TaxTMI 
TaxTMI 
2016 (2) TMI 170
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....s of the case in totality as well case law relied upon by the appellant. 2. Without prejudice to the above the appellant submits that Learned CIT (A) has erred in confirming the disallowance merely on the ground that in appellants' case Learned CIT(A) (his predecessor) for Assessment Year 2009- 10 had confirmed the similar disallowance in an order for Assessment Year 2009-10 without appreciating that (i) Appellant was in appeal against said disallowance before Hon'ble ITAT which appeal was pending. (ii) That every assessment year is an independent assessment & therefore the concerned authority has to consider the facts of that year and the case laws relied upon. 3. Without prejudice to the above The appellant submits that Learned Assessing Officer has erred in holding that interest payable to partners on their capital u/s. 40 (b) is an expenditure of the firm instead of holding same as an allowance claimed by the assessee & therefore and does not fall within the ambit of section 14-A. 4. The Appellants crave leave to add, amend alter and / or vary any of the grounds at the time or before the hearing of this appeal. ....
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....ubmitted that since, interest paid on capital of partners is only a statutory allowance allowable under the provision of sec. 40(b) of the Act, same cannot be held as an expenditure incurred for earning of an exempt income under the ambit of Section 14A of the Act. The assessee firm submitted that interest paid to partners on capital is not an expenditure but forms part of appropriation account and thus as per principles of accountancy it goes below the line. In this case of partnership firm , profit(loss) is arrived at before paying interest and remuneration to partners which is considered as actual profit earned by a firm and it is only thereafter that the interest and/or profit is payable to partners. The assessee firm relied upon decision of the Ahmedabad Tribunal-Special Bench in the case of Sh. Vishnu Anant Mahajan v. ACIT in ITA No. 3002/Ahd./2009 dated 25-05-2012 to contend that depreciation was held to be statutory allowance and shall not be considered for disallowance u/s 14A of the Act as Section 14A of the Act deals with only expenditure incurred and not any statutory allowances and depreciation is a statutory allowance u/s 32 of the Act relying upon the decision of Hon....
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....A), against which the appeal is pending before the Tribunal . The CIT(A) held that for the assessment year 2009-10 , The CIT(A) has held that the AO was justifying in invoking the provisions of Section 14A of the Act and working out disallowance as per the Rule 8D of Income Tax Rules, 1962 for which adequate reasons has been given by the AO and Rule 8D of Income Tax Rules, 1962 is applicable from the assessment year 2008-09 and same has to be applied in the case of the assessee firm . The CIT(A) held that there is no change in the position during the year vis-à-vis the preceding assessment year and the facts relating to the disallowance remains the same which was confirmed by the CIT(A) vide orders dated 30.12.2013. 7.Aggrieved by the orders of the CIT(A) dated 30.12.2013, the assessee firm filed the appeal before the Tribunal. 8.The assessee firm reiterated its submissions as made before the authorities below which are not repeated for sake of brevity. The assessee firm also submitted that disallowance of the interest paid on partners capital is to be deleted as the same is not covered u/s. 14A of the Act as the issue is squarely covered by the decision of Mumbai T....
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....interest paid by the assessee firm to its partners on the capital contributed by the partners, i.e. whether it is an expenditure under the provisions of the Act or part of the profit distributable to Partners being merely appropriation of profits chargeable to tax in the hands of the partners u/s 28(v) of the Act ?. Whether it is an 'expenditure' as is referred to in Section 14A of the Act incurred and attributable to in relation to earning of an exempt income?. Whether it falls within the definition of Section 36(1)(iii) of the Act being an expenditure or it falls u/s 40(b) of the Act being an statutory allowance claimed by the assessee and therefore does not fall within ambit of 'expenditure' as envisaged under Section 14A of the Act ? . The Mumbai Tribunal in ITA No 6870/Mum/2012 vide orders dated 11.03.2015 in assessee firm's own case, has held that the addition to the extent of disallowance u/s 14A of the Act on account of interest expenditure on capital contributed by the partner and which is not on borrowed funds but on the capital contributed by the partners of the assessee firm cannot be disallowed u/s 14A of the Act read with Rule 8D of Income Tax Rules, 1962 as ....
