TMI Blog2018 (4) TMI 517X X X X Extracts X X X X X X X X Extracts X X X X ..... e quite better compared to the year in which 15 % disallowance was confirmed, we have reduced it to 5 % in assessee’s appeal. Hence, ground No. 1 of the appeal of the revenue is dismissed. Disallowance by reducing the WDV of the block of the asset - Held that:- Applicable rate of depreciation on electrical fittings is 10% and not 15% as claimed by the assessee as it falls under the category of ‘furniture and fittings”. The Assessee has not shown before the lower authorities that electrical fittings are falling in the classification of ‘Plant and Machineries.” to qualify as deduction at the higher rate of depreciation. . In view of this we do not find any infirmity in the order of CIT (A) . Disallowance of interest - Held that:- Hon’ble Bombay High Court in case of Reliance Utilities Ltd. [2009 (1) TMI 4 - BOMBAY HIGH COURT] has held that if the assessee has more interest free funds then advances given free of interest for that case presumption is available to the assessee that amount is advance out of non interest bearing funds. In view of this disallowance of ₹ 3113654/- out of interest expenditure is not sustainable. However, there is also a statement that assessee ha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... filed appeal raising following two grounds in ITA No. 5997/Del/2014 : 1. The Ld. CIT(A) erred in law and on facts in restricting the disallowance out of polishing charges to the extent of 7.5% of total polishing charges despite assessee failed to justify the claim with evidence. 2. The Ld. CIT (A) erred in law and on facts in deleting the additions of foreign commission of ₹ 47,77,826/- on account of non deduction of TDS. 5. Brief facts of the case are that assessee is a partnership firm engaged in the manufacturing and export of stainless steels, utensils, and cutleries items etc. The assessee filed its return of income on 14.10.2010 for ₹ 11658590/- . Assessment u/s 143(3) was made by the Ld. ACIT, Circle 9 (1), New Delhi at ₹ 23436144/-. The assessee challenged the order of the ld AO before the Ld. CIT (A) who deleted certain additions, disallowance and confirmed part of them by his order dated 27.06.2014. Therefore, both the parties aggrieved by that order are in appeal before us. 6. We first take up the appellant of the assessee. The first ground of appeal is against disallowance of ₹ 995122/- being 7.5% of the total polishing charges ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... disallowance is required to be made. He further held that in case of the assessee the coordinate bench in earlier years have decided the identical issue 50% of the disallowance of total expenditure made by the Assessing Officer, which was restricted to 15% by the CIT (A), was upheld. Therefore, we are also of the opinion that some disallowance is required to be upheld on the facts of the present AY and the history of the assessee in previous A.Y. In the present case, the Ld. CIT (A) after discussion of the whole issue in detail in para No. 9 to 9.21 has restricted the disallowance to 7.5 % of the total payment. In the details submitted by the assessee before us the assessee also could not submit the confirmation with respect to total payment of ₹ 1095707/-. In the earlier case decided by the coordinate bench the total payment made by the assessee for Polishing Charges was of ₹ 3.02 crores whereas in the present case the total payment is only of ₹ 1.32 crores. In that particular case the Ld. Assessing Officer only filed addresses of 16 parties out of 300 and confirmation could only be filed in case of 9 parties. In the present case, the assessee has submitted conf ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... .1 of the appeal of the revenue. 12. The ground No. 2 of the appeal of the assessee is against confirmation of disallowance of ₹ 59931/- by reducing the WDV of the block of the asset. The brief facts of the case shows that assessee has claimed depreciation of electrical fittings @ 15% whereas the Ld. Assessing Officer observed that the correct rate of depreciation is 10% as it falls under the classification of Furniture fittings . On appeal before the CIT (A), the same was confirmed. 13. The Ld. AR submitted that it is confirming part of the block of the asset from the earlier years. In opening balance, the rate of depreciation was 15 %. 14. The Ld. DR submitted that depreciation has been correctly allowed by the Assessing Officer at the appropriate rates, as assessee has not shown how the rates of 15 % can be applied to it. 15. We have carefully considered the rival contentions and find that applicable rate of depreciation on electrical fittings is 10% and not 15% as claimed by the assessee as it falls under the category of furniture and fittings . .The Assessee has not shown before the lower authorities that electrical fittings are falling in the classifica ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that assessee has paid interest on Fixed capital of partners. This fact requires to be verified. In the result ground, No. 3 of the appeal is set aside to the file of ld AO where the assessee is directed to show that assessee has interest free funds available in the form of partner s current account. Accordingly, this ground is allowed with above direction. 20. This leaves us with the ground No. 2 of the appeal of the revenue wherein the Ld. CIT (A) has deleted the disallowance of Foreign Commission expenditure of ₹ 4777826/- . The assessee has paid Foreign Commission and has not deducted tax at source u/s 195 of the Income Tax Act. The assessee submitted that no tax is required to be deducted as no part of the income arises in India. The Ld. CIT (A) deleted the above addition. The Ld. AR relied on the order of the CIT (A) and Ld. DR relied upon the order of the Ld. Assessing Officer. 