DCIT, New Delhi V. M/s. Sathyadeep Engineering Co. Ltd., New Delhi

ITA 5923/DEL/2014

• Counselvise Citation: [2018] 126 COUNSELVISE.COM (IT) 3288 (ITAT-DELHI)
• Duration Of Justice: 3 year(s) 4 month(s) 2 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 06-03-2018
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: G
• Assessment Year: 2010-2011
• Appeal Filed On: 03-11-2014
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: S KAUSHLENDRA TIWARI
• Assessee Lawyers: Y P KAPUR
• Keywords: Business income; Permanent establishment
• Section: 143(3)

Judgement Text

1 ITA NO. 5923/DEL/2014 IN THE INCOME TAX APPELLATE TRIBUNAL DELHI BENCH: G NEW DELHI MS SUCHITRA KAMBLE, JUDICIAL MEMBER AND SH. PRASHANT MAHARISHI, ACCOUNTANT MEMBER ITA NO. 5923/DEL/201 4 ( A.Y 2010-11) DCIT CIRCLE-7(1) NEW DELHI (APPELLANT) VS SATHYADEEP ENGINEERING CO. LTD. FLAT NO. 13, SITE NO. 37 & 38, LSC, KALKAJI NEW DELHI AAFCS577J (RESPONDENT) APPELLANT BY SH. S. KAUSHLENDRA TIWARI, SR. DR RESPONDENT BY SH. Y. P. KAPUR, ADV ORDER PER SUCHITRA KAMBLE THIS APPEAL HAS BEEN FILED BY THE REVENUE AGAINST T HE ORDER DATED 08/08/2014 PASSED BY CIT(A)-X, NEW DELHI FOR ASSE SSMENT YEAR 2010-11. 2. THE GROUNDS OF APPEAL ARE AS UNDER:- 1. THE ID. CIT(A) HAS ERRED IN LAW AND ON FACTS IN DEL ETING THE ADDITION OF RS.53,46,151/- MADE BY THE A.O U/S40(A) (IA) OF INC OME TAX ACT, 1961. 2. THE LD.CIT(A) HAS ERRED IN LAW AND ON FACTS IN D ELETING THE ADDITION OF RS.73,81,506/- MADE BY THE A.O ON ACCOUNT OF REJECT ION OF TRADING RESULTS. 3. THE ASSESSEE COMPANY WAS ENGAGED IN THE BUSINESS OF MANUFACTURING AND EXPORT OF WIRE WELDED OR MESH PLANTS BESIDES SA LES IN THE COUNTRY. RETURN DATE OF HEARING 05.03.2018 DATE OF PRONOUNCEMENT 06.03.2018 2 ITA NO. 5923/DEL/2014 OF INCOME WAS FILED ON 29/4/2011 DECLARING IN INCOM E OF RS.93,78,160/-. THE ASSESSMENT U/S 143(3) WAS COMPLETED AT AN INCOME OF RS.2,21,05,817/-AFTER MAKING THE FOLLOWING DISALLOWANCES (I) COMMISSION E XPENSES DISALLOWED U/S 40(A) (I) RS.53,46,151/- (II) REJECTION OF TRADING RESULTS U/S145(2) OF THE ACT. RS.73, 81,506/- 4. AGGRIEVED BY THE ASSESSMENT ORDER THE ASSESSEE F ILED APPEAL BEFORE THE CIT (A). THE CIT (A) ALLOWED THE APPEAL OF THE ASS ESSEE. 