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2019 (8) TMI 441 - ITAT VISAKHAPATNAMTDS u/s 195 - compensation paid for breach of contract for supply of material to foreign buyer - disallowance u/s 40a(ia) - HELD THAT:- There is no dispute that the payment was made towards the assessee’s failure to supply the export order which constitutes business transaction. As per the DTAA between India and Malaysia, as per Article vii, business profits of an enterprise of one of the contracting states should be taxable only in the contracting state, unless the enterprise carries on business in other contracting state through a permanent establishment situated theirin. There is no evidence brought on record that the sum paid to foreign buyer is income within the meaning of Article VII of DTAA to be taxable in India. The department did not establish that foreign company has a permanent establishment in India, therefore, we hold that the sum paid to the foreign buyer does not attract TDS u/s 195 and there is no case of making disallowance u/s 40(a)(ia). Accordingly, the addition made by the AO is deleted and the appeal of the assessee is allowed. TDS u/s 195 - Addition u/s 40(a)(i) - payment was made towards quality rebate on export - HELD THAT:- The assessee placed copies of invoices of export. The assessee also placed copy of letter dated 19.12.2016. addressed to SBI, Hyderabad informing them that due to some quality problems, the assessee had agreed to give discount of USD 2500 to the party. Since it is a quality rebate towards discount, the assessee argued that the same does not attract TDS. Since the assessee has established that it is a quality rebate with relevant documents which goes to reduce the sale, there is no case for deduction of tax at source. Apart from the above it is established that the payment was quality rebate on sales and business transaction. As per Article VII of DTAA between India and UK, the business profits are taxable in contracting state and in this case, the recipient is foreign company having no permanent establishment. The case law relied upon by the Ld.AR is squarely applicable in the assessee’s case. Hence, we hold that there is no case for deduction of tax at source and making the addition u/s 40(a) (i). Accordingly addition made by the AO is deleted and the appeal of the assessee is allowed.
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