ACIT, CHENNAI V. M/s. Tractors and Farm Equipments Ltd., CHENNAI

ITA 815/CHNY/2012

• Counselvise Citation: [2013] 140 COUNSELVISE.COM (IT) 68774 (ITAT-CHENNAI)
• Duration Of Justice: 1 year(s) 5 month(s) 18 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 30-09-2013
• Appeal Filed By: Department
• Order Result: Partly Allowed
• Bench Allotted: B
• Next Hearing Date: 24-09-2013
• Assessment Year: 2006-2007
• Appeal Filed On: 12-04-2012
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: SUNEEL VERMA
• Assessee Lawyers: R VIJAYARAGHAVAN
• Keywords: Double taxation relief; Retrospective amendment; Permanent establishment; Non-deduction of tax
• Section: 14A

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL B BENCH, CHENNAI BEFORE SHRI ABRAHAM P. GEORGE, ACCOUNTANT MEMBER AND SHRI CHALLA NAGENDRA PRASAD, JUDICIAL MEMBER I.T.A. NO. 815/MDS/2012 (ASSESSMENT YEAR : 2006-07) THE ASSISTANT COMMISSIONER OF INCOME TAX, COMPANY CIRCLE III(2), CHENNAI - 600 034. (APPELLANT) V. M/S TRACTOR AND FARM EQUIPMENT LTD., 35, NUNGAMBAKKAM HIGH ROAD, NUNGAMBAKKAM, CHENNAI - 600 034. PAN : AAACT 2761 Q (RESPONDENT) APPELLANT BY : SHRI SUNEEL VERMA, CIT RESPONDENT BY : SHRI R. VIJAYARAGHAVAN, ADVOCATE DATE OF HEARING : 24.09.2013 DATE OF PRONOUNCEMENT : 30.09.2013 O R D E R PER ABRAHAM P. GEORGE, ACCOUNTANT MEMBER : IN THIS APPEAL FILED BY THE REVENUE, IT HAS RAISE D FIVE GROUNDS, OUT OF WHICH, GROUNDS 1 AND 5 ARE GENERAL NEEDING N O ADJUDICATION. 2. GROUNDS 2 AND 3 DEAL WITH DISALLOWANCE MADE UNDE R SECTION 40(A)(I) OF INCOME-TAX ACT, 1961 (IN SHORT 'THE ACT ') IN RESPECT OF I.T.A. NO. 815/MDS/12 2 COMMISSION PAID TO CERTAIN NON-RESIDENT SELLING AGE NTS AND REIMBURSEMENT OF EXPENSES TO A SUBSIDIARY COMPANY O F THE ASSESSEE IN USA. 3. FACTS APROPOS ARE THAT ASSESSEE, ENGAGED IN THE BUSINESS OF MANUFACTURING AND SELLING OF TRACTORS AND FARM EQUI PMENTS, HAD FILED ITS RETURN FOR THE IMPUGNED ASSESSMENT YEAR DECLARI NG AN INCOME OF ` 17,71,86,570/-. DURING THE COURSE OF ASSESSMENT PR OCEEDINGS, IT WAS NOTED BY THE ASSESSING OFFICER THAT ASSESSEE HAD DE BITED A SUM OF ` 163.05 LAKHS AS COMMISSION TO SELLING AGENTS. FROM THE BREAK-UP, ASSESSING OFFICER NOTED THAT THIS INCLUDED A SUM OF ` 28,91,685/- PAID AS COMMISSION TO SELLING AGENTS. ASSESSEE HAD NOT EFFECTED ANY DEDUCTION OF TAX AT SOURCE ON THE SAID AMOUNT. WHE N CALLED FOR THE EXPLANATION, REASON FOR NON-DEDUCTION OF TAX GIVEN BY THE ASSESSEE WAS THAT THE ACTIVITIES OF THE SELLING AGENTS WERE CONFINED TO FOREIGN SOIL AND THEY HAD NO BUSINESS CONNECTION IN INDIA. HENCE, AS