21. We have carefully considered the rival contentions. In the present case the Ld. CIT (A) has given a detailed finding that Foreign Commission paid by the assessee has not chargeable to tax in India in para No. 12 of his order which is under :- 12. Foreign Commission 12.1 I have ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... other mode : Provided further that no such deduction shall be made in respect of any dividends referred to in section 115-0. Explanation-For the purposes of this section, where any interest or other sum as aforesaid is credited to any account, whether called Interest payable account or Suspense account or by any other name, in the books of account of the person liable to pay such income such crediting shall be deemed to be credit of such income to the account of the payee and the provisions of this section shall apply accordingly. (2) Where the person responsible for paying any such sum chargeable under this Act (other than salary) to a non-resident considers that the whole of such sum would not be income chargeable in the case of the recipient, he may make an application to the Assessing Officer to determine, by general or special order, the appropriate proportion of such sum so chargeable, and upon such determination, tax shall be deducted under sub-section (1) only on that proportion of the sum which is so chargeable. 12.3 It is apparent that under Section 195 of the Income-tax Act, 1961, an obligation is cast on a person making payment to a non-resident ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on income. Therefore, it can also not be said that the impugned Commission income has accrued or arisen to the Non Resident agent in India. The aforesaid Commission payment may, however, be deemed to accrue or arisen in India under - (i) section 9(1 )(i) of the Act if the commission agent has a business connection in Indiaand the income arises through such business connection or (ii) section 9(1 )(vii) of the Act if the services rendered by the commission agent could be characterized as defined in Explanation 2 to that section. 12.7 The concept of business connection was dealt with in the decision of Hon ble Supreme Court in the case of CIT vs. R.D. Aggarwal Co. Anr., 56 ITR 20, wherein the Apex Court held that a business connection involves a relation between a business carried on by a non resident which yields profit or gains and some activity in the taxable territories which contributes directly or indirectly to the earning of those profits or gains. It predicates an element of continuity between the business of the non-resident and the activity in the taxable territories . Given the above definition, a case can be made out by an Assessing Officer that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he second aspect of the same question is whether the commission amounts credited in the books of the statutory agent can be treated as incomes accrued, arisen, or deemed to have accrued or arisen in India to the non- resident assessees during the relevant year. This takes us to s. 9 of the Act. It is urged that the commission amounts should be treated as incomes deemed to have accrued or arisen in India as they, according to the department, had either accrued or arisen through and from the business connection in India that existed between the non-resident assessees and the statutory agent. This contention overlooks the effect of cl. (a) of the Explanation to cl. (i) of sub-s. (1) of s. 9 of the Act which provides that in the case of a business of which all the operations are not carried out in India, the income of the business deemed under that clause to accrue or arise in India shall be only such part of the income as is reasonably attributable to the operations carried out in India. If all such operations are carried out in India, the entire income accruing there from shall be deemed to have accrued in India. If however, all the operations are not carried out in the taxable ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... panies for securing business outside India, there is no liability to deduct tax at source under the Indian Income Tax 1961. 12.11 Similar decisions have been made in the following judgments also: i. DCIT vs. Angelique International Ltd. [(2013) 55 SOT 226 (Delhi)] Commission paid to a non-resident agent for services rendered outside India is not chargeable to tax in India and that hence, no disallowance can be made under s. 40(a)(ia).Where the relationship between the assessee and its nonresident agents is on a principal to principal basis, sales commission paid to non- residents for services rendered outside India could not be deemed to be income accrued or arise in India. ii. ACIT vs. Priyadarshini Spinning Mills (P.) Ltd. [2013] 55 SOT 432 (Hyderabad) Section 195, read with section 40(a)(i), of the Income-tax Act, 1961 - Deduction of tax at source - Payments to non-resident - Assessment year 1998-99 - Whether where foreign agents were appointed to act as a selling agents of assessee outside India, commission earned by them for services rendered by them outside India could not be considered as income chargeable to tax in India - Held, yes - Whether th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... vices rendered outside India cannot be deemed to be income which has accrued or arisen in India in terms of section 9(1 )(i) of the Act. 12.13 The Assessing Officer has relied upon the decision of the Delhi Bench of the Hon'ble ITAT in the case of Asia Satellite Telecommunications Company Ltd. vs. DCIT, 85 ITD 478 (Delhi), where it was held that since the payment to non resident agent had been made for Commission which is originating in India due to the Indian goods, the Commission income is attributable to the operations carried in India. In this regard, it is observed that this order of the Hon ble