Sri Rajalakshmi Enterprises, Salem V. ITO, Salem

ITA 599/CHNY/2013

• Counselvise Citation: [2014] 140 COUNSELVISE.COM (IT) 81207 (ITAT-CHENNAI)
• Duration Of Justice: 1 year(s) 6 month(s) 3 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 09-10-2014
• Appeal Filed By: Assessee
• Bench Allotted: B
• Next Hearing Date: 09-10-2014
• Assessment Year: 2008-2009
• Appeal Filed On: 05-04-2013
• Court: TRIBUNAL
• Department Lawyers: C V PAVANA KUMAR
• Assessee Lawyers: G BASKAR
• Keywords: Capital asset; Deemed to accrue or arise in india; Permanent establishment; Non-deduction of tax
• Section: 14A

Judgement Text

, , IN THE INCOME TAX APPELLATE TRIBUNAL B BENCH, C HENNAI . . . , ! '# , $ !%' !& BEFORE DR. O.K. NARAYANAN, VICE PRESIDENT & SHRI VIKAS AWASTHY, JUDICIAL MEMBER I.T.A. NOS. 599, 600 & 1977/MDS/2013 ASSESSMENT YEARS: 2008-09, 2009-10 & 2010-11 SRI RAJALAKSHMI ENTERPRISES, NO.3/18, A.R.G. COMPLEX, ASHOK NAGAR, NARASOTHIPATTI, SALEM-636 004 [PAN: AARFS 3117 K] ( #' /APPELLANT) VS THE INCOME TAX OFFICER, WARD-I(5) / THE ASSISTANT COMMISSIONER OF INCOME TAX, CIRCLE-I(2), SALEM ( ()#' /RESPONDENT) / APPELLANT BY : SHRI G.BASKAR, ADVOCATE / RESPONDENT BY : SHRI C.V.PAVANA KUMAR, JCIT / DATE OF HEARING : 09-10-2014 / DATE OF PRONOUNCEMENT : 09-10-2014 %* / O R D E R PER VIKAS AWASTHY, J.M: THE SET OF THREE APPEALS HAVE BEEN FILED BY THE ASS ESSEE IMPUGNING THE ORDERS OF THE COMMISSIONER OF INCOME TAX(APPEALS), SALEM FOR THE ASSESSMENT YEARS (AYS) 2008-09 & 2009-10 DATED 29-01-2013 AND ORDER DATED 30-08-2013 FOR THE I.T.A. NOS. 599, 600 & 1977/MDS/13 2 AY.2010-11. IN ALL THE THREE APPEALS, THE ASSESSEE HAS RAISED FOLLOWING TWO ISSUES: I. DIS-ALLOWANCE U/S.14A R.W.RULE 8D II. DIS-ALLOWANCE U/S.40(A)(I) IN RESPECT OF COMMIS SIONS PAID TO FOREIGN AGENTS. THE ASSESSEE IS IN THE BUSINESS OF TRADING AND EXPO RT OF YARN. DURING THE COURSE OF SCRUTINY ASSESSMENT IN THE AYS UNDER CONSIDERATION, THE ASSESSING OFFICER MADE DIS-ALLOWANCES/ADDITIONS IN RESPECT OF INTEREST ON INVESTMENT IN SHARES BY INVOKING THE PROVISIONS OF SECTION 14A R. W.RULE 8D AND FOR NON-DEDUCTION OF TAX AT SOURCE ON THE PAYMENT O F COMMISSIONS TO M/S.SVAV-OR LTD., ISRAEL, D.L.DICKSON, SRILANKA AND SOME OTHERS. AGGRIEVED BY THE ASSESSMENT ORDERS FOR THE RESPECTI VE AYS, THE ASSESSEE FILED APPEALS BEFORE THE CIT(APPEALS). THE CIT(APPEALS) UPHELD THE FINDINGS OF ASSESSING OFFIC ER AND DISMISSED THE APPEALS OF THE ASSESSEE. AGGRIEVED BY THE ORDER OF CIT(APPEALS), THE ASSESSE E HAS COME IN SECOND APPEAL BEFORE THE