K.T.V.Oil Mills, CHENNAI V. ACIT, CHENNAI

ITA 788/CHNY/2016

• Counselvise Citation: [2017] 128 COUNSELVISE.COM (IT) 4596 (ITAT-CHENNAI)
• Duration Of Justice: 1 year(s) 1 month(s) 5 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 05-05-2017
• Appeal Filed By: Assessee
• Bench Allotted: B
• Next Hearing Date: 10-04-2017
• Assessment Year: 2003-2004
• Appeal Filed On: 30-03-2016
• Court: TRIBUNAL
• Department Lawyers: SUPRIYA PAL
• Assessee Lawyers: S SRIDHAR
• Keywords: Permanent establishment
• Section: 234B

Judgement Text

, , IN THE INCOME TAX APPELLATE TRIBUNAL B BENCH : CHENNAI , . ! '# BEFORE SHRI CHANDRA POOJARI, ACCOUNTANT MEMBER AND SHRI G.PAVAN KUMAR, JUDICIAL MEMBER ./ I.T.A.NO.788/MDS./2016 / ASSESSMENT YEAR : 2003-04 M/S.K.T.V.OIL MILLS , 7/3,ARULNAGAR SALAI, R.V.NAGAR POST, KODINGIY8UR, CHENNAI 600 118. VS. THE ACIT, CIRCLE-XI, CHENNAI 600 006. [PAN AAAFK 0745 L ] ( $% / APPELLANT) ( &'$% /RESPONDENT) / APPELLANT BY : MR.S.SRIDHAR,ADVOCATE /RESPONDENT BY : MR.SUPRIYA PAL, JCIT, D.R / DATE OF HEARING : 10 .04 .2017 !' / DATE OF PRONOUNCEMENT : 05 .05 .2017 ( / O R D E R PER CHANDRA POOJARI, ACCOUNTANT MEMBER THIS APPEAL OF THE ASSESSEE IS DIRECTED AGAINS T THE ORDER OF THE COMMISSIONER OF INCOME-TAX (APPEALS)-5, CHENNA I DATED 12.02.2016 AND PERTAINS TO ASSESSMENT YEAR 2003-0 4. 2. THE ONLY GROUND RAISED BY THE ASSESSEE IS WIT H REGARD TO CONFIRMING THE DISALLOWANCE OF INTEREST PAID OUTSID E INDIA ON THE ITA NO.788 /MDS./2016 :- 2 -: APPLICATION OF SEC.40(A)(I) OF THE ACT FOR WANT OF TDS WITHOUT ASSIGNING PROPER REASONS AND JUSTIFICATION BY LD.CI T(A). 3. THE FACTS OF THE ISSUE ARE THAT THERE WAS AN IN TEREST PAYMENTS TO NON-RESIDENTS, VIZ. M/S.KUOK OILS AND G RAINS PVT LTD.,( ` 2,12,999/-) AND M/S.PAN CENTURY EDIBLE OIL ( ` 1,98,070/-) TOTALING OF ` 4,11,069/-. THE LD. ASSESSING OFFICER DISALLOWED T HE SAME BY INVOKING THE PROVISIONS OF THE SEC.40(A)(I) OF T HE ACT ON THE REASON THAT PROVISIONS OF THE SECTION 195 OF THE ACT IS AP PLICABLE. AGGRIEVED, THE ASSESSEE CARRIED THE APPEAL BEFORE THE LD.CIT(A ). ON APPEAL, LD.CIT(A) ENDORSED THE VIEW OF THE LD. ASSESSING OF FICER. AGAINST THIS, THE ASSESSEE IS IN APPEAL BEFORE US. 4. BEFORE US LD.A.R SUBMITTED THAT SEC.195 OF THE ACT HAVE NO APPLICATION TO THE FACTS OF THE CASE AS INTEREST PA YMENTS WERE MADE UNDER COMMERCIAL INVOICES FOR PURCHASE OF EDIBLE OI LS AND THE SAID NON-RESIDENT COMPANIES DID NOT HAVE PERMANENT BUSIN ESS ESTABLISHMENT IN INDIA. 