ITO, CHENNAI V. M/s. Trident Exports, CHENNAI

ITA 2108/CHNY/2013

• Counselvise Citation: [2014] 120 COUNSELVISE.COM (IT) 5399 (ITAT-CHENNAI)
• Duration Of Justice: 2 month(s) 23 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 27-02-2014
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: A
• Assessment Year: 2010-2011
• Appeal Filed On: 04-12-2013
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: N MADHAVAN
• Keywords: Services rendered outside India
• Section: 143(3); 5(2)

Judgement Text

, , IN THE INCOME TAX APPELLATE TRIBUNAL A BENCH, CHENNAI . , . . , ! ' BEFORE SHRI A.MOHAN ALANKAMONY, ACCOUNTANT MEMBER AND SHRI S.S. GODARA, JUDICIAL MEMBER ./ I.T.A.NO.2108/MDS./2013 ( / ASSESSMENT YEAR :2010-11) INCOME TAX OFFICER, BUSINESS WARD-V(4), CHENNAI 600 034. VS. M/S.TRIDENT EXPORTS , NO.24, TRIDENT HOUSE, INDRA NAGAR, VALASARAVAKKAM, CHENNAI 600 087. PAN AAAFT 2598 L ( #$ / APPELLANT ) ( %&#$ / RESPONDENT ) / APPELLANT BY : SHRI N.MADHAVAN, JCIT D.R. / RESPONDENT BY : SHRI K.BALASUBRAMANIAN, ADVOCATE TAX CONSULTANT / DATE OF HEARING : 28.01.2014 ! /DATE OF PRONOUNCEMENT : 27.02.2014 ' / O R D E R PER A.MOHAN ALANKAMONY , ACCOUNTANT MEMBER: THIS APPEAL IS FILED BY THE REVENUE, AGGRIEVED BY THE ORDER OF THE LEARNED COMMISSIONER OF INCOME TAX (CENTRAL)-V, CHENNAI DATED ITA NO.2108/MDS/13 2 19.08.2013 IN ITA.NO.47/13-14(A)-V PASSED UNDER SE CTION 143(3) READ WITH SECTION 250 OF THE ACT. 2. THE REVENUE HAS RAISED THREE GROUNDS IN ITS APP EAL; HOWEVER THE CRUX OF THE ISSUE IS THAT THE LD.CIT (A) ERRED IN DELETING THE DISALLOWANCE OF COMMISSION BY LD. AO FOR ` 37,90,073/-, WHICH WAS PAID BY THE ASSESSEE TO NON-RESIDENT AGENTS OUTSIDE INDIA FOR THE SERVICES RENDERED BY THEM OUTSIDE INDIA. 3. THE BRIEF FACTS OF THE CASE ARE THAT THE ASSESSE E IS A FIRM, FILED ITS RETURN OF INCOME ON 12.10.2010 ADMITTING TOTAL INCOME OF ` 14,56,840/-. SUBSEQUENTLY THE CASE WAS TAKEN FOR SCRUTINY AND ASSESSMENT U/S.143(3) OF THE ACT WAS COMPLETED ON 05.11.2012 WHEREIN LD. ASSESSING OFFICER DISALLOWED AN AMOUNT OF ` 37,96,073/- INVOKING SECTION 40(A)(I) OF THE ACT FOR NON-DEDUCT ION OF TAX FOR THE COMMISSION PAID TO FOREIGN AGENTS. THE ASSESSEES ARGUMENTS WERE THAT:- (I) AS PER THE BOARDS CIRCULAR NOS.23/23.7.1969 , 163/29.5.1975 & 786/7.2.2000, TDS PROVISIONS DO NOT APPLY FOR PAYME NTS OF ITA NO.2108/MDS/13 3 COMMISSION TO FOREIGN AGENTS FOR SERVICES RENDERED OUTSIDE INDIA. (II) THERE IS NO REQUIREMENT TO DEDUCT TAX IN THE CASE OF NON-RESIDENT AGENTS, WHO RENDERS SERVICE OUTSIDE IN DIA AS PER THE DECISION OF THE HONBLE APEX COURT IN M/S.GE T ECHNOLOGY CEN. PVT LTD VS. LD. CIT 193 TAXMAN 234. (III) THE AGENTS OF THE ASSESSEE DO NOT HAVE PERMAN ENT ESTABLISHMENT (PE) IN INDIA. 