TMI Blog2018 (10) TMI 1714X X X X Extracts X X X X X X X X Extracts X X X X ..... er passed by the Ld. ITAT in assessee s own case for the AY 2004-05 to AY 2010-11 it is held Section 26 of the Act provides that unless otherwise agreed, the goods remain at the seller risk. In case of FOB contracts the goods are delivered free on board the ship once the seller has placed the goods safely on board at his cost and thereby handed over the possession of the goods to the ship in transfer of the Bill of Landing or other document, the responsibility of the seller ceases on the delivery of the goods to the buyer is complete - sale was executed under FOB as per which the risk was transferred from the seller to the buyer when the goods put on ship or rail. In view of above, we are not inclined with the decision of the CIT(A) and we are of the view that when the sale was executed under FOB, CIF terms as per which the risk was transferred from the seller to the buyer when the goods put on ship or rail. Therefore, the appeal of the assessee is allowed on this issue. Disallowance of depreciation on no compete fees - HELD THAT:- After considering the facts and the detailed findings along with various judicial pronouncements elaborated in the order of the CIT(A), we consider ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in the instant case by the assessee. 3. Ground No.1 : The assessee has filed its return of income on 27.11.2012 declaring total income of ₹ 43,80,17,520/-. Upon scrutiny, notice u/s.143(2) of the Income Tax Act, 1961 (hereinafter referred to as the Act ) was issued on 08.08.2013 followed by notice u/s.142(1) of the Act dated 21.08.2014 followed by notice u/s.143(2) r.w.s. 129 of the Act dated 21.08.2015 and 22.12.2015 due to change of incumbent. It appears from the record that the assessee-company during the AY 2012-13 had entered into several international transactions with its associated enterprises. The Assessing Officer (AO) noticed that the assessee-company had paid total commission of ₹ 1,04,41,126/- out of which no TDS was deducted on the commission of ₹ 80,68,921/- paid to non-resident. Since in the previous assessment year, the AO had disallowed the payment of foreign commission u/s.40(a)(ia) of the Act, on that premise the assessee was asked to furnish explanation as to why similar additions/disallowances should not be made. The assessee was further directed to explain as to why the commission paid to non-resident should not be disallowed in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o various commission agents of which details are noted as under:- Sl. No. Agent s name and address Commission US $ Commission Amount Rs. 1 AI Sanabeek Trading Corporation P.O.Box 10474, Jeddah-21433, Saudi Arabia C.R. 4030086374 $ 7500 341,250 2 AI Sanabeak Trading Corporation P.O. Box 10474, Jeddah -21433, Saudi Arabia C.R.4030086374 $20,000 1,001,000 3 AI Sanabeak Trading Corporation P.O. Box 10474, Jeddah -21433, Saudi Arabia C.R.4030086374 $5,885 294,544 4 AI Sanabeak Trading Corporation P.O. Box 10474, Jeddah -21433, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Saudi Arabia C.R.4030086374 $24,600 1,280,922 15 Plastech International P6-63, PO Box 121696 Sharjah $15,000 781,050 16 Aliasgar Tailor P.O. Box 30126, Ahman $3,000 156.120 TOTAL $154,975 8,068.921 It has been noticed that in respect to the commission agents at Sr. No. 1 to 8, 10, 11, 12 14, noted in the above table, the appellant has also paid the commission in A.Y. 2011-12 and earlier years and the similar disallowance u/s.40(a)(ia) of the Act have been made by the AO in the respective assessment years. However, the aforesaid disallowances u/s.40(a)(ia) of the Act have been deleted by the first appellate authority i.e. CIT(A) while deciding the appeal of the respective assessment years. For ready reference the decision of the CIT(A)-2, Ahmedabad in a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 sections (2)(b) read with section 9 (1) (i) of Income Tax Act. 2. Whether the provisions of section 195(2) were applicable on the appellant and he should have deducted tax and in case of no deduction he should have obtained a no deduction certificate from the AO. 4.3.1 Regarding the first issue it is noted from the evidences given by the appellant as well as noted by the AO in his order that the services have been rendered by the foreign agents outside India. The sales were booked by them in their country or for the country for which they have been appointed as commission agents. None of the activity of soliciting the clients and procuring the orders is in India. The goods are being delivered by the appellant company in the other country. The activities of procuring the payment on behalf of the appellant company are also done abroad. The AO was therefore, incorrect to hold that the source of income lies in India as the sales have been made from India. T ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 327ITR 456. Therefore, in view of the preceding discussion the AO was not justified to hold