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....s and we are bound to follow the same. In the case of CIT v. Smt. Godavari Saraf [1978] 113 ITR 589 (Bom.), the Bombay High Court held that the Judgment of non-Jurisdictional High Court was binding on the Tribunal if there were no contrary judgments .The above Judgment runs contrary to Article 141 of the Constitution as per which only the Supreme Court's Judgments are binding on all Courts within India. The Bombay High Court in the case of CIT v. Thane Electricity Supply Ltd. [1994] 206 ITR 727overruled the Judgment in the above case of Godavari Saraf(supra) holding that the decision of one High Court was not a binding precedent for another High Court or Lower Courts outside the jurisdiction. Under the above background , we are now proceeding to adjudicate the issue in this appeal which, in our considered view, majorily deals purely with a legal issue being question of law as detailed by us. The assessee firm has raised capital from the partners, on which interest of Rs. 1.39 crores was paid. The assessee firm has made investments in Mutual Funds to the tune of Rs. 4.75 crores , income of which would be exempt from tax. The AO by invoking Section 14A of the Act read with ....
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....ovisions of the Income-tax Act and the rules made there-under. Salary ,commission and interest payable to partners The legal position as it existed prior to the amendment made by the Finance Act, 1992, was that any amount paid as remuneration to the partners, whether called salary, bonus, commission or by any other name and interest paid to partners, was required to be disallowed and added back to the income of the partnership firm under the provision of section 40(b) of the Act of the preamended Act. The result was that any payment so made was, on the one hand, disallowed in the hands of partnership firm while, on the other hand, on allocation of the profits or losses in the hands of the partners, the amount so paid was added to the income of the respective partners and their shares in the registered firm were determined accordingly. The Finance Act, 1992 effected a material change in as much as the substituted section 184 of the Act permitted the payment of salary and commission to the partners subject to the condition that it was so authorised by the deed of partnership. The maximum percentage prescribed for payment of interest on the capital contributed by the partners....
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....elf. On the other hand, where a firm was registered, the firm itself did not pay any tax but each partner's share of profit was added to his other income and the tax payable by each partner on the basis of his total income was determined and the levy was made on the partners individually. There was, thus, no double taxation in this case. Changes were effected by the Finance Act, 1956 whereby income-tax at a special low rate came to be assessed on registered firms and this came to be known as the registered firms' tax. The partners of such a firm were in addition liable to be taxed in their individual assessment in respect of their share in the firm's income. There was, thus, double taxation of the identical income, once in the hands of the registered firm and second time in the hands of the partners on allocation of the firm's income amongst them. This scheme of double taxation was criticized by the Law Commission in its 12th Report, 1958. The position under the 1961 Act was the same as existed after the 1956 amendment under the 1922 Act. Till 1969, rebate was permitted to a partner in respect of his share of the tax paid by the firm. From 1969 onwards, the provision for rebate ....
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.... taxed at the rates applicable to individuals, with the share income included in the hands of the partners for rate purposes only. There has been a consistent demand for removal of the double taxation. A new scheme of assessment of firms has been introduced from assessment year 1993-94. The scheme is modelled after the scheme introduced by the Direct Tax Laws (Amendment) Act, 1987, with suitable modifications to take care of the difficulties pointed out in the context of the 1987 scheme. The scheme contained in Direct Taxes Laws (Amendment) Act, 1987 sought to tax firms at the maximum marginal rate after allowing interest and remuneration to partners. Further there was a rigorous definition of "Whole time working partners" to whom alone remuneration was payable. The deduction for remuneration and interest allowable to partners and allowing remuneration to any partner or partners at the discretion of the firm, have been suitably restructured. 48.1 A firm will now onwards be taxed as a separate entity (sections 184 & 185). There will be no distinction between registered and unregistered firms, and clauses 39 and 48 of section 2 containing the definition of "registered firm" ....