ITAT has been reversed by the Hon ble Delhi High Court in the case of Asia Satellite Telecommunications Co. Ltd. Vs. Director of Income Tax, 322 ITR 140 wherein the Hon ble High Court of Delhi has held that in order for income to be taxable u/s 9(1) (i), the carrying on of operations in India is a sine qua non. As discussed earlier, in the present case, the Commission Agents had no business connection in India, therefore, their income from Commission cannot be deemed to be income accruing or arising in India for the purposes of section 9(1 )(i) of the Act. 12.14 The Asses ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... was amongst those some taxpayers who were claiming relief not in accordance with the Act. The Ld. Assessing Officer without establishing that the present Assessee was amongst those some taxpayers who were claiming relief which was not in accordance with the Act, sought to use the withdrawal of Circular No. 23 alongwith Circular No. 163 and Circular No. 786, as if the relief was to be denied to all taxpayers irrespective of the facts of the case or the genuineness of the relief claimed. 12.17 The withdrawal of the relevant Circular and its effect on the allowability of foreign Commission has been discussed by Hon ble Bangalore Bench of ITAT in the case of Exotic Fruits Pvt. Ltd. vs. ITO [in ITA 1008 to 1013/Bang./2012, order dated 04-10-2013], according to which even after the withdrawal of the said circulars, Foreign Agent's Commissions paid in the above circumstances do not become income chargeable to tax in India. In this judgment, the Hon ble ITAT has considered a crucial fact about the withdrawal of circular by the Central Board of Direct Taxes (CBDT) i.e. Circular No. 23 dated 23-07-1969, it was held that TDS was not required to be deducted on the payments of Comm ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uch income (commission) in the hands of non-resident commission agents did not accrue or arise directly or indirectly, through or from any business connection in India. Such income to the non-resident commission agents did not accrue or arise in India through or from any property in India or through the transfer of capital asset situated in India. In the facts and circumstances the provisions of sec. 9(1) were not applicable to such payment of commission by appellant to nonresident agents Para 7.7- in the absence of permanent establishment(s) of such agents in India, the incomes of the said agents were NOT liable to be taxed in India and, as such, the assessee was not obliged to effect any deduction of tax on the commission payments made to the agents who were positioned overseas. 12.18 The Hon ble ITAT in the case of Gujarat Reclaim Rubber Products Ltd. vs. Addl. DIT dated 19 April, 2013 [2013] 35 taxmann.com 587 (Mum) -Trib.] has also considered the issue of withdrawal of circular by the Central Board of Direct Taxes (CBDT) i.e. Circular No. 23 dated 23-07-1969 and even after the withdrawal it was held that TDS was not required to be deducted on the payments of co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... deemed to accrue and arise in India under section 5(2)(b) read with section 9(1 )(i) of the IT Act. However, on a careful perusal, it appears that in the aforesaid case, Section 9(1 )(i) was applied without examining the concept of business connection . In this context, the term business connection as defined in Explanation 2 to Section 9(1) would mean: any business activity carried out through a person who, acting on behalf of the non-resident (a) has and habitually exercises in India, an authority to conclude contracts on behalf of the non-resident, unless his activities are limited to the purchase of goods or merchandise for the non-resident; or (b) has no such authority, but habitually maintains in India a stock of goods or merchandise from which he regularly delivers goods or merchandise on behalf of the non-resident; or (c) habitually secures orders in India, mainly or wholly for the nonresident or for that non-resident and other non-residents controlling, controlled by, or subject to the same common control, as that nonresident: Provided that such business connection shall not include any business activity carried out through a broker, general com ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s case, the facts are entirely different. In this case, the Appellant has paid foreign Commission to Non Residents for Commission due on export orders procured by them, i.e. the Non Residents. These foreign Commission Agents are not resident in India. These agents operate their activities outside India in their own countries i.e. UAE USA, and no part of their activities arise in India. They were paid Commission which relates to services provided to the Appellant from outside India .The relation between the Appellant and the Agents are principal to principal. These Agents did not have any Permanent Establishment or permanent place of business place in India. The Commission was remitted directly to these Agents directly outside India and not received by them or on their behalf in India by any third party (or by them). Moreover, the Hon'ble AAR in the case of Ind Telesoft P. Ltd. 267 ITR 725 have held that tax was not required to be deducted out of foreign Agent s Commission. In that view of the matter, the decision of the AAR in SKF Boilers cannot be said to be a binding precedent. 