Dy.Commissioner of Income Tax, Circle-2(1)(2), Ahmedabad V. M/s. Mc Fills Enterpries Pvt.Ltd., Ahmedabad

ITA 3469/AHD/2015

• Counselvise Citation: [2018] 118 COUNSELVISE.COM (IT) 9144 (ITAT-AHMEDABAD)
• Duration Of Justice: 3 year(s) 7 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 17-12-2018
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: Not Allotted
• Assessment Year: 2012-2013
• Appeal Filed On: 10-12-2015
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: LALIT JAIN
• Assessee Lawyers: T P HEMANI
• Keywords: Earning of tax free income; Permanent establishment
• Section: 143(3); 14A; 40(a)(ia); 195

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL D BENCH, AHMEDABAD BEFORE SHRI WASEEM AHMED, ACCOUNTANT MEMBER & MS. MADHUMITA ROY, JUDICIAL MEMBER I.T.A. NO.3469/AHD/2015 (ASSESSMENT YEAR : 2012-13) DY. CIT, CIR 2(1)(2), AHMEDABAD 380 009. VS. M/S. MC FILLS ENTERPRISE PVT. LTD., 501, 5 TH FLOOR, SHIKHAR, NR. NAVRANGPURA CROSSING AHMEDABAD 382 210. [PAN NO. AADCM 5954 B] ( APPELLANT ) .. ( RESPONDENT ) APPELLANT BY : SHRI LALIT JAIN, A.R. RESPONDENT BY : SHRI T. P. HEMANI, SR. D.R. DATE OF HEARING 11/10/2018 DATE OF PRONOUNCEMENT 17/12/2018 O R D E R PER MS. MADHUMITA ROY - JM: THE INSTANT APPEAL FILED BY THE REVENUE BEFORE US I S AGAINST THE ORDER DATED 01.09.2015 PASSED BY THE COMMISSIONER OF INCOME TAX (APPEALS)-7, AHMEDABAD [LD. CIT(A) IN SHORT] FOR ASSESSMENT YEAR (AY) 2012-13 ARISING OUT OF THE ORDER U/S.143(3) OF THE INCOME TAX ACT, 1961 (HEREINAFTER REFERRED T O AS 'THE ACT') DATED 30.01.2015 PASSED BY THE DCIT, CIRCLE 2(1)(2), AHMEDABAD WIT H THE FOLLOWING GROUNDS: 1. THE LD.CIT(A) HAS ERRED IN LAW AND ON FACTS IN DELETING THE DISALLOWANCE MADE ON ACCOUNT OF COMMISSION PAID TO FOREIGN AGENT S U/S. 40(A)(I) OF THE ACT AMOUNTING TO RS.43,57,703/-, WITHOUT PROPERLY A PPRECIATING THE FACTS OF THE CASE AND THE MATERIAL BROUGHT ON RECORD. 2. THE LD.CIT(A) HAS ERRED IN LAW AND ON FACTS IN DELETING THE DISALLOWANCE MADE U/S. 14A OF THE ACT AMOUNTING TO RS.26,64,827/ -, WITHOUT PROPERLY APPRECIATING THE FACTS OF THE CASE AND THE MATERIAL BROUGHT ON RECORD. 3. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE C ASE, THE LD. CIT(A) OUGHT TO HAVE UPHELD THE ORDER OF THE ASSESSING OFFICER. - 2 - ITA NO.3469/AHD/2015 DCIT VS. MC FILLS ENTERPRISES PVT. LTD. ASST.YEAR 2012-13 4. IT IS, THEREFORE, PRAYED THAT THE ORDER OF THE LD. CIT(A) MAY BE SET ASIDE AND THAT OF THE ASSESSING OFFICER MAY BE RESTORED TO TH E ABOVE EXTENT. 5. THE APPELLANT CRAVES LEAVE TO AMEND OR ALTER AN Y GROUND OR ADD A NEW GROUND, WHICH MAY BE NECESSARY. 