TMI Blog2018 (12) TMI 182X X X X Extracts X X X X X X X X Extracts X X X X ..... ection 5 of the act deals with the scope of the total income of the non-residents and takes within the scope two types of income, the income which is received or deemed to be received in India and second one the income accrues or arises or deemed to accrues or arise in India. In the case of the assessee we are dealing with the second part of the scope of income pertaining to income deemed to accrue or arise in India. Section 9 of the act provides for the income deemed to accrue or arise in India. It is noticed that no income is deemed to accrue or arise in India by applying the provisions of section 9 (l)(i) as the assessing officer has failed to establish accruing or arising of any income from business connection in India or through or from any property or through the transfer of a capital asset situated in India. There was no material which can demonstrate that any of the agents had any Permanent Establishment in India as all the agents had their establishments situated in the overseas places. CIT(A) it is clear that the Provisions of section 9(1)(i) cannot be applied, therefore we consider that the CIT(A) has rightly deleted the impugned disallowance of commission payment ma ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ontravening the provision of section 195 of the IT Act by assessee. 4. On the facts and in the circumstances of the case, the Ld. CIT (A) ought to have upheld the order of the Assessing Officer. 5. It is, therefore, prayed that the order of the Ld. CIT (A) may be set aside and that of the Assessing Officer may be restored to the above extent. 4. In this case, return of income declaring income of ₹ 39,70,40,112/- was filed on 4th October, 2010. Subsequently, the case was selected under scrutiny by issuing of notice u/s. 143(2) of the act on 25th August, 2011. The assessee company is engaged in the business of manufacturing of road construction and maintenance machinery. Further facts of the case are discussed under the different grounds of appeal filed by the revenue as under:- Ground No.1(Addition of ₹ 47,22,523/- on account unrealized sales). 5. During the course of assessment proceedings, the assessing officer noticed that the assessee company has not included some part of sales in its P L a/c which was retained by its customers either as securities for performance or for any other reasons. The assessing officer has worked out total such unr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... was seized with the following substantial question of law:- [A] Whether the Appellate Tribunal is right in law and facts of the case to delete the disallowance of claim on account of retention money of ₹ 40,32,955/-? 15. And the Hon ble High Court held as under:- 5. Insofar as the first question is concerned, a perusal of the order passed by the Commissioner (Appeals) shows that after analyzing the terms of payments of purchase orders in respect of various parties, has given categorical finding that the retention of 10% money of total sales was due to specific terms and conditions for final payment mentioned in the customer purchase order, it was further held that the assessee - company had been following this system of accounting for the last several years and was accepted by the department. The Commissioner (Appeals) further examined as to whether the assessee had made any deviation from the usual practice followed by it in the earlier years with an intention to evade tax and found that there was no such change during the year under appeal and whatever retention money had not been shown in that year and realized in the subsequent year had been shown as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ld. CIT(A). The ld. CIT(A) has allowed the appeal of the assessee stating that these expenses have been incurred in accordance with the contractual terms and conditions of the business. 10. We have heard the rival contentions and perused the material on record on this issue carefully. We have noticed that similar addition has been deleted by the ld. CIT(A) in assessment year 2009-10. Thereafter, the appeal of the revenue on this issue has been dismissed by the Co-ordinate Bench of the ITAT vide ITA No. 200/Ahd/2013 dated 19th April, 2018. The relevant part of the decision is reproduced as under:- 15. We have carefully considered the orders of the authorities below. There is no dispute that apportion of the sale consideration was retained by the payees on account of late delivery of the machineries and as per the terms of contract, the assessee had to compensate the customers if it fails to deliver the goods on time. There is no dispute that such expenditures were incurred during the ordinary course of the business of the assessee and therefore are directly related to the business activity of the assessee. It is also true that these expenditures are not penalty levied for ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to foreign agents by holding that the income arising on account of commission payable to overseas agents was deemed to accrue or arise in India and was accordingly taxable under the Provisions of section 5 (2)(b) read with section 9 (1)(i) of Income Tax Act. It has further been observed by the AO that the appellant company had failed to comply with the Provisions of section 195 (2). The appellant on the other hand, in its detailed written submission, has claimed that the Provisions of Section 5 (2)(b) read with section 9 (1)(i) of Income Tax Act were not applicable in its case. The income has been earned abroad and is therefore, not taxable in India. The issues which are to be examined and decided are: - 1. Whether the commission paid to foreign agents is taxable in India by virtue of the provisions