Addl. CIT, Ghaziabad V. Chaudhary Hammer Works Ltd., Ghaziabad

ITA 5333/DEL/2011

• Counselvise Citation: [2012] 140 COUNSELVISE.COM (IT) 65489 (ITAT-DELHI)
• Duration Of Justice: 9 month(s) 22 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 21-09-2012
• Appeal Filed By: Department
• Order Result: Partly Allowed
• Bench Allotted: B
• Next Hearing Date: 18-09-2012
• Assessment Year: 2008-2009
• Appeal Filed On: 29-11-2011
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: PRITHI LAL
• Assessee Lawyers: G N SRIVASTAVA V P FINANCE
• Keywords: Gross profit estimation; Earning of tax free income; Permanent establishment; Advance ruling
• Section: 5(2); 14A

Judgement Text

ITA NO.5333/DEL/2011 1 IN THE INCOME TAX APPELLATE TRIBUNAL DELHI BENCH B, NEW DELHI BEFORE SHRI JOGINDER SINGH, JUDICIAL MEMBER AND SHRI SHAMIM YAHYA, ACCOUNTANT MEMBER I.T.A. NO. 5333/DEL/2011 A.Y. : 2008-09 A DDL. C.I.T., RANGE - 1, CGO COMPLEX-I, GHAZIABAD VS. CHAUDHARY HAMMER WORKS LTD., NOW CHW FORGE LTD., NEAR HAPUR ROAD FLYOVER, GHAZIABAD (PAN/GIR NO. : AAACC6049C) (APPELLANT ) (APPELLANT ) (APPELLANT ) (APPELLANT ) (RESPONDENT ) (RESPONDENT ) (RESPONDENT ) (RESPONDENT ) ASSESSEE BY : SH. G.N. SRIVASTAVA, V.P. (FINANCE) DEPARTMENT BY : SH. PRITHI LAL, SR. D.R. ORDER ORDER ORDER ORDER PER SHAMIM YAHYA: AM PER SHAMIM YAHYA: AM PER SHAMIM YAHYA: AM PER SHAMIM YAHYA: AM THIS APPEAL BY THE REVENUE IS DIRECTED AGAINST TH E ORDER OF THE LD. COMMISSIONER OF INCOME TAX (APPEALS), GHAZIABAD DATED 22.9.2011 PERTAINING TO ASSESSMENT YEAR 2008-09. 2. THE GROUNDS RAISED READ AS UNDER:- 1) THAT THE LD. COMMISSIONER OF INCOME TAX (A) HAS ERRED IN LAW AND ON FACTS BY DELETING THE ADDITION OF ` 5,00,000/- MADE BY THE ASSESSING OFFICER ON ACCOUNT OF LOW GP RATE BY CONSIDERING THE VARIATION IN GP, NP RATE AS VERY LOW IN COMPARISON TO EARLIER YEARS; WHEREAS THE ASSESSING OFFICER HAS CONSIDERED ONL Y LOW GP RATE WHILE MAKING THE ADDITION. THEREFORE, ITA NO.5333/DEL/2011 2 THE ORDER OF THE LD. COMMISSIONER OF INCOME TAX (A) BE SET ASIDE AND THE OTHER OR THE ASSESSING OFFICE R BE RESTORED ON THIS ISSUE. 2) THE LD. COMMISSIONER OF INCOME TAX (A) HAS ERRED ON FACTS AND IN LAW BY ALLOWING RELIEF TO THE EXTENT OF ` 4,72,614/- OUT OF DISALLOWANCE OF ` 5,00,000/- MADE BY THE ASSESSING OFFICER U/S. 14A, THOUGH AGREED IN PRINCIPLE, IGNORING THE INDIRECT IMPLICATIONS OF THE INVESTMENTS MADE LIKE INTEREST PAIN ON THE SECURED AND UNSECURED LOANS ETC. THEREFORE, THE ORDER O F THE LD. COMMISSIONER OF INCOME TAX (A) BE SET ASIDE AND THE OTHER OF THE ASSESSING OFFICER BE RESTORED ON THIS ISSUE. 3) THE LD. COMMISSIONER OF INCOME TAX (A) HAS ERRED ON FACTS AND IN LAW BY DELETING THE DISALLOWANCE MADE BY THE ASSESSING OFFICER AMOUNTING TO ` 5,00,000/- ON FOREIGN EXCHANGE FLUCTUATION, IGNORING THE FACT TH AT IT WAS CORRECTLY WORKED OUT ON THE BASIS OF DETAILS SUBMITTED BY THE ASSESSEE ITSELF. THEREFORE, THE ORDER OF THE LD. COMMISSIONER OF INCOME TAX (A) BE SET ASIDE AND THE ORDER OF THE ASSESSING OFFICER BE RESTORED ON THIS ISSUE. 