12.21 The Hon ble Delhi High Court has held that in the case of CIT vs. EON TECHNOLOGY (P) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es not have permanent establishment in India. The services are rendered and utilised outside India and the payments for the services rendered is also received outside India. There is no business connection in India. In such circum-stances, the income of the non-resident company is not taxable in India. The questions raised by the applicant are answered as follows : (1) The payments made by the applicant towards line production services provided by Endemol ARG in accordance with the agreement entered into by the applicant with Endemol ARG is not fees for technical services as the services falls under work contract as defined in the Explanation to section 194C of the Income-tax Act. (2) The question is not dealt with because of our answer to question No. 1. (3) The payments made by the applicant to Endemol ARG for availing of the line production services under the agreement is not chargeable to tax as per the provisions of section 9(1 )(i) of the Income-tax Act. (4) The receipts by Endemol ARG from the applicant will not suffer withholding of tax under section 195 of the Act as the income earned is not taxable in India. The ruling is given and p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t be taxed in India the income of buying agent also cannot be taxed in India. J. K. (Bombay) Ltd. v. CBDT [1979] 118 ITR 312 (Delhi) and SkyceW Communications Ltd. v. Deputy CIT [2001] 251 ITR 53 (Mad) applied. The assessee was a tax resident of Hong Kong. Its sourcing division provided buying agency services to various customers including an Indian company, an associate enterprise. For such services the assessee entered into a buying agency services agreement with the Indian company for sourcing of merchandise in respect to which the assessee received buying commission at 8.25 per cent, of the value of merchandise. The assessee provided services which included centralised media and advertisement planning, market research, public relations, sports marketing and other marketing services such as catalogue production, development of retail shop systems, etc. Another division of the assessee's group, provided certain regional marketing and administrative support services to the group's Asia-Pacific distribution entities (including the Indian company). Under the buying agency services agreement, during the assessment year 2007-08 the assessee was required to provide ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by the assessee was appropriately classified as commission as against fees for technical services . It was not taxable in India. 12.25 It has been held by the Hon ble ITAT Mumbai in the case of Armayesh Global vs. ACIT 45 SOT 69 as under:- The overseas agent did not render any services in India. It had no place or permanent establishment in India. It worked abroad and procured orders. The orders were sent directly by the foreign purchasers remitted to the assessee in India and even the payment for export was received by the assessee in foreign currency directly from foreign purchasers and the commission was paid to foreign agent thereafter as a percentage of sales in terms of the agency agreement. The payment made to overseas commission agent by the assessee was not for technical/managerial services. Therefore, in the absence of any service having been rendered in India, no part of the commission paid to the overseas agent could be said to be chargeable in India and in the absence of any income chargeable to tax in India, question of applying section 195 did not arise. 12.26 It has been held by the Hon'ble Allahabad High Court in the order dated 17.12.2013 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e Department. 12.28 It is also noted that there is no requirement for the agreements with the Agents to be in writing as held by Delhi Bench of Hon'ble Income Tax Appellate Tribunal in the case of DCIT vs. Angelique International Limited [(2013) 55 SOT 226 (Delhi)]. However, the letter for appointment of the Agents dated 6.3.05 and 25.4.07 of the two Agents i.e. A1 Mehtab Trading Co. Ltd., Dubai, UAE and Global Purchasing Inc., New Jersey, USA were filed before the Assessing Officer and it was stated by the Appellant that these letters constituted the final contracts duly evidence by the conduct of the parties. It was also claimed that similar payments were made in the earlier years which were allowed and that following the principle of consistency, the payments made towards Commission to Non-Residents should be allowed in this year also. Though merely because disallowance was not made in earlier years, the Assessee cannot claim that no disallowance be made, as each year is separate, and there is no res judicata in taxation proceedings as discussed above in Para 9.16 to 9.19, but even for the instant year there is nothing to show that disallowance should be made. 12. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... other business activities carried on in the other State of the same or similar kind as those effected through that permanent establishment. 12.32 Thus the existence of Permanent Establishment (PE) in India is sine qua non for bringing to tax business income of those entities in India. In other words, even if a UAE or a USA resident is held to have a business connection in India, its business income will not be taxable in India in the absence of PE of such enterprise in India. 12.33 In the present case, it is observed that the Commission agents did not have any Permanent Establishment in India. It is not the case of the Ld. Assessing Officer that the Non Resident Agents had a Permanent Establishment in India or that the activities of the Agents were such that it could be deemed that there a Permanent Establishment (PE) in India. Hence, the Commission paid by the Appellant to the foreign resident would not be taxable in India as business income since that resident does not have PE in India. 12.34 On the basis of the above discussion, I am of the considered opinion that Commission payment to non-resident Commission Agents for export of Manufactured Stainless Steel U ..... X X X X Extracts X X X X X X X X Extracts X X X X
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