of sectionsS (2)(b) read with section 9 (l)(i) of Income Tax Act. 2. Whether the provisions of section 195(2) were applicable on the appellant and it should have deducted tax and in case of no deduction he should have obtained a no deduction certificate from the AC. And 2.3.1 Regarding the first issue it is noted from the evidences given by the appellant as wel ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r offices on the foreign soil and the records do not indicate that they had any PE in India. Further the assessing officer has also not pointed out any such fact in its order which indicate that there was any such office which attracts the deeming provisions. Further the observation that the source of income was in India, is also not proper as it has clearly been discussed in the preceding paragraphs that none of the services have been rendered in India and source of income cannot be said to be in India as the source of income is the services rendered and not the sales. There is no business connection in India from which the income has been earned,' there is no property through or from which the income has been earned. Therefore, the Provisions of section 9 (1)(i) also cannot be applied. The appellant has rightly placed reliance on the judgement of honourable Supreme Court in the case of GE India Technology Centre Private Limited 327 1TR 456. In a recent judgement of honourable ITAT Chennai bench in the case of I M Gears Private Limited, 49 taxmann.com 175, it has been held that no tax was deductible at source on commission payment to overseas agent for procuring orders, as sai ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ons reported in 125 ITD 263 has held in para-35 of the order that in if the assessee has not applied to the Assessing Officer under section 195(2) for deduction of tax at a lower or nil rate of tax under a bona fide belief that no part of the payment made to the non-resident is chargeable to tax, then he is not under any statutory obligation to deduct tax at source on any part of thereof. While deciding the case the honourable Bench has considered several cases which were relevant to the issue. Similar view has been taken by Hon'ble Gujarat High Court in the case of Vinayaka Exports (supra). In the present case the appellant did not deduct the tax or approached the AO for low/no deduction of tax certificate as there are several judicial pronouncements in support of the appellant which have been relied by it in the written submission. It has submitted that the commission paid to non-resident agent was not liable to tax under the Provisions of the Act when the services were rendered outside India, services were used outside India, payments were made outside India and there was no permanent establishment or business connection in India. The submission given by the appellant c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nce made by the assessing officer in respect of commission paid to foreign agents. The ld. counsel has also placed reliance on the decisions of Gujarat High Court, M/s. Viyayak Exports Tax Appeal No. 404 of 2011 dated 12th June, 2012, MGM Export Tax Appeal No. 309 of 2018 dated 11/04/2018 and ITAT, Ahmedabad Bench in case of M/s. Gujarat Microwax in ITA No. 2503/Ahd/2016 dated 24th May, 2018. On the other hand the Ld. DR has supported the order of the assessing officer. 14. We have heard the rival contentions and perused the material on record. It is noticed that the assessee company has been regularly exporting its products with the help of overseas dealers. It is undisputed fact that the commission were paid to such non-resident agents in respect of all the services rendered by them related to the export made by the assessee outside India. There was no permanent establishment / office of these agents or any infrastructure situated in India. These agents have carried out all their activities outside India and commission was paid for the activities carried out side India.Section 195 is applicable only if the payments made to non-residents are chargeable to tax. If the payment ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f ₹ 15,39,99,135/-. Therefore the assessee was asked to explain why no disallowance under section14 A of the act has been made towards expenditure incurred for earning exempt income. The assessee responded that investments have been made out of non-interest bearing funds therefore no disallowance has been made in accordance with the provision of section 14A of the act. The assessing officer has not accepted the explanation of the assessee stating it has failed to substantiate that investment in shares and securities were made out of own funds, therefore, he has applied provision of section 14A r.w.s 8D of the IT rule and worked out disallowance of expenditure of ₹ 18,03,630/ incurred towards earning exempt income. 17. Aggrieved assessee has filed appeal before the ld. CIT (A). The ld. CIT (A) has party allowed the appeal of the assessee. The relevant part of the decision of ld. CIT(A) is reproduced as under:- 5.3 Decision: I have carefully considered the facts of the case, the assessment order and the written submission of the appellant. The AO has made the disallowance by applying Rule 8D read with section 14 A. It was noted by him that the appel ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... be accepted as it is the claim of the appellant to say that the investment is out of the interest-free fund and therefore, the onus is on the appellant to prove the same. To prove its claim the appellant has to demonstrate specific nexus between the investment and the interest free funds invested which it has not done. Therefore, the contention of the appellant that the investment was out of interest free funds is not acceptable. It