that the commission payable to the overseas agents was deemed to accrue or arise in India and is taxable under the Act in view of the specific provisions of sections 5 (2) (b) read with section 9(1)(i) of Income Tax Act. 4.3.2 Regarding the issue of obtaining no deduction certificate under section 195 it is seen that for the applicability of the provisions of this section, the sum must be chargeable under the provisions of the Income Tax Act. Section 195 provides for deduction of tax by the person responsible for paying to a non-resident any interest or any other sum chargeable under the Provisions of the Act. If is clear that the payment was not the interest. It has to be seen whether the payment is covered unde ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... here are several other decisions which hold that such kind of commission is not taxable in India and accordingly no liability to deduct fax was there. Further the decision of honourable Supreme Court of India in the case of Hon'ble Supreme Court in the case of CIT vs. Toshoku Limited 125 ITR 525, still prevails as on date and is the law of the land as regards applicability of IDS provisions to commission paid to overseas/nonresident agents by Indian Exporters. In view of the preceding discussion it is clear that the appellant was not liable to deduct tax on the commission paid foreign agents. Therefore, the disallowance of ₹ 1,20,22,460/- under section 40(a)(ia) made by the AO is directed to be deleted. The fact of the present year are almost identical to the A. Y. 2009 -10 except for certain commission that has been paid to nonresident agents in respect of sales made in India. It has been submitted by the appellant that commission of ₹ 1880876 has been paid towards machines sold in India. It has been submitted that all services were rendered by non-resident entities outside India and the agents do not have any permanent establishment in India. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t Sr. No. 9, 13, 15, 16 of the above table, it has been noticed that during the course of assessment proceedings the appellant has not submitted any details and evidences to prove that the aforesaid commission agents have not provided the services in India and they did not have any business connection or permanent establishment in India. The onus was on the appellant to justify the claim of appellant by adducing necessary evidences in form of copies of invoices of sales, working of commission, copy of Form No.l5CA 15CB, bank remittance advisory notes or any other evidences. However, the appellant has failed to provide the aforesaid details and copies of the said documents. So, there is nothing onrecord submitted by the appellant that the agents to whom commission was paid in the year under consideration for services having rendered, if any, outside India were also paid in the preceding years. 3.6. in view of the aforesaid discussion, it is noticed that in this case, the appellant has failed to prove the no business connection of such payment in India, and in absence of the same, the allowability of the same remained unsubstantiated. Therefore, for the reasons discussed ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in India, and is accordingly taxable under section 5(2)(b) r.w.s 9(1)(i) of the Income Tax Act. On the other hand, the ld.CIT(A) was of the view that income has been derived from the activities of soliciting sales on behalf of the assessee-company by the agent; they are non-residents, and do not have any establishment in India and no activities was carried out in India. This aspect has been examined lucidly by the Tribunal in the case of Welspun Corporation Ltd. (supra), wherein one of us (Accountant Member) was author of the order. The discussion made by the Tribunal reads as under: 7. We find that once the agreements and related invoices have been furnished by the assessee at the assessment as also at the appellate stage, and no specific defects have been pointed out in the same, it cannot be open to the revenue to contend that genuineness of commission payments is not established. The commission payments are made with regulatory approvals and through banking channels, and all the requisite documentation is furnished for perusal. In these circumstances, we are of the considered view that the CIT(A) was indeed justified in his well reasoned conclusions on this aspect o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he purposes of making or earning any income from any source outside India; or (c) * Explanation 1- .* Explanation 2.