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2016 (5) TMI 71 - ITAT CHENNAI

2016 (5) TMI 71 - ITAT CHENNAI - TMI - Deemed dividend addition u/s.2(22) - Held that:- The provision is very clear that to become a beneficiary they must be registered as shareholder. We rely on the decision of CIT vs. Madurai Chettiyar Karthikeyan (2014 (4) TMI 825 - MADRAS HIGH COURT ) were held trade advance in relation to business transaction cannot be treated as deemed dividend within Sec.2(22) (e) of the Act - Decided in favour of assessee

Addition being payment of foreign comm .....

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genuineness of transaction whether foreign agent have paid taxes in their country.

Deduction u/s.80IB of the Act on job works treated as business income - Held that:- We considered the submissions and findings of the ld. Departmental Representative on the order of Commissioner of Income Tax (Appeals) which lacks clarity and the claim of job works by the ld. Authorised Representative does not specify the nature of work undertaken by the assessee company and the same was not reflected b .....

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are of the opinion that the matter has to be re-examined for limited purposes to verifying the nature of job works for captive consumption or for others. Therefore, we deem it necessary to set aside the impugned order of Commissioner of Income Tax (Appeals) and remit the file to the Assessing Officer to pass the order on above findings and Assessing Officer shall also provided adequate opportunity of being heard to the assessee.

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were it was held that in order to allow a claim under section 10A what all is to be seen is whether such benefit earned by the assessee was derived by virtue of export made by the assessee. The exchange value based on upward or downward of the rupee value is not in the hands of the assessee. Therefore, when the fluctuation in foreign exchange rate was solely relatable to the export business of the assessee, and the higher rupee value was earned by virtue of such exports carried out by the asses .....

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ng apparent facts we are not inclined to interfere with the order of Commissioner of Income Tax (Appeals) and dismiss the ground of the Revenue. - I.T.A. Nos. 2230/Mds/2013 & 390/Mds/2014 - Dated:- 27-4-2016 - Shri Chandra Poojari, Accountant Member And Shri G. Pavan Kumar, Judicial Member For the Appellant : Shri. A.V. Sreekanth, IRS, JCIT For the Respondent : Shri. R. Srinivasan, Advocate ORDER Per G. Pavan Kumar, Judicial Member These two appeals filed by Department are directed against diffe .....

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:- 2.1 The CIT(A) erred in holding that both the companies are not holding each other's share and hence the business advances received from Penguin Garments Pvt. Ltd., was treated as commercial transaction which do not attract the provision of deemed dividend. 2.2 The CIT(A) failed to note that the deeming provision under Section.2(22)(e) will extend to any payment by a company, to any concern in which such shareholder is a member or a partner and in which he has a substantial interest. 2.3 .....

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iled to note that the commission paid by the assessee company to the foreign agents is only for procuring order abroad for the business of the assessee company in India and thus the commission income of the foreign agents does accrue and arise in India and accordingly Section.195 would attract. 3.2 The CIT(A) failed to note the impact of CBDT's withdrawal of Circular Nos.23 dated 23.07.09, 163 dated 29.05.1975 and 786 dated 07.02.2000 by its Circular No.7 of 2009 is that in respect of entiti .....

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have solicited orders, but the right to receive the commission arises in India when the order is executed by the applicant in India. The fact that the agents have rendered services abroad in the form of soliciting the order and the commission is to be remitted to them abroad are wholly irrelevant for the purpose of determining the situs of their income. We follow the ruling of this Authority in [Rajive Malhotra AAR 671 of 2005, 284 ITR 564}. We therefore hold that the income arising on account o .....

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assessee is a Private Limited Company manufacturing garments and having 100% export oriented unit (EOU) and filed e-return of income on 08.09.2010 admitting total income of ₹ 2,36,51,160/- under normal computation and ₹ 2,00,59,175/- under presumptive provisions of Sec.115JB of the Act and return was processed u/s.143(1) of the Act on 15.03.2011. The case was selected for scrutiny under CASS and notice u/s.143(2) of the Act was issued. The Assessing Officer after considering the subm .....

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provided in respect of M/s. Penguin Garments P. Ltd and peak credit established ₹ 1,02,11,870/- and entire amount was squared off by repaying the amount. The Assessing Officer treated the transaction as deemed dividend and show cause notice was issued and the assessee has filed explanation as under:- The assessee-company filed relevant ledgers and details regarding the same. Further the assessee-company have submitted that provisions of Sec.2(22)(e) is not applicable in regard to the trans .....

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TR. However, the matter had not been finalized and the department had filed SLP against this order. To have better understanding of the provisions of the section, it is worthwhile to reproduce the section here which reads as- 'dividend' includes any payment by a company, not being a company in which the public are substantially interested, of any sum (whether as representing a part of the assets of the company or otherwise) made after 31st day of May, 1987, by way of advance or loan to a .....

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to the extent to which a company in either case possess accumulated profits. " But the Assessing Officer relying on judicial decisions made an addition of ₹ 1,02,11,870/-. Aggrieved by the order, the assessee filed an appeal before Commissioner of Income Tax (Appeals). 5. In the appellate proceedings, the assessee filed written submissions and explained the provisions of deemed dividend does not apply to the assessee company and ld. Commissioner of Income Tax (Appeals) considered the .....