4) THE LD. COMMISSIONER OF INCOME TAX (A) HAS ERRED ON FACTS AND IN LAW BY DELETING THE DISALLOWANCE MADE BY THE ASSESSING OFFICER AT ` 5,00,000/- ON ACCOUNT OF COMMISSION PAID TO FOREIGN AGENCIES WITHOUT TDS IGNORING THE FACT THAT THE ASSESSEE HAS FAILED TO ITA NO.5333/DEL/2011 3 COMPLY WITH THE PROVISIONS OF SECTION 195(1) OF I.T. ACT. THEREFORE, THE ORDER OF THE LD. COMMISSIONER O F INCOME TAX (A) BE SET ASIDE AND THE ORDER OF THE ASSESSING OFFICER BE RESTORED ON THIS ISSUE. IT IS HUMBLY PRAYED THAT THE ORDER PASSED BY THE LD . COMMISSIONER OF INCOME TAX (A), GHAZIABAD BE SET ASIDE AND ORDER OF THE ASSESSING OFFICER BE RESTOR ED BACK. 3. APROPOS ISSUE OF ADDITION OF ` 5,00,000/- ON A/C OF LOW GP. THE ASSESSEE COMPANY IS ENGAGED IN THE MANUFACTURE O F STEEL FORGING/FLANGES. THE ASSESSING OFFICER NOTED THA T ASSESSEE DECLARED FOLLOWING TRADING RESULTS FOR THE YEAR UNDER CONSID ERATION AND THE PREVIOUS YEAR AS UNDER:- DETAILS DETAILS DETAILS DETAILS A.Y. 2008 A.Y. 2008 A.Y. 2008 A.Y. 2008- -- -09 09 09 09 A.Y. 2007 A.Y. 2007 A.Y. 2007 A.Y. 2007- -- -08 08 08 08 A.Y. 2006 A.Y. 2006 A.Y. 2006 A.Y. 2006- -- -07 07 07 07 SALES 104,70,50,264 81,07,22,348 56,26,50,128 GROSS PROFIT 415822284 348905225 1,75,46,758 NET PROFIT NET PROFIT NET PROFIT NET PROFIT 189560293 189560293 189560293 189560293 160741589 160741589 160741589 160741589 79258 79258 79258 79258940 940 940 940 GROSS PROFIT RATE 39.71% 43.04% 31.04% NET PROFIT RATE 18.10% 19.83% 14.09% CONSIDERING THE ABOVE ASSESSING OFFICER OBSERVED THAT A PERUSAL OF THE CHART REFLECTS THAT THERE IS CONSIDERABLE FA LL IN GP RATE AND THE NP RATE HAS ALSO DECLINED. ASSESSING OFFICER FURTHE R OBSERVED THAT THE ASSESSEE WAS REQUIRED TO FURNISH THE REASON FOR THE SAME, FOR WHICH NO SATISFACTORY EXPLANATION COULD BE GIVEN. THEREFO RE, THE ASSESSING OFFICER HELD THAT IN VIEW OF THIS AN ESTIMATED ADD ITION OF ` 5 LACS IS BEING MADE UNDER THIS HEAD. 4. UPON ASSESSEES APPEAL LD. COMMISSIONER OF INCO ME TAX (A) NOTED THE DECREASE IN GP AND NP RATES, AS COMPARED TO EARLIER YEARS IS NOT DRASTIC. IN FACT, DECREASE IN NP RATE IS VERY MA RGINAL. LD. ITA NO.5333/DEL/2011 4 COMMISSIONER OF INCOME TAX (A) FURTHER NOTED THAT AS SESSING OFFICER DID NOT CONDUCT MORE DISCUSSION OR EXAMINATION. IN THIS CASE HE FURTHER NOTED THAT ASSESSEE HAS GIVEN EXHAUSTIVE R EASONS ALONGWITH THE REQUISITE DETAILS, SO AS TO HIGHLIGHT THE MOST IMPORTANT REASONS BEING THAT (I) PROPORTIONATE INCREASE IN PRICES OF RAW MATERIAL IS MORE THAN THE PERCENTAGE INCREASE IN THE PRICES OF FINIS HING PRODUCTS (II) LABOUR AND WAGES HAVE INCREASED MORE IN THIS YEAR B ECAUSE THE ASSESSEE HAS GOT THE JOB WORK OF FORGING, DONE MOR E FROM OUTSIDE IN THIS YEAR; AND (III) NATURE OF BUSINESS / INDUSTRY IS SUCH THAT EACH AND EVERY LOT SALES IS SPECIFIC TO THE PARTICULAR PROJE CT AND CLIENT. ACCORDINGLY, LD. COMMISSIONER OF INCOME TAX (A) HELD THAT NO ESTIMATED ADDITION IS WARRANTED ON ACCOUNT OF LOW GP/NP IN THIS CASE. THEREFORE, ADDITION OF ` 5,00,000/- WAS DELETED. 