2. THE REVENUE HAS QUESTIONED THE ORDER OF DELETION OF THE DISALLOWANCE MADE ON ACCOUNT OF COMMISSION PAID TO THE FOREIGN AGENTS U/ S 40(A)(IA) OF THE ACT TO THE TUNE OF RS.43,57,703/-. FURTHER THAT DELETION MADE BY THE L EARNED CIT(A) OF THE DISALLOWANCE MADE U/S 14A OF THE ACT AMOUNTING TO RS.26,64,827/- HAS ALSO BEEN CHALLENGED IN THE INSTANT APPEAL FILED BY REVENUE. 3. THE ASSESSEE, AN INDIAN COMPANY ENGAGED IN MANUF ACTURE AND SALE OF REACTIVE DYES, DURING THE YEAR UNDER CONSIDERATION HAD RECEI VED ORDERS FROM PARTIES LOCATED ABROAD THROUGH FOREIGN AGENTS; UPON RECEIVING SUCH ORDER THE MATERIALS WERE SHIPPED AND COMMISSION BECAME PAYABLE TO THE SAID AGENTS. O N SCRUTINY OF THE P&L ACCOUNT IT REVEALED THAT THE ASSESSEE HAS DEBITED AN AMOUNT OF RS.43,57,703/- AGAINST SUCH COMMISSION EXPENSES. THE ASSESSEE WAS DIRECTED TO F URNISH THE DETAILS ALONG WITH DOCUMENTARY EVIDENCES REGARDING SUCH PAYMENT OF COM MISSION EXPENSES UPON WHICH ON 22.11.2014 THE LEDGER ACCOUNT FOR COMMISSION EXPENS ES FOR THE YEAR UNDER CONSIDERATION WAS FURNISHED PERUSAL OF WHICH FURTHER REVEALED THA T THE ASSESSEE HAS PAID COMMISSION AMOUNTING TO RS.43,57,703/- TO THE NON-RESIDENT FOR EIGN AGENTS WITHOUT DEDUCTING THE TAX AT SOURCE AND THEREFORE, BY AND UNDER LETTER DATED 24.12.2014 A SHOW-CAUSE WAS ISSUED TO THE ASSESSEE AS TO WHY SUCH COMMISSION PAID TO THE NON-RESIDENT FOREIGN AGENTS SHOULD NOT BE DISALLOWED INVOKING THE PROVISION OF SECTION 195 OF THE ACT. 4. IN RESPONSE TO THE SAID SHOW-CAUSE THE ASSESSEE SUBMITTED THAT THE PROVISION OF SECTION 195 OF THE ACT DOES NOT APPLY IN THE INSTAN T CASE SINCE THE AMOUNT PAID TO THE NON-RESIDENT IS NOT CHARGEABLE UNDER THE PROVISION OF INCOME TAX ACT AS INCOME OF THE PAYEE. THE ASSESSEE FURTHER RELIED UPON THE JUDGMEN T OF G. E. INDIA TECHNOLOGY CENTRE - 3 - ITA NO.3469/AHD/2015 DCIT VS. MC FILLS ENTERPRISES PVT. LTD. ASST.YEAR 2012-13 PVT. LTD.-VS-CIT, 327 ITR 456 AS PASSED BY THE HON BLE APEX COURT WHERE IT HAS BEEN HELD THAT SECTION 195 OF THE ACT SHALL BE APPLICABL E ONLY IN THE CASES WHERE AMOUNT PAID OR PAYABLE TO NON-RESIDENT IS CHARGEABLE UNDER THE PROVISION OF INCOME TAX ACT AS INCOME OF THE PAYEE. THE COMMISSION PAID TO THE FOR EIGN AGENTS IS NOT AN INCOME CHARGEABLE TO TAX UNDER THE HAND OF SUCH AGENTS AND THEREFORE THE AMOUNT CANNOT BE DISALLOWED. FURTHER THAT THE PAYMENT OF COMMISSION TO THOSE NON-RESIDENT FOREIGN AGENTS FOR THE SERVICES SINCE RENDERED OUTSIDE INDIA FOR P ROCUREMENT OF SALES ORDER IS NOT CHARGEABLE TO TAX IN INDIA UNDER THE PROVISION OF I NCOME TAX ACT AND ON THAT SCORE ALSO THE COMMISSION IS NOT CHARGEABLE TO TAX IN INDIA. T HEREFORE, THE QUESTION OF APPLICABILITY OF SECTION 195 OF THE ACT DOES NOT ARISE AT ALL HAS ALSO SUBMITTED BEFORE THE LEARNED AO BY THE ASSESSEE. IT WAS ALSO PLACED ON RECORD THAT IN THE EARLIER YEARS ALSO THE COMPANY HAS PAID COMMISSION TO SUCH AGENTS AND NO SUCH DISA LLOWANCE HAS