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his submissions has stated that the appellant company is not a shareholder in Penguin Garments Pvt. Ltd. As the appellant company do not hold any shares in Penguin Garments Pvt. Ltd., the provisions of Section 2(22)( e) are not attracted. In his submissions the AR has mentioned, that, the reliance placed by the AO on several case laws mentioned supra, are related to the transaction between the assessee company and the shareholder. In the case of the appellant, there is no such relationship as a .....

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of Sec. 2(22)(e) of the Act creates a fiction, purpose being that persons who manage closely held companies should not arrange their affairs in a manner that they assist the shareholder in avoiding the payment of taxes by having these companies pay to distribute, what would legitimately be dividend in the hands of the shareholders, money in the form of advance or loan. The word 'advance' has to be read in conjunction with the word 'loan'. Usually a loan involves positive act of .....

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hareholders. Whereas trade advances, which are in the nature of money transacted to give effect to a commercial transaction would not be deemed dividend. Thus the current account maintained between the parties establishing the payment to the result of trading transaction between the parties and not given by way of loan or advance, the same cannot be treated as dividend. 4.6 The purpose of Section 2(22)( e) is to tax the distribution of profits to share holders, where the same is distributed not .....

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any is in receipt of loan / advance. Similarly, the AR placed his reliance on Ankitech Pvt. Ltd., & Others, wherein it was held that the appellant company had received some amount by way of book entries from one Jackson Generators P. Ltd., which the AO treated as deemed dividend. The ratio held in the above judgement that the amount received cannot be assessed in the hands of the assessee company as it was not a shareholder in Jackson Generators P. Ltd. Thus the business advances received fr .....

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s are not holding each other's share holding and hence the business advances received from penguin garments Pvt. Ltd., is treated as commercial transaction which do not attract the provision of deemed dividend and hence deleted. The appellant succeeds on this ground of appeal . and allowed the ground of the assessee. Aggrieved by the Commissioner of Income Tax (Appeals) order, the Revenue has assailed an appeal before Tribunal. 6. Before us, the ld. Departmental Representative agitated the g .....

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holder to invoke the deeming provisions. 7. Contra, the ld. Authorised Representative reiterated the submissions made in the appellate proceedings, judicial decisions relied in the appellate proceedings and written submissions filed before Commissioner of Income Tax (Appeals). The Commissioner of Income Tax (Appeals) has considered the provisions and allowed the ground of the assessee. The ld. Authorised Representative further substantiated his arguments with the factual matrix of shareholding .....

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neficiary and deeming provisions are applicable. Further on perusal of findings and observation of order the Commissioner of Income Tax (Appeals) and the arguments of the ld. Authorised Representative, The provision is very clear that to become a beneficiary they must be registered as shareholder. We rely on the decision of CIT vs. Madurai Chettiyar Karthikeyan 223 Taxman 350 (Madras) were held trade advance in relation to business transaction cannot be treated as deemed dividend within Sec.2(22 .....

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10, the assessee company has availed the services of M/s. Natural Origin Worldsise Pte. Ltd, Singapore for procuring the orders. The assessee paid the commission without deduction of tax as per Sec.195 of the Act as there was no permanent established in India. The ld. Assessing Officer relied on the CBDT circular discussed elaborately at page 4 of his order as under:- The Central Board of Direct Taxes has by its Circular 7 of 2009 dated 22.10.2009 withdrawn its earlier [i] Circular No.23 dated 2 .....

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rcular mentioned in supra. The recent rulings by the Authority for Advance Ruling in the case of M/s. SKF Boilers and Driers Pvt. Ltd., (AAR No.983- 984 of 2012), had adjudged this issue in favour of Department. The relevant Paragraphs are reproduced below: " On the above stated facts, the applicant has raised the following questions, common in both the above applications, for a ruling by this authority. 1. Whether the income of the non-resident agent can be deemed to accrue or arise in Ind .....

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Aggrieved by the order, the assessee filed an appeal before the Commissioner of Income Tax (Appeals). 11. In the appellate proceedings, the ld. Authorised Representative reiterated the submissions made before Assessing Officer and supported the case with various provisions and case laws to prove that there is no permanent establishment in India and filed written submissions. The ld. Commissioner of Income Tax (Appeals) considered the findings and observations of the Assessing Officer and writte .....

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lar and the foreign agent who received the commission are liable to the taxed. Therefore, prayed the Tribunal to set aside the Commissioner of Income Tax (Appeals) order. 13. Contra, the ld. Authorised Representative of the assessee relied on the findings of the Commissioner of Income Tax (Appeals) and substantiated his arguments on various aspects alongwith High Court decisions and filed paper book and drew attention to the various aspects of commission payments and pleaded for dismissal of the .....