- For the purposes of this clause, fees for technical services means any consideration (including any lump sum consideration) for the rendering of any managerial, technical or consultancy services (including the provision of services of technical or other personnel) but does not include consideration for any construction, assembly, mining or like project undertaken by the recipient or consideration which would be income of the recipient chargeable under the head Salaries . * Not relevant for our purposes 32. So far as deeming fiction under section 9(1)(i) is concerned, it cannot be invoked in the present case since no part of the operations of the recipient s business, as commission agent, was carried out in India. Even though deeming fiction under section 9(1)(i) is triggered on the facts of this case, on account of commission agent s business connection in India, it has no impact on taxability in the hands of commission agent because admittedly no business operations were carried out in India, and, therefor ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... elevant to decide the scope of Explanation 1 to Section 9(1)(i), which is what is material in the context of the situation that we are in seisin of. The revenue s case before us hinges on the applicability of Section 9(1)(i) and, it is, therefore. important to ascertain as to what extent would the rigour of Section 9(1)(i) be relaxed by Explanation 1 to Section 9(1)(i). When we examine things from this perspective, the inevitable conclusion is that since no part of the operations of the business of the commission agent is carried out in India, no part of the income of the commission agent can be brought to tax in India. In this view of the matter, views expressed by the Hon ble AAR, which do not fetter our independent opinion anyway in view of its limited binding force under s. 245S of the Act, do not impress us, and we decline to be guided by the same. The stand of the revenue, however, is that these rulings, being from such a high quasi-judicial forum, even if not binding, cannot simply be brushed aside either, and that these rulings at least have persuasive value. We have no quarrel with this proposition. We have, with utmost care and deepest respect, perused the above rulings r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r they have no business connection or permanent establishment in India. We, therefore, for the ends of justice set aside this part of the order to the file of the Ld.AO to verify the said aspect considering the evidences to be adduced by the assessee in this respect. We make it clear that the assessee be given a reasonable opportunity of hearing positively by the Ld. Assessing Officer while adjudicating the matter and to pass orders in accordance with law. 6. In the result, assessee s appeal in ITA No.462/Ahd/2017 for AY 2012-13 is allowed for statistical purposes. Ground No.2: 7. The assessee has further challenged the confirmation of addition made by the Ld. Assessing Officer of ₹ 67,83,650/- towards an alleged suppressed sales of sales in transit; the same was confirmed by the Ld. CIT(A) following the orders passed by his predecessors. 8. The assessee has shown four machines dispatched on account of CIF cells of ₹ 2,07,23,040/- as machine in transit at closing stock value of ₹ 1,39,39,390/-. As against the sale value of ₹ 2,07,23,040/-inclusive of profit of ₹ 67,83,650/-the assessee had shown the v ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e relevant portion whereof is as follows: 8. We have heard both the sides and perused the material on record carefully. We have noticed that the identical issue has been decided by the coordinate bench of the ITAT in the case of assessee itself for the assessment year 2004-05 to A.Y.2010-11 and the decision vide ITA No. 337/Ahd/2008 for A.Y.2004-05 is reproduced as under:- 14. We have heard both the sides and perused the material on record. We have perused the judgment of the Hon ble Supreme Court wherein it was held that the goods remains the seller s property till those have been brought and loaded on board the ship and so the sales were exempted before tax under Art 286(1) of the Constitution. We noticed that where the sales were made under FOB contracts the seller continued to be owner of the goods till those crossed the custom barrier and entered the export stream. In the case of B.K.Wadeyar vs. M/s Daulatram Rameshwarlal On 27th September, 1961: 1961 AIR 311, 1961 SCR (1) 924 It was stated as under:- We have therefore come to the conclusion that there is no circumstance which would justify a conclusion that the parties came ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dication. 13. In the result, Assessee s appeal in ITA No.462/Ahd/2017 for AY 202-13 is allowed. ITA No. 584/Ahd/2017 for Assessment Year 2012-13 14. Ground No.1: The revenue has come up in appeal challenging the order passed by the learned CIT(A) in restricting disallowance under section 40(a)(ia) of ₹ 18,98,539/-as against ₹ 80,68,921/-made by the AO on account of commission paid to the non-resident. The issue has already been discussed in assessee s appeal being ITA No.462/Ahd/2017 for the Assessment Year 2012-13. The same has been decided by us hereinbefore in favour of the assessee. In that, view of the matter the ground preferred by the revenue in this appeal is dismissed. Ground No.2 15. The revenue has further challenged the order passed by the learned CITA in deleting the disallowance of depreciation on no compete fees amounting ₹ 2,24,64,750/-. 