5. AGAINST THE ABOVE ORDER THE REVENUE IS IN APPEAL BEFORE US. 6. WE HAVE HEARD BOTH THE COUNSEL AND PERUSED THE R ECORDS. WE FIND THAT ASSESSING OFFICER HAS MADE THE ADHOC DIS ALLOWANCE IN THIS REGARD BY NOTING THAT THERE IS SOME MARGINAL DECLINE IN THE GP RATE. WE FIND THAT NO OTHER REASONS HAS BEEN PUT BY THE A SSESSING OFFICER. ON THE OTHER HAND, WE FIND THAT LD. COMMISSIONER OF I NCOME TAX (A) HAS CONSIDERED THE REASONING OF THE ASSESSEE AND F OUND IT COGENT ENOUGH. IN OUR CONSIDERED OPINION, NO ADDITION IN THIS REGARD ON ADHOC BASIS IS SUSTAINABLE. UNDER THE CIRCUMSTANCE S, WE UPHOLD THE ORDER OF THE LD. COMMISSIONER OF INCOME TAX (A) AND D ECIDE THE ISSUE IN FAVOUR OF THE ASSESSEE. 7. APROPOS THE ISSUE OF ALLOWING RELIEF TO THE EXTE NT OF ` 4,72,614/- OUT OF DISALLOWANCE OF ` 5,00,000/- U/S. 14A. ITA NO.5333/DEL/2011 5 ON THIS ISSUE ASSESSING OFFICER ASKED THE ASSESSE E FOLLOWING AS PER THE SHOW CAUSE NOTICE. ON DETAILS OF INVESTMENTS GIVEN IN ANNEXURE-6 OF T HE BALANCE SHEET, IT HAS BEEN NOTED THAT ALTHOUGH NO FRESH INVESTMENT IS MADE IN PURCHASE OF SHARES / BONDS ON WHICH THE INCOME IS OTHERWISE TAX FREE, W HY PROPORTIONATE DISALLOWANCE OF INTEREST U/S. 14A OF THE I.T. ACT BE NOT MADE ON SUCH INVESTMENT BECAUSE THE COMPANY ON OTHER SIDE HAS INTEREST BEARING FUNDS. PLEASE EXPLAIN AS TO WHY SECTION 14A BE NOT INVOLVED AND PROPORTIONATE DISALLOWANCE ON ` 48,56,686/- BE NOT MADE AT THE RATE ON WHICH THE COMPANY IS PAYING ON INTEREST BEARING FUNDS. 7.1 CONSIDERING THE REPLY, ASSESSING OFFICER OBSE RVED THAT ASSESSEE HAS SOUGHT RELAXATION ON THIS ACCOUNT IN VIEW OF T HE FACT THAT NO FRESH INVESTMENT HAS BEEN MADE BY IT AND THAT NO EXPENDIT URE HAS BEEN INCURRED FOR EARNING THIS INCOME. ASSESSING OFFIC ER NOTED THAT ASSESSEE HAS FAILED TO OFFER ANY EXPLANATION ON THE ISSUE THAT ON ONE SIDE THE INTEREST IS BEING PAID BY THE ASSESSEE ON THE LOANS RAISED BY IT THAT INCLUDE LOAN FROM FOREIGN BANKS ALSO, THEN WHY THESE INVESTMENTS FETCHING LOWER RATES OF INTEREST BE NOT CONSIDERED FOR ADDITION U/S. 14A OF THE I.T. ACT. ASSESSING OFFICER NOTED THAT SI NCE THE ASSESSEE HAS NOT FURNISHED ANY DETAILS OF THE INTEREST EARNED AN D PAID AND THE RATES OF INTEREST ON EVERY LOAN, AN ADHOC ADDITION OF ` 5 LACS ON THIS ACCOUNT WAS MADE. 8. UPON ASSESSEES APPEAL LD. COMMISSIONER OF INCO ME TAX (A) NOTED THAT ASSESSEE HAS EARNED TAX EXEMPT INTEREST A ND HENCE, ITA NO.5333/DEL/2011 6 PROVISION OF SECTION 14A ARE INDEED