4. HOWEVER, THE LD. A.O INVOKED THE PROVISIONS OF SEC.40(A)(I) BECAUSE OF THE FOLLOWING REASONS:- ( I ) THE CIRCULAR REFERRED BY THE ASSESSEE WAS WITHD RAWN BY THE BOARD VIDE CIRCULAR NO.7/2009 DATED 22.10.2009. ( II ) PROVISIONS OF SECTION 9(1)(I) OF THE ACT PROVIDE S THAT THE INCOME ACCRUING OR ARISING DIRECTLY OR INDIRECTLY, THROUGH OR FROM ANY BUSINESS CONNECTION FROM INDIA SHALL BE DEEMED TO A CCRUE OR ARISE IN INDIA. ( III ) RELIANCE WAS PLACED ON THE DECISION OF THE ADVANC E AUTHORITY OF RULINGS(INCOME-TAX),NEW DELHI (AAR) DATED 22/02/20 12, AAR ITA NO.2108/MDS/13 4 NO. 983- 984 OF 2010 IN THE CASE OF M/S SKF BOILERS & DRIERS PVT LTD. ( IV ) IN THE CASE OF M/S.GE TECHNOLOGY (SC) REFERRED TO BY THE ASSESSEE VIDE THEIR LETTER FILED ON 23.08.2012, IT HAS BEEN HELD THAT SEC.195(2) IS BASED ON THE PRINCIPLES OF PR OPORTIONALITY AND THE SUB-SECTION GETS ATTRACTED ONLY IN CASES WH ERE THE PAYMENT MADE IS A COMPOSITE PAYMENT IN WHICH A CERT AIN PROPORTION OF PAYMENT HAS AN ELEMENT OF INCOME CHAR GEABLE IN INDIA. IN THE ASSESSEE FIRMS CASE, THE INVOICE IS INCLUSIVE OF THE COMMISSION PAYABLE TO AGENTS AS PER THE PAYMENT SYS TEM AGREED UPON. ( V ) THE ARGUMENT OF THE ASSESSEE THAT THE AGENTS DO NOT HAVE PE IN INDIA IS NOT APPLICABLE IN THIS CASE BECAUSE:- (A) THE BUSINESS CONNECTIVITY FROM WHICH THE INCO ME IS GENERATED IS VERY MUCH IN INDIA AND THE PAYMENTS AR E MADE FROM INDIA. (B) THE NON-RESIDENT AGENTS DOES THE FOLLOWING ACTIVITY ON BEHALF OF THE ASSESSEE SUCH AS PROCURING EXPORT OR DER, PROVIDING ITA NO.2108/MDS/13 5 CONFIRMED EXPORT ORDERS, PROVIDING INFORMATION REGA RDING RESPECTIVE CUSTOMERS AND EXECUTING THE EXPORT SALES . ( VI ) RELIANCE WAS ALSO PLACED IN THE CASE OF DALMIA V S. CIT REPORTED IN (1970) 106 ITR 895 (SC). 5. BEFORE THE LD.CIT (A), LD. A.R HAD MADE THE FO LLOWING SUBMISSIONS:- (A) THE MAIN ISSUE AGITATED BEFORE THE LD. CIT CON CERNS THE DISALLOWANCE OF COMMISSION PAYMENTS TO FOREIGN AGEN TS DURING THE YEAR UNDER CONSIDERATION. (B) THE TOTAL AMOUNT OF COMMISSION DISALLOWED AMO UNTED TO ` 37.96 LACS. (C) THE DETAILS OF COMMISSION PAYMENTS WITH NAMES AND ADDRESSES OF THE PARTIES WERE SUBMITTED ALONG WITH THE CONFIR MATION FROM THEM. LETTERS FROM THEM STATING THAT THEY HAD NO P LACE OF INDIA WERE ALSO SUBMITTED. (D) THE A.O HAD ACCEPTED THE EVIDENCE FOR THESE P AYMENTS AND DID NOT RAISE ANY ISSUE REGARDING THE GENUINESS OF THES E PAYMENTS. (E) THE AO RAISED ISSUES OF NON DEDUCTION OF TDS O N THESE PAYMENTS CITING THE WITHDRAWAL OF CIRCULAR NO.786 O F 2000. ITA NO.2108/MDS/13 6 (F) FURTHER REGARDING THE ISSUE FOLLOWING