5. ON THE OTHER HAND, LD.D.R SUBMITTED THAT AS AMO UNT IS IN NATURE OF INTEREST U/S.2(28A) OF THE ACT AND THUS U NDER THE PROVISIONS OF THE ACT THERE IS A REQUIREMENT TO DEDUCT TAX AT SOURCE. HAVING NOT DEDUCTED TAX AT SOURCE, THE PROVISIONS OF THE SEC.4 0(A)(I) OF THE ACT TO BE APPLIED. ITA NO.788 /MDS./2016 :- 3 -: 6. WE HAVE HEARD BOTH THE PARTIES AND PERUSED THE MATERIAL ON RECORD. SIMILAR ISSUE CAME BEFORE HYDERABAD TRIBUNA L IN THE CASE OF M/S.VIJAI ELECTRICALS LTD. IN ITA NO.1072/HYD./2004 & OTHERS DATED 22.07.2011 HELD AS FOLLOWS:- SECTION 2(28A) AND IT WILL TAKE CHARACTER OF PURCH ASE PRICE AND, THEREFORE, ASSESSEE WAS NOT LIABLE TO DEDUCT TAX AT SOURED FRO M THE SAID PAYMENT OF INTEREST AND HENCE DISALLOWANCE OF INTEREST MADE U/ S. 40(A)(I) WAS NOT ATTRACTED. HOWEVER, THIS VIEW WAS REVERSED BY GUJAR AT HIGH COURT IN THE CASE OF CIT VS. VIJAY SHIP BREAKING CORPORATION (SU PRA) AND HELD THAT THE USANCE INTEREST PAID BY THE ASSESSEE WAS CHARGEABLE UNDER THE PROVISIONS OF THE I.T. ACT, 1961 AND SINCE THE ASSESSEE WAS RESPO NSIBLE OF PAYING TO NON- RESIDENT, THEY WERE LIABLE TO DEDUCT THE INCOME TAX U/S. 195 OF THE ACT. IT WAS HELD THAT USANCE INTEREST WAS NOT ANY PART OF T HE PURCHASE PRICE AND WAS IN FACT INTEREST WITHIN THE MEANING OF DEFINITI ON OF THE TERM INTEREST U/S. 2(28A) OF THE I.T. ACT. HOWEVER, THIS JUDGEMEN T OF GUJARAT HIGH COURT WAS REVERSED BY THE SUPREME COURT IN THE CASE OF VI JAY SHIP BREAKING CORPORATION & ORS. VS. CIT (314 ITR 309) WHEREIN IT WAS HELD THE HONBLE HIGH COURT DELIVERED THIS JUDGEMENT ON 20TH MARCH, 2003 , THE INCOME-TAX ACT WAS AMENDED ON 18TH SEPTEMBER, 2003 WITH EFFECT FROM 1ST APRIL, 1983. BY REASON OF SUCH AMENDMENT, EXPLANATION 2 WAS ADDE D TO SECTION 10(15)(IV)(C), WHICH READS AS FOLLOWS: EXPLANATION 2. FOR THE REMOVAL OF DOUBTS, IT IS HEREBY DECLARED THAT THE USANCE INTEREST PAYABLE OUTSIDE I NDIA BY AN UNDERTAKING ENGAGED IN THE BUSINESS OF SHIP-BREAKIN G IN RESPECT OF PURCHASE OF A SHIP FROM OUTSIDE INDIA SHALL BE D EEMED TO BE THE INTEREST PAYABLE ON A DEBT INCURRED IN A FOREIG N COUNTRY IN RESPECT OF THE PURCHASE OUTSIDE INDIA. 40. FINALLY IT WAS HELD BY THE HONBLE SUPREME COUR T THAT IN VIEW OF THE ABOVE EXPLANATION THE ASSESSEE IS NOT BOUND TO DEDUCT TAX AT SOURCE SINCE THE ASSESSEE IS NOT LIABLE TO PAY TAX AS THE INTEREST PAYABLE ON DE BT WAS INCURRED IN A FOREIGN COUNTRY IN RESPECT OF THE PURCHASE OUTSIDE INDIA. I N VIEW OF THE ABOVE JUDGEMENT OF THE HONBLE SUPREME COURT, WE FIND THAT THE ASSESSE E CASE ALSO COMES UNDER THAT PARAMETER AND THE INTEREST PAID BY THE ASSESSEE ON PURCHASE FROM OUTSIDE THE ITA NO.788 /MDS./2016 :- 4 -: COUNTRY CANNOT BE CONSIDERED AS INTEREST U/S. 2(28A ) OF THE I.T. ACT., AND IT TAKES CHARPCTER OF PURCHASE PRICE OF SUPPLIES. FURTHER JU RISDICTIONAL HIGH COURT IN THE CASE OF CIT VS. VISAKHAPATNAM PORT TRUST (AP) (144 ITR 1 46) HELD AS FOLLOWS: THE AGREEMENT BETWEEN THE GERMAN COMPANY AND THE P OONA COMPANY DID NOT ALSO AMOUNT TO THE GERMAN COMPANY H