APPLICABLE. HOWEVER, LD. COMMISSIONER OF INCOME TAX (A) OBSERVED THAT ASSESSI NG OFFICER HAS MADE EXCESSIVE DISALLOWANCE, FAILING TO APPRECIATE T HAT TOTAL OF SUCH EXEMPT INCOME IS ONLY ` 2,73,867/-. LD. COMMISSION ER OF INCOME TAX (A) HELD THAT IT CAN BE SAFELY AND REASONABLY ESTIMA TED THAT 10% OF THIS MAY BE INDIRECT EXPENSES INCURRED TO EARN THIS TAX-E XEMPTED INCOME. THEREFORE, HE HELD THAT ADDITION U/S. 14A WAS TO BE RESTRICTED TO ` 27,386/-. 9. AGAINST THE ABOVE ORDER THE REVENUE IS IN APPEA L BEFORE US. 10. WE HAVE HEARD BOTH THE COUNSEL AND PERUSED THE RECORDS. WE FIND THAT ASSESSING OFFICER HAS MADE THE ADHOC ADDI TION ON THIS ISSUE, WITHOUT BRINGING PROPER COGENT MATERIAL. ON THE O THER HAND, LD. COMMISSIONER OF INCOME TAX (A) HAS FOUND THAT ASSESS ING OFFICER HAS MADE EXCESSIVE DISALLOWANCE. LD. COMMISSIONER OF IN COME TAX (A) HAS FURTHER FOUND THAT TOTAL TO SUCH EXEMPT INCOME IS ONLY ` 2,73,867/-. UNDER SUCH CIRCUMSTANCES, ESTIMATION O F 10% OF THIS TO BE ATTRIBUTED TO EARN THIS EXEMPT INCOME CANNOT BE SAID TO BE WRONG. ACCORDINGLY, WE UPHOLD THE ORDER OF THE LD. COMMISSI ONER OF INCOME TAX (A) ON THIS ISSUE AND DECIDE THE ISSUE IN FAVO UR OF THE ASSESSEE. 11. APROPOS THE ISSUE OF DISALLOWANCE MADE BY THE ASSESSING OFFICER AMOUNTING TO ` 500009/- FOREIGN EXCHANGE FLUCTUATION . ON THIS ISSUE ASSESSING OFFICER NOTED THAT ASSESS EE HAS REFLECTED THE AMOUNT OF FOREIGN EXCHANGE FLUCTUATION OF ` 4591 052/- AFTER NETTING THE INCOME AND THE LOSSES ON THIS ACCOUNT, CREDITED IN ITS ACCOUNTS. ASSESSING OFFICER FURTHER OBSERVED THA T THE COMPANY HAS GAINED ` 85,75,621/- ON ACCOUNT OF FOREIGN EXCHANGE FLUCTUATION AND ` 4267049/- HAS BEEN DEBITED TO THIS ACCOUNT. ASSESSING OFFICER ITA NO.5333/DEL/2011 7 FURTHER OBSERVED THAT LOSS IN AGGREGATE OF ` 500009 /- WHICH SHOULD HAVE BEEN CLAIMED DURING THE A.Y. 2007-08 HAS BEEN CLAIMED DURING THE YEAR UNDER CONSIDERATION. ASSESSING OFFIC ER HELD THAT SINCE THE ASSESSEE IS FOLLOWING MERCANTILE SYSTEM OF ACCOUNTIN G AND SINCE THE EXPENSE CLAIMED IS A PREVIOUS YEAR EXPENSES, THE AMOU NT OF ` 500009/- PERTAINING TO THE PREVIOUS YEAR WAS DISALL OWED. 12. UPON ASSESSEES APPEAL LD. COMMISSIONER OF INC OME TAX (A) CONSIDERED THE ASSESSEES SUBMISSIONS THAT THERE IS NO BASIS BY THE ASSESSING OFFICER TO PICK UP THE FIGURE OF ` 50000 9/-. LD. COMMISSIONER OF INCOME TAX (A) FOUND THAT IT WAS NOW HERE MENTIONED IN THE TAX AUDIT REPORT OR IN THE LEDGER ACCOUNT OR IN THE DETAILS OF FOREIGN EXCHANGE FLUCTUATION. FURTHER, LD. COMMIS SIONER OF INCOME TAX (A) OBSERVED THAT IT IS CLEAR THAT ASSESSEE HAS FOLLOWED AS-11 IN COMPUTING VARIOUS INSTANCES FOREIGN EXCHANGE FLUCTUA TION AND ALL THESE ARE AS PER ACCOUNTING NORMS. FURTHERMORE, THE TOT AL GAIN ON ACCOUNT OF FOREIGN EXCHANGE FLUCTUATION IS MORE THAN THE LO SS; NET GAIN ON THIS ACCOUNT BEING SHOWN AT ` 45,91,053/-. LD. COMMIS