BEEN MADE DURING THE ASSESSMENT PROCEEDINGS OF SUCH EARLIER YEAR CARRIED OUT U/S 143(3) OF THE ACT. HOWEVER, THE CASE MADE OUT BY THE ASSESSEE WAS NOT FOUND TO BE ACCEPTABLE BY THE LEARNED AO AND HE THUS DISALLOWED THE ENTIRE AMOUNT OF RS.43,57,70 3/- ON THE PRETEXT THAT THE ASSESSEE IS IN OBLIGATION TO DEDUCT TAX AT SOURCE AS ENVISAGE U /S 195 OF THE ACT FROM THE PAYMENT MADE TO NON-RESIDENT AGENTS TOWARDS SERVICES RENDER ED BY THEM. SUCH EXPENDITURE TO THE TUNE OF RS.43,57,703/- CLAIMED UNDER THE HEAD COMMI SSION EXPENSES PAID TO SUCH NON- RESIDENT WAS THUS DISALLOWED AND ADDED BACK TO THE INCOME U/S 40(A)(IA) OF THE ACT AGAINST WHICH APPEAL WAS PREFERRED BEFORE THE LEARN ED CIT(A) WHO IN TURN DELETED SUCH ADDITION MADE BY THE AO. HENCE, THE INSTANT APPEAL BEFORE US. 5. AT THE TIME OF HEARING OF THE APPEAL, LEARNED CO UNSEL APPEARING FOR THE ASSESSEE SUBMITTED BEFORE US THAT THE NON-RESIDENT AGENTS DI D NOT RECEIVE THE COMMISSION IN INDIA AND THEREFORE THE INCOME DO NOT FALL UNDER THE CATE GORY WHERE TDS IS LIABLE TO BE DEDUCTED ON SUCH COMMISSION PAID TO THE FOREIGN AGE NTS. FURTHER THAT THE NON-RESIDENT AGENTS SITUATED OUTSIDE INDIA AND NOT CARRIED OUT T HEIR BUSINESS ACTIVITY IN INDIA. THERE IS NO SUCH BUSINESS OPERATION CARRIED OUT BY SUCH FORE IGN AGENTS IN INDIA AND THUS THE - 4 - ITA NO.3469/AHD/2015 DCIT VS. MC FILLS ENTERPRISES PVT. LTD. ASST.YEAR 2012-13 INCOME DOES NOT ACCRUE OR ARISE IN INDIA. THE LEARN ED AR RELIED UPON THE JUDGMENT PASSED BY THE APEX COURT IN THE MATTER OF G. E. IND IA TECHNOLOGY CENTRE PVT. LTD.-VS- CIT, 327 ITR 456 IN SUPPORT OF HIS ARGUMENT AND ALS O RELIED UPON THE ORDER PASSED BY THE LEARNED CIT(A). ON THE OTHER HAND, LEARNED REPRESEN TATIVE OF THE DEPARTMENT RELIED UPON THE ORDER PASSED BY THE LEARNED AO. 6. WE HAVE HEARD THE RESPECTIVE PARTIES, PERUSED TH E MATERIALS AVAILABLE ON RECORD. WE FIND FROM THE RECORDS THAT THE ASSESSEE HAS PAID COMMISSION TO THE NON-RESIDENT FOREIGN AGENTS WHO ARE CARRYING OUT ACTIVITIES OUTS IDE INDIA. THE COMMISSION INCOME, THEREFORE, DOES NOT ACCRUE OR ARISE IN INDIA. FURTH ER THAT THERE IS NO PERMANENT ESTABLISH IN INDIA OF SUCH FOREIGN AGENTS. IT IS CLEAR FROM THE READING OF THE EXPLANATION 1 TO SECTION 9(1)(I) THAT THE INCOME OF THE BUSINESS TO ACCRUE O R ARISE IN SUCH SCENARIO IS ONLY SUCH PART THAT CAN REASONABLY ATTRIBUTED TO OPERATIONS CARRIE D OUT IN INDIA. SINCE THE NON-RESIDENT AGENTS DO NOT HAVE ANY PERMANENT ESTABLISHMENT IN I NDIA NO PART OF THE COMMISSION INCOME OF THOSE AGENTS CAN BE SAID TO HAVE BEEN ACC RUED OR ARISE IN INDIA. FURTHER THAT THE COMMISSION PAYMENTS TO NON-RESIDENT AGENTS ALSO CAN NOT BE AS REGARDED FEES FOR TECHNICAL SERVICES AS DEFINED IN EXPLANATION 2 OF SECTION 9(V II) AS THE COMMISSION PAYMENT IS