TMI Blog2013 (11) TMI 474X X X X Extracts X X X X X X X X Extracts X X X X ..... the income of the said agents cannot be subjected to tax in India and hence assessee was not liable to deduct tax on payments made to the said agents. Therefore, provisions of section 40(a)(ia) have no application on the given facts. - Decided in favor of assessee. The ITAT, Mumbai in the case of DCIT vs. Ardeshi B. Cursetjee & Sons Ltd [2008 (3) TMI 500 - ITAT MUMBAI] has held that commission paid to nonresident agents outside India for services rendered outside India were not chargeable to tax in India. In the facts and circumstances, commission paid by appellant to the non resident commission agent was not chargeable under the provisions of I.T. Act. Disallowance of Ocean Freight Expenses paid by the assessee company to a non resident shipping company M/s Transmode Overseas Partners, Germany by invoking section 40(a)(ia) of the Act – Held that:- Section 194C deals with work contracts including carriage of goods and passengers by any mode of transport other than railways. This section applies to payments made by a person referred to in clauses (a) to (u) of sub-section (1) to any "resident". (termed as contractor). It is clear from the section that the area of operation of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... art of the interest could be disallowed on the reason that assessee had advanced interest free advances to its sister concern. It is also a fact that assessee has invested money in a sister concern and if any disallowance is required the same has to be considered under section 14A which is the case not here as assessee has not earned any exempt income. Since assessee’s available capital is more than the borrowed funds, presumption as decided by the Hon'ble jurisdictional High Court in the case of Reliance Utilities and Power Ltd [2009 (1) TMI 4 - HIGH COURT BOMBAY] equally apply - Amount of Rs.3,18,600 cannot be disallowed as it has no nexus to the other finance charges claimed by assessee as business expenditure – Decided in favor of Assessee. - ITA No.8868/Mum/2010,ITA No.8789/Mum/2011&ITA No.169/Mum/2012 - - - Dated:- 19-4-2013 - B Ramakotaiah and Vijay Pal Rao, JJ. For the Appellants : Shri B V Jhhaveri Ms Manju Sisodia For the Respondent : Shri Deepak K Sinha, DR ORDER:- PER : Bench These are appeals by assessee and Revenue in AY 2007-08 and 2008-09. The appeal in 2007-08 is by assessee against the orders of the CIT (A-22 Mumbai dated 25.10.2010, where ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... re Expenses) of Rs.9,85,864/- though these expenses were not claimed in Profit and Loss Account and were in fact been capitalised and therefore there was no question of disallowing the said expenses. In fact, though the CIT(A) decided on the merit, it was wrongly directed to carry rectification u/s.154 of the Act instead of allowing the same. 8) On the facts and circumstances of the case and in law, the CIT(A) erred in directing the Assessing Officer to carry out the rectification u/s.154 of the Act instead of deciding on merit in respect of Repair Maintenance (Office Renovation Expenses) of Rs.3,60,845/- though these expenses were not claimed in Profit Loss Account and were in fact been capitalised and therefore there was no question of disallowing the said expenses. In fact, though the CIT(A) decided on the merit, it was wrongly directed to carry rectification u/s.154 of the Act instead of allowing the same. 9) On the facts and circumstances of the case and in law, the Commissioner of Income Tax(A) erred in confirming addition on account of interest expenses of Rs.3,18,6001-, without considering that: a) No borrowed funds were utilised for Investments/ Advances ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... outside India has not deemed to accrue or arise in India and hence the said commission income of the non resident agents are not taxable in India. 4.3 It was further submitted that the assessee company appointed aforesaid agents for marketing and distribution of various grades of reclaim rubber in the respective countries for a commission of 5% of the FOB value of the shipment of the products to the clients. The terms conditions of sales of the products by the principal including price, delivery schedule, packing, payment terms, product grades and specifications is to be mutually decided between the Principal, Agents and the Customers which is confirmed by a purchase order from the agent or from the customer. In other words, assessee reserves the right of execution of order and/or cancel the order procured by the agent. The agent is not authorized to market the products of third party which are competing with those of the assessee company. 4.4 Assessee relied on the Board Circular No.23 and 786 which was subsequently withdrawn by the Circular No.7 issued on 22.10.2009. The learned Counsel relied on the decision of the Hon'ble Bombay High Court in the case of BASF (India) Ltd. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... x in India and hence assessee was not liable to deduct tax on payments made to the said agents. Therefore, provisions of section 40(a)(ia) have no application on the given facts. This issue was very elaborately discussed by the CIT (A) in AY 2008-09 which we consider as worth extracting for completeness of the order. The order of the CIT (A) in Para 4.3 in AY 2008-09 is as under: 4.3 I have considered the facts of the case. The appellant made payment of commission to three nonresident commissions agents aggregating to Rs.32,73,538/- for procuring the orders for export of reclaimed rubber manufactured by the appellant. It was admitted fact that firstly the non- resident commission agents procured orders outside India, secondly rendered services outside India and thirdly the payment to such non- resident commission agents were made by appellant in foreign currency and outside India. It was also an admitted fact that the said non-resident commission agents had no permanent establishment in India. The A.O. disallowed such payment of commission holding that firstly no documentary evidence was furnished to substantiate as to how the above payments were not liable for TDS except the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n at the rates enforced. The payment made by appellant was admittedly not on account of any interest payment. Consequently it has to be examined whether the commission paid by appellant is covered by the term "any other sum chargeable under the provision of this Act" as provided in sec.195 of the Act. It is worth to mention here that for the purpose of applicability of sec.195 any other sum must be chargeable under the provisions of the I. T. Act. Sec. 5 of the I.T. Act deals with the "scope of total income". As per sub-sec.(2) of sec.5, the total income of a person who is not resident includes all income from whatever sources derived which is received or deemed to be received in India in such year by or on behalf of such person or accrue or arise or is deemed to accrue or arise to him in India during such year. Sec.7 explains the income deemed to be received. Sec.9 further explained/ defined the income deemed to accrue or arise in India. As per sub-sec.(I) of sec.9, the income shall be deemed to accrue or arise in India in case of all income accruing or arising whether directly or indirectly, through or from any business connection in India, or through any property in India, or fr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... been given as under: - Maintaining a branch office in India for the purchase or sale of goods or transacting other business. - Appointing an agent in India for the systematic and regular purchase of raw materials or other commodities, or for sale of the non-resident's goods, or for other business purposes - Erecting factory in India where the raw produce purchased locally is worked out into a form suitable for export abroad. - Forming a local subsidiary company to sell the products of the non- resident parent company. - Having financial association between a resident and a non-resident company. In the said circular CBDT have given clarification regarding the applicability of provisions of sec.9 in the certain specific situations as under: (1) Non-resident exporter selling goods from abroad to Indian importer (2) Non-resident company selling goods from abroad to its Indian subsidiary (3) Sale of plant machinery to an Indian importer on installment basis. (4) Foreign agents of Indian exporters - a foreign agent of Indian exporter operates in his own country and no part of his income arises in India. His commission is usually remitte ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ituated in India. In the facts and circumstances the provisions of sec.9(1) were not applicable to such payment of commission by appellant to non-resident agents. The year under consideration is A.Y.2008-09 covering the previous year period 01.4.2007 to 31.03.2008. The CBDT issued Circular No.7 of 2009 in the year 2009. In the above mentioned case, the Bench of ITAT have held that withdrawal of such Circular is not having retrospective effect and will be applicable prospectively. In the facts and circumstances, even if it is assumed that the withdrawal of Circular No.23 of 1969 by the CBDT's Circular No.7 of 2009 is having any effect on taxability of commission paid to non-resident agents, such withdrawal of Circular will not be applicable in the year under consideration. In the facts and circumstances the Circular No.23 of 1969 will be clearly applicable in the year under consideration making such commission payment not liable to tax in India. In view of the above discussion, it is held that the payment of commission aggregating to rs.32,73,538/- by appellant to the non-resident commission agents was not attracting the provisions of sec.195 and