SUBMISSI ONS WAS MADE:- I. THE FOREIGN AGENTS DID NOT HAVE ANY PE OF BUSI NESS IN INDIA. II. THE FOREIGN AGENTS HAD DONE THE SERVICES IN THE IR COUNTRY BY GETTING ORDERS FOR THE ASSESSEE. III. THE COMMISSION PAYMENTS TO THESE AGENTS WERE M ADE FOR SERVICES RENDERED BY THEM ABROAD. IV. SEC.195 OF THE INCOME TAX ACT REQUIRING TO DED UCT TAX ON FOREIGN PAYMENTS I.E. SUM PAID BY RESIDENT TO NON-R ESIDENT, COMES INTO FORCE ONLY WHEN THE PAYMENT MADE TO THE NON-RESIDENT IS THEIR INCOME CHARGEABLE UNDER INDIA N INCOME TAX LAW. THEREFORE, TAX DEDUCTION LIABILITY ON SUC H COMMISSION IS AN OFF-SHOOT FROM ITS CHARGEABILITY T O INCOME TAX U/S. 5(2) OF THE ACT. (G) THE FOREIGN PARTIES WERE CARRYING ON THEIR BU SINESS OPERATIONS IN THEIR COUNTRY AND AS PER THE DTA WITH THOSE COUNTRIES, THE BUSINESS PROFITS COULD BE TAXED ONLY IN THAT STATE AND NOT IN INDIA. AS PER ARTICLE-7 OF THE TAX TREATIES ENTERED INTO BETWEEN INDIA AND OTHER COUNTRIES, IT WAS PROVIDED THAT THE BUSINESS PROFITS OF A NON-RESIDEN T ENTERPRISE ITA NO.2108/MDS/13 7 CAN BE TAXED IN INDIA ONLY IF SUCH ENTERPRISE CARRI ES OUT BUSINESS THROUGH PE IN INDIA. (H) THE ASSESSEE HAS BEEN MAKING THE COMMISSION PA YMENTS ALL THESE YEARS, WHICH WERE ACCEPTABLE BY THE DEPARTMEN T AND ALL THESE WERE DONE ON SCRUTINY ASSESSMENTS UNDER S ECTION 143(3). (I) ONLY DURING THE YEAR UNDER REVIEW, THE DISALLO WANCE WAS SOUGHT TO BE MADE BY FOLLOWING A DECISION OF ADVANC E RULING AUTHORITY (AAR) (J) IN VIEW OF THE DECISIONS OF VARIOUS JUDICIAL A UTHORITIES INCLUDING THE HON. SUPREME COURT OF INDIA, THERE WA S NO OBLIGATION ON THE PART OF THE FIRM TO DEDUCT TAX AT SOURCE ON COMMISSION PAYMENTS TO THE FOREIGN AGENTS. (K) THE WITHDRAWAL OF CIRCULAR DOES NOT HAVE TH E EFFECT OF ANY OF THE PROVISIONS OF THE INCOME TAX ACT. (L) RELIANCE WAS PLACED ON THE DECISIONS OF THE G E TECHNOLOGY ( 32 ITR 456)(SC), EON TECHNOLOGY ( 203 TAXMAN 266)(DEL. ), CIT VS.TOSHOKU LTD ( 125 ITR 525)(SC), WHELLS INDIA LTD , CHENNAI VS.DEPARTMENT OF INCOME TAX ON 27 JULY, 201 2 OF ITA NO.2108/MDS/13 8 ITAT, CIT VS. SCHREINER AIRWAY BV 1990- 48 TAXMAN 204(ALLAHABAD), INDOPEL GARMENTS P LTD VS.CIT (2003 ) 86 ITD 101 (MAD.) 6. LD. LD. CIT (A) AFTER EXAMINING THE ISSUE ALLO WED THE APPEAL OF THE ASSESSEE BY OBSERVING AS UNDER:- 8. ON ANYALYZING THE GROUND OF APPEAL AS WELL A S THE ASSESSMENT ORDER AS WELL AS CASE LAWS CITED BY THE AR OF THE A PPELLANT IN SUPPORT OF THE APPELLANTS CASE, THE ONLY ISSUE PERTAINS TO TH E DISALLOWANCE OF COMMISSION PAYMENTS MADE TO FOREIGN AGENTS CLAIMED BY THE RS.37,96,073/-. THE AO HAS NOT DOUBTED THE GENUINE NESS OF THE PAYMENTS MADE TO THE COMMISSION AGENTS LOCATED IN F