Tribunal Upholds Tax Relief: Payments to Non-Residents Not Taxable Without Permanent Establishment, No Exempt Income Found.

DCIT-8 (2) (1), Mumbai Versus M/s. Shamrock Pharmachemi Pvt. Ltd.

DCIT-8 (2) (1), Mumbai Versus M/s. Shamrock Pharmachemi Pvt. Ltd. - TMI Issues Involved:
1. Disallowance under Section 40(a)(i) of the Income Tax Act for non-deduction of tax at source under Section 195.
2. Disallowance under Section 14A of the Income Tax Act read with Rule 8D(2) of the Income Tax Rules.

Detailed Analysis:

1. Disallowance under Section 40(a)(i) of the Income Tax Act for non-deduction of tax at source under Section 195:

The primary issue in the appeals was whether the Commissioner of Income Tax (Appeals) [CIT(A)] was justified in deleting the disallowance made under Section 40(a)(i) of the Income Tax Act, 1961, for non-deduction of tax at source under Section 195. The disallowance amounted to Rs. 4,18,50,792/- for Assessment Years (AY) 2013-14 and 2014-15.

The assessee, engaged in the business of trading pharmaceutical ingredients, chemicals, and intermediates, had paid export commission to overseas agents without deducting tax at source. The Assessing Officer (AO) disallowed this expense, invoking Section 40(a)(i) read with Section 195, arguing that tax should have been deducted at source.

The CIT(A) deleted the disallowance, holding that the commission paid to non-residents who did not have a Permanent Establishment (PE) in India and were covered by Double Taxation Avoidance Agreements (DTAA) was not chargeable to tax in India. Therefore, there was no requirement to deduct tax at source.

The Tribunal upheld the CIT(A)'s decision, relying on the Supreme Court's ruling in GE India Technology Center Pvt. Ltd. vs CIT, which clarified that tax deduction at source under Section 195 arises only if the payment is chargeable to tax in India. The Tribunal also referenced several other judicial precedents supporting this view, including CIT vs Toshoku Ltd and CIT vs Angelique International Limited.

The Tribunal noted that the non-resident agents rendered services outside India and did not have any PE in India. Therefore, no income was chargeable to tax in India under Section 195(1), and the provisions of Section 195(2) did not apply. The Tribunal also referred to its own earlier decision in the assessee's case for AY 2009-10, which had similar facts and legal issues.

2. Disallowance under Section 14A of the Income Tax Act read with Rule 8D(2) of the Income Tax Rules:

The second issue was the deletion of disallowance made under Section 14A of the Income Tax Act read with Rule 8D(2) of the Income Tax Rules. The AO had made a disallowance of Rs. 3,78,632/- under these provisions, despite the fact that the assessee had not earned any exempt income during the year.

The CIT(A) deleted the disallowance, relying on various High Court decisions which held that when no exempt income is earned, disallowance under Section 14A cannot be made. The Tribunal upheld the CIT(A)'s decision, finding no infirmity in the order.

Conclusion:

The Tribunal dismissed both appeals filed by the revenue, affirming the CIT(A)'s deletion of disallowances under Sections 40(a)(i) and 14A of the Income Tax Act. The Tribunal's decision was based on established judicial precedents and the specific facts of the case, which indicated that the payments to non-resident agents were not chargeable to tax in India and no exempt income was earned by the assessee.