16. The brief facts leading to the issue is this that upon scrutiny the Ld.Assessing Officer found that the assessee has entered into services provided and non-competition agreement on 28th August 2010. In terms of the said agreement non-competent fe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tal expenditure it would not be necessary that it is eligible for depreciation. The assessing officer has further stated that as per provision of section 32(1)(ii) depreciation can be claimed in respect of know-how, patents, copy right trade-marks, license, franchise or any other business, commerce rights of similar nature. So far as the nature of non-compete fees is concerned, it is clearly evident that it does not fall within the ambit of any of the above intangible assets or business or commercial rights of similar nature pertaining to the above intangible assets. Therefore, the clam of depreciation of the assessee by treating non-compete fees as intangible assets was rejected by the assessing officer. 12. Aggrieved assessee filed appeal before the ld. CIT(A). The ld. CIT(A) has allowed the appeal of the assessee by observing as under:- 4.3. Decision: I have carefully considered the facts of the case, the assessment order and the written submission of the appellant. The appellant has made payment of non-compete fee of ₹ 10.29 crores to Shri M. N. Patel to protect its business interest and ward off potential competition from him. It has be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to, the FMIL's existing business within the restricted territory. c. He shall not directly or indirectly own, manage, operate, control be employed by, or participate in the ownership, management, operation or control of any person, entity or business similar to, or which directly or indirectly is competitive with, FMIL's existing business within the restricted territory. d. He shall not divert or attempt to divert or seek to cause any party to refrain from doing any business with FMIL, within the Restricted Territory. e. He shall not during the term, directly or indirectly, solicit, seek business from, entice, persuade or induce any person or entity which has a business relationship with FMIL as to the existing business within the restricted territory to direct or transfer away any business, patronage or source of supply from FMIL. f. He shall not, during the term, hire, identify for solicitation or solicit, directly or indirectly, any employee of FMIL for employment by any person or entity other than FMIL (assessee) and g. He shall not disclose any confidential information. The confidential information means with respect to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ction 32(1)(ii) of the Act and consequently depreciation would be allowable. It is to be noted that agreement is only for three years. The appellant has rightly placed reliance on the following judgements and the relevant extracts from those judgements are quoted as under: - 1. In case of CIT Vs Ingersoll Rand International Ind. Ltd. 227 Taxmann 176 (Karnataka), it has been held by the honourable court that non-compete fee is an intangible asset entitled for depreciation. The head note of the judgement is reproduced hereunder. - Section 32, read with section 28(vaj, of the Income-tax Act,, 196] -Depreciation - Allowance/rate of (Intangible assets] - Assessment year 2006-07 - Whether right to carry on business without competition has an economic interest and money value - Held, yes - Whether whenever assessee makes payment for non-compete fee, commercial right comes into existence and, therefore, that right which assessee acquires on payment of non-compete fee confers in him a commercial or a business right which is held to be similar in nature to know-how, patents, copyrights, trade marks, licences, franchises - Held, yes - Whether commercial right so ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... iz., business claims; business information; business records; contracts; employees; and know-how, are all assets, which are invaluable and result in carrying on the transmission and distribution business by the assessee, which was hitherto being carried out by the transferor, without any interruption. The aforesaid intangible assets are, therefore, comparable to a licence to carry out the existing transmission and distribution business of the transferor. In the absence of the aforesaid intangible assets, the assessee would have had to commence business from scratch and go through the gestation period whereas by acquiring the aforesaid business rights along with the tangible assets, the assessee got an up and running business. This view is fortified by the ratio of the decision of the Supreme Court in Techno Shares and Stocks Ltd. 12010} 327/TR 323 ISO wherein it was held that intangible assets owned by the assessee and used for the business purpose which enables the assessee to access the market and has an economic and money value is a licence or akin to a licence which is one of the items falling in Section 32(1) (ii) of the Act.' The High Court has further held ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n-compete fee vests a right in the assessee to carry on business without competition which in turn confers a commercial right to carry on business smoothly. When once the expenditure incurred for acquiring the said right is held to be capital in nature, consequently the depreciation provided under Sec.32(1)(ii) is attracted and the assessee would be entitled to the deduction as provided in the said provision . 