has also not given any specific nexus such as the entries in the bank account or the dates of investment to show that certain interest free funds which were available at that point of time has been invested in the case of tax exempt assets. The onus to prove that it has not incurred any expenditure is on the appellant as it is the claim made by it and the onus therefore, would be on the appellant. The reliance is placed on the recent decision of ITAT Panaji Bench in the case of Joe Marcelinho Mathias 143 ITD 132 and Hercules Hoist Ltd 35 taxman.com 592, Mumbai ITAT. The onus has not been satisfactorily discharged. Therefore, the appellant's contention regarding non-incurring of any interest expenditure is not accepted. In these circumstances it is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y to the extent they are relatable to the earning of taxable income, which means that the expenses which are not incurred not for the purpose of earning of taxable income cannot be allowed for the computation of net income. Hence, even if from the investments made, no exempt income has resulted but the said expenditure cannot be said to be incurred for earning of taxable income, the same cannot be allowed while computing the taxable income. Where there is a hotchpotch of funds and the expenditure both for investments and business purposes are incurred from the common poof and cannot be segregated, the hon'ble Supreme Court has upheld the principle of apportionment of expenses as provided under section 14 A of the Act. As has been discussed in the preceding Paras that the appellant has itself admitted that it is not maintaining any separate funds and was not in a position to demonstrate that the investment has been made out of interest free funds, it would be appropriate that disallowance out of interest on account of investment in the assets which has yielded exempt income should also be made. For this purpose reliance is placed on the judgement of honourable Mumbai ITAT ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... many should not be considered for the purpose of working out the disallowance of interest as the dividend income from that company would be taxable in India and accordingly the same cannot be considered for working the disallowance under section 14 A. For AY 2011 - 12, the details available in the annual report for FY 2010 - 11 show that there is an increase of tax exempt investment from ₹ 15.3999 crores to 36.8823 crores. The increase is due to increase in investment from 30.295 Lacs to 3.7944 crores in the subsidiary in Germany, accordingly there is an increase of ₹ 3,49,14,500/-. The another investment is in equity shares of associate company in the name of Apollo Earthmovers Ltd, which has increased from 13.2533 crores to 31.2533 crores. Therefore, there is an increase of 18 crores during the year. As discussed in the preceding Para, the appellant has not given any nexus of this investment with the interest free funds. The appellant was specifically asked to prove the nexus but it has expressed inability to do the same. The details of this year's balance sheet show that there is an increase from shareholders fund from 143 crores to 152 crores whereas there is an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... en incurred for earning the dividend income, is applicable in the case of the appellant. Some administrative action such as the review of investment or monitoring of the activities of the companies in which the appellant company has made substantial investment might have been done by the director of the appellant companies and the supporting employees must have done some activity by spending some time on the issue. Therefore, the salary paid by the appellant company to those employees and the directors have not been utilised exclusively for the purpose of the business of the company. A part of it can always be attributed to the earning of dividend which is exempt from tax. Therefore, in these circumstances also having regard to the accounts of the appellant, I am not satisfied with the correctness of the claim of the appellant in respect of no administrative expenditure in relation to income which does not form part of the total income under this Act that is the dividend income shown by the appellant. It is further noted that my predecessor CIT(A) has restricted the disallowance made by the AO for A.Y 2009 - 10 to an amount of ₹ 7,00,000/- as against the disallowance of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ome, in view of this judgement also the application of Rule 8D by the AO is upheld. The appellant has also placed reliance on various judgements which have been reproduced and mentioned at the relevant page where the submission of the appellant has been given. However, after going through the various judgements it is noted that none of the judgement is applicable to the appellant's case as the facts in those cases were different from that of the appellant. The cases are therefore, respectfully distinguished. Regarding the judgement of honourable Gujarat High Court in the case of Corrtech Energy P. Ltd (supra), it is noted that the judgement is not applicable as in that case the appellant did not claim any exemption on account of the dividend received, whereas in the present case the appellant has claimed exempt income, in both the assessment years involved, on account of dividend received from the investments. The judgement is therefore respectfully distinguished. The grounds of appeal for both the years are accordingly, partly allowed. 18. We have heard the rival contentions and perused the material on record on this issue carefully. It is noticed that dur ..... X X X X Extracts X X X X X X X X Extracts X X X X
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