2019 (3) TMI 1595 - AT - Income Tax

Assessee's appeal partly allowed, revenue's appeal dismissed. Service tax, commission payments deleted.

M/s Knight Frank (I) Pvt. Ltd. Versus The Addl. Commissioner of Income Tax – 2 (2) And The DCIT – 2 (2), Versus M/s Knight Frank (India) Pvt. Ltd., Mumbai

The Tribunal allowed the assessee's appeal partly, directing the AO to delete the additions related to service tax and commission payments while remanding ... Addition u/s 145A - inclusion of service tax as part of trading receipts - HELD THAT:- We notice that the coordinate Bench has decided the identical issue in favour of the assessee in the assessee’s own case for the A.Y. and 2008-09 [2013 (7) TMI 1033 - ITAT MUMBAI] as held assessee is a service provider company and patently, provisions of section 145A cannot be made applicable, because the provision was specifically introduced for the purposes of manufacture segment of business because section 145A(a)(ii) submitted before the CIT (A) mentions “ by the assessee being goods to the place of location & conditions as on the date of valuation are required to be included - addition made u/s 43B would also be deleted, because no liability arises as such or on the last day of the account period - Decided in favour of assessee. Addition on account of AIR/ITS/TDS difference - HELD THAT:- Assessee has given explanation in respect of the party ACC Ltd., however could not explain the difference in respect of the remaining three parties. As alleged by the assessee since the AO did not provide the break-up in respect of the three companies despite request made by the assessee, the assessee could not explain the same before the authorities below. We further notice that the AO has made addition on the basis of the AIR data without conducting any further enquiry. The facts of the decision relied upon by the assessee is different from the facts of the present case - agree with the CIT (A) that the AO has made the addition without giving adequate opportunity to the assessee. Hence, we endorse the findings of the CIT (A) and direct the AO to verify the fact and pass a speaking order after affording opportunity of being heard to the assessee. Disallowance of referral fees for non-deduction of tax - addition u/s 40(a)(ia) - disallowance on the basis of Explanation to section 9 of the Act inserted by Finance Bill 2010 with retrospective effect - HELD THAT:- The amount was paid towards referral fees to NKF for business referred by them therefore in the light of the judgment FAIZAN SHOES PVT. LIMITED [2014 (8) TMI 170 - MADRAS HIGH COURT] the assessee was not required to deduct tax at source. So far as the applicability of the Circular No 786 of 2000 is concerned the same was applicable in case of the assessee as it was withdrawn on 22.10.2009. As per the order of the Hon’ble Bombay High court rendered in the case of UTI vs. Unny and others [2001 (4) TMI 77 - BOMBAY HIGH COURT] subsequent withdrawal of an earlier Circular cannot have retrospective operation. So far as the retrospective effect of the Explanation to section 9 is concerned, The coordinate Bench has held that disallowance on the basis of Explanation to section 9 of the Act inserted by Finance Bill 2010 with retrospective effect from 01.06.1976 was bad in law as the assessee could not have visualized to deduct the tax in the absence of any such provision at the time of making payment. Hence we set aside the findings of the Ld. CIT(A) and allow this ground of appeal of the assessee and further direct the AO to delete the addition. Issues Involved:1. Treatment of service tax under Section 145A.2. Applicability of Section 43B to service tax.3. Enhancement without notice under Section 251(2).4. Addition due to AIR/ITS/TDS differences.5. Disallowance of commission under Section 40(a)(ia).6. Applicability of Circular No. 786.7. Taxability under Double Taxation Avoidance Agreement.8. Full credit for TDS claims.Issue-wise Detailed Analysis:1. Treatment of Service Tax under Section 145A:The assessee contended that service tax should not be treated as trading receipts under Section 145A. The Tribunal, referencing its own previous decisions and the Bombay High Court's confirmation in similar cases, agreed with the assessee. It was determined that service tax is not a tax duty, cess, or fee paid by the assessee and should not be included in trading receipts. The Tribunal directed the AO to delete the addition made under Section 145A.2. Applicability of Section 43B to Service Tax:The Tribunal noted that since service tax is not payable by the assessee, Section 43B does not apply. This was consistent with the Tribunal's earlier decisions and the Bombay High Court's stance. Consequently, any addition under Section 43B was also deleted.3. Enhancement without Notice under Section 251(2):The assessee argued that the CIT(A) made an enhancement without issuing a statutory notice. The Tribunal did not specifically address this procedural issue in the detailed analysis, focusing instead on the substantive issues of tax treatment.4. Addition Due to AIR/ITS/TDS Differences:The AO added Rs. 8,18,113 due to discrepancies between the income reported and AIR data. The CIT(A) remanded the issue for verification. The Tribunal agreed that the AO did not provide adequate opportunity for the assessee to explain the differences and directed the AO to verify and pass a speaking order after giving the assessee a fair chance to present its case.5. Disallowance of Commission under Section 40(a)(ia):The AO disallowed Rs. 23,44,138 paid to a non-resident without TDS. The assessee argued that the payment was covered by Circular No. 786, which exempts such payments from TDS if services are rendered outside India. The Tribunal, referencing the Bombay High Court's decision in similar cases, held that the commission paid to non-residents for services rendered outside India is not taxable in India. The Tribunal directed the AO to delete the disallowance.6. Applicability of Circular No. 786:The Tribunal affirmed that Circular No. 786 was applicable as it was in force during the relevant assessment year. The subsequent withdrawal of the circular does not have retrospective effect. The Tribunal, therefore, found the disallowance based on the non-applicability of Circular No. 786 to be unjustified.7. Taxability under Double Taxation Avoidance Agreement:The Tribunal did not specifically address this issue in the detailed analysis, focusing on the broader applicability of Circular No. 786 and the retrospective amendment to Section 9.8. Full Credit for TDS Claims:The Tribunal did not specifically address the issue of full credit for TDS claims in the detailed analysis provided.Separate Judgments:The Tribunal’s decision was consistent across both the assessee's appeal and the revenue's appeal, following precedents set in previous years and upheld by the Bombay High Court.Conclusion:The Tribunal allowed the assessee's appeal partly, directing the AO to delete the additions related to service tax and commission payments while remanding the issue of AIR/ITS/TDS differences for further verification. The revenue's appeal was dismissed, affirming the CIT(A)'s order based on consistency with previous judgments.