Commission paid to NR agents for export not liable to tax in India [ITAT]

These two appeals filed by revenue and two cross objections filed by assessee A.Y. 2010-11 & 2011-12, arise from order of the CIT(A)-VIII, Ahmedabad, in proceedings under section 143(3) of the Income Tax Act, 1961; in short the Act.

2. The brief fact of the case is that return of income declaring loss of Rs. 59,28,500/- was filed on 15th October, 2010. Subsequently, the case was selected under scrutiny by issuing of notice u/s. 143(2) of the act on 25th August, 2011. Remaining facts of the case are discussed while adjudicating the respective grounds of appeals of the revenue and of cross objection of the assessee as under:- 1st ground of appeal (disallowance u/s. 40(a)(ia) of the act in respect of commission expenses)

3. During the course of assessment, the assessing officer noticed that assessee has claimed commission payment of Rs. 3,47,81,265/- to various non-residents on export sales made during the year under consideration. After verification of the detail filed, the assessing officer observed that assessee has not deducted tax on such commission payment made to non- residents, therefore, the assessee was asked to explain why no TDS was made as per provisions of section 195 of the act on such commission payment. The assessee explained that the non-resident agents to whom the commission was paid have rendered services outside India. The assessee has further submitted that as per provision of section 5 and section 9 of the income tax act, no part of commission income was received or deemed to be received in India. It was further submitted that section 195 has to read with the provision of section 4, 5 and 9 of the act and if the payment made to non- resident is not at all chargeable to tax in India then no deduction of tax at source is required to be made on such payments. The assessee has also placed reliance on the decision of Honble Supreme Court in the case of GE India Technology Centre Pvt. Ltd. vs. CIT (2010) 327 ITR 456 (SC) and CIT vs. Toshoku Ltd. 125 ITR 525 (SC). The assessing officer has not agreed with the submission of the assessee. He was of the view that in the case of the assessee, the income accruing or arising directly or indirectly through or from any source of income in India shall be deemed to accrue or arise in India as per section 9(1)(i) of the act. The assessing officer has stated that commission payment has been made for utilization of their services for procuring order from the overseas companies. The assessing officer was of the view that no doubt the agents must have rendered services abroad and have solicited orders therefrom, but the rights to receive the commission arise in India when the order is executed by the assessee in India and therefore the income accrued is sourced in India. Therefore, he was of the view that income arising in India and is taxable under the act in view of the specific provision of section 5(2)(b) r.w.s. 9(1)(ii) of the act. The assessing officer has opined that the assesse was under obligation to deduct tax at source as envisaged u/s. 195 of the act from the payments made to non-residents towards services rendered by them. Therefore an amount of Rs. 3,47,81,265/- on which TDS has not been deducted was disallowed and added to the total income of the assessee u/s. 40(a)(ia) of the act.

4. Aggrieved assessee has filed appeal before the ld. CIT(A). The ld. CIT(A) has allowed the appeal of the assessee stating that commission paid to non-resident agent was not liable to tax under the provision of the act when the services were rendered outside India, payments were made outside and there was no permanent establishment or business connection in India. During the course of appellate proceedings before us, ld. departmental representative has supported the order of assessing officer. On the other hand, the ld. counsel has submitted paper book containing detail of information and various submissions on this issue made before the assessing officer and ld. CIT(A) during the course of assessment proceedings and appellate proceedings. He has also submitted a paper book containing number of judicial pronouncements delivered by the Co-ordinate Benches of the ITAT Ahmedabad after placing reliance on the decision of Honble Supreme Court in the case of GE India Technology Centre (Pvt.) Ltd. Vs. CIT (2010) 327 ITR 456/193 taxman 234/7 taxman/com 18 that for application of section 195, it is sine quo non that the payment to non- resident must have an element of income liable to be taxed under the income tax act, 1961.