5. THE LD. DR SUBMITTED THAT THE CIT (A) ERRED IN D ELETING THE ADDITION OF RS.53,46,151/- MADE BY THE ASSESSING OFFICER U/S 4 0(A) (IA). THE LD. DR SUBMITTED THAT IN THE ABSENCE OF PROPER STOCK REGIS TER, THE LOG BOOK, JOB CARDS OR EVEN THE DETAILS OF CONSUMPTION OF PRINCIPAL ITE MS IN A MACHINERY PRODUCED, THE CONSUMPTION OF RAW MATERIAL WAS NOT VERIFIABLE AT THE STAGE OF ASSESSMENT PROCEEDINGS. THE LD. DR FURTHER SUBMITTED THAT BY SIMPLY PRODUCING THE BOOKS OF ACCOUNT AND PURCHASE BILLS, THE ASSESSEE C ANNOT DISCHARGE ITS ONUS THAT ALL IS WELL WITH ITS ACCOUNTING AND THAT ALL T HE MATERIAL AS PER THE PURCHASE BILL WAS UTILIZED BY IT OR THAT IT SUBSTAN TIATE ITS TRADING RESULTS. THE LD. DR FURTHER SUBMITS THAT THE ASSESSEE HAS NOT GI VEN PROPER DETAILS AND THEREFORE, THE ASSESSING OFFICER HAS RIGHTLY MADE A N ADDITION OF RS.73, 81,506/- ON ACCOUNT OF REJECTION OF TRADING RESULTS . THE LD. DR RELIED UPON THE ORDER OF THE ASSESSING OFFICER. 6. THE LD. AR SUBMITTED THAT THE CIT (A) HAS GIVEN A DETAILED FINDING IN PARA 5.1 AND 6.1. AS RELATES TO GROUND NO. 1 THE LD . AR SUBMITTED THAT FOREIGN AGENTS DO NOT HAVE ANY PERMANENT ESTABLISHMENT IN I NDIA AND HENCE NO PART OF COMMISSION PAYABLE FOR PROCURING EXPORT ORDER IS PA YABLE IN INDIA AND THEREFORE, NOT TAXABLE IN INDIA. THE LD. AR SUBMITT ED THAT THE PAYMENT WAS MADE DIRECTLY OUTSIDE INDIA, IT WAS NOT MADE IN IND IA, NEITHER THE COMMISSION PAID TO FOREIGN AGENTS ACCRUE OR ARISE IN INDIA. TH US, THE CIT(A) HAS RIGHTLY DELETED THE ADDITION OF EXPENSES MADE BY THE ASSESS ING OFFICER U/S 40(A)(I) OF 3 ITA NO. 5923/DEL/2014 THE ACT. THE LD. AR RELIED UPON VARIOUS CASE LAWS WHEREIN IT IS HELD THAT THE COMMISSION INCOME OF A NON-RESIDENT FOR RENDERING S ERVICES OUTSIDE INDIA DOES NOT FALL WITHIN THE SCOPE OF ASSESSEES TOTAL INCOM E, AND THE SAME IS NOT CHARGEABLE TO TAX IN ASSESSEES HAND. THUS, THERE I S NO OBLIGATION OF THE ASSESSEE-PAYER TO DEDUCT TAX AT SOURCE ON SUCH COMM ISSION PAYMENT TO THE NON-RESIDENT. AS RELATES TO GROUND NO. 2, THE LD. A R SUBMITTED THAT SINCE ASSESSING OFFICER HAS NOT POINTED OUT ANY DEFECT WH ATSOEVER IN THE BOOKS OF ACCOUNTS PRODUCED BEFORE HIM AND EXAMINE BY HIM. O N THE ONE HAND, THE BOOK OVER WHICH TRADING ACCOUNTS WERE ACCEPTED IN T OTO BY ASSESSING OFFICER AND ADDITION IN THE GP WAS MADE MERELY ON THE BASIS OF MAINTENANCE OF STOCK REGISTER, LOG BOOKS AND JOB CARDS. 