TRIBUNAL. I.T.A. NOS. 599, 600 & 1977/MDS/13 3 2. SHRI G.BASKAR, APPEARING ON BEHALF OF THE ASSESS EE SUBMITTED THAT AS FAR AS THE FIRST ISSUE RELATING T O DIS-ALLOWANCE U/S.14A R.W.RULE 8D IS CONCERNED, HE IS NOT PRESSIN G THE ISSUE AT THIS STAGE. IN SO FAR AS THE SECOND ISSUE RELATING TO DIS-ALLOWANCE U/S.40(A)(I) IN RESPECT OF PAYMENT OF FOREIGN AGENC Y COMMISSION IS CONCERNED, THE AUTHORITIES BELOW HAVE ERRED IN MAKI NG DIS- ALLOWANCE. THE FOREIGN AGENTS HAVE BEEN PROCURING ORDERS FOR THE ASSESSEE FROM THE OVERSEAS CUSTOMERS, THE COMMISSIO N HAS BEEN PAID OUTSIDE INDIA AND THE SALES AGENTS HAVE NO BUS INESS CONNECTION OR PERMANENT ESTABLISHMENT [PE]. THEREF ORE, THE INCOME OF FOREIGN AGENTS IS NOT TAXABLE IN INDIA. TO SUPPORT HIS CONTENTIONS, THE LD.COUNSEL PLACED RELIANCE ON THE DECISION OF HON'BLE MADRAS HIGH COURT IN THE CASE OF CIT VS. FAIZAN SHOES PVT. LIMITED REPORTED AS 367 ITR 155 (MAD). 3. ON THE OTHER HAND, SHRI C.V.PAVANA KUMAR, APPEAR ING ON BEHALF OF THE REVENUE SUPPORTED THE FINDINGS OF CIT (APPEALS) AND PRAYED FOR DISMISSING THE APPEALS OF THE ASSESSEE. 4. WE HAVE HEARD THE SUBMISSIONS MADE BY THE REPRESENTATIVES OF BOTH THE SIDES AND HAVE PERUSED THE ORDERS OF THE AUTHORITIES BELOW, AS WELL AS THE JUDGMENT ON W HICH THE I.T.A. NOS. 599, 600 & 1977/MDS/13 4 LD.COUNSEL FOR THE ASSESSEE HAS PLACED RELIANCE. T HE ONLY ISSUE FOR ADJUDICATION BEFORE THE TRIBUNAL IS WITH REGARD TO DIS-ALLOWANCE MADE U/S.40(A)(I) IN RESPECT OF PAYMENT OF COMMISSI ON TO FOREIGN AGENTS WITHOUT DEDUCTION OF TAX AT SOURCE. THE LD. COUNSEL FOR THE ASSESSEE HAS CONTENDED THAT THE COMMISSION CHARGES WERE PAID TO THE FOREIGN AGENTS FOR PROCURING BUSINESS ORDERS . THE COMMISSION CHARGES WERE DEDUCTED BY THE FOREIGN BUY ERS FROM THE SALE VALUE AND PAID TO THE AGENTS DIRECTLY. THE FO REIGN BUYERS SENT PAYMENTS BY LC ONLY FOR 97% AMOUNT. THE SERVICES W ERE RENDERED BY THE AGENTS OUTSIDE INDIA AND THE PAYMEN TS WERE MADE OUTSIDE INDIA. THE SAID FOREIGN AGENTS HAVE N O BUSINESS CONNECTION OR PE IN INDIA AND THE SERVICES ARE REN DERED BY THE AGENTS OUTSIDE INDIA. THEREFORE, THE COMMISSION IN COME EARNED BY THE FOREIGN AGENTS IS NOT CHARGEABLE TO TAX IN I NDIA. THE CIT(APPEALS) IN ORDER TO BRING SAID COMMISSION PAYM ENTS WITHIN THE TAX NET HAS INVOKED EXPLANATION-2 TO SECTION 9( 1)(I) OF THE ACT. EXPLANATION-2 DEFINES BUSINESS CONNECTION TO BE U NDERSTOOD IN THE MANNER, THE EXPRESSION IS USED IN SECTION 9(1)( I). THE RELEVANT EXTRACT OF SECTION 9(1)(I) IS REPRODUCED HEREUNDER: I.T.A. NOS. 599, 600 & 1977/MDS/13 5 9.