OUTSET, CERTAIN PROVISIONS OF THE ACT NEEDS TO BE LOOKED INTO 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 ISSU ED FOR PUBLIC SUBSCRIPTION BEFORE THE 1ST DAY OF APRIL, 19 38) ROYALTY, FEES FOR TECHNICAL SERVICES OR OTHER SUM CHARGEABLE UNDER THIS 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 UNDER CHAPTER VIIB AND SUCH TAX HAS NOT BEEN DEDUCTED OR, AFTER DEDUCTION, HAS NOT BEEN PAID DUR ING THE PREVIOUS YEAR, OR IN THE SUBSEQUENT YEAR BEFORE THE EXPIRY OF THE TIME PRESCRIBED UNDER SUB-SECTION (1) OF SECTION 200: - - ITA 1797/15 7 7. THE AFORESAID CLAUSE MAKES IT CLEAR THAT THE DI SALLOWANCE SHALL BE MADE IN CASE OF ANY PAYMENT MADE WHICH IS CHARGEABLE UNDER THIS ACT AND IS PAYABLE OUTSIDE INDIA OR IN I NDIA TO A NON- RESIDENT NOT BEING A COMPANY OR TO A FOREIGN COMPAN Y ON WHICH TAX IS DEDUCTIBLE AT SOURCE. THEREFORE, THE FIRST C ONDITION REQUIRED TO BE FULFILLED IS THE PAYMENT MUST BE CHARGEABLE U NDER THE ACT, THEREAFTER THE QUESTION OF DEDUCTION OF TAX WILL AR ISE. SECTION 195 (1) OF THE ACT ALSO PRESCRIBES THAT TAX HAS TO BE D EDUCTED WHILE MAKING PAYMENT TO NON-RESIDENT WHICH IS CHARGEABLE UNDER THE PROVISIONS OF THE ACT. THEREFORE, THE CONDITION PRE CEDENT 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 ASSESSEE HAS NOT PRODUCED THE AGREEMENT ENTERED INT O BY THE ASSESSEE WITH FOREIGN AGENTS TO SHOW THAT THEY WERE APPOINTED TO ACT AS COMMISSION AGENTS OUTSIDE INDIA IN THEIR RESPECTIVE COUNTRIES. THE AO HAS DISALLOWED COMMISSION PAYMENT U/S 40(A)(I) OF THE ACT, SINCE, THERE WAS NO AGREEMENT TO SUGGEST THE PAYMENT OF SALES COMMISSION. - - ITA 1797/15 8 8. AS SEEN FROM THE ORDER S OF THE LOWER AUTHORITIE S, THE ASSESSEE HAS NOT DISCHARGED THE BURDEN CAST UPON IT TO SHOW THE NATURE OF SERVICES RENDERED BY NON-RESIDENT AGENT. IF THERE ARE SERVICES RENDERED BY NON-RESIDENTS, WHO HAVE NO PER MANENT ESTABLISHMENT IN INDIA OR HAVE ANY BUSINESS CONNECT ION IN INDIA, BY VIRTUE OF WHICH THE PAYMENT OF COMMISSION ACCRUE D OR AROSE IN INDIA THEN, IT IS EXEMPTED, IF THE ASSESSEE IS A BLE TO PROVE THAT THE SERVICES WERE RENDERED BY THOSE NON-RESIDENTS A T ABROAD. IN THE PRESENT CASE, THE ASSESSEE HAS NOT ESTABLISHED THE FACTS ON RECORD THAT THE NON-RESIDENT HAS RENDERED SERVICES AT ABROAD AND THERE IS NO BUSINESS CONNECTION IN INDIA BY PRO DUCING RELEVANT RECORDS, VIZ., EITHER AGREEMENT ENTERED IN TO BY THE ASSESSEE WITH THEM OR CORRESPONDENCE TOOK BETWEEN T HE PARTIES. WITHOUT EXAMINING THESE DETAILS, WE ARE N OT IN A POSITION TO DECIDE THE NATURE OF SERVICES RENDERED BY THE NO N-RESIDENT AGENT. THEREFORE, IT IS APPROPRIATE TO REMIT THE E NTIRE ISSUE BACK TO THE FILE OF THE AO WITH DIRECTION TO THE ASSESSE E TO PROVE THAT IT WAS SALES COMMISSION TOWARDS PROCUREMENT OF ORDERS FROM ABROAD. ACCORDINGLY, THE ENTIRE ISSUE IS REMITTE D BACK TO THE FILE OF THE AO FOR FRESH CONSIDERATION AND THE AO IS DIR ECTED TO MAKE - - ITA 1797/15 9 NECESSARY ENQUIRY REGARDING THE NATURE OF SERVICES RENDERED BY THE NON-RESIDENT AGENT AND THE PAYMENTS MADE THEREO F. WITH THESE OBSERVATIONS, THE APPEAL IS ALLOWED FOR STATI STICAL PURPOSES. 9. IN THE RESULT, THE APPEAL OF THE REVENUE IS ALLO WED FOR STATISTICAL PURPOSES. ORDER PRONOUNCED ON FRIDAY, THE 16 TH OF OCT., 2015 AT CHENNAI. SD/- SD/- ( $ % . & '( ) ( ) * + , ) DUVVURU RL REDDY - ./012304556037- 8 9: /JUDICIAL MEMBER ! 9:;<<5=1>01>?@AB@3 )8 /CHENNAI, C9 /DATED, THE 16 TH OCT., 2015. MPO* 9D EFGF /COPY TO: 1. /APPELLANT 2. /RESPONDENT 3. H- /CIT(A) 4. H /CIT 5. FIJ K /DR 6. J(L /GF.