7. WE HAVE HEARD BOTH THE PARTIES AND PERUSED THE M ATERIAL AVAILABLE ON RECORD. AS RELATES TO GROUND NO. 1 OF THE APPEAL, THE ASSESSING OFFICER IGNORED THE FACT THAT THERE IS NO PERMANENT ESTABLISHMENT O F THE AGENTS IN INDIA. THE PERUSAL OF ACTIVITIES UNDERTAKEN BY THE FOREIGN AGE NTS SHOWS THAT THESE ARE RELATING TO FACILITATING THE SALES OF THE ASSESSEE COMPANY AND THE SERVICES ARE NOT FALLING UNDER THE CATEGORY OF THE TECHNICAL SER VICES. ITS A CLEAR CASE OF COMMISSION PAID TO THE FOREIGN AGENTS FOR IMPROVING THE SALES. THE RELIANCE OF THE HONBLE DELHI HIGH COURT DECISION IN CASE OF DI T VS. PANALFA AUTOELEKTRIK LTD. (2014) 49 TAXMANN.COM 412 IS RELEVANT IN THE P RESENT CASE WHEREIN IT IS HELD THAT COMMISSION PAID BY THE ASSESSEE TO ITS FO REIGN AGENT FOR ARRANGING EXPORT SALES AND RECOVERY OF PAYMENT COULD NOT BE R EGARDED AS FEE FOR TECHNICAL SERVICES. THE SECOND LIMB OF THE SUBMISSIONS OF THE ASSESSEE THAT THERE IS NO OBLIGATION OF THE ASSESSEE-PAYER TO DEDUCT TAX AT S OURCE ON SUCH COMMISSION PAYMENT TO THE NON-RESIDENT IS SUPPORTED BY THE ITA T DECISION IN CASE OF WELSPRING UNIVERSAL VS. JCIT (2015) 56 TAXMANN.COM 174. THE CIT(A) HAS TAKEN INTO ACCOUNT ALL THE FACTORS AND HAS GIVEN DE TAILED REASONING. THERE IS NO NEED TO INTERFERE WITH THE SAME. THUS, GROUND NO. 1 OF THE REVENUES APPEAL IS DISMISSED. 4 ITA NO. 5923/DEL/2014 8. AS REGARDS GROUND NO. 2, IT IS PERTINENT TO NOTE THAT THE ASSESSING OFFICER WHILE REJECTING THE BOOKS OF ACCOUNTS HAS N OT GIVEN AS TO WHAT DEFECT WAS THERE IN THE BOOKS OF ACCOUNTS. THE CIT (A) HA S GIVEN A DETAILED FINDING IN PARAGRAPH 6.1 WHICH IS AS FOLLOWS:- 6.1 THE FACTS OF THE CASE AND WRITTEN SUBMISSIONS OF THE APPELLANT ARE CAREFULLY CONSIDERED. THE GROUNDS OF APPEAL TAKEN B Y THE APPELLANT ARE BEING ADJUDICATED IN THE FOLLOWING PARAGRAPHS: GROUNDS NO.6,7 & 8 ARE AGAINST THE ADDITION OF RS.7 3,81,506/- MADE BY THE A.O. IN THE TRADING RESULTS DECLARED BY THE APP ELLANT AFTER INVOKING THE PROVISIONS OF SECTION 145(3) OF THE ACT. IT WAS OBS ERVED BY THE A.O. THAT THE CONSUMPTION OF RAW MATERIAL DURING THE YEAR UND ER REFERENCE WAS AT RS.8,11,16,226/- ON A TOTAL SALES OF RS.12,11,85,70 9/- WHICH WAS 66.9% AS AGAINST THE CONSUMPTION OF RAW MATERIAL OF RS.2, 44,08,426/- ON A TOTAL TURNOVER OF RS.4,22,19,367/- IN THE IMMEDIATELY PRE CEDING YEAR WHICH IS 57.8%. IT WAS OBSERVED BY THE A.O. THAT THE APPELLA NT WAS NOT MAINTAINING STOCK REGISTER, LOG BOOK, JOB CARD OR E VEN THE