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iated his arguments and drew our attention to the agreements with the non-resident at page 1 and confirmation letter at page 4 of the paper book that they do not have any establishment in India and exclusively deal outside India. Further substantiated the grounds with the debit note raised in respect of foreign agent and jurisdictional High Court decisions. The assessee has not substantiate with the type of works undertaken by Foreign Agent and volume of business conducted by them in proportiona .....

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& 11 as under:- The aforesaid clause makes it clear that the disallowance shall be made in case of any payment made which is chargeable under this Act and is payable outside India or in India to a nonresident not being a company or to a foreign company on which tax is deductible at source. Therefore, the first condition required to be fulfilled is the payment must be chargeable under the Act, thereafter the question of deduction of tax will arise. Section 195 (1) of the Act also prescribes .....

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ssion payment u/s 40(a)(i) of the Act, since, there was no agreement to suggest the payment of sales commission. As seen from the order s of the lower authorities, the assessee has not discharged the burden cast upon it to show the nature of services rendered by non-resident agent. If there are services rendered by non-residents, who have no permanent establishment in India or have any business connection in India, by virtue of which the payment of commission accrued or arose in India then, it i .....

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of services rendered by the non-resident agent. Therefore, it is appropriate to remit the entire issue back to the file of the AO with direction to the assessee to prove that it was sales commission towards procurement of orders from abroad. Accordingly, the entire issue is remitted back to the file of the AO for fresh consideration and the AO is directed to make necessary enquiry regarding the nature of services rendered by the non-resident agent and the payments made thereof. With these observ .....

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ed by the Revenue that Commissioner of Income Tax (Appeals) erred in considering the claim of deduction u/s.80IB of the Act on job works treated as business income and also not considering the findings of the Punjab and Haryana High Court in the case of CIT vs. Impal Forge and Allied Industries Limited were income derived from a job work charges received from the process of dry cleaning is not an income derived from the industrial undertaking from the manufacturing process and the assessee is no .....

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of the Act. The return of income was processed u/s.143(1) on 09.02.2011 resulting in a demand of ₹ 29,97,289/- and the case was selected for scrutiny and the assessment was completed u/s.143(3) of the Act, treating receipts received towards duty drawback and job work as other income and excluded from business income. Aggrieved by the order, the assessee filed an appeal before the Commissioner of Income Tax (Appeals). 19. In the appellate proceedings, the ld. Commissioner of Income Tax (App .....

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idering the facts that job works are in the nature of business and deduction be disallowed and further substantiated his arguments with the judicial decisions and prayed for set aside of the order of Commissioner of Income Tax (Appeals). 21. On the other hand, the ld. Authorised Representative relied on the findings of the Commissioner of Income Tax (Appeals) and the judicial decisions and opposed the ground. 22. We heard the rival submissions and perused the material on record and judicial deci .....

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ty not only for himself but for others also. Consequently profits derived from job work done for others also quality for deduction under sec. 80IB of the Act and further supported with the decision of CIT vs. Sadhu Forging Ltd 336 ITR 444 were it was held that activity of forging which involves heat treatment of material to produce automobile parts is manufacture and, therefore, labour charges and job work charges earned by the assessee for doing the job of forging for customers are gains derive .....

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ls on record to explain the nature of job works undertaken and job works charges takes the characteristic of business income. Even before us, the ld. Authorised Representative could not substantiate the working criteria of nature of job works with any supporting material in respect of particular product and further there is no discussion on the product used in job works by the Commissioner of Income Tax (Appeals). We are of the opinion that the matter has to be re-examined for limited purposes t .....

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sessee has claimed bank discount on foreign exchange forward contract as income derived from eligible business and such discount represent gain on foreign exchange forward contract and directly attributable to the business and deduction u/s.80IB of the Act. But the Assessing Officer has denied the claim. Aggrieved by the order, the assessee filed an appeal before Commissioner of Income Tax (Appeals). 24. In the appellate proceedings, the ld. Commissioner of Income Tax (Appeals) considered the gr .....

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time of shipment. Sometimes the shipment takes place beyond the expected period when we have been obliged to cancel the forward contract. The bankers pass on the benefit on foreign exchange contract by crediting to our account and loss to the debit our account. This is in the course of export trade. Therefore the exchange gain on hedging is in the nature of export trade. The decision of the Apex Court in CIT Vs. Woodward Governor India (P) Ltd. (312 ITR 254 (SC) will apply and it cannot be trea .....

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account. Following the decision of the Apex Court in CIT vs Woodward Governor India (P) Ltd 312 ITR 254(SC) the Assessing Officer is directed to allow the claim of the assessee for this deduction under section 80IB. and allowed the ground of the assessee. Aggrieved by the order, the Revenue has assailed an appeal before Tribunal. 25. In the appellate proceedings, the ld. Departmental Representative contention that the assessee is not eligible for deduction u/s.80IB of the Act in respect of fore .....

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his arguments with the judicial decisions. 27. We heard the rival submissions and perused the material on record and judicial decisions. The contention of the ld. Departmental Representative that nature of transaction of foreign exchange gain is speculation and they are not eligible for any benefit for eligible business. There is no nexus provided with respect to business activities. Prime facie the assessee enters into international business transactions and such foreign exchange gain should be .....

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