AVING A PERMANENT ESTABLISHMENT IN INDIA. THE ORIGINAL CONT RACT BETWEEN THE GERMAN COMPANY AND THE PORT TRUST CONTEMPLATED THE EMPLOYMENT OF A SUB-CONTRACTOR OR SUB- SUPPLIER. TH E POONA COMPANY WAS SO EMPLOYER LATER. THERE WAS NEITHER AN Y IDENTITY OF INTEREST NOR IDENTITY OF CHARACTER NOR OF PERSON ALITY, NOR WAS THERE ANY UNITY IN PROFIT MAKING BETWEEN THE POONA COMPANY AND THE GERMAN COMPANY SO THAT THE FORMER MAY BE TR EATED AS AN INDIAN AGENT OF THE LATTER; AND (IV) THAT THE PROVISIONS OF ART III OF THE INDOGERM AN AGREEMENT INDICATED THAT WHILE INDUSTRIAL OR COMMERCIAL INCO ME OF THE FOREIGN ENTERPRISE WAS NOT TAXABLE IN INDIA, THE RE NTS, ROYALTIES, INTEREST, DIVIDENDS, ETC., DERIVED BY THE FOREIGN E NTERPRISE FROM SOURCES IN INDIA WERE TAXABLE. THE ITEMS, RENTS, RO YALTIES, DIVIDENDS, ETC., WERE TAXABLE ONLY IF THEY SATISFIE D HE CONDITIONS MENTIONED FOR THEIR LIABILITY TO TAX AS ENVISAGED I N THE VARIOUS SPECIFIC ARTICLES, ART. VIII REFERRED TO TAXABILITY OF INTEREST IN INDIA. INTEREST WOULD BE TAXABLE IF IT AROSE OUT OF INDEBTEDNESS. THE WORDS ANY OTHER FORM OF INDEBTEDNESS FROM SOU RCES IN THE OTHER TERRITORY COULD ONLY MEAN INTEREST ARISING OR ACCRUING AS A SEPARATE SOURCE OF INCOME. IT WOULD NOT INCLUDE I NTEREST PAYABLE ON THE UNPAID PURCHASE MONEY AGREED TO BE P ART OF THE SALE CONSIDERATION. THERE WAS NOTHING IN THE INITIA L CONTRACT BY WAY OF NOVATION CONVERTING THE BALANCE OF CONSIDERA TION INTO A LOAN. HENCE, THE INTEREST RECEIVED BY THE SELLER CA NNOT BE REGARDED AS INTEREST ON MONEY LENT NOTWITHSTANDING THE NOMENCLATURE ADOPTED BY THE PARTIES. THE ASSESSEE WAS IMMUNE FROM LIABILITY EITHER WHOLL Y OR PARTLY TO INCOME-TAX IN VIEW OF THE PROVISIONS OF THE DOUBLE TAXATION AVOIDANCE AGREEMENT BETWEEN THE FEDERAL REPUBLIC OF GERMANY AND INDIA. 41. ACCORDINGLY, THE ASSESSEE IS NOT LIABLE TO DEDU CT TDS ON THAT USANCE INTEREST AND THE PROVISIONS OF SECITONL95 R.W.S. 40(A)(IA) A RE NOT APPLICABLE. ACCORDINGLY, WE ALLOW THE GROUND TAKEN BY THE ASSESSEE IN THESE APPEALS. FURTHER THE LEVY OF INTEREST U/S. 234B AND 234C IT SHOULD BE CONSEQUENT IAL AND MANDATORY IN NATURE, IS TO BE COMPUTED ACCORDINGLY. IN THE RESUL T, APPEALS OF THE ASSESSEE IN I.T.A. NOS. 239/HYD/09, 845/HYD/09 AND 1462/HYD/201 0 ARE ALLOWED. ITA NO.788 /MDS./2016 :- 5 -: ACCORDINGLY, WE DECIDE THE ISSUE IN FAVOUR OF ASSES SEE. 7. IN THE RESULT, THE APPEAL OF THE ASSESSEE IS A LLOWED. ORDER PRONOUNCED ON 05 TH MAY, 2017, AT CHENNAI. SD/ - SD/ - ( . ) ( G.PAVAN KUMAR ) ! / JUDICIAL MEMBER ( ) (CHANDRA POOJARI) / ACCOUNTANT MEMBER #$ / CHENNAI %& / DATED: 05 TH MAY, 2017. K S SUNDARAM &'(()*( +* / COPY TO: ( 1 . / APPELLANT 3. ( ,(- . / CIT(A) 5. */0 (1 / DR 2. / RESPONDENT 4. ( , / CIT 6. 02(3 / GF