PER ASSESSEE, SECTION 195 OF THE ACT WAS NOT ATTRACTED. ASSESSEE, VIDE ITS LETTER DATED 18.12.2009, MENTIONED THE PAYMENT MADE TO M/S WALLACE CARTWRIGHT & CO. AS COMING WITHIN THE AMBIT OF FEE FOR TECHNICAL SERVICES. AS PER THE ASSESSEE, NEVERTHE LESS, SUCH FEE FELL WITHIN THE EXCEPTION PROVIDED IN SECTION 9(1)(VII) (B) OF THE ACT. I.T.A. NO. 815/MDS/12 3 4. HOWEVER, ASSESSING OFFICER WAS NOT IMPRESSED. A CCORDING TO HIM, THE FEE PAID BY THE ASSESSEE TO M/S WALLACE CA RTWRIGHT & CO. WAS FOR SERVICES UTILIZED IN INDIA AND, HENCE, DID NOT FALL WITHIN THE EXCEPTION CLAUSE PROVIDED UNDER SECTION 9(1)(VII) ( B) OF THE ACT. AS PER THE A.O., EXPLANATION TO SECTION 9(2) OF THE AC T OBVIATED THE REQUIREMENT FOR A NON-RESIDENT TO HAVE A TERRITORIA L NEXUS OR BUSINESS CONNECTION IN INDIA, FOR TAXING THE FEE FOR TECHNIC AL SERVICES RECEIVED BY THEM IN INDIA. HE, THEREFORE, HELD THE ASSESSEE HAD FAILED TO DEDUCT TAX OF ` 28,91,685/- AND MADE A DISALLOWANCE OF THE SAID SU M UNDER SECTION 40(A)(IA) OF THE ACT. 5. ASSESSING OFFICER ALSO NOTED THAT ASSESSEE HAD P AID A SUM OF ` 5,20,42,800/- TO M/S TAFE INC., USA AND A SUM OF ` 2,93,68,570/- TO ITS OVERSEAS OFFICES AT BELGRADE, VIENNA AND LONDON . AS PER THE ASSESSEE, THESE WERE ONLY REIMBURSEMENT OF EXPENSES . M/S TAFE INC., USA, AS PER ASSESSEE, WAS CONDUCTING MARKET I NTELLIGENCE SURVEY IN USA AND THE SAID ARRANGEMENT WAS BETWEEN TAFE INC., USA AND RESIDENTS IN USA. M/S TAFE INC., USA HAD N O BUSINESS CONNECTION OR PERMANENT ESTABLISHMENT IN INDIA. IN SOFAR AS REIMBURSEMENT OF EXPENDITURE TO THE OFFICES AT BELG RADE, VIENNA AND LONDON WAS CONCERNED, ARGUMENT OF THE ASSESSEE WAS THAT THESE I.T.A. NO. 815/MDS/12 4 WERE ALSO PURELY REIMBURSEMENTS OF EXPENDITURE INCU RRED. SINCE THESE WERE REIMBURSEMENTS OF EXPENDITURE, ASSESSEE ARGUED THAT THERE WAS NO NECESSITY TO DEDUCT ANY TAX AT SOURCE. 6. HOWEVER, ASSESSING OFFICER WAS NOT IMPRESSED. A CCORDING TO HIM, THE NATURE AND SERVICES RENDERED BY M/S TAFE I NC., USA BROUGHT IT CLEARLY WITHIN THE AMBIT OF FEE FOR TEC HNICAL SERVICES. SIMILARLY, THE REIMBURSEMENTS OF EXPENDITURE TO THE OFFICES AT BELGRADE, VIENNA AND LONDON WERE ALSO FOUND TO FALL IN THE CATEGORY OF CONSULTATION SERVICE. ACCORDING TO A.O., BY VIR TUE OF EXPLANATION TO SECTION 9(2) OF THE ACT, THERE WAS NO NECESSARY FOR THE NON-RESIDENTS TO HAVE A PERMANENT ESTABLISHMENT OR BUSINESS CONNE CTION IN INDIA FOR BEING CONSIDERED AS A TAXABLE ENTITY IN INDIA. TAKING THIS VIEW OF THE MATTER, A.O. CAME TO A CONCLUSION ASSESSEE HAD FAILED TO DEDUCT TAX AT SOURCE ON THE AMOUNTS PAID TO M/S TAFE INC., USA AS WELL AS TO ITS BELGRADE, VIENNA AND LONDON OFFICES. HE, TH EREFORE, APPLIED SECTION 40(A)(I) OF THE ACT AND MADE A TOTAL DISALL OWANCE OF ` 8,14,11,370/-. 