2. In the case of ACIT Vs Real Image Tech (P) Ltd. 120 TTJ 0983, Hon'ble Chennai ITAT, noted that:- When a bus/ness man pays money to another business man for restraining the other business man from competing with the Assessee, he gets a vested right which can be enforced under law and without that the other business man can compete with the first business man. When by payment of non-compete fee, the business man gets his right what he is practically getting is kind of monopoly to run his business without bothering about the competition. It is just like separating big plant from other plants affecting the growth of the big I plant. Generally, non-compete fee is paid for a definite period which in this case is five years. The idea is that by that time, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e mark, I/cense, and franchise, fulfils the conditions of 'being intangible asset', then surely the impugned business/commercial right acquired by the assessee also fulfils that condition, by way of a logical corollary . The ITAJ has held that the impugned 'non-compete right' acquired by the assessee-company, was eligible for depreciation under clause (ii) of section 32(1) of the Act. 4. In case of Bunge Agri Business (India) P. Ltd. Vs DCIT 132 ITD 0549, Hon'ble Mumbai ITAT has held that We have considered the rival submissions carefully and find that in the case of Real Image Tech (?) Ltd. [supra], after analyzing the provisions of sec.32[1][ii] if was held that non compete fee would constitute capital asset and depreciation was ultimately held to be allowable. However, we find that the AO vide para-8 of his order has observed that non compete fee was not mentioned in the agreement as a separate payment. Therefore, he should find out the amount of non compete fee determined by the assessee and accordingly allow depreciation in view of the decision the Chennai Tribunal in the case of Real Image Tech (P) Ltd. 5. In case of Serum ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ire consideration for acquiring the network also includes the payment for non-compete fee. However, the assessee has not shown any bifurcation of the consideration paid for non-compete fee to AFL The ITAT further observed that The Hon'ble Delhi High Court in the case of Hindustan Coca Cola Beverages (P.) Ltd. (supra) has held in para 24 as under: 25. lt is worth noting that the meaning of business or commercial rights of similar nature has to be understood in the backdrop of section 32(1)(ii) of the Act. Commercial rights are such rights which are obtained for effectively carrying on the business and commerce, and commerce, as is understood, is a wider term which encompasses in its fold many a facet. Studied in this background, any right which is obtained for carrying on the business with effectiveness is likely to fall or come within the sweep of meaning of intangible asset. The dictionary clause clearly stipulates that business or commercial rights should be of similar nature as know-how, patents, copyrights, trademarks, licences, franchises, etc. and all these assets which are not manufactured or produced overnight but are brought into existence by experience a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... venue s appeal on this ground stands dismissed. 21. Ground Nos. 3 5o 5 are general in nature and do not require any adjudication. ITA No. 463 /Ahd/2017 AY 2013-14 22. The assessee has challenged the order passed by the Ld. CIT(A) in confirming the disallowance to the extent of ₹ 1,31,40,243/- out of the commission paid to nonresident agents towards services rendered outside India under section 40 (a)(ia) of the Act made by the Ld. Assessing Officer. Further that confirmation of addition made by the Ld.AO to the tune of ₹ 39,97,669/- towards alleged suppressed sales of sales in transit has also been challenged in the instant case by the assessee. 23. Ground No.1 : The issue involved in this particular ground is identical to that of ground in appeal preferred by the assessee in ITA No. 462/Ahd/2017 for AY 2012-13. The same has already been decided by us in favour of the assessee hereinbefore. 24. Following the same, we observe that the assessee is not liable to deduct tax on the commission paid to the non-resident. However, it appears that no details and evidences have been provided before the authorities below by th ..... X X X X Extracts X X X X X X X X Extracts X X X X
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