SIONER OF INCOME TAX (A) FURTHER OBSERVED THAT NONE OF THESE LOSS IN STANCES APPEAR TO BE RELATED TO EARLIER ASSESSMENT YEAR. HENCE, LD. CO MMISSIONER OF INCOME TAX (A) DELETED THE ADDITION IN THIS REGA RD. 13. AGAINST THE ABOVE ORDER THE REVENUE IS IN APPE AL BEFORE US. 14. WE HAVE HEARD BOTH THE COUNSEL AND PERUSED THE RECORDS. WE FIND THAT LD. COMMISSIONER OF INCOME TAX (A) HAS GIVE N A FINDING THAT THERE IS NO COGENT BASIS FOR THE ASSESSING OFFICER TO PICK UP THE FIGURE OF ` 500009/-, AS THE AMOUNT PERTAINING TO PREVIOUS PERIOD. FURTHERMORE, LD. COMMISSIONER OF INCOME TAX (A) HAS FOUND THAT ASSESSEE HAS FOLLOWED THE PROPER ACCOUNTING SYST EM IN THIS REGARD. ITA NO.5333/DEL/2011 8 FURTHERMORE, HE HAS OBSERVED THAT TOTAL AMOUNT OF FOR EIGN EXCHANGE FLUCTUATION IS MORE THAN THE LOSSES. UNDER THE CIRC UMSTANCES, IN OUR CONSIDERED OPINION, THERE IS NO BASIS OF ASSESSING OFFICER IN DISALLOWING THE FIGURES OF ` 500009/- IN THIS REGAR D. UNDER THE CIRCUMSTANCES, WE UPHOLD THE ORDER OF THE LD. COMMISSI ONER OF INCOME TAX (A) AND DECIDE THE ISSUE IN FAVOUR OF THE ASSES SEE. 15. APROPOS ISSUE OF DISALLOWANCE ON ACCOUNT OF CO MMISSION PAID. ON THIS ISSUE ASSESSING OFFICER NOTED THAT ASSESS EE HAS MADE THE PAYMENT OF ` 58,26,720/- BEING COMMISSION ON SAL ES PAID IN FOREIGN CURRENCY. HE OBSERVED THAT ASSESSEE COMPA NY HAS NOT DEDUCTED ANY TDS ON THE PAYMENT OF FOREIGN COMMISSION AS REQUIRED BY THE PROVISIONS OF SECTION 195(1) OF THE I.T. AC T. ACCORDINGLY, ASSESSING OFFICER DISALLOWED THE AMOUNT OF COMMISSIO N PAID. 16. BEFORE THE LD. COMMISSIONER OF INCOME TAX (A) A SSESSEE SUBMITTED THAT AS PER THE MANDATE OF SECTION 195(1) IT WAS NECESSARY TO DEDUCT TDS, WHEN PAYMENT MADE IS CHARGEABLE UNDER THE PROVISIONS OF THE ACT. IT WAS CONTENDED THAT ASSE SSING OFFICER SHOULD REACH TO THIS CONCLUSION THAT THE PAYMENT MADE IS CHA RGEABLE UNDER THE PROVISIONS THE ACT, ONLY THEN HE CAN DISALLOW INTEREST OR ANY OTHER SUM PAID BY THE ASSESSEE WITHOUT DEDUCTING TDS. IT WAS SUBMITTED THAT IN THE IMPUGNED ORDER ASSESSING OFFICER HAS DI SALLOWED THE COMMISSION PAID TO FOREIGN BASED AGENTS WITHOUT GIV ING ANY FINDING WHETHER ASSESSEE IS LIABLE TO DEDUCT TDS ON THIS CO MMISSION OR NOT AND WHETHER THE SAID COMMISSION IS CHARGEABLE UNDER T HE PROVISIONS OF THE ACT OR NOT. FURTHER SUBMISSION OF THE ASSESS EE WERE AS UNDER:- IT IS MOST RESPECTFULLY SUBMITTED THAT EVEN IF WE LO OK INTO A FACTUAL POSITION READ WITH RELEVANT LAW THEN IT ITA NO.5333/DEL/2011 9 BECOMES VERY CLEAR THAT ASSESSEE IS NOT LIABLE TO DEDUCT TAX AS THE SUM PAID BY ASSESSEE IS NOT CHARGEABLE UNDER THE PROVISIONS OF THE ACT. DEPARTMENT VIDE CIRCULAR NO. 786 DATED 07.2.2000 CLARIFIED AS FOLLOWS:- THE DEDUCTION OF TAX AT SOURCE UNDER SECTION 195 WOULD ARISE IF THE PAYMENT OF COMMISSION TO THE NON-RESIDENT IS CHARGEABLE TO TAX IN INDIA. IN TH