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....orking partners. 48.5 The payment should be duly authorised by and in accordance with the terms of the partnership deed. These payments will be allowed as deduction only for a period beginning with the date of the partnership deed and not for any earlier period. Thus, if a partner is allowed a higher remuneration by varying the terms of the deed on a particular date, such higher remuneration cannot be allowed to him for any period prior to the said date. However, as the financial year 1992-93 had already commenced, by the time the Bill received the Presidential assent, it would not have been possible for assessees to change the partnership deed with effect from 1-4-1992. Therefore, the Finance Act has provided that for the previous year 1992-93 interest or remuneration would be allowed if the partnership deed provides for such payment any time during the accounting period. Thus for the previous year 1992-93, relevant to assessment year 1993-94, the terms of the partnership deed may be amended to have retrospective operation. There is no restriction as to the number of times the terms of a partnership deed may be changed during a previous year in so far as payment of salary....
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....he hands of the firm. The payment of interest should be in pursuance of the partnership deed. The maximum rate of interest allowed would be 18% simple interest per annum [section 40(b)(iv)]. 48.9 Changes have been made in the scheme of set off and carry forward of losses. The existing provisions relating to firms and their partners in sections 76 and 77 have been omitted. Under the new scheme, the firms are treated as a separate entity and the losses suffered by them would be allowed to be carried forward in their hand only. There would be cases where brought forward losses apportioned to a partner have not been set off in the hands of the partner prior to assessment year 1992-93. A provision has been made for dealing with brought forward losses pertaining to assessment years prior to assessment year 1993-94. In such cases, the carried forward losses of a partner will be allowed as a set off in the assessment income of the firm subject to the condition that the partner continued to remain a partner in the said firm (section 75). 48.10 Although, the distinction between a registered and unregistered firm has been removed, a partnership will be assessed as a firm onl....
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....puted after including interest paid to the partner to the extent allowed as deduction as per limit prescribed u/s 40(b)(iv) of the Act. The assessee firm has contended that the said interest is nothing but profit of the firm , as the interest to partners is not allowed as deduction under Section 30 to 37 of the Act but u/s 40(b) of the Act and hence interest on capital paid to partner is nothing but statutory allowance and is part of allocable profits to the firm. This argument of the assessee firm is misconceived and fallacious. The Hon'ble Apex Court in the case of Munjal Sales Corporation v. CIT (2008) 168 Taxman 43(SC) has elaborately discussed the provisions of Section 30 to 38 of the Act vis-à-vis Section 40(b) of the Act and has settled the controversy by holding that interest paid to partners is an expenditure whereby claim of deduction u/s 36(1)(iii) of Act is to be firstly established by the taxpayer, and then Section 40(b)(iv) of the Act is not a standalone section but is a corollary section to Section 36(1)(iii) of the Act , restricting the deduction as per provisions of Section 40(b)(iv) of the Act, as under: "9. The basic question which arises for d....
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.... its claim for deduction under sections 30 to 38 and that it was not disentitled under section 40(b) would apply. According to learned counsel, section 40 is in nature of a proviso to sections 30 to 38 and, therefore, even if the assessee establishes its claim for deduction under section 36(1)(iii), it has still to prove that it is not disentitled under section 40(b)( iv). Therefore, according to learned counsel, after Finance Act, 1992 the assessee has to establish deductions under sections 30 to 38 and it has also to prove that it is not disentitled under section 40 of the 1961 Act, like any other assessee. 12. We quote herein below sections 36(1)(iii), 40(b ) as it existed before 1-4- 1993 and 40(b)( iv) after Finance Act, 1992 with effect from 1-4-1993 which read as follow : "36. Other deductions.-(1) The deductions provided for in the following clauses shall be allowed in respect of the matters dealt with therein, in computing the income referred to in section 28- (i )and (ii)****** (iii)the amount of the interest paid in respect of capital borrowed for the purposes of the business or profession :- ****** Explanation.-Recur....