(1) THE FOLLOWING INCOMES SHALL BE DEEMED TO ACC RUE OR ARISE IN INDIA:- (I) ALL INCOME ACCRUING OR ARISING, WHETHER DIRECTL Y OR INDIRECTLY, THROUGH OR FROM ANY BUSINESS CONNECTION IN INDIA, OR THROUG H OR FROM ANY PROPERTY IN INDIA, OR THROUGH OR FROM ANY ASSET OR SOURCE OF INCOME IN INDIA, OR THROUGH THE TRANSFER OF A CAPITAL ASSET S ITUATE IN INDIA. EXPLANATION 1. - XXXXXXXXXX EXPLANATION 2.FOR THE REMOVAL OF DOUBTS, IT IS HER EBY DECLARED THAT 'BUSINESS CONNECTION' SHALL INCLUDE ANY BUSINESS AC TIVITY CARRIED OUT THROUGH A PERSON WHO, ACTING ON BEHALF OF THE NON-R ESIDENT, (A) HAS AND HABITUALLY EXERCISES IN INDIA, AN AUTHO RITY TO CONCLUDE CONTRACTS ON BEHALF OF THE NON-RESIDENT, UNLESS HIS ACTIVITIES ARE LIMITED TO THE PURCHASE OF GOODS OR MERCHANDISE FOR THE NON- RESIDENT; OR (B) HAS NO SUCH AUTHORITY, BUT HABITUALLY MAINTAINS IN INDIA A STOCK OF GOODS OR MERCHANDISE FROM WHICH HE REGULARLY DELIVE RS GOODS OR MERCHANDISE ON BEHALF OF THE NON-RESIDENT; OR (C) HABITUALLY SECURES ORDERS IN INDIA, MAINLY OR W HOLLY FOR THE NON- RESIDENT OR FOR THAT NON-RESIDENT AND OTHER NON-RES IDENTS CONTROLLING, CONTROLLED BY, OR SUBJECT TO THE SAME COMMON CONTROL, AS THAT NON-RESIDENT: PROVIDED THAT SUCH BUSINESS CONNECTION SHALL NOT IN CLUDE ANY BUSINESS ACTIVITY CARRIED OUT THROUGH A BROKER, GENERAL COMM ISSION AGENT OR ANY OTHER AGENT HAVING AN INDEPENDENT STATUS, IF SUCH B ROKER, GENERAL COMMISSION AGENT OR ANY OTHER AGENT HAVING AN INDEP ENDENT STATUS IS ACTING IN THE ORDINARY COURSE OF HIS BUSINESS : I.T.A. NOS. 599, 600 & 1977/MDS/13 6 PROVIDED FURTHER THAT WHERE SUCH BROKER, GENERAL CO MMISSION AGENT OR ANY OTHER AGENT WORKS MAINLY OR WHOLLY ON BEHALF OF A NON-RESIDENT (HEREAFTER IN THIS PROVISO REFERRED TO AS THE PRINC IPAL NON-RESIDENT) OR ON BEHALF OF SUCH NON-RESIDENT AND OTHER NON-RESIDENTS WHICH ARE CONTROLLED BY THE PRINCIPAL NON-RESIDENT OR HAVE A CONTROLLING INTEREST IN THE PRINCIPAL NON-RESIDENT OR ARE SUBJECT TO THE SA ME COMMON CONTROL AS THE PRINCIPAL NON-RESIDENT, HE SHALL NOT BE DEEMED TO BE A BROKER, GENERAL COMMISSION AGENT OR AN AGENT OF AN INDEPEND ENT STATUS. IT IS NOT A CASE, WHERE THE NON-RESIDENT IS CARRYIN G ON ANY BUSINESS ACTIVITY IN INDIA. IT IS THE ASSESSEE WHO HAS ENGA GED THE SERVICES OF NON-RESIDENT AGENTS OUTSIDE INDIA TO PROPAGATE A ND CO-ORDINATE ITS SALES OUTSIDE INDIAN TERRITORY. THUS, IT IS UN AMBIGUOUSLY EVIDENT THAT THE PROVISIONS OF CLAUSE (I) OF SECTION 9(1) A ND EXPLANATION-2 WILL HAVE NO APPLICATION IN THE FACTS OF THE PRESEN T