NOT FOR RENDERING ANY MANAGERIAL, TECHNICAL OR CONSULTA NCY SERVICES. IT IS WELL SETTLED PRINCIPLE OF LAW FLOWING FROM THE JUDGMENT PASSED B Y THE HONBLE SUPREME COURT IN THE CASE OF CIT VS. TOSHOKU LTD., 125 ITR 525 THAT THE NON-RESIDENT SINCE RENDERING SERVICES OUTSIDE INDIA, THE COMMISSION EARNED BY SUCH NON-RE SIDENT FOR ACTING AS AN AGENT FOR INDIAN EXPORTER WOULD NOT ACCRUE IN INDIA. IN THE C ASE IN HAND THE FOREIGN AGENTS ARE NOT RESIDENTS OF INDIA AND THUS SQUARELY COVERED BY THE SAID JUDGMENT PASSED BY THE HONBLE APEX COURT. FURTHER THAT SIMILAR COMMISSION PAID IN EARLIER YEARS BY THE ASSESSEE TO THE FOREIGN AGENTS IN THE SIMILAR SET OF FACTS AND CIRC UMSTANCES NO DISALLOWANCE MADE BY THE AUTHORITIES BELOW AND THEREFORE DISALLOWANCE MADE B Y THE LEARNED AO IS NOT JUSTIFIED. IN FACT THE ORDER IMPUGNED CLARIFIED EACH AND EVERY AS PECT OF THE MATTER AS DISCUSSED ABOVE - 5 - ITA NO.3469/AHD/2015 DCIT VS. MC FILLS ENTERPRISES PVT. LTD. ASST.YEAR 2012-13 DOES NOT CALL FOR ANY INTERFERENCE AND THEREFORE IN THE ABSENCE OF ANY INFIRMITY WE CONFIRM THE SAME. THUS, REVENUES GROUND OF APPEAL IS DISMISSED. 7. THE REVENUE HAS ALSO CHALLENGED THE DELETION OF DISALLOWANCE MADE U/S 14A OF THE ACT TO THE TUNE OF RS.26,64,827/- BY THE LEARNED AS SESSING OFFICER. 8. IT IS THE CASE OF THE ASSESSEE THAT IN THE RETUR N OF INCOME FILED BY THE COMPANY, NO INCOME IS CLAIMED AS EXEMPT INCOME FORMING PART OF TOTAL INCOME. THESE ARE THE BASIC AND FUNDAMENTAL REQUIREMENT OF THE PROVISIONS OF SE CTION 14A BECOMING APPLICABLE AS SUBMITTED BY THE LEARNED AR BEFORE US AT THE TIME O F HEARING OF THE APPEAL. IN THE ABSENCE OF ANY TAX-FREE INCOME OR ANY INCOME EARNED BY THE COMPANY WHICH DOES NOT FORM PART OF THE TOTAL INCOME, THE PROVISION OF SEC TION 14A OF THE ACT WILL NOT BE APPLICABLE. IN SUPPORT OF THE CONTENTION MADE BY TH E LEARNED AR RELIANCE WERE MADE ON THE JUDGMENT PASSED IN THE MATTER OF CIT VS. CORRTE CH ENERGY LTD., ITA NO.239 OF 2014 PASSED BY THE JURISDICTIONAL HIGH COURT. HE THUS RE LIED UPON THE ORDER PASSED BY THE LEARNED CIT(A) DELETING SUCH ADDITION MADE BY THE L EARNED AO WRONGLY APPLYING PROVISION OF SECTION 14A OF THE ACT. ON THE CONTRAR Y, THE LEARNED DR RELIED UPON THE ORDER PASSED BY THE LEARNED AO. 9. WE HAVE HEARD THE RESPECTIVE PARTIES. WE HAVE PE RUSED THE RELEVANT MATERIALS AVAILABLE ON RECORD. IT APPEARS FROM THE RECORD THA T OUT OF THE SALE CONSIDERATION ON SALE OF IMMOVABLE PROPERTY, RS.8 CRORES HAVE BEEN INVESTED DIRECTLY IN THE CAPITAL OF PARTNERSHIP FIRM. FURTHER THAT ADDITIONAL DEPOSIT FROM DIRECTOR S HAS ALSO BEEN INVESTED IN THE CAPITAL. DURING THE YEAR, CASH ACCRUALS FROM THE OPERATIONS OF THE COMPANY AGGREGATED TO RS.12.54 CRORES HAS ALSO BEEN UTILIZED FOR ADDITION AL INVESTMENT IN THE