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.... (b)in the case of any firm assessable as such,- (iv)any payment of interest to any partner which is authorized by, and is in accordance with, the terms of the partnership deed and relates to any period falling after the date of such partnership deed insofar as such amount exceeds the amount calculated at the rate of eighteen per cent simple interest per annum;" Issue 13. Whether the claim for special deduction made by the assessee exclusively came only under section 40(b)( iv) and that it never came under section 36(1)(iii) of the 1961 Act as argued on behalf of the assessee? Legal Position Explained 14. Before enactment of Finance Act, 1992, broadly speaking, payment of interest by the firm to any partner of the firm, constituted Business Disallowance per se. After Finance Act, 1992, section 40(b)( iv) of the 1961 Act places limitations on the deductions under sections 30 to 38. Prior to Finance Act, 1992, payment of interest to the partner was an item of Business Disallowance. However, after Finance Act, 1992, the said section 40(b) puts limitations on the deductions under sections 30 to 38 from which it follows that section 40 is not a....
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....g on par different assessees in the matter of assessment. Therefore, the assessee-firm, in the present case, was required to prove that it was entitled to claim deduction for payment of interest on capital borrowed under section 36(1)(iii) and that it was not disentitled under section 40(b)( iv). There is one more way of answering the above contention. Section 36(1)(iii) and section 40(b)(iv ) both deal with payment of interest by the firm, for which deduction could be claimed, therefore, keeping in mind the scheme of Chapter IV-D every assessee who claims deduction under sections 30 to 38 is also requires to establish that it is not disentitled under section 40. It is in this respect that we have stated that the object of section 40 is to put limitation on the amount of deduction which the assessee is entitled to under sections 30 to 38. In our view, section 40 is a corollary to sections 30 to 38 and, therefore, section 40 is not a stand-alone section. ********* ********* 18. Before concluding, we may mention that the importance of the judgment is the clarification which we were required to give in the context of deductions under sections 30 to 38 to be ....
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....ontribution cannot be treated as an 'expenditure' being incurred or attributable to earn exempt income u/s 14A of the Act as the said interest is itself not 'expenditure' but a 'statutory allowance' , cannot be accepted in view of the decision of the Hon'ble Apex Court in Munjal Sales Corporation(supra). The Ahmedabad Tribunal in the case of Shankar Chemicals Work v. DCIT (2011) 12 taxmann.com 461(Ahd.) has under identical facts and circumstances passed an elaborate and detailed order and held as under: "5. At the time of hearing before us, on behalf of the assessee, Shri S.N. Soparkar along with Shri Jaimin Gandhi appeared and filed a paper book containing 8 pages which, inter alia, include (1) submissions before CIT(A) - 1 to 4 pages, (2) Comparative tax working at page No. 5, (3) Balance-sheet & Profit & Loss A/c. at page Nos. 6 and 7 and (4) Alternative calculation of interest disallowance under section 14A at page No. 8. The first contention raised by the assessee is that no nexus is established. Therefore, following the decision of Hon'ble Gujarat High Court in the case of CIT v. Gujarat Power Corporation Ltd. [Tax Appeal No. 1587 of 2009, dated 28-3-2011] (un....
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....e maximum rate. He further submitted that amendment in the assessment of a firm has been made to avoid double taxation of the income. Interest paid to partners is distribution of profit allocated to the partners in the form of interest. Interest to partners can be taxed once either in the hands of the firm or in the partner's hand. It cannot be taxed in both places. Since, the partners have paid tax on interest received from the firm and all the conditions laid down in the provisions of section have been fulfilled, no portion of interest paid to partners can be disallowed. If it is disallowed, it will amount to double taxation. 6. We have heard both the sides on various pleas but we are not satisfied. We decide each and every contention raised by the ld. Counsel of the assessee. The first contention raised by him has already been rejected by us in para No. 5 above. Regarding the second contention raised by him that any disallowance of interest under section 14A will amount to double disallowance, we would like to point out that this contention is also devoid of any merit. For the purpose of deciding this aspect, we first reproduce the provisions of sub-section (1) of s....
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....ands of concerned partners. In this regard, he drew our attention to the provisions of section 28(v), which reads as under : "28. (v) any interest, salary, bonus, commission or remuneration, by whatever name called, due to, or received by, a partner of a firm from such firm : Provided that where any interest, salary, bonus, commission or remuneration, by whatever name called, or any part thereof has not been allowed to be deducted under clause (b) of section 40, the income under this clause shall be adjusted to the extent of the amount not so allowed to be deducted." 6.3 From the above proviso to section 28(v), it is seen that if there is any disallowance of interest in the hands of the firm due to clause (b) of section 40, income in the hands of the partner has to be adjusted to the extent of the amount not so allowed to be deducted in the hands of the firm. Hence, it is seen that the operation of the proviso to section 28(v) will come into play only if there is some disallowance in the hands of the firm under clause (b) of section 40 but in the present case, the disallowance is under section 14A and not under section 40(b) and therefore, the proviso to ....