CASE. 5. THE HON'BLE JURISDICTIONAL HIGH COURT IN THE CASE OF CIT VS. FAIZAN SHOES PVT. LIMITED (SUPRA) WHILE DEALING WITH A SIMILAR ISSUE HAS HELD AS UNDER: 10. WHILE DEALING WITH SECTION 9(1) OF THE ACT, TH E SUPREME COURT IN COMMISSIONER OF INCOME TAX V. TOSHOKU LIMITED, [198 0] 125 ITR 525 (SC), ON CONSIDERING A TRANSACTION WHERE TOBACCO WA S EXPORTED TO JAPAN AND FRANCE AND SOLD THROUGH NON-RESIDENT ASSE SSEES WHO WERE PAID COMMISSION, HELD AS UNDER: I.T.A. NOS. 599, 600 & 1977/MDS/13 7 THE SECOND ASPECT OF THE SAME QUESTION IS WHETHER T HE COMMISSION AMOUNTS CREDITED IN THE BOOKS OF THE STA TUTORY AGENT CAN BE TREATED AS INCOMES ACCRUED, ARISEN, OR DEEME D TO HAVE ACCRUED OR ARISEN IN INDIA TO THE NON-RESIDENT ASSE SSEES DURING THE RELEVANT YEAR. THIS TAKES US TO S. 9 OF THE ACT. IT IS URGED THAT THE COMMISSION AMOUNTS SHOULD BE TREATED AS INCOMES DEE MED TO HAVE ACCRUED OR ARISEN IN INDIA AS THEY, ACCORDING TO THE DEPARTMENT, HAD EITHER ACCRUED OR ARISEN THROUGH AN D FROM THE BUSINESS CONNECTION IN INDIA THAT EXISTED BETWEEN T HE NON-RESIDENT ASSESSEES AND THE STATUTORY AGENT. THIS CONTENTION OVERLOOKS THE EFFECT OF CL. (A) OF THE EXPLANATION TO CL. (I) OF SUB-S. (1) OF S. 9 OF THE ACT WHICH PROVIDES THAT IN THE CASE OF A BUSINESS O F WHICH ALL THE OPERATIONS ARE NOT CARRIED OUT IN INDIA, THE INCOME OF THE BUSINESS DEEMED UNDER THAT CLAUSE TO ACCRUE OR ARISE IN INDI A SHALL BE ONLY SUCH PART OF THE INCOME AS IS REASONABLY ATTRIBUTAB LE TO THE OPERATIONS CARRIED OUT IN INDIA. IF ALL SUCH OPERAT IONS ARE CARRIED OUT IN INDIA, THE ENTIRE INCOME ACCRUING THEREFROM SHAL L BE DEEMED TO HAVE ACCRUED IN INDIA. IF HOWEVER, ALL THE OPERATIO NS ARE NOT CARRIED OUT IN THE TAXABLE TERRITORIES, THE PROFITS AND GAI NS OF BUSINESS DEEMED TO ACCRUE IN INDIA THROUGH AND FROM BUSINESS CONNECTION IN INDIA SHALL BE ONLY SUCH PROFITS AND GAINS AS ARE R EASONABLY ATTRIBUTABLE TO THAT PART OF THE OPERATIONS CARRIED OUT IN THE TAXABLE TERRITORIES. IF NO OPERATIONS OF BUSINESS ARE CARRI ED OUT IN THE TAXABLE TERRITORIES, IT FOLLOWS THAT THE INCOME ACCRUING OR ARISING ABROAD THROUGH OR FROM ANY BUSINESS CONNECTION IN INDIA CA NNOT BE DEEMED TO ACCRUE OR ARISE IN INDIA (SEE CIT V. R. D . AGGARWAL AND CO. [1965] 56 ITR 20 (SC) AND CARBORANDUM CO. V. CI T [1977] 108 ITR 335 (SC) WHICH ARE DECIDED ON THE BASIS OF S. 4 2 OF THE INDIAN I.T. ACT, 1922, WHICH CORRESPONDS TO S. 9(1)(I) OF THE ACT). IN THE INSTANT CASE, THE NON-RESIDENT ASSESSEES DID NOT CARRY ON ANY BUSINESS OPERATIONS IN THE TAXABLE TERRITORI