TMI Blog2012 (12) TMI 691X X X X Extracts X X X X X X X X Extracts X X X X ..... he head profits and gains of business or profession is to be deducted under clause (i) of Explanation (baa) to section 80HHC for determining the profits of business. - Decision of CIT(A) sustained - Decided in favor of assessee. - IT Appeal Nos. 218 & 223 (Hyd.) of 2009 And 1427 (Hyd.) of 2010 - - - Dated:- 26-10-2012 - Chandra Poojari And Saktijit Dey, JJ. K.A. Sai Prasad for the Appellant. Smt. Nivedita Biswas for the Respondent. ORDER Saktijit Dey, Judicial Member - These three appeals, two by the department and one by the assessee are directed against separate orders of CIT (A)-III, Hyderabad and they pertain to the assessment years 2005-06, 2004-05 and 2006-07 respectively. Since common issues are involved in these appeals, these are clubbed together and disposed of by this combined order for the sake of convenience. ITA No. 218/Hyd/2009- Asst. Year : 2005-06:- 2. The only effective ground of the department is ground No.2 which is extracted as under: "The ld. CIT (A) erred in holding that no disallowance u/s 40(a)(i) is called for on commission paid to foreign agents, though no TDS was made by the assessee on such commission payment." 3. Bri ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 7]. The CIT (A) following the decision of ITAT, Hyderabad Bench in the case of Dr. Reddy Laboratories Ltd. (supra) held that commission payment to the foreign agents operating outside India is not liable to tax in India. Therefore, no disallowance could be made u/s 40 (a)(i) of the Act. He therefore deleted the addition. 4. The learned DR relying upon the assessment order submitted that the commission payment being for the services rendered by the foreign agents in connection with business activities arising in India, the income becomes taxable at the hands of the foreign agents and therefore the assessee was required to deduct tax at source. Since the assessee has failed to deduct tax, disallowance u/s 40(a)(i) was in accordance with law. 5. The learned AR strongly supporting the order of the CIT (A) submitted that the disallowance u/s 40(a)(i) was justified since payment of commission should be deemed to have arisen in India as per section 5(2)(a) of the Act. It is further submitted that the foreign agents did not render any part of the services in India. They did not have an establishment in India. Therefore, payment of commission to them not being chargeable to tax in India ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n was that when the payments made to the non resident were not entirely income, but a trading receipt, there is no question of deduction of income tax at the source as the section does not provide for it. To this contention, the Supreme Court answered that the assessee who made the payments to the non residents was under an obligation to deduct tax at source u/s 195 of the Act in respect of the sums paid to them under the contracts entered into. It further held that the obligation of the assessee to deduct tax u/s 195 is limited only to the appropriate proportion of income chargeable under the Act. Thus, it can be seen that the said judgment in fact helps the assessee. The second question answered by the Supreme Court can be understood to mean that the obligation of the assessee to deduct tax u/s 195 is not there when the payment made to the non resident does not contain any proportion of income therein. In our view, right from the beginning, not only on the basis of the circulars of the Board, but also on the basis of the decision of the Tribunal in its own case, the assessee firmly believed that no part of the income paid to the foreign agent was taxable in India. Therefore, ther ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Revenue has raised six grounds before us. Ground Nos. 1 and 6 are general in nature and hence they do not require any adjudication. 9. Ground No.2 reads as under:- "The ld. CIT (A) erred in holding that the interest receipt should be set off against such interest payments, having direct nexus with the interest receipts, before excluding 90% thereof in terms of clause (baa) of Explanation to section 80HHC of the IT Act, 1961." 10. Briefly the facts are in the course of assessment proceedings while computing the deduction/s 80HHC of the Act, the AO noticed that the assessee has not reduced its gross interest income by 90% from the profit of the business as required under clause (bba) of explanation to section 80HHC of the Act when the AO raise a query in this regard, the assessee stated that interest income of Rs.31,78,211 and misc. expenses of Rs.7,63,480 was incurred for set off against the interest paid to bank towards working capital. The assessee relied on the decision of ITAT, Special Bench in the case of Lalsons Enterprises v. Dy. CIT [2004] 89 ITD 25 in this regard. The AO however rejected the claim of the assessee and held that the interest income required to be reduc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... HC." 12. The learned DR supporting the reasoning of the AO submitted before us that the CIT (A) was not justified in directing for setting off the interest income against interest payment before excluding 90% therefore for computing deduction u/s 80HHC. The learned DR in support of her contention relied upon the following decisions:- (i) CIT v. V. Chinnapandi [2006] 282 ITR 389 (ii) Choudhary Garments v. Dy. CIT [2003] 86 ITD 779 (Mum.) (iii) CIT v. Liberty Footwear Co. [2006] 287 ITR 339 (Punj. Har.) 13. The learned AR strongly supporting the finding of the CIT (A) contended that as per clause baa of Explanation to section 80HHC interest income has to be set off against the interest payment before excluding 90% thereof for computing deduction/s 80HHC. In support of such contention, the learned AR further relied on the judgment of Hon'ble Supreme Court in the case of ACG Associated Capsules (P.) Ltd. v. CIT [2012] 343 ITR 89. 14. We have heard rival submissions and perused the material on record. The only dispute in this case is as to whether 90% of the gross interest or the net interest is to be deducted under clause (i) of (baa) to section 80HHC for determining t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... here shall be no order as to costs. " From the aforesaid decision of the Hon'ble Supreme Court it is clear that 90% of the net interest and not the gross interest which has been included in the profits of the business of the assessee as computed under the head profits and gains of business or profession is to be deducted under clause (i) of Explanation (baa) to section 80HHC for determining the profits of business. It is evident from para 2.3 of the CIT (A)'s which has been extracted herein above, the CIT (A) has directed the AO to find out whether there is nexus on the interest receipts and the interest payment and if there is a nexus, then interest receipt should be set off against interest payment before excluding 90% thereof in terms of clause (baa) of Explanation to 80HHC of the Act. In our view, the direction of the CIT (A) is in accordance with law and therefore needs no inference. While giving effect to the direction of the CIT (A), the AO shall also keep in mind the principles of law laid down by the Hon'ble Supreme Court in the case of ACG Associated Capsules (P.) Ltd. (supra). 15. In the result, we dismiss the grounds raised by the Revenue. 16. Ground Nos. 4 and 5 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hat the issue is squarely covered by the decision of Hon'ble Supreme Court in the case reported in Tulsyan Nec Ltd. (supra). The Hon'ble Supreme Court held that interest u/s 234B and 234C has to be computed after giving MAT credit. In view of the aforesaid law laid down by the Hon'ble Supreme Court, we uphold the order of the CIT (A) and the grounds raised by the revenue are dismissed. 22. In the result, the appeal is dismissed. ITA 1427/Hyd/2010:- (asasessee's appeal):- 23. The assessee has raised the following effective grounds:- "1. The order of the CIT (A) is contrary to facts and law. 2. The CIT (A) erred in confirming the disallowance of Rs. 9,87,042/- in respect of foreign commission paid to foreign agents on the ground that tax has not been deducted on the same." 24. Facts are identical with the facts involved in grounds No.2 raised in ITA No.218/Hyd/09 and ground No.3 in 223/Hyd/09. The AO disallowed the commission paid to foreign agents u/s 40A(1) by observing that the remittances made to foreign agents through telegraphic transfer obtained from banks, Hyderabad would amount to accrual or arising of income at the hands of the non-resident in India. The as ..... X X X X Extracts X X X X X X X X Extracts X X X X
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