7. AGGRIEVED, ASSESSEE MOVED IN APPEAL BEFORE CIT(A PPEALS). ARGUMENT OF THE ASSESSEE WAS THAT BY VIRTUE OF CIRC ULAR NO.786 DATED 7.2.2000 OF CBDT, THERE WAS NO REQUIREMENT FOR DEDU CTING TAX ON I.T.A. NO. 815/MDS/12 5 PAYMENTS MADE ON COMMISSION AND OTHER RELATED CHARG ES TO NON- RESIDENTS. FURTHER, AS PER ASSESSEE, THE QUESTION OF DEDUCTION OF TAX WOULD ARISE ONLY WHEN THE INCOME WAS CHARGEABLE TO TAX. INCOME DID NOT ARISE OR ACCRUE IN INDIA TO THE NON-RESIDENTS. RELIANCE WAS PLACED BY THE ASSESSEE ON THE DECISION OF HON'BLE A PEX COURT IN THE CASE OF GE TECHNOLOGY CENTRE V. CIT (327 ITR 456). 8. INSOFAR AS PAYMENT MADE TO M/S TAFE INC., USA WA S CONCERNED, ARGUMENT OF THE ASSESSEE WAS THAT THE SA ID COMPANY, BEING WHOLLY SUBSIDIARY OF ASSESSEE, HAD RENDERED S ERVICE IN RELATION TO EXPORTS IN USA, SINCE ASSESSEE WAS NOT MAINTAINI NG ANY SEPARATE OFFICE THERE. AS FOR THE REIMBURSEMENTS MADE TO BE LGRADE, VIENNA AND LONDON OFFICES, EXPLANATION OF THE ASSESSEE WAS THAT SUCH REIMBURSEMENTS WERE ROUTINE OUTGO LIKE RENT, TELEPH ONE CHARGES, STATIONERY, ETC. 9. LD. CIT(APPEALS) WAS APPRECIATIVE OF THE CONTENT IONS OF THE ASSESSEE. HE HELD THAT BY VIRTUE OF THE DECISION O F HON'BLE APEX COURT IN THE CASE OF GE TECHNOLOGY CENTRE (SUPRA), THE REMITTANCES DID NOT RESULT IN ANY ACCRUAL OF INCOME TO THE NON- RESIDENTS TO BE LIABLE FOR TAX IN INDIA. HE HELD THAT SECTION 40(A )(I) COULD NOT BE APPLIED AND DELETED THE DISALLOWANCE. I.T.A. NO. 815/MDS/12 6 10. NOW BEFORE US, SHRI SUNEEL VERMA, APPEARING FOR REVENUE, STRONGLY ASSAILING THE ORDER OF CIT(APPEALS), SUBMI TTED THAT THE CIT(APPEALS) HAD NOT EXAMINED THE AGREEMENT ENTERED BETWEEN ASSESSEE AND NON-RESIDENTS, NOR WITH M/S TAFE INC., USA. LD. CIT(APPEALS) HAD SIMPLY CAME TO A CONCLUSION THAT T HIS WAS A SIMPLE COMMISSION FOR SALES. WHETHER THE SO-CALLED REIMBU RSEMENT MADE TO M/S TAFE INC., USA WOULD INCLUDE ANY PROFIT ELEMENT RESULTING OUT OF THE SERVICE RENDERED BY THEM, WAS NOT VERIFIED. CI T(APPEALS) MISAPPLIED THE DECISION OF HON'BLE APEX COURT IN TH E CASE OF GE TECHNOLOGY CENTRE (SUPRA). 