sec.40(a)(i) of the Act. W ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d to foreign shipping companies. The Board Circular No.723 dated 19.09.1995 reads as under: "2. Section 172 deals with shipping business of non-resident. Section 172(1) provides the mode of the levy and recovery of tax in the case of any ship, belonging to or chartered by a nonresidents, which carries passengers, live- stock, mail or goods shipped at a port in India. An analysis of the provision of section 172 would show that these provisions have to be applied to every journey a ship, belonging to or chartered by a non-resident, undertakes from any port in India. Section 172 is a self-contained code for the levy and recovery of the tax, shipwise and journey-wise, and requires the filing of the return within a maximum time of thirty days from the date of departure of the ship. "3. The provisions of section 172 are to apply, notwithstanding anything contained in other provision of the Act. Therefore, in such cases, the provisions of section 194C and 195 relating-to tax deduction at source are not applicable. The recovery of tax is to be regulated, for a voyage undertaken from any port in India by a ship under the provisions of section 172. "4. Section 194C deals with ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rs or charters, he receives payments primarily on behalf of his principal i.e., non-resident ship owners or ships charters shipped at a port in India. In our opinion, even if these amounts are inclusive of small element of the amounts that ultimately may be going into his own pocket or any of resident on account of demurrage or handling charge or any amount of similar nature, it will be covered by sub-section (8) of section 172 inasmuch as the circular does not draw any distinction between a dry port and a sea port. Thus, as per provisions of section 172(8) the inland haulage charges are also covered under this provision of law and, hence, no deduction of tax is called under section 194C of the Act. We are further of the opinion that such an interpretation is also fair because the dry ports or ICD's are treated at par with the regular ports. Hence, the contradictory stand taken by the Assessing Officer i.e., when he included certain charges in freight in respect of movement of goods by road at the destination contrary by the slipping line such charges are deemed to be covered under section 172, but when the same shipping line or their agents take charges for transportation from ICD ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... aimed as legal expenses. Assessee claimed the following amounts under the head legal and professional fee: Name of the party Description Amount Ruchira Pillai Fees for net security solution 2,50,000 Sangeeta Telang Fees for ERP feasibility study report 50,000 Shalin Pandey For acquiring land 35,000 SYSSOFT Software Development 3,00,000 Total 6,35,000 8.1 AO disallowed the above amount by stating as under: 6.2 Bills of above parties were perused and examined. It is noticed that assessee has got enduring benefit from above expenses. The sum of Rs.6,00,000 was spent for development of ERO software systems in the company. It results into creation of assets. Remainder amount of Rs.35,000 was spent for acquiring land. It is not related to revenue expenditure. Therefore, sum of Rs.6,35,000 is disallowed and added back to the total income of assessee. However, depreciation of Rs.3,60,000 is allowed @ 60% on Rs.6,00,000 being intangible assets came into existence by way of ERP system developed by assessee . 8.2 The learned CIT (A) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hat the assessee has debited an amount of Rs8,02,139/- under the head website development charges . The A.O. asked why the same should not be treated as capital expenditure. It was submitted that the website offers the various details of the company s business and products it offers. Hence it is essentially an advertisement expenses and allowable as revenue in nature. The A.O. did not accept the contentions of the learned A.R. and treated the expenditure as capital in nature stating that the life span of the website is quite long and it is an asset in the cyber space. However, he allowed depreciation @ 25% on website development charges. Before the CIT(A) it was submitted that the website is a very cost effective tool of advertisement/marketing of the company s business. It is a medium of corporate communication and offers advantages over traditional mode of advertisement. Therefore it is essentially an advertisement expenditure allowable as revenue expenditure. After hearing the learned A.R. and considering the facts the CIT(A) deleted the addition by holding as under: - 9. I have carefully considered the above fact and do not find any merit in the observations and find ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... onclusion that the expenditure on the website was of a revenue nature and not of a capital nature. No substantial question of law arises for consideration. Respectfully following the above decision we uphold the decision of the CIT(A). The expenditure is correctly allowed as revenue expenditure. Ground is rejected . 