5. We have heard the rival contention and perused the material on record carefully. The assessing officer has disallowed the commission paid to foreign agents by holding that the income arising on account of commission paid to overseas agents was deemed to accrue or arise in India and was accordingly taxable under the provision of section 5(2)(b) r.w.s. 9(1)(i) of the act and the assessee has failed to make compliance with the provisions of section 195(2) of the act. With the assistance of ld. representatives, we have gone through the material on record. In this case, the non-residents agents have rendered their services outside India. All the agents have overseas offices and they were not having any permanent establishment in India. As per explanation below section 9(2) state that income of non-resident shall be deemed to accrue or arise in India under clause (v) or (vi) or (vii) of sub- section (1) included in the total income of the non-resident whether or not the non-resident has a residence or place of business or business connection in India or the non-resident has rendered services in India. It is clear from the provision that income of the nature of interest or royalty or fees for technical services shall be deemed to accrue or arise in India in the case of non-resident. Therefore, after considering the decision of Honble Supreme court in the case of GE India Pvt. Ltd supra, we consider that provision of section 9(1)(i) are not applicable to the case of the assessee. Regarding applicability of section 195 of the act, we observe that once the income is not taxable, there is no liability of deduction of tax, therefore, it was not applicable for the assessee to deduct tax, therefore, there was no violation of provision of section 195 of the act. After considering the above facts, we observe that in the case of the assessee, the commission paid to non-resident agent was not liable to tax under the provisions of act when the services were rendered outside India, payments were made outside India and there was no permanent establishment or business connection in India. These undisputed facts has not been disproved by the revenue, therefore, we do not find any infirmity in the decision of the ld. CIT(A). Accordingly, this ground of appeal of the revenue is dismissed. 2nd ground of appeal (disallowance u/s. 14A of Rs. 5,95,111/-)

6. During the assessment, the assessing officer noticed that assessee company was having investment of Rs. 1,02,25,000/- in shares of Jay Infra Trade Pvt. Ltd. one of its sister concern. The assessing officer observed that prime motive of assessee company for making investment in the sister concern was to earn dividend which was not includible in the taxable income of the assessee. Therefore, the assessing officer has applied provision of section 14A and computed disallowance of Rs. 5,95,111/- and added to the total income of the assessee.

7. Aggrieved assessee has filed appeal before the ld. CIT(A). The ld. CIT(A) has allowed the appeal of the assessee placing reliance on the decision on the decision of Honble Gujarat High Court in the case of Corrtech Energy Pvt. Ltd. supra wherein the Honble High Court has held that if no exemption has been claimed, there was no question of disallowance u/s. 14A.

8. We have heard the rival contention on this issue. It is undisputed fact that assessee has not earned and claimed any exempt income during the year under consideration, therefore, we consider that ld. CIT(A) has rightly deleted the disallowance after following the decision of Jurisdictional High Court of Gujarat in the case of Corrtech Energy Pvt. Ltd. 45 taxman.com 116 (Guj). Therefore, we do not find any merit in this ground of appeal of the revenue and the same is dismissed. C.O. No. 01/Ahd/2015 filed by assessee

9. At the time of hearing, ld. counsel of the assessee has not pressed this cross objection, so, the same is dismissed as not pressed. ITA N. 305/Ahd/2015 filed by revenue 1st and 2nd grounds of appeal of disallowance of commission payment u/s.40(a)(ia) of the act

10. The assessing officer has disallowed the commission paid to foreign agent by holding that the income arising on account 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) r.w.s. 9(1)(i) of the income tax act and the assessee has failed to make compliance with provision of sedition 195(2) of the act. The assessing officer has made disallowance of Rs. 24785500/- u/s. 40(a)(ia) of the act. The ld. CIT(A) has deleted the impugned addition stating that similar issue has been decided in the case of the assessee for assessment year 2010-11.

11. We have heard the rival contentions. With the assistance of ld. representatives, we have gone through the material on record and it is noticed that identical issue on similar facts for the assessment year 2010-11 in the case of the assessee vide ITA No. 2693/Ahd/2014 has been adjudicated in favour of the assessee as supra in this order. On careful consideration of the entire fact of the case, we consider that similar issue and identical facts has been involved in this ground of appeal, therefore, following the finding as supra for assessment year 2010-11 in this order, we do not find any infirmity in the decision of ld. CIT(A), therefore, this ground of the revenue is dismissed. Ground no. 3 (disallowance of interest amounting to Rs. 17,85,407/- u/s. 36(1)(iii)

12. During the course of assessment, the assessing officer noticed from the balance sheet for the year ended on 31st March, 2011 that fixed assets of the assessee company were increased from 157.63 crores to Rs. 178.55/- crores and capital work in progress has also increased from 4.51 crores to Rs. 26.70 crores. He has also noticed that assessee had debited interest expenses of Rs. 10.24 crores in the P & L a/c account during the year under consideration. Therefore, the assesse was show caused to explain why the interest on borrowed fund utilized for CWIP should not be capitalized as per provisions of section 36(1)(iii) of the act. The assessee explained that it has already capitalized the interest of Rs. 32,64,147/- on borrowing used to acquire the capital asset up to the time the capital assets were put to use. The assessing officer has not accepted the explanation of the assessee. The assessing officer was of the view that interest free funds of Rs. 10.82 cores were only available with the assessee during the year under consideration against which the assessee had acquired fixed assets of Rs. 20.92 crores and CWIP of Rs. 21.56 crores during the year. The assessing officer has reported the above facts in his order as under:-