OREIGN COUNTRIES BASED ON THE CONFIRMATION LETTER AS WELL AS LETTER RECEIVED FROM THE FOREIGN AGENTS WHO HAD NO PE OR PLACE OF BUSINESS I N INDIA. THE FOREIGN AGENTS HAD DONE THE SERVICES IN THEIR COUNTRIES SUC H AS FRANCE AND GERMANY AND RECEIVED COMMISSION PAYMENTS FOR THE SE RVICES RENDERED BY THEM IN THEIR COUNTRIES FORGETTING ORDERS TO THE APPELLANT. THE OPERATION OF THE SEC.195 OF THE IT ACT COMES INTO F ORCE FOR DEDUCTING TDS ON FOREIGN PAYMENTS PAID BY THE RESIDENT ASSESS EE TO NON-RESIDENT AGENTS ONLY WHEN THE PAYMENT MADE TO THE NON-RESIDE NTS IF THEIR INCOME CHARGEABLE UNDER INDIAN INCOME TAX LAW. IN THE INST ANT CASE, THE TDS LIABILITY DOES NOT ARISE ON SUCH COMMISSION PAYMENT S WHICH ARE AN ITA NO.2108/MDS/13 9 OFFSHOOT FROM ITS CHARGEABILITY TO INCOME TAX U/S. 5(2) OF THE IT ACT. VARIOUS COURTS DECISIONS HAVE HELD THAT IN SUCH TYP E OF SITUATIONS, THE PROVISIONS OF DEDUCTING TAX WILL NOT ARISE AS THE O VERSEAS COMMISSION INCOME OF A FOREIGN AGENT IS NOT TAXABLE IN INDIA I N THE ABSENCE OF BUSINESS CONNECTION. A COMMISSION PAYMENT WORKIN G OUTSIDE INDIA FOR OBTAINING EXPORT ORDERS DOES NOT CARRY OUT ANY BUSI NESS OPERATION IN INDIA AND THEREFORE NO INCOME IS STATED TO ACCRUE O R ARISE IN INDIA. THE CBDT CIRCULARS CLARIFYING THIS PROVISION HAVE BEEN WITHDRAWN BUT IT HAS NOT CHANGED THE FUNDAMENTAL PRINCIPLES. IF THE COM MISSION AGENTS ACTING AS A SELLING AGENT OUTSIDE INDIA WHO IS NOT CHARGEA BLE TO TAX IN INDIA AND THE RECEIPT IN INDIA OF THE SALE PROCEEDS REMITTED BY THE PURCHASERS FROM ABROAD DID NOT AMOUNT TO AN OPERATION CARRIED OUT B Y THE NON-RESIDENT COMMISSION AGENT IN INDIA HAS CONTEMPLATED BY CLAUS E (A) OF THE EXPLANATION TO 9(1) OF THE ACT. THE APEX COURT IN THE CASE OF TOSHOKU LTD 125 ITR 525 HAS CATEGORICALLY HELD THAT THE COM MISSION AMOUNTS WHICH WERE EARNED BY THE NON-RESIDENT FOR SERVICES RENDERED OUTSIDE INDIA COULD NOT BE DEEMED TO BE INCOME WHICH HAD EI THER ACCRUED OR ARISEN IN INDIA. SIMILARLY VARIOUS CASE LAWS SUCH AS WHEELS INDIA LTD JURISDICTIONAL ITAT HAD HELD THAT THE TDS PROVISION S DO NOT APPLY TO COMMISSION PAYMENTS MADE TO OVERSEAS AGENTS. A SIM ILAR VIEW WAS HELD IN BY HONBLE ALLAHABAD HIGH COURT IN THE CASE SCHREINER AIRWAY BV 1990 THAT COMMISSION EARNED BY FOREIGN AGENTS WAS N OT TAXABLE IN INDIA ITA NO.2108/MDS/13 10 EVEN IN CASES WHERE THE NONRESIDENT WAS A REGULAR A GENT. IN THE CASE OF INDOPEL GARMENTS P LTD (86 ITD 101 MADRAS) WHEREIN IT WAS HELD THAT COMMISSION PAYABLE TO A NON-RESIDENT FOR SERVICES R ENDERED OUTSIDE INDIA SHALL NOT BE LIABLE TO TAXABLE IN INDIA. CONSIDERING THE VARIOUS JUDICIAL PRECEDENTS HAS M ENTIONED ABOVE, THE AO IS NOT JUSTIFIED