IS REGARD ATTENTION TO CBDT CIRCULAR NO. 23 DATED 23 RD JULY, 1969 IS DRAWN WHERE THE TAXABILITY OF FOREIG N AGENTS OF INDIAN EXPORTERS WAS CONSIDERED ALONG WI TH CERTAIN SPECIFIC SITUATIONS. IT HAD BEEN CLARIFI ED THEN THAT WHEREIN THE NON-RESIDENT AGENTS OPERATES OUTSI DE THE COUNTRY, NO PART OF THIS INCOME ARISES IN INDIA. FURTHER, SINCE THE PAYMENT IS USUALLY REMITTED DIRECTL Y ABROAD IT CAN NOT BE HELD TO HAVE BEEN RECEIVED BY OR ON BEHALF OF THE AGENT IN INDIA. SUCH PAYMENTS WERE THEREFORE HELD TO BE NOT TAXABLE IN INDIA. THE RELE VANT SECTIONS, NAMELY SECTION 5(2) AND SECTION 9 OF THE INCOME TAX ACT, 1961 NOT HAVING UNDERGONE ANY CHANGE IN THIS REGARD, THE CLARIFICATION IN CIRCULA R NO. 23 STILL PREVAILS. NO TAX IS THEREFORE DEDUCTIBLE U NDER SECTION 195' THIS CIRCULAR HAS BEEN WITHDRAWN VIDE CIRCULAR NO.7 2009 DATED 22.10.2009. THUS IT IS CLEAR THAT THIS CIRCULAR WAS IN FORCE DURING THE PERIOD IN QUESTION . ITA NO.5333/DEL/2011 10 AFTER GOING THROUGH ABOVE MENTIONED CIRCULAR, IT BECOMES CLEAR THAT IF FOLLOWING CONDITIONS ARE FULFI LLED THEN COMMISSION PAID TO NON-RESIDENT IS NOT TAXABLE I N INDIA:- .:. AGENT SHOULD BE NON-RESIDENT .:. AGENT SHOULD OPERATE ITS BUSINESS ACTIVITIES OUTSIDE INDIA .:. COMMISSION PAID SHOULD BE RELATED TO SERVICES PROVIDED OUTSIDE INDIA .:. AGENT SHOULD NOT HAVE ANY PERMANENT ESTABLISHMENT OR PERMANENT BUSINESS PLACE IN INDIA .:. COMMISSION REMITTED TO AGENT DIRECTLY OUTSIDE INDIA. ALL THE CONDITIONS MENTIONED ABOVE STANDS FULFILLED IN THE CASE OF APPELLANT. APPELLANT PAID COMMISSION TO 7 AGENTS DURING THE RELEVANT PERIOD. ALL THESE AGENTS ARE NON-RESIDENTS . A DECLARATION FROM ALL THESE AGENTS TO THIS EFFECT IS ENCLOSED FOR YOUR REFERENCE AS 'ANNEXURE - 5' COLLECTIVELY. ALL THESE AGENTS ARE OPERATING THEIR BUSINESS ACTIVITIES OUTSIDE INDIA. ROLE OF THESE AGENTS ARE (1) TO PROCURE ORDERS FROM BUYERS (2) TO NEGOTIATE PRICE AN D ITA NO.5333/DEL/2011 11 OTHER TERMS & CONDITIONS AND INTIMATE SAME TO THE APPELLANT (3) TO RE-NEGOTIATE THE TERMS/PRICES IF NECESSARY, BASED ON THE INSTRUCTION OF THE APPELLAN T (4) FOLLOW UP IN GETTING PURCHASE ORDERS FROM CUSTOMERS AND FORWARD THE SAME TO THE APPELLANT. IT CLEARLY ESTABLISHED THEY DO NOT DO ANY BUSINESS ACTIVITY IN INDIA. AS ALL THESE AGENTS ARE NON-RESIDENT AND OPERATE OUTSIDE INDIA. APPELLANT HAS NO OTHER RELATION WITH THEM EXCEPT OF AGENT AND PRINCIPAL AND THE ENTIRE PAYMENT MADE TO THEM IS TOWARD THEIR SERVICES PROVIDED OUTSIDE INDIA. ALL THE AGENTS DO NOT HAVE ANY PERMANENT ESTABLISHMENT OR PERMANENT BUSINESS PLACE IN INDIA. A DECLARATION TO THIS EFFECT IS ENCLOSED AS 'ANNEXURE - 5' COLLECTIVELY. COMMISSIONS TO ALL THESE AGENTS ARE REMITTED IN FOREIGN CURRENCY DIRECTLY IN THEIR BANK ACCOUNT OUT SIDE INDIA. THIS FACT CAN ALSO BE CONFIRMED FROM OUR BANK ACCOUNTS. HENCE, ALL THE CONDITIONS MENTIONED