11. PER CONTRA, ADV. R. VIJAYARAGHAVAN, APPEARING F OR ASSESSEE, STRONGLY SUPPORTING THE ORDER OF CIT(APPEALS), SUBM ITTED THAT INSOFAR AS THE SUM OF ` 28,91,685/- WAS CONCERNED, THESE WERE THE AMOUNTS PAID TO SELLING AGENTS ABROAD FOR CLEARING, FORWARD ING AND MEETING THE ADMINISTRATIVE EXPENSES THERE. ACCORDING TO HIM, S UCH PAYMENTS WHICH WERE EFFECTED TO M/S WALLACE CARTWRIGHT & CO. WAS ONLY FOR PROCURING ORDERS IN TUNISIA. M/S WALLACE CARTWRIGH T & CO. WAS NOT HAVING ANY BUSINESS CONNECTION IN INDIA, NOR ANY PE RMANENT ESTABLISHMENT IN INDIA. THERE WERE NO TECHNICAL SE RVICES RENDERED BY THE SAID COMPANY AT ALL. THE QUESTION OF APPLICATI ON OF SECTION I.T.A. NO. 815/MDS/12 7 9(1)(VII) (B) WOULD COME INTO PLAY ONLY IF THERE WE RE ANY TECHNICAL SERVICE RENDERED BY M/S WALLACE CARTWRIGHT & CO. A S PER LEARNED A.R., LETTER DATED 18.12.2009, RELIED ON BY THE A.O . WAS ONLY AN ALTERNATE CLAIM PUT UP BY THE ASSESSEE, IF THE SERV ICE RENDERED BY M/S WALLACE CARTWRIGHT & CO. WAS CONSIDERED FEES FOR TE CHNICAL SERVICES. INSOFAR AS PAYMENT MADE TO M/S TAFE INC., USA WAS C ONCERNED, LEARNED A.R. SUBMITTED THAT THESE WERE REIMBURSEMEN TS OF EXPENDITURE. EVEN IF THE SERVICES RENDERED BY M/S TAFE INC., USA WERE CONSIDERED AS TECHNICAL SERVICES, IT FELL WITH IN THE AMBIT OF DOUBLE TAXATION AVOIDANCE AGREEMENT BETWEEN INDIA A ND USA. ACCORDING TO HIM, UNLESS TECHNICAL SERVICES WERE MA DE AVAILABLE BY M/S TAFE INC., USA TO THE ASSESSEE, IT WOULD NOT FA LL WITHIN THE PURVIEW OF TAXABILITY. SIMILAR WAS THE CASE WITH R EIMBURSEMENTS OF EXPENDITURE WITH REGARD TO OFFICES OF THE ASSESSEE AT BELGRADE, VIENNA AND LONDON. THEREFORE, ACCORDING TO LEARNED A.R., CIT(APPEALS) WAS JUSTIFIED IN DELETING THE DISALLOW ANCE MADE BY THE A.O. UNDER SECTION 40(A)(I) OF THE ACT. 12. WE HAVE PERUSED THE ORDERS AND HEARD THE RIVAL SUBMISSIONS. INSOFAR AS PAYMENT OF ` 28,91,685/- TO M/S WALLACE CARTWRIGHT & CO. IS CONCERNED, WE FIND THAT NONE OF THE AUTHORITIES HAVE VERIFIED I.T.A. NO. 815/MDS/12 8 AGREEMENT BETWEEN THE ASSESSEE AND THE SAID COMPANY , BASED ON WHICH PAYMENTS WERE EFFECTED TO THEM. NO EXAMINATI ON HAS ALSO BEEN DONE AS TO WHETHER THERE EXISTED ANY DTAA BETW EEN INDIA AND TUNISIA AND WHAT WAS THE DEFINITION OF TECHNICAL S ERVICES IF ANY IN SUCH DTAA. UNLESS AND UNTIL THESE ASPECTS ARE CARE FULLY VERIFIED, IT WILL NOT BE POSSIBLE TO COME TO A CONCLUSION THAT M /S WALLACE CARTWRIGHT & CO. WAS BEING PAID SUMS ON WHICH TAX W AS NOT DEDUCTIBLE AT SOURCE IN INDIA. WE FULLY AGREE WITH THE LEARNED D.R. THAT BY VIRTUE OF EXPLANATION TO SECTION 9(2) OF TH E ACT, INTRODUCED BY FINANCE ACT, 2010 WITH RETROSPECTIVE EFFECT FROM 1. 