PARTNERSHIP FIRM DURING THE YEAR UNDER CONSIDERATION. ULTIMATELY, NO PART OF INTEREST BEARING FUNDS HAVE BEEN UTILIZED FOR THIS PURPOSE AND THEREFORE THE AM OUNT OF INTEREST IS ELIGIBLE UNDER RULE 8D(II) IS NIL. IT SEEMS THAT NO DIRECT OR INDIRECT EXPENDITURE HAS BEEN INCURRED BY THE FIRM - 6 - ITA NO.3469/AHD/2015 DCIT VS. MC FILLS ENTERPRISES PVT. LTD. ASST.YEAR 2012-13 IN RESPECT OF INVESTMENT IN CAPITAL WITH PARTNERSHI P FIRM. IN THE ABSENCE OF ANY EXPENDITURE INCURRED AND DEBITED TO PROFIT AND LOSS ACCOUNT OF THE COMPANY IN RELATION TO INVESTMENT IN CAPITAL IN PARTNERSHIP FIRM APPLICATI ON OF RULE 8D(III) IS NOT PERMISSIBLE AND THEREFORE NO DISALLOWANCE OF EXPENDITURE IS REQUIRE D TO BE MADE. THE INVESTMENT IN PARTNERSHIP WAS MADE OUT OF THE OWN FUNDS AS IT IS CLEARLY EVIDENT FROM THE RECORD BEFORE US; NO INTEREST BEARING BORROWED FUND WERE USED FOR MAKING THESE INVESTMENT. THE JUDGMENT RELIED UPON BY THE LEARNED AR IN THIS RESP ECT PASSED BY THE JURISDICTIONAL HIGH COURT IN THE CASE OF CORRTECH ENERGY PVT. LTD. WHIC H HAS HELD THAT IN A CASE WHERE THERE IS NO INCOME WHICH IS NOT CHARGEABLE TO TAX, PROVIS ION OF SECTION 14A OF THE ACT WILL NOT BE APPLIED IS RIGHTLY APPLIED TO THE INSTANT CASE. SINCE THE APPELLANT HAS NOT CLAIMED ANY EXEMPT INCOME THE CASE IS SQUARELY COVERED BY THE S AID DECISION AS RIGHTLY CONCLUDED BY THE LEARNED CIT(A), WITHOUT ANY AMBIGUITY. RESPECTF ULLY APPLYING THE JUDGMENT PASSED BY THE JURISDICTIONAL HIGH COURT AS DISCUSSED ABOVE . WE FIND THAT THE ORDER IMPUGNED IS WITHOUT ANY INFIRMITY AND THE SAME IS THUS CONFIRME D. 10. IN THE RESULT, APPEAL IS DISMISSED. THIS ORDER PRONOUNCED IN OPEN COURT ON 17/12/2018 SD/- SD/- ( WASEEM AHMED ) ( MS. MADHUMITA ROY ) ACCOUNTANT MEMBER JUDICIAL MEMBER AHMEDABAD; DATED 17/12/2018 PRITI YADAV, SR.PS - 7 - ITA NO.3469/AHD/2015 DCIT VS. MC FILLS ENTERPRISES PVT. LTD. ASST.YEAR 2012-13 / COPY OF THE ORDER FORWARDED TO : 1. / THE APPELLANT 2. / THE RESPONDENT. 3. / CONCERNED CIT 4. () / THE CIT(A)-7, AHMEDABAD. 5. , ! ' , #$%% / DR, ITAT, AHMEDABAD 6. &' () / GUARD FILE. / BY ORDER, //TRUE COPY// / ( DY./ASSTT.REGISTRAR) !, #$ / ITAT, AHMEDABAD 1. DATE OF DICTATION 04/12/2018 (DICTATION PAGES 12 ) 2. DATE ON WHICH THE TYPED DRAFT IS PLACED BEFORE THE DICTATING MEMBER 07/12/2018 3. OTHER MEMBER 4. DATE ON WHICH THE APPROVED DRAFT COMES TO THE SR.P. S./P.S 11/12/2018 5. DATE ON WHICH THE FAIR ORDER IS PLACED BEFORE THE D ICTATING MEMBER FOR PRONOUNCEMENT 6. DATE ON WHICH THE FAIR ORDER COMES BACK TO THE SR.P .S./P.S. 7. DATE ON WHICH THE FILE GOES TO THE BENCH CLERK 8. DATE ON WHICH THE FILE GOES TO THE HEAD CLERK ... 9. THE DATE ON WHICH THE FILE GOES TO THE ASSISTANT RE GISTRAR FOR SIGNATURE ON THE ORDER.. 10. DATE OF DESPATCH OF THE ORDER