ABOVE STANDS FULFILLED IN THE CASE OF APPELLANT AND SUM PAID AS COMMISSION TO THESE FOREIGN BASED AGENTS ARE NOT CHARGEABLE UNDER THE PROVISIONS OF THE ACT. SINCE, THE SUM IS NOT CHARGEABLE UNDER THE PROVISIONS OF THE A CT, APPELLANT IS NOT LIABLE TO DEDUCT TDS UNDER SECTION 195 OF THE ACT. ITA NO.5333/DEL/2011 12 AS THE APPELLANT IS NOT LIABLE TO DEDUCT TDS UNDER SECTION 195 OF THE ACT, HENCE DISALLOWANCE ON ACCOU NT OF NON DEDUCTION OF TDS IS NOT SUSTAINABLE IN THE EY ES OF LAW. HON'BLE AUTHORITY FOR ADVANCE RULINGS (INCO ME TAX), NEW DELHI IN THE CASE OF 'MIS. SPAHI PROJECTS PRIVATE LTD., JHAVER CENTER, 4TH FLOOR, RAJAH ANNAMALA I BUILDING 72, MARSHALLS ROAD, EGMORE, CHENNAI' ON 29T H JULY, 2009 HELD THAT 'AS THE. INCOME OF ZAIKOG ON ACCOUNT OF THE COMMISSION PAID TO IT BY THE APPLICANT IS NOT CHARGEABLE TO TAX IN INDIA BY VIRTUE OF ART. 7 OF DT AA AND SECTION 9(1)(I) READ WITH EXPLANATION THERETO, THE APPLICANT IS NOT OBLIGED TO DEDUCT THE TAX AT SOURCE UNDER SECTION 195 OF THE INCOME TAX ACT, 1961.' HON'BLE ITAT, MUMBAI IN THE CASE OF 'ADDITIONAL DIRECTOR OF INCOME TAX (INTERNATIONAL TAXATION), CIR CLE 2(1), MUMBAI VERSUS STAR CRUISE INDIA TRAVEL SERVICES (P) LTD.,' HAS HELD THAT 'IN TERMS OF EXPLANATION 1 (A) TO SECTION 9(1 )(I), 'IN THE CASE OF A BUSINESS OF WHI CH ALL THE OPERATIONS ARE NOT CARRIED OUT IN INDIA, THE IN COME OF BUSINESS DEEMED UNDER THIS CLAUSE TO ACCRUE OR ARISE IN INDIA SHALL BE ONLY SUCH PART OF THE INCOME AS IS REAS0!1ABLY ATTRIBUTABLE TO THE OPERATIONS CARRI ED OUT IN INDIA' BUT THEN SINCE NO PART OF THE OPERATI ON WAS CARRIED OUT IN INDIA, NO PART OF ASSESSES INCOM E COULD HAVE BEEN THUS TAXABLE IN INDIA. IT WOULD THU S SEEN TO US THAT WHEN NO BUSINESS OPERATIONS ARE CARRIED OUT IN INDIA, EVEN IF A NON-RESIDENT HAS A ITA NO.5333/DEL/2011 13 BUSINESS CONNECTION IN INDIA, NO PART OF INCOME OF SUCH BUSINESS CAN BE DEEMED TO HAVE ACCRUED OR ARISEN IN INDIA.' HON'BLE ITAT, MUMBAI IN THE CASE OF 'YAHOO INDIA (P) LTD. VERSUS DY. COMMISSIONER OF INCOME TAX, RANGE 7(3), MUMBAI' HAS HELD THAT 'IN THE ABSENCE OF ANY P E OF YAHOO HOLDINGS (HONG KONG) LTD., IN INDIA, IT WA S NOT CHARGEABLE TO TAX IN INDIA. ASSESSEE THUS WAS NOT LIABLE TO DEDUCT TAX AT SOURCE FROM THE PAYMENT MADE TO YAHOO HOLDINGS (HONG KONG) LTD., FOR SUCH SERVIC ES AND IN OUR OPINION, THE PAYMENT SO MADE CANNOT BE DISALLOWED BY INVOKING THE PROVISIONS OF SECTION 40 (A) FOR NON DEDUCTION OF TAX.' IN VIEW OF FOREGOING DECISIONS AND SUBMISSION, IT IS AMPLY CLEAR THAT APPELLANT WAS NOT LIABLE TO DEDUCT TAX AT SOURCE IN RESPECT OF SUM PAID AS COMMISSION TO FOREIGN BASED AGENTS NOT HAVING ANY PERMANENT ESTABLISHMENT IN INDIA, HENCE DISALLOWANCE OF THIS EXPENDITURE IS NOT ACCORDING TO THE PROVISIONS OF L AW.' 16.1 CONSIDERING THE ABOVE SUBMISSIONS, LD. COMMISSI ONER OF INCOME TAX (A) OBSERVED THAT