6.1976, THE REQUIREMENT FOR A NON-RESIDENT TO HAVE A RESIDENCE OR PLACE OF BUSINESS OR BUSINESS CONNECTION, IS NO MORE NECESSA RY. 13. COMING TO THE REIMBURSEMENTS ALLEGED TO HAVE BE EN MADE BY THE ASSESSEE FOR EXPENSES INCURRED BY ITS SUBSIDIAR Y M/S TAFE INC., USA, NONE OF THE AUTHORITIES HAVE VERIFIED THE BASE ON WHICH THE REIMBURSEMENTS HAD BEEN DONE. HERE ALSO WHETHER TH ERE WAS ANY AGREEMENT BETWEEN ASSESSEE AND M/S TAFE INC., USA, HAS NOT BEEN SEEN. ASSESSEES EXPLANATION HAD NO DOUBT BEEN CON SIDERED BY THE ASSESSING OFFICER, BUT THE AGREEMENT, IF ANY, WITH M/S TAFE INC., USA WAS NOT SEEN BY HIM, NOR BY LD. CIT(APPEALS). AS IN THE CASE I.T.A. NO. 815/MDS/12 9 OF PAYMENT MADE TO M/S WALLACE CARTWRIGHT & CO., TU NISIA, HERE ALSO THE QUESTION WHETHER THE SERVICES RENDERED BY THEM FALL WITHIN THE AMBIT OF TECHNICAL SERVICES UNDER THE DOUBLE TAXA TION AVOIDANCE AGREEMENT BETWEEN INDIA AND USA WAS NOT VERIFIED. SIMILAR IS THE CASE OF REIMBURSEMENTS OF EXPENDITURE TO BELGRADE, VIENNA AND LONDON OFFICES. 14. CONSIDERING ALL THE ABOVE ASPECTS, WE ARE OF TH E OPINION THAT THE MATTER REQUIRES A FRESH LOOK BY THE ASSESSING O FFICER. WE, THEREFORE, SET ASIDE THE ORDERS OF AUTHORITIES BELO W AND REMIT THE ISSUE REGARDING REQUIREMENT OF DEDUCTION OF TAX AT SOURCE ON PAYMENTS MADE TO M/S TAFE INC., USA, M/S WALLACE CA RTWRIGHT & CO., TUNISIA AND TO OFFICES OF THE ASSESSEE IN BELG RADE, VIENNA AND LONDON, BACK TO THE FILE OF THE A.O. FOR CONSIDERAT ION AFRESH IN ACCORDANCE WITH LAW. 15. GROUND NOS.2 AND 3 ARE ALLOWED FOR STATISTICAL PURPOSES. 16. VIDE ITS GROUND NO.4, GRIEVANCE RAISED BY THE R EVENUE IS THAT THE CIT(APPEALS) DELETED A DISALLOWANCE MADE BY THE ASSESSING OFFICER UNDER SECTION 14A OF THE ACT. I.T.A. NO. 815/MDS/12 10 17. LEARNED D.R. FAIRLY ADMITTED THAT SIMILAR ISSUE HAD COME UP BEFORE THE TRIBUNAL IN ASSESSEE'S OWN CASE FOR ASSE SSMENT YEAR 2004-05. ACCORDING TO HIM, THIS TRIBUNAL IN I.T.A. NO. 732/MDS/2009 DATED 4.9.2009 HAD HELD THAT THE DISALLOWANCE UNDER SECTION 14A COULD NOT HAVE BEEN MADE SINCE RULE 8D OF INCOME-TA X RULES, 1962 WAS NOT APPLICABLE FOR THAT ASSESSMENT YEAR. SINCE THE CIT(APPEALS) HAD FOLLOWED THIS TRIBUNALS DECISION IN THE CASE O F ASSESSEE ITSELF FOR ASSESSMENT YEAR 2004-05, WE FIND NO REASON TO INTER FERE WITH THE ORDER OF CIT(APPEALS). 18. GROUND NO.4 OF THE REVENUE STANDS DISMISSED. 19. IN THE RESULT, APPEAL FILED BY THE REVENUE IS P ARTLY ALLOWED FOR STATISTICAL PURPOSES. ORDER WAS PRONOUNCED IN THE COURT ON MONDAY, THE 30 TH OF SEPTEMBER, 2013, AT CHENNAI. SD/- SD/- (CHALLA NAGENDRA PRASAD) (ABRAHAM P. GEORGE) JUDICIAL MEMBER ACCOUNTANT MEMBER CHENNAI, DATED THE 30 TH SEPTEMBER, 2013. KRI. COPY TO: APPELLANT/RESPONDENT/CIT(A)-VI, CHENNAI/ CIT-I, CHENNAI/D.R./GUARD FILE