IN DISALLOWING THE COMMISSION P AYMENTS MADE ABROAD ON THE GROUND THAT NO TDS WAS DEDUCTED AND THEREFOR E KEEPING IN VIEW OF THE VARIOUS CASE LAWS MENTIONED SUPRA AND RESPEC TFULLY FOLLOWING THEM, THE AO IS DIRECTED TO DELETE THE ADDITION MAD E AT RS.37,96,073/- 7. BEFORE US, LD. D.R. ARGUED IN SUPPORT OF THE O RDER OF LD.A.O AND LD. A.R RELIED ON THE ORDER OF THE LD.CIT (A). FURTHER THE LD. A.R RELIED ON THE DECISIONS OF THE CASE M/S.FARIDA SHOE S PVT LTD. IN ITA NO.359/MDS./13 VIDE ORDER DATED 11.04.2013, M/S.PRA KESH IMPEX IN ITA NO.08/MDS./12 VIDE ORDER DT.30.03.2012 & CIT ALLAHABAD VS. MODEL EXIMS, KANPUR IN [2013] 38 TAXMANN.COM 319. 8. WE HAVE HEARD BOTH THE PARTIES AND CAREFULLY PE RUSED THE MATERIALS AVAILABLE ON RECORD. FROM THE FACTS OF T HE CASE, IT IS EVIDENT THAT THE ASSESSEE HAD MADE PAYMENTS TO COMMISSION A GENTS LOCATED IN FOREIGN COUNTRIES. THESE FOREIGN AGENTS HAVE REN DERED SERVICES IN THEIR RESPECTIVE COUNTRIES AND HAD RECEIVED THE COM MISSION. ITA NO.2108/MDS/13 11 IT IS ALSO EVIDENT THAT THE FOREIGN AGENTS DID NOT HAVE ANY PE IN INDIA AND THERE WAS NOTHING BROUGHT ON RECORD TO SHOW THA T THE AGREEMENTS BETWEEN THE ASSESSEE & THE COMMISSION AG ENTS WERE ENTERED IN INDIA. IN THESE CIRCUMSTANCE THE DECISI ON RENDERED IN THE CASE OF C.I.T., A.P VS. TOSHOKU LTD. IN 125 ITR 5 25 (SC) IS SQUARELY APPLICABLE CONSIDERING THE FACTS OF THE CASE BEFORE US. IN THIS CASE, THE HONBLE APEX COURT HELD THAT THE COMMISSION AGE NTS, WHO ARE ENGAGED IN THE SERVICES EXECUTED OUTSIDE INDIA, CAN NOT BE CONSIDERED TO CARRY ON ANY BUSINESS OPERATIONS IN I NDIA AND THEREFORE, PROVISIONS OF SECTION 9(1)(I) OF THE ACT AND EXPLANATION-1A WILL NOT BE APPLICABLE. SIMILARLY, THE HONBLE APEX COURT, IN THE CASE OF GE INDIA TECHNOLOGY CENTRE P. LTD VS. CIT (SUPRA) HAS HELD THAT THE EXPRESSION CHARGEABLE U NDER THE PROVISIONS OF THE ACT IN SEC.195(1) SHOWS THAT TH E REMITTANCE HAS TO BE OF TRADING RECEIPT, THE WHOLE OR PART OF WHICH, IS LIABLE TO TAX IN INDIA. IF TAX IS NOT SO ASSESSABLE, THERE IS NO QUE STION OF TAX AT SOURCE BEING DEDUCTED. CONSIDERING THE FACTS AND CIRCUMS TANCES OF THE CASE AND THE DECISIONS RENDERED BY THE HONBLE APEX COURT, WE ARE OF THE CONSIDERED VIEW THAT THE LD. LD. CIT (A) HAD DECIDED ITA NO.2108/MDS/13 12 THE ISSUE IN ACCORDANCE WITH LAW. THEREFORE, WE HE REBY CONFIRMED THE ORDER OF THE LD.CIT (A). 9. IN THE RESULT, THE APPEAL OF REVENUE IS DISMISS ED. ORDER PRONOUNCED ON 27 TH FEBRUARY, 2014 AT CHENNAI. SD/- SD/- (S.S.GODARA) (A.MOHAN ALANKAMONY) JUDICIAL MEMBER ACCOUNTANT MEMBER CHENNAI, DATED THE 27 TH FEBRUARY, 2014. K S SUNDARAM. COPY TO: ASSESSEE/AO/CIT (A)/CIT/D.R./GUARD FILE