HE FOUND THAT ALL THE COMMISSION PAID WERE TO FOREIGN BASED AGENTS COVERED BY BOARD CIRC ULAR NO. 786 DATED 7.2.2000 BEING NON-RESIDENT OPERATING ONLY O UTSIDE, RECEIVING COMMISSION FOR SERVICE RENDERED OUTSIDE, WITHOUT ANY PE PAYEE IN INDIA AND RECEIVING COMMISSION OUTSIDE INDIA. LD. COMMIS SIONER OF INCOME ITA NO.5333/DEL/2011 14 TAX (A) CONCLUDED THAT ALL CONDITIONS MENTIONED IN CIRCULAR NO. 786 ARE JUSTIFIED SO AS TO KEEP THIS COMMISSION PAYMENT OUTSI DE THE AMBIT OF SECTION 5(2) READ WITH SECTION 9, READ WITH SECT ION 195 OF THE ACT. ACCORDINGLY, HE HELD THAT ASSESSEE WAS NOT LIABL E TO DEDUCT THE TDS ON THIS PAYMENT. 17. AGAINST THE ABOVE ORDER THE REVENUE IS IN APPE AL BEFORE US. 18. WE HAVE HEARD THE RIVAL CONTENTIONS IN LIGHT O F THE MATERIAL PRODUCED AND PRECEDENT RELIED UPON. WE FIND THAT ADDITION ON THIS ACCOUNT WAS MADE BY THE ASSESSING OFFICER, AS ASSES SEE HAS NOT DEDUCTED THE TDS ON PAYMENT OF FOREIGN COMMISSION AMOUN TING TO ` 58,36,720/-. ASSESSEE HAS NOT MADE DETAILED SUBMISSI ON BEFORE THE ASSESSING OFFICER. HOWEVER, BEFORE THE LD. COMMISSI ONER OF INCOME TAX (A) ASSESSEE HAS MADE ELABORATE SUBMISSIONS AND R EFERRED TO CIRCULAR NO. 786 AND ANOTHER CASE LAWS ALSO. CONSI DERING THE ABOVE LD. COMMISSIONER OF INCOME TAX (A) DECIDED THE ISSUE IN FAVOUR OF THE ASSESSEE. WE FIND THAT LD. COMMISSIONER OF INCOME TA X (A) HAS AFFIRMED THE SUBMISSION OF THE ASSESSEE WITHOUT GIVI NG A PROPER SPEAKING ORDER ON THE SUBJECT. WE FIND THAT ASSESSI NG OFFICER SHOULD ALSO BE GIVEN AN OPPORTUNITY TO GO THROUGH THE SUB MISSIONS AND CASE LAWS IN THIS REGARD. A FINDING HAS ALSO BE GIVEN IN THIS CASE THAT RECIPIENTS OF THE COMMISSION WERE FOREIGN AGENTS WHO SE INCOME WAS ITA NO.5333/DEL/2011 15 NOT TAXABLE IN INDIA, AS THEY DID NOT HAVE ANY PE IN INDIA. IN OUR CONSIDERED OPINION, ON THE FACTS AND CIRCUMSTANCES OF THE CASE INTEREST OF JUSTICE WILL BE SERVED IF THE ISSUE IS REMITTED T O THE FILES OF ASSESSING OFFICER. ACCORDINGLY, WE REMIT THIS ISSUE TO THE FI LE OF THE ASSESSING OFFICER. THE ASSESSING OFFICER IS DIRECTED TO CON SIDER THE ISSUE AFRESH, AFTER GIVING THE ASSESSEE PROPER OPPORTUNITY OF BEI NG HEARD. 19. IN THE RESULT, THE APPEAL FILED BY THE REVENUE IS PARTLY ALLOWED FOR STATISTICAL PURPOSES. ORDER PRONOUNCED IN THE OPEN COURT ON 21/9/2012. SD/- SD/- [ [[ [JOGINDER SINGH JOGINDER SINGH JOGINDER SINGH JOGINDER SINGH] ]] ] [SHAMIM YAHYA] [SHAMIM YAHYA] [SHAMIM YAHYA] [SHAMIM YAHYA] JUDICIAL MEMBER JUDICIAL MEMBER JUDICIAL MEMBER JUDICIAL MEMBER ACCOUNTANT MEMBER ACCOUNTANT MEMBER ACCOUNTANT MEMBER ACCOUNTANT MEMBER DATE 21/9/2012 SRBHATNAGAR SRBHATNAGAR SRBHATNAGAR SRBHATNAGAR COPY FORWARDED TO: COPY FORWARDED TO: COPY FORWARDED TO: COPY FORWARDED TO: - -- - 1. APPELLANT 2. RESPONDENT 3. CIT 4. CIT (A) 5. DR, ITAT TRUE COPY BY ORDER, ASSISTANT REGISTRAR, ITAT, DELHI BENCHES