TMI Blog2015 (8) TMI 1456X X X X Extracts X X X X X X X X Extracts X X X X ..... e of income and consequently any permanent establishment in India, the said income in the hands of the foreign agent is not taxable in India. - decided in favour of assessee. Disallowance of compensation paid of prior period export sales - selection of assessment year - Held that:- There is no dispute that the assessee is following mercantile system of accounting. Even otherwise, as per the accounting standard as well as per provisions of Companies Act, the assessee is bound to follow the mercantile system of accounting. The assessee has claimed sale rebate/damage on account of defective goods exported in the earlier year. It is pertinent to note that it is not the claim of the assessee that the liability of damage has been crystallized in this year and till the year under consideration assessee was disputing the claim of the purchaser. It is only payment in respect of same amount was adjusted against the purchases received in the year under consideration. Therefore, this amount of damage is undisputedly related to the export of goods made in the earlier assessment year. Accordingly, when the assessee has never disputed the claim of damages, then the claim which pertains to e ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dyestuffs, iron, steel and other items. The AO noted that the assessee has claimed expenses towards commission paid to foreign agent. AO asked the assessee to furnish details of the commission paid to foreign agent. The assessee submitted the details of the commission paid. From the details filed by the assessee, AO found that the assessee has not deducted tax at source on these payments. Accordingly, AO disallowed the said claim by invoking the provisions of sec. 40(a)(i). AO held that the income accrued or arisen to the foreign agent is directly or indirectly through or from the business connection in India or source of income in India. Therefore, the said income shall be deemed to have accrued or arisen in India. To support his view, the AO has recorded the reason that right to receive commission arises in India when the order is executed by the assessee in India. 4. On appeal, the CIT(A) has deleted the addition by holding that commission income paid to foreign agent is not chargeable to tax in India. Therefore, tax was not required to be paid nor any tax was required to be deducted u/s 195 of the Act. 5. Before us, learned DR has heavily relied upon the finding of the A ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rovision of s. 40(a)(i) is attracted in the facts of the case. Section 40(a)(i), overriding sections 30 to 38, provides that where any interest, royalty, fees for technical services or other sum chargeable under the Act, is paid either outside India or in India to a non-resident (not being a foreign company) or to a foreign company, on which tax is deductible at source under Chapter XVII-B, and such tax has not been deducted or, after deduction not been 3 ITA No. 4522/Mum/2013 (A.Y. 2009-10) Asst. CIT vs. Vilas N. Tamhankar paid during the previous year or in the subsequent year before the expiry of the time allowed u/s. 200(1), the said amount shall not been allowed in computing the business income. The first thing, therefore, that we would need to see is whether the provisions of Chapter XVII-B are attracted to the impugned payment. The payments to a non-resident being covered under section 195, we begin by reproducing the same in its relevant part, the interpretation of which is in issue: Other sums. 195. (1) Any person responsible for paying to a non-resident, not being a company, or to a foreign company, any interest (not being interest referred to in section 194LB or s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ry sections. Due weight has to be given to every word in the section. The interpretation by the Revenue was, in its view, guided more by administrative convenience, and which would though imply deduction of tax even on payments qua which there was no territorial nexus with India or otherwise were not chargeable to tax in India. Administrative considerations could not be the basis of the interpretation of the statutory provisions, even as the law contemplates adequate safeguards in the form of section 40(a)(i) and section 195(6); the latter being inserted on the statute by Finance Act, 2008 w.e.f. 01.04.2008. The hon ble court also explained the decision in the case of Transmission Corpn. of A.P. Ltd. (supra). Section 195 contemplates deduction of tax at source not only on amounts, whole of which are pure income payments, but also covers payments which have an element of income imbedded or incorporated therein. Where, therefore, the payer entertains a doubt as to the amount on which the tax is to be deducted or otherwise considers that the same is not deductible on the gross amount on the footing that only a part thereof represented income chargeable to tax in India, it was necessar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... with sub- section (1) and to make deduction thereunder applies and shall be deemed 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. The same, however, in our view, would not operate to disturb the law as enunciated in GE India Technology (supra), except where the basis of the payer s belief, i.e., as to the non-chargeability of the payment to tax in India, is on the ground that the payee has no place of business or business connection or otherwise any presence whatsoever in India. In the present case, the edifice of the assessee s case is the rendering of the services outside India. Therefore, though for a consideration for marketing and sale support services and, thus, only in the nature of commission or service charges, the same has no nexus with India. All that, in our clear view, the said Explanation does is to remove the issue of the determination of the tax incidence on the basis of whether the payee is a tax resident in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ds/compensation is allowable only in the year of relevant export. Thus, the CIT(A) has confirmed the disallowance. 9. We have heard the learned AR of the assessee as well as the learned DR and considered the relevant material on record. There is no dispute that the assessee is following mercantile system of accounting. Even otherwise, as per the accounting standard as well as per provisions of Companies Act, the assessee is bound to follow the mercantile system of accounting. The assessee has claimed sale rebate/damage on account of defective goods exported in the earlier year. It is pertinent to note that it is not the claim of the assessee that the liability of damage has been crystallized in this year and till the year under consideration assessee was disputing the claim of the purchaser. It is only payment in respect of same amount was adjusted against the purchases received in the year under consideration. Therefore, this amount of damage is undisputedly related to the export of goods made in the earlier assessment year. Accordingly, when the assessee has never disputed the claim of damages, then the claim which pertains to earlier year cannot be allowed in the year unde ..... X X X X Extracts X X X X X X X X Extracts X X X X
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