TMI Blog2012 (2) TMI 654X X X X Extracts X X X X X X X X Extracts X X X X ..... Nampula and Zambezia. According to the ld.representative, the foreign company, viz. M/s Mozambique Holdings Ltd has no permanent establishment in India. The contract was awarded by a foreign government for construction of 800 borewells in the foreign country. As per the agreement dated 14-08-2004, the copy of which is available at pages 1 to 3 of the paper book, M/s Mozambique Holdings Ltd has to provide support only to win the contract from the National Directorate of Water. Apart from that M/s Mozambique Holdings Ltd is not required to provide anything as per the agreement. For the purpose of providing with marketing support to win the contract, the assessee has to pay agency commission @15% on the value of the contract. The ld.representative further submitted that the agency commission was paid in foreign currency outside India, therefore, no part of income has accrued to M/s Mozambique Holdings Ltd in India so as to subject the amount to tax in India. Therefore, according to the ld.representative, the assessee is not required to deduct tax at the time of making payment to M/s Mozambique Holdings Ltd. Referring to the assessment order, the ld.representative for the assessee subm ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... efore, according to the ld.representative, no part of the amount paid / payable to the foreign company is taxable in India. Therefore, the provisions of section 195 of the Income-tax Act are not applicable to the case at all. 5. Referring to the judgment of the Apex Court in the case of G.E. Technology Centre Pvt Ltd vs Commissioner of Income-tax (2010) 327 ITR 457 (SC), the ld.representative submitted that the expression chargeable under the provisions of the Act in section 195(1) shows that the remittance has to be of a trading receipt, the whole or part of which is liable to tax in India. If tax is not so assessable there is no question of deduction of tax at source. 6. On the contrary, Smt. Vijayaprabha, the ld.DR submitted that the assessee entered into agreement for consultancy services with M/s Mozambique Holdings Ltd on 14-08-2004. According to the ld.DR, the consultant, M/s Mozambique Holdings Ltd agreed to provide technical and marketing support to win the contract with National Directorate of Water for construction of 800 borewells in the provinces of Nampula and Zambezia. After the agreement with M/s Mozambique Holdings Ltd, the assessee has also entered into an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in dispute. Merely because the amount was not paid in full the assessing officer disallowed the claim of the assessee. In view of the method of accounting followed by the assessee this Tribunal is of the opinion that when the liability has arisen during the year under consideration for payment of agency commission, such liability has to be allowed as deduction while computing the taxable income since the assessee is following mercantile system of accounting. Therefore, the reasons stated by the assessing officer for disallowance of the claim of the assessee are not justified. 8. Now coming to the order of the Commissioner of Income-tax(A), as rightly submitted by the ld.representative for the assessee, even though the assessee contended that the assessee was following mercantile system of accounting and therefore, the assessing officer was not justified in disallowing the claim of the assessee, the Commissioner of Income-tax(A) has not made any comments on that. The Commissioner of Income-tax(A) proceeded to confirm the disallowance on the ground that the tax was not deducted while making payment to the foreign company. From the order of the Commissioner of Income-tax(A), it app ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ermanent establishment in India. The foreign company has to provide marketing support for the purpose of winning the contract outside the country. The borewell was also to be dug outside the country. The payment was also to be made in foreign country in foreign currency. Therefore, no part of the contract was required to be executed in India.Therefore, merely because the assessee happened to be a resident in India, the payment made to the foreign company outside the country cannot be construed as income accrued in India. In other words, no part of income has accrued to M/s Mozambique Holdings Ltd in India, therefore, it is not taxable under the Incometax Act. 10. The next question arises for consideration is when the income is not chargeable in the hands of the recipients, viz. M/s Mozambique Holdings Ltd, whether the assessee is required to deduct tax at the time of payment. This issue was examined elaborately by the Apex Court in the case of G.E. Technology Centre Pvt Ltd (supra). After considering the provisions of section 195 and the case laws on the subject, the Apex court speaking through the Hon ble Chief Justice, S.H. Kapadia has observed as follows: .. It is the c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e Income-tax Act relating to tax deduction at source in respect of payments outside India in respect of royalties, fees or other sums chargeable under the Income-tax Act. In a given case where the payer is an assessee he will definitely claim deduction under the Income-tax Act for such remittance and on inquiry if the Assessing Officer finds that the sums remitted outside India come within the definition of royalty or fees for technical service or other sums chargeable under the Income-tax Act then it would be open to the Assessing Officer to disallow such claim for deduction. Similarly, vide the finance Act, 2008, with effect from April 1, 2008, sub-section (6) has been inserted in section 195 which requires the payer to furnish information relating to payment of any sum in such form and manner as may be prescribed by the Board. This provision is brought into force only from April 1, 2008. It will not apply for the period with which we are concerned in these case before us. Therefore, in our view, there are adequate safeguards in the Act which would prevent revenue leakage. 11. In view of the above observations of the Apex court, the assessee is not liable to deduct tax since ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ,894. The assessee also claimed that it has sufficient amount in the form of share capital reserve surplus and interest free advances from other directors. However, the lower authorities have not examined the availability of interest free funds in the hands of the assessee. Therefore, this Tribunal is of the opinion that the assessing officer has to examine the availability of interest free funds at the hands of the assessee in the light of the judgment of the Supreme Court in the case of Munjal Sales Corporation (supra). Since the lower authorities have not examined the issue in the light of the judgment of the Apex Court, the order of lower authority is set aside and the issue of disallowance of interest to the extent of ₹ 1,63,066 is remitted back to the file of the assessing officer. The assessing officer shall reexamine the matter in the light of judgment of the Apex Court in the case of Munjal Sales Corporation (supra) and thereafter decide the issue in accordance with law after giving opportunity of hearing to the assessee. 16. In the result, the appeal of the assessee is allowed, for statistical purpose. Order pronounced in the open court on this 29th day of Feb ..... X X X X Extracts X X X X X X X X Extracts X X X X
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