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M.K. Jailani, Prop: M.N. Leathers Versus The Income Tax Officer, Non Corporate Ward 4 (2) , Chennai

2017 (5) TMI 909 - ITAT CHENNAI

TDS u/s 195 - disallowance for want of non deduction of tax at source on interest payments to M/s. Reliance Capital Limited - Held that:- assessee has filed a certificate dated 09.01.2017 from Chartered Accountants as prescribed in first proviso to Sec. 201(1) of the Act. This certificate says that M/s. Reliance Capital Limited had taken into account interest paid by the assessee for computing their taxable income. In my opinion first proviso to Sec. 201(1) of the Act did not prescribe therein a .....

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ayments made to M/s. Reliance Capital Ltd, requires a revisit by ld. Assessing Officer. - Decided in favour of assessee for statistical purpose. - Non TDS on commission payment to the non-resident marketeer - addition u/s.40(a)(i) - Held that:- Assessee was not obliged to deduct tax at source on the commission paid by it to the non-resident marketeer. Question of getting a certificate from the Assessing Officer under Section 195(2) of the Act will be applicable only where the assessee consid .....

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> ORDER Grounds taken by the assessee in this appeal directed against an order dated 28.12.2016 of Commissioner of Income Tax (Appeals)-5, Chennai are reproduced hereunder:- 1. Learned A/O has erred in disallowing ₹ 9,67,348 being interest paid to M/s. Reliance Capital and CIT (A) erred in confirming the addition without appreciating the fact that the whole amount of interest was paid before '31-3-2013 and nothing by way of interest was due to Reliance Capital an .....

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ss activities outside India. * The commission paid related to services provided outside India. *The agent does not have any permanent establishment or permanent business place in India. * The commission was remitted to the agent directly outside India. All the above conditions bring to a reasonable conclusion that the commission paid in the facts of the present case to the non-resident agent is not taxable in India and hence Sec.195(1) or Sc.9(1)(vii) are not .....

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Capital Ltd. As per ld. Authorised Representative, assessee which was in leather business had raised capital from number of banks and institutions. Further, as per the ld. Authorised Representative Sec. 40(a)(ia) of the Act could be applied only if the payee had not accounted the interest receipt as a part of its income. Submission of the ld. Authorised Representative was that assessee was having certificate of a Chartered Accountant as stipulated in first proviso to Sub-section (1) of Sec. 201 .....

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ant of deduction of tax. As per the ld. Authorised Representative, assessee had paid a commission of A10,35,967/- to M/s. Freedom Leather, Italy. According to him, one M/s. Tara Leather Exim Pvt Ltd was having an exclusive agency agreement with M/s. Freedom Leathers, Italy for collecting orders for leather goods. As per ld. Authorised Representative M/s. Tara Leather, thereafter apportioned the orders received through M/s. Freedom Leather among various leather exporters of which assessee was one .....

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e Act. Further, according to him, canvassing orders would not come within the meaning of the term technical services as defined under Explanation 2 of Sec. 9(1)(vii) of the Act. Relying on the judgment of Hon ble Jurisdictional High Court in the case of CIT vs. Farida Leather Company (2016) 135 DTR 268, ld. Authorised Representative submitted that when primary tax liability of a foreign agent cannot be established, assessee cannot be fastened with a liability to deduct tax at source on payments .....

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ne so, as per the ld. Departmental Representative assessee could by itself conclude that it was not liable to deduct tax on the commission paid to the foreign agents. Further as per ld. Authorised Representative the agent had done managerial/consultancy services to the assessee and this was nothing but technical service as defined in Explanation 2 to Sec. 9(1)(vii) of the Act. Failure to deduct tax, therefore as per the ld. Departmental Representative, attracted Section 40(a)(i) of the Act. In s .....

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ssessee before me is that recipient had accounted such interest as a part of its income and paid taxes thereon. Therefore, according to the assessee by virtue of first proviso to Sec. 201 read alongwith second proviso to Sec. 40 (a) (ia) of the Act, it was not liable to deduct tax. As against this, claim of the ld. Departmental Representative is that such a claim was never preferred by the assessee before lower authorities and it was a fresh ground which should not be considered by the Tribunal, .....

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may be true that assessee had not produced this certificate before lower authorities. However, if payee had taken into account the interest paid by the assessee while computing their taxable income and had filed their return, then in my opinion assessee cannot be visited with rigours of Sec. 40(a)(ia) of the Act, by virtue of first proviso therein. Accordingly, I am of the opinion that question regarding liability of the assessee to deduct tax on the interest payments made to M/s. Reliance Capit .....

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defined in Explanation (2) to Sec. 9(1)(vii) of the Act. Services rendered by M/s. Freedom Leather was not directly to the assessee but to M/s. Tara Leather Exim Pvt. Ltd through an exclusive agency agreement entered by M/s. Tara Leather Exim Pvt. Ltd with M/s. Freedom Leather. M/s. Tara Leather Exim Pvt. Ltd had distributed the orders received by them through M/s. Freedom Leather to various parties, inter-alia including assessee. For such services M/s. Tara Leather Exim Pvt. Ltd charged 2.5% on .....