ES. THEY ACTED AS SELLING AGENTS OUTSIDE INDIA. THE RECEIPT IN INDIA OF THE SALE I.T.A. NOS. 599, 600 & 1977/MDS/13 8 PROCEEDS OF TOBACCO REMITTED OR CAUSED TO BE REMITT ED BY THE PURCHASERS FROM ABROAD DOES NOT AMOUNT TO AN OPERAT ION CARRIED OUT BY THE ASSESSEES IN INDIA AS CONTEMPLATED BY CL . (A) OF THE EXPLANATION TO S. 9(1)(I) OF THE ACT. THE COMMISSIO N AMOUNTS WHICH WERE EARNED BY THE NON-RESIDENT ASSESSEES FOR SERVI CES RENDERED OUTSIDE INDIA CANNOT, THEREFORE, BE DEEMED TO BE IN COMES WHICH HAVE EITHER ACCRUED OR ARISEN IN INDIA. THE HIGH CO URT WAS, THEREFORE, RIGHT IN ANSWERING THE QUESTION AGAINST THE DEPARTMENT. 11. THE FACTS OF THE PRESENT CASE ARE AKIN TO THE F ACTS OF THE DECISION IN TOSHOKU LIMITED CASE, REFERRED SUPRA. IN THE INSTAN T CASE ALSO THE ASSESSEE ENGAGED THE SERVICES OF NON-RESIDENT AGENT TO PROCURE EXPORT ORDERS AND PAID COMMISSION. THAT APART, THE COMMISS IONER OF INCOME (APPEALS) AS WELL AS THE TRIBUNAL HAVE CORRECTLY AP PLIED THE PRINCIPLE LAID DOWN IN GE INDIA TECHNOLOGY CEN. (P) LTD. CASE , REFERRED SUPRA, TO HOLD THAT THE ASSESSEE IS NOT LIABLE TO DEDUCT TAX AT SOURCE WHEN THE NON-RESIDENT AGENT PROVIDES SERVICES OUTSIDE INDIA ON PAYMENT OF COMMISSION. 6. THE HON'BLE SUPREME COURT OF INDIA IN THE CASE OF GE INDIA TECHNOLOGIES P. LTD., REPORTED AS 327 ITR 456 HAS HELD THAT WHERE THE INCOME IS NOT CHARGEABLE TO TAX, THERE IS NO QU ESTION OF DEDUCTING TAX AT SOURCE. IN THE INSTANT CASE, THE COMMISSION PAID BY THE ASSESSEE TO HIS AGENT IS NOT CHARGEABLE TO T AX IN INDIA. THEREFORE, THE ASSESSEE WAS NOT LIABLE TO DEDUCT TA X AT SOURCE ON THE SAID PAYMENTS. SINCE, THE INCOME OF FOREIGN AG ENTS IS OUTSIDE THE PURVIEW OF SECTION 9, CONSEQUENTLY SECTION 195 OF THE ACT WILL I.T.A. NOS. 599, 600 & 1977/MDS/13 9 NOT COME INTO PLAY. THE FINDINGS OF CIT(APPEALS) I N CONFIRMING DIS-ALLOWANCE U/S.40(A)(I) ARE SET ASIDE AND THE IS SUE IS DECIDED IN FAVOUR OF THE ASSESSEE. 7. THE LD.COUNSEL FOR THE ASSESSEE HAS NOT PRESSED THE FIRST ISSUE WITH REGARD TO DIS-ALLOWANCE U/S.14A R.W.RULE 8D. THE SAME IS DISMISSED, ACCORDINGLY. IN RESULT, ALL THE APPEALS OF THE ASSESSEE ARE PART LY ALLOWED IN THE AFORESAID TERMS. ORDER PRONOUNCED IN THE OPEN COURT AT THE TIME OF H EARING ON THURSDAY, THE 09 TH OCTOBER, 2014 AT CHENNAI. SD/- SD/- ( . . . ) ( ! '# ) (DR. O.K. NARAYANAN) (VIKAS AWAS THY) / VICE PRESIDENT ! '# / JUDICIAL MEMBER $ /CHENNAI, %'& /DATED: 09 TH OCTOBER, 2014 TNMM '(!)*+* /COPY TO: 1. /APPELLANT 2. /RESPONDENT 3. ,-. /CIT(A) 4. , /CIT 5. */0!!12 /DR 6. 0345 /GF