8.7 In view of the above, since the same principles were also upheld by the Hon'ble Bombay High Court in the case of CIT vs. Raychem RPG Ltd (supra), we modify the orders of AO and direct him to allow the expenditure as revenue in nature. Consequently depreciation, if any, allowed by AO can be withdrawn. With these directions, this ground is considered allowed. 9. Ground No.9 pertain to disallowance of interest expenses of.3,18,600. On perusal of details filed it is seen that assessee has paid interest and financial charges of Rs. 10,104,198/. It is also noticed that assessee has made investment amounting to Rs. 20,05,600/ and gave loan of Rs. 6,50,000/ to M/s Alpanso Netsecure Pvt. Ltd being associate company. Assessee was asked as to why the proportionate interest should not be disallowed. In response to such query, assessee has submitted note thereon as und ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... consideration and commercial expediency and hence interest is allowable as per the decision of the Hon'ble Supreme Court in case of SA Builders (Supra). However, I do not agree with the contention of the appellant since during the year, assessee had paid huge software charges to other concerns. Hence no business expediency is served by advancing loan to the sister concern. The appellant also claimed that it was having sufficient interest free fund to invest or advance to the associate concern. However, on perusal of balance sheet it is noticed that share capital and reserve and surplus in total amounted Rs.31.21 crores as against which the invest in fixed assets is Rs.37.21 crores. Thus, there were no interest free funds available with the appellant to make interest free advance/investment. Apparently these advances are out of the interest bearing funds only. Further, the provision of section 14A are also applicable since the appellant has made investment in shares. In view of these facts, I am of the considered opinion that AO has rightly made the disallowance of interest which is upheld . 9.2 It was submitted that during the year ending 31.3.2007, the assessee company had given ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Rs.1.16 crores, the details of which can be referred to Note 2 of the notes forming part of the account for the year ended on 31.03.2007. The interest charges and the finance charges as seen from the record are mostly paid for these loans and working capital requirements including discounting of bills. Therefore, we are of the opinion that no part of the interest could be disallowed on the reason that assessee had advanced interest free advances to its sister concern. It is also a fact that assessee has invested money in a sister concern and if any disallowance is required the same has to be considered under section 14A which is the case not here as assessee has not earned any exempt income. Since assessee s available capital is more than the borrowed funds, presumption as decided by the Hon'ble jurisdictional High Court in the case of Reliance Utilities and Power Ltd 313 ITR 340 (Bom.) equally apply. This aspect was elaborately discussed by the Coordinate Bench in the case of DCIT vs. Mohit Diamonds Pvt Ltd in ITA No.2097/M/11 for AY 2007-08 dated 31,.7.2012 as under: The Learned AR pointed out that the assessee had Shareholders' funds including Share capital along with Res ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on 40(a)(ia) raised in the above two grounds was discussed elaborately along with assessee s ground Nos. 3 5 in the appeal for AY 2007-08 (Supra). For the reasons stated therein, the Revenue grounds are rejected. 10.2 In the Result the appeal filed by the Revenue is dismissed. ITA No.8789/Mum/2011 AY 2008-09: 11. Assessee in this appeal has raised the following grounds: 1. On the facts and in the circumstances of the case and in law, the learned CIT (A) erred in confirming addition on account of interest expenses of Rs.4,56,672 without considering that: (a) No borrowed funds were utilized for investments/advances (b) Most of the amounts were given for strategic investment and not by way of loan. (c) The investments were made on various dates and not on the first day of the year for working out interest. 2. On the facts and in the circumstances of the case and in law, the learned CIT (A) erred in invoking the provisions of section 14A of the Act in respect of the investment in shares of associate concern, though the provisions of section 14A are not applicable to the facts of the case. 3. On the facts and in the circumstances of the case and ..... X X X X Extracts X X X X X X X X Extracts X X X X
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