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ing on record to show that M/s. Freedom Lather had done any managerial or consultancy or technical service to the assessee. Only if services rendered came within the meaning of technical services as mentioned in Sec. 9(1)(vii) of the Act, the question of applying the Explanation given under Sec. 9(2) will arise. The said Explanation applied by the lower authorities which enable the Revenue to deem income of an non Resident to arise in India, even where the non Resident has not residence or place .....

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:p> (i) Section 40 (a) (i) of the Act :- Section 40 - Amounts not deductible: Notwithstanding anything to the contrary in sections 30 to 38, the following amounts shall not be deducted in computing the income chargeable under the head Profits and gains of business or profession , (a) in the case of any assessee (i) any interest (not being interest on a loan issued for public subscription before the 1st day of April, 1938), royalty, fees for technical servi .....

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en deducted during the previous year but paid after the due date specified in subsection (1) of section 139, such sum shall be allowed as a deduction in computing the income of the previous year in which such tax has been paid. Explanation: For the purposes of this sub-clause,- (A) royalty shall have the same meaning as in Explanation 2 to clause (vi) of sub-section (1) of section 9: (B) fees for technical services shall have the same meaning as in Explanation 2 to clause ( .....

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n 139 thirty per cent of, such sum shall be allowed as a deduction in computing the income of the previous year in which such tax has been paid. Provided further that where an assessee fails to deduct the whole or any part of the tax in accordance with the provisions of Chapter XVII-B on any such sum but is not deemed to be an assessee in default under the first proviso to sub-section (1) of section 201, then, for the purpose of this sub-clause, it shall be deemed that the assessee ha .....

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(not being income chargeable under the head Salaries ) shall, at the time of credit of such income to the account of the payee or at the time of payment thereof in cash or by the issue of a cheque or draft or by any other mode, whichever is earlier, deduct income-tax thereon at the rates in force : Provided that in the case of interest payable by the Government or a public sector bank within the meaning of clause (23D) of section 10 or a public financial institution within the meanin .....

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to have always applied and extends and shall be deemed to have always extended to all persons, resident or non-resident, whether or not the non-resident person has- (i) a residence or place of business or business connection in India; or (ii) any other presence in any manner whatsoever in India. (iii) Explanation 4 to Section 9 (1) (i) of the Act:- Section 9 - Income deemed to accrue or arise in India - (1) The following incomes shall be dee .....

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lways meant and included ''by means of", "in consequence of" or "by reason of". 7.1. Section 40 of the Act spells out what amounts are not deductable from the income charged to tax under the profits and gains of business or profession. 7.2. Section 40 (a) (i) of the Act deals with interest and other sums payable outside India. The provisions of this sub-clause made applicable to interest have been extended to payment of royalty, technical fe .....

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the payer, who is enjoined to deduct the tax, either credit such income to the account of the payee or make payment thereof, whether in cash / cheque / draft or any other mode. The taxability of such amount in the hands of the payee or occasioning of the taxable event is alien for the purpose of Section 195 (1) of the Act. 7.4. Section 195 (2) is an enabling provision, enabling an assessee to file an application before the Assessing Officer to determine the appropriate proportion of t .....

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010) 327 I.T.R. 456, in which, it is very categorically held that the tax deducted at source obligations under Section 195 (1) of the Act arises, only if the payment is chargeable to tax in the hands of the non-resident recipient. 9.1. Therefore, merely because a person has not deducted tax at source or a remittance abroad, it cannot be inferred that the person making the remittance, namely, the assessee, in the instant case, has committed a default in discharging his tax withholding .....

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thholding liability cannot be invoked, unless primary tax liability of the recipent / foreign agent is established. In this case, the primary tax liability of the foreign agent is not established. Therefore, the vicarious liability on the part of the assessee to deduct the tax at source does not exist. 10. Further, just because, the payer / assessee has not obtained a specified declaration from the Revenue Authorities to the effect that the recipent is not liable to be taxed in India, .....

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her than the above. Sourcing orders abroad, for which payments have been made directly to the non-residents abroad, does not involve any technical knowledge or assistance in technical operations or other support in respect of any other technical matters. It also does not require any contribution of technical knowledge, experience, expertise, skill or technical know-how of the processes involved or consist in the development and transfer of a technical plan or design. The parties merely source th .....

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idents were not providing any technical services to the assessee, as held above and as held by the Commissioner of Income Tax (Appeals), the commission payment made to them does not fall into the category of fees of technical services and therefore, explanation (2) to Section 9 (1) (vii) of the Act, as invoked by the Assessing Officer, has no application to the facts of the assessee's case. 13. In this case, the commission payments to the non-resident agents are not taxable in Ind .....

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