DETAILS OF CONSUMPTION OF PRINCIPAL ITEMS IN A MACHINE PRODUCE D AND, THEREFORE, IN THE CONSUMPTION OF RAW MATERIAL, ACCORDING TO THE A .O. WAS NOT VERIFIABLE. MERE PRODUCTION OF BOOKS OF ACCOUNTS AND PURCHASE B ILLS WERE NOT FOUND SUFFICIENT BY THE A.O. IN RESPECT OF DISCHARGING IT S ONUS, SO FAR AS THE UTILIZATION OF MATERIAL AS PER THE PURCHASE BILLS W AS CONCERNED, THEREFORE, BY INVOKING THE PROVISIONS OF SECTION 145(3) OF THE ACT AND REJECTING THE TRADING RESULTS, THE A.O. MADE AN ADDITION OF RS.73 ,81,576/- BEING 9.1% OF THE CONSUMPTION OF RS.8,11,16,226/- DURING THE Y EAR. THE FIGURE OF 9.1% WAS TAKEN BY THE A.O. BEING THE EXCESS CONSUMP TION (66.9% AGAINST 57.8%) SHOWN BY THE APPELLANT DURING THE YEAR AS CO MPARED TO THE IMMEDIATELY PRECEDING YEAR. THE APPELLANT HAS MADE THE LENGTHY SUBMISSIONS WHICH ARE SUMMARIZED AS UNDER: (I) THE SALES / TURNOVER OF THE APPELLANT HAD INCREASE D BY 2.87 TIMES (EXPORT TURNOVER INCREASED BY 3.7 TIMES). (II) THERE WAS A MARGINAL INCREASE OF 0.8% IN GP RATE A S COMPARED TO PREVIOUS YEAR'S GP WHICH HAD RESULTED INTO SUBSTANT IAL INCREASE IN THE VOLUME OF GROSS PROFIT BY A SUM OF RS.181.20 LAKHS DURING THE YEAR AS COMPARED TO IMMEDIATELY PRECEDING YEAR. (III) THE APPELLANT DID NOT MANUFACTURE TAILOR-MADE ITEM S DURING THE YEAR ESPECIALLY WHEN IN THE EXPORT SALES, GOODS ARE BEING MANUFACTURED AS PER DESIGN AND SPECIFICATION PROVIDED BY THE BUY ERS OF THE EXPORTED 5 ITA NO. 5923/DEL/2014 ORDERS. THUS, THE CONSUMPTION OF RAW MATERIAL VARIE S FROM ORDER TO ORDER DUE TO DESIGN OF THE MACHINES REQUIRED BY THE BUYER S. AS SUCH, THE CONSUMPTION OF RAW MATERIAL IS NOT COMPARABLE WHEN ORDERS ARE OF DIFFERENT DESIGN AND SPECIFICATION ESPECIALLY IN RE SPECT OF EXPORT SALES. (IV) THE SALES DECLARED BY THE APPELLANT HAD BEEN ACCEPTED BY THE SALES TAX AUTHORITIES ON THE BASIS OF SAME SETS OF BOOKS OF ACCOUNTS WHICH WERE PRODUCED BEFORE THE A.O. (V) ADMITTEDLY THE APPELLANT WAS NOT MAINTAINING S TOCK REGISTER, LOG BOOK, JOB CARDS BECAUSE OF ITS LIMITATION IN MANUFACTURIN G THE ITEMS BUT OTHER BOOKS OF ACCOUNTS, PURCHASE AND SALE VOUCHERS AND V OUCHERS FOR OTHER EXPENSES WERE MAINTAINED BY IT IN ITS USUAL COURSE OF BUSINESS AND THE SAME WERE SUBJECTED TO AUDIT. THE CENTRAL GOVERNMEN T HAD NOT LAID DOWN ANY GUIDANCE IN RESPECT OF THE BOOKS OF ACCOUNTS, T YPE OF STOCK RECORDS, PAST RECORDS ARE