2018 (10) TMI 1714
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....n of Rs. 67,83,650/- towards suppression of sales in transit was also been challenged 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 Rs. 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 Rs. 1,04,41,126/- out of which no TDS was deducted on the commission of Rs. 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....
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....ade the commission payment to 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, Saudi Arabia C.R.4030086374 $8,335 417,617 5 AI Sanabeak Trading Corporation P.O. Box 10474, Jeddah -21433, Saudi Arabia C.R.4030086374 $4,000 200,200 6 AI Sanabeek Trading Corporation P.O. Box 10474, Jeddah-21433, Saudi Arabia C.R. 4030086374 $5,000 272,200 7 AI Sanabeak Trading Corporation P.O. Box 10474, Jeddah -21433, Saudi Arabia C.R.4030086374 $17,850 971,754 8 AI Sanabeak Trading Corporation P.O. Box 10474, Jeddah -21433, Saudi Arabia C.R.4030086374 $14,700 800,268 9 Barinderjit Singh Sanni P.O. Box 13300 Dubai $6,180 336,439 10....
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....e deciding the appeal for A.Y 2009 - 10 vide Appeal No.CIT(A)- VIII/JC1T/R.4/141/12-13 order dated 31/12/2013, The facts of the present case are also identical to the earlier year. The commission has been paid to non-resident agents who have rendered the services abroad, the agents does not have any PE or any other establishment in India. For the sake of clarity the decision given by me in that appeal is reproduced as under: - "I have carefully considered the facts of the case, the assessment order and the written submission of the appellant. The AO has disallowed the commission paid 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 (2J(bj 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)9i) of income Tax Act were not applicable in its case. The income has bee....
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....India. In the present case before me also, the foreign selling commission agent is resident of foreign country, from where the procurement service has been provided for which the commission has been paid, and therefore, the issue is directly and squarely covered by the Apex Court decision. Regarding the observation of the AO that the income is deemed to accrue or arise in India by applying the provisions of section 9 (1)(i) it is seen that there is no fact on record to indicate that any of the agents had any permanent establishment in India. All the agents had their offices on the foreign soil and the correspondence which has been placed before me indicate that they had no PE in India. Further the assessing officer has also not pointed out any such fact in its order which indicate that there were any such offices which attract 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 busine....
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....al cases which were relevant to the issue. 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 dearly demonstrates its bona fide belief. Therefore, considering the above discussion there was no liability on the part of the appellant to deduct tax under section 195 or approach the IT. Authorities for a no deduction tax certificate. The AO has also placed reliance on the decision of Hon'ble Authority of Advance Rulings in the case of SKF Boilers and Driers (P) Ltd. (2012) 18 Taxmann 325 and Rajive Malhotra (2006) 284 1TR 564 (Delhi). The judgements are not applicable to the present facts as there are several other decisions which hold that such....
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....to the aforesaid foreign agents at SI. No. 1 to 8 and 10, 11, 12 & 14 of the above table is found not correct and hence the same is deleted following the decision of CIT(A) in appellant's own case for A.Yrs. 2011-12, 2010-11 and 2009-10-subject to the following observations. It is worth here to mention that although there are no details available on record with regard to the foreign commission payments in respect of sales made by the agents noted at SI. No. 1 to 8 and 10, 11, 12 & 14 of the above table in India during the year under consideration of which commission income has been accrued in India, therefore, on such commission payments the assessee was liable to make the IDS and in absence of such non-deduction of IDS such commission payments are liable for disallowance. The AO is directed to verify this aspect in line of the directions given by the CIT(A) in his order for A.Y. 2011-12 at Page No. 12 & 13 of his order and disallowance of commission to that extent, if any, is liable for disallowance. 3.5. Now with regard to the foreign commission agents at Sr. No. 9, 13, 15, 16 of the above table, it has been noticed that during the course of assessment proceedings the a....
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....ssment year 2009- 10 in favour of the assessee. The relevant part of the decision is reproduced as under:- "22. We have duly considered rival contentions and gone through the record carefully. As far as genuineness of the transactions is concerned, the AO has not raised any dispute. The details of commission payments were produced before the AO. He compiled all these details in Annexure-A attached with the assessment order. The dispute between the parties relates to whether the TDS was to be deducted on commission payment or not. The AO was of the view that income arisen on account of commission payable to overseas agents was deemed to accrue or arise 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....
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.... this clause [i.e. 9(1)(i)], (a) in the case of a business of which all the operations are not carried out in India, the income of the business deemed under this 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; (b) (c) (d).....* (vii) income by way of fees for technical services payable by- (a) ..............* (b) a person who is a resident, except where the fees are payable in respect of services utilised in a business or profession carried on by such person outside India or for the 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 und....
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....emitted to him abroad are wholly irrelevant for the purpose of determining situs of his income". We do not consider this approach to be correct. When no operations of the business of commission agent is carried on in India, the Explanation 1 to Section 9(1)(i) takes the entire commission income from outside the ambit of deeming fiction under section 9(1)(i), and, in effect, outside the ambit of income 'deemed to accrue or arise in India' for the purpose of Section 5(2)(b). The point of time when commission agent's right to receive the commission fructifies is irrelevant 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 ....
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.... is thus dismissed." Respectfully following the decision of coordinate bench, we allow the appeal of the assessee and appeal of the revenue is dismissed." 5.1. We therefore do not hesitate to 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 the assessee in respect of payment mentioned in Sl.No.9, 13, 15 & 16 in order to establish that the said agents have not provided services in India or 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 add....
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....hand, the Ld. Representative of the Revenue relied upon the orders passed by the authorities below. 10. We have heard the learned counsel appearing for the parties, perused the relevant materials available on record. We have also gone through the order passed by the coordinate bench following the order passed by the Ld. ITAT in assessee's own case for the AY 2004-05 to AY 2010-11 as relied upon by the Ld.Representative of the assessee the 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 mad....
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....the assessee is allowed." 11. We find that the issue is entirely covered by the judgment as cited herein before and respectfully following the same delete the addition to the tune of Rs. 67,83,650/- made by the authorities below. In the result, the grounds of appeal filed by the assessee is allowed. 12. Ground Ns.3 & 4 are general in nature and do not require any adjudication. 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 Rs. 18,98,539/-as against Rs. 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 depre....
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....intangible assets. The assessing officer was of the view that claim of depreciation on non-compete fees is not justified because the payment of non-compete fees did not merely facilitate conduct of business as it would be a capital expenditure by merely because of capital 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 ....
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....b. He shall not conspire, plan or otherwise agree with any person, entity or business to organize or develop any business or entity that directly or indirectly is competitive with or engages in business similar 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 fo....
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....without competition and indirectly confer a right to carry on business smoothly. This right is capital in nature and would also fall within the ambit of section 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....
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....carrying on of the business. In the circumstances, it is observed that in the case of the assessee, intangible assets, viz., 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 lice....
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.... in Cl.(b) of Expln.3. Here the doctrine of ejusdem generis would come into operation and therefore the non-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....
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....the business/commercial right of a patent, copyright trade 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 T....
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....tire 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 and rep....
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.... 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 Rs. 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 Rs. 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 the assessee in respect of payment mentioned in Sl.Nos.2,6,7,9,10,15,16,21 to 24 28 and 31 in order to es....