TO BE MAINTAINED BY THE COMPANIES LIKE THE APPELLANT WHERE DIFFERENT TYPES OF MACHINERIES ARE MANUFACTUR ED. (VI) THE A.O. HAS NOT POINTED OUT ANY DEFECT WHATSO EVER IN THE BOOKS OF ACCOUNTS PRODUCED BEFORE HIM AND EXAMINED BY HIM BU T MERELY ON THE BASIS OF NON MAINTENANCE OF STOCK REGISTER, LOG BOO K AND JOB CARDS, THE PROVISIONS OF SECTION 145(3) OF THE ACT ARE INVOKED . THUS, ON THE ONE HAND THE BOOK VERSION OF TRADING ACCOUNTS WERE ACCEPTED IN TOTO BY THE A.O., ADDITION IN THE GP HAS BEEN MADE MERELY ON THE BASI S OF NO MAINTENANCE OF STOCK REGISTER, LOG BOOK AND JOB CARDS. (VII) THE A.O. HAS NOT POINTED OUT THAT ON THE BA SIS OF BOOKS OF ACCOUNTS MAINTAINED BY THE APPELLANT, THE CORRECT PROFIT CAN NOT BE DEDUCED ALTHOUGH SUCH BOOKS OF ACCOUNTS ARE CONSISTENTLY MA INTAINED AND THE TRADING RESULTS WERE REGULARLY BEING ACCEPTED BY TH E AUTHORITIES IN THE PAST. THE APPELLANT HAS RELIED UPON THE DECISIONS OF VARI OUS COURTS INCLUDING THE JURISDICTIONAL HIGH COURT OF DELHI IN THE CASE OF CIT V. POONAM RANI (2010) 326 ITRT 223 (DEL). ON CONSIDERING THE FACTS OF THE CASE IT IS OBSERVED THAT ADMITTEDLY THERE WAS AN INCREASE IN THE CONSUMPTION OF RAW MATERIAL FROM 57.8% TO 66.9%. HOWEVER, SINCE THE APPELLANT WAS NOT MANUFACTURING TAILOR-MADE MACHINES AND ITS DESIGN AND SPECIFICATION WERE BASE D UPON THE REQUIREMENT OF THE BUYERS (MAJORITY THEM BEING THE FOREIGN BUYERS), THE INFERENCE DRAWN BY THE A.O. THAT THE CONSUMPTION OF RAW MATERIAL SHOULD HAVE BEEN CONSTANT IS NOT SUPPORTED WITH A SOUND LO GIC. THE A.O. HAS LOST SIGHT OF THE FACT THAT THE TURNOVER OF THE APPELLAN T COMPANY HAS INCREASED MULTIFOLD AND BY THIS LOGIC ALSO CONSUMPTION OF RAW MATERIAL SHOULD DEFINITELY INCREASE. IT IS DISHEARTENING TO NOTICE THAT THE A.O. HAS NOT GONE 6 ITA NO. 5923/DEL/2014 THROUGH THE FACT THAT THE RESULTANT GP RATE HAD INC REASED AS COMPARED TO IMMEDIATELY PRECEDING YEAR DESPITE INCREASE IN THE CONSUMPTION OF RAW MATERIAL. IT IS NOTICED THAT WHILE GP RATIO IN AY 2 009- 10 WAS 21.73% IT HAD INCREASED TO 22.52% (INCREASED BY 0.79%) DURING THE YEAR UNDER CONSIDERATION. HAD THERE BEEN ANY DECREASE OR LOSS RESULTANT TO THE INCREASE OF CONSUMPTION, IT WOULD HAVE BEEN AN INDI CATION BEFORE THE A.O. THAT THE APPELLANT'S CASE REQUIRED DEEPER SCRUTINY FOR SEARCHING THE CAUSES OF SUCH DECLINE. HOWEVER, SINCE THE APPELLANT WAS C ONSISTENTLY MAINTAINING THE BOOKS OF ACCOUNTS, PURCHASE VOUCHER S, EXPENDITURE VOUCHERS ETC. AND ITS RESULTS WERE BEING ACCEPTED, THERE WAS LITTLE DOUBT ABOUT THE RESULTS REFLECTED IN THE REGULAR BOOKS OF ACCOUNTS UNLESS THE A.O. WAS IN A POSITION TO FIND OUT ANY DEFECTS IN SUCH B OOKS OF ACCOUNTS, THE APPELLANT HAS AMPLY CLARIFIED THAT IT WAS NOT PRACT ICALLY POSSIBLE FOR HIM TO MAINTAIN THE ITEM WISE CONSUMPTION RECORDS AND STOC K REGISTER AND AT THE SAME TIME THE APPELLANT'S ARGUMENT HAS FORCED THAT MAINTAINING SUCH RECORDS WAS NOT STATUTORY OBLIGATION ON THE PART OF THE APPELLANT HAS NO SUCH RULES HAVE BEEN PRESCRIBED FOR SUCH MANUFACTUR ING / TRADING ACTIVITY. THERE ARE PLETHORA DECISIONS OF HON'BLE COURTS THAT MERELY NON- MAINTENANCE OF STOCK RECORDS ITSELF CANNOT BE A GRO UND FOR REJECTION OF ACCOUNTS UNLESS AND UNTIL SOME POSITIVE MATERIAL IS DETECTED BY THE A.O. AGAINST THE CORRECTNESS OF THEIR ACCOUNTS. IN THE I NSTANT CASE, THE A.O. FAILED TO BRING OUT ANY POSITIVE MATERIAL ON RECORD FROM THE BOOKS OF ACCOUNTS AGAINST THEIR CORRECTNESS AND, THEREFORE, THE REJECTION OF TRADING RESULTS MERELY ON ACCOUNT OF NON-MAINTENANCE OF STO CK REGISTER IS NOT JUSTIFIED IN VIEW OF THE DECISION OF JURISDICTIONAL HIGH COURT AS RELIED UPON BY THE APPELLANT. THE ADDITION OF RS.73,81,506/- MA DE BY THE A.O. IS NOT JUSTIFIED AND THE SAME IS DIRECTED TO BE DELETED. G ROUNDS NO.6,7 & 8 OF APPEAL ARE ALLOWED. THE CIT(A) HAS GIVEN A DETAILED FINDING AND THERE IS NO NEED TO INTERFERE WITH THE SAME. HENCE, THE APPEAL OF THE REVENUE IS DISMISSED. 9. IN RESULT, THE APPEAL OF THE REVENUE IS DISMISSE D. ORDER PRONOUNCED IN THE OPEN COURT ON 06TH MARCH, 2018 . SD/- SD/- (PRASHANT MAHARISHI) (SUCHITRA KAMBLE) ACCOUNTANT MEMBER JUDICIAL MEM BER DATED: 06/03/2018 COPY FORWARDED TO: 7 ITA NO. 5923/DEL/2014 1. APPELLANT 2. RESPONDENT 3. CIT 4. CIT(APPEALS) 5. DR: ITAT ASSISTANT REGISTRAR ITAT NEW DELHI DATE 1. DRAFT DICTATED ON 06/03/2018 PS 2. DRAFT PLACED BEFORE AUTHOR 06/03/2018 PS 3. DRAFT PROPOSED & PLACED BEFORE THE SECOND MEMBER .2017 JM/AM 4. DRAFT DISCUSSED/APPROVED BY SECOND MEMBER. JM/AM 5. APPROVED DRAFT COMES TO THE SR.PS/PS 06.03.2018 PS/PS 6. KEPT FOR PRONOUNCEMENT ON PS 7. FILE SENT TO THE BENCH CLERK 0 6 .03.2018 PS 8. DATE ON WHICH FILE GOES TO THE AR 9. DATE ON WHICH FILE GOES TO THE HEAD CLERK. 10. DATE OF DISPATCH OF ORDER.