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....ds of the partner and it cannot be taxed in both hands. It is also his contention that since the partners have paid tax on interest received by them from the firm, no portion of interest paid to partners can be disallowed and if it is disallowed, it will amount to double taxation. This contention of the ld. Counsel is also devoid of any merit because interest to partners by the firm is not distribution of profit by the firm because interest is payable to the partners, if it is so prescribed in the partnership deed, even if there is no profit in the hands of the firm. If the firm pays interest to the partners and the firm is having loss, loss of the firm will increase to that extent and it will be allowed to carry forward in the hands of the firm and therefore, payment of interest by the firm to its partners is not distribution of profits by the firm to the partners. We have also observed somewhere in above paragraphs that there is no disallowance as such of interest in the hands of the firm and only the manner of allowing deduction on account of interest or other expenses incurred for earning exempt income is specified in section 14A, as per which, deduction on account of expenses ....
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.... of the assessee is also liable to be rejected because if any expenditure has been incurred for earning exempt income, the same has to be disallowed even if there is no actual earning of any exempt income. If interest-bearing borrowed funds are utilised for the purpose of investment in shares and there is no receipt of dividend income or if there is only meagre amount of dividend income, even then, the whole amount of interest expenditure incurred for this purpose will be subject to disallowance under section 14A because the same has been incurred for earning exempt income. Hence, the actual earning of exempt income is not relevant. In the earlier period, when dividend income was not exempt, interest expenditure incurred on borrowed funds used for investment in shares was held to be fully allowable expenses, even if, there was no actual receipt of dividend or insufficient/meagre amount of dividend income. The logic was that the entire expenditure has been incurred for earning taxable dividend income and hence, it is allowable, even if there is nil or small amount of dividend income. This aspect has been approved by various courts and hence, the same judgment supports this view also....
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....ed (2010) 323 ITR 518(P&H.) We will now review all the above decisions in the light of our above discussions as above: a) CIT v. Walfort Share and Stock Brokers Private Limited (2010) 326 ITR 1(SC) , whereby the Hon'ble Supreme Court held that expenditure incurred as is referred to in Section 14A of the Act refers to the expenditure in respect to which allowance are provided u/s 30 to 37 of the Act . We have already discussed that the claim of deduction of interest on capital paid to partner is to be allowable firstly if all the conditions as stipulated u/s 36(1)(iii) of the Act is complied with, and that Section 40(b)(iv) of the Act is not a stand alone section and is a corollary to Section 36(1)(iii) of the Act and its object is to put limitation on the amount of deduction which the assessee firm is otherwise entitled to under Section 36(1)(iii) of the Act (Reference- decision of Hon'ble Supreme Court in the case of Munjal Sales Corp.(supra)). Hence, the reliance of the assessee firm on the decision of Walfort Share and Stock Brokers Private Limited(supra) is devoid of merit and is rejected. b) CIT v. R M Chidambaram Pillai (1977)106 ITR 292(SC) - This decisi....
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....' in respect of the profits or gains of any business, profession or vocation carried on by him...... (4) Nothing in clause (ix) or clause (xv) of sub-section (2) shall be deemed to authorise the allowance of any sum paid on account of any cess, rate or tax levied on the profits or gains of any business, profession or vocation or assessed at a proportion of or otherwise on the basis of any such profits or gains; and nothing in clause (xv) of sub-section (2) shall be deemed to authorise-..... (b) any allowance in respect of any payment by way of interest, salary, commission or remuneration made by a firm to any partner of the firm;..." It is plain that salaries paid to partners are regarded by the Incometax Act, as retaining the character of profits and not excludible from the tax net, whatever the reason behind it be. The procedure for computation of the total income of a partner, found in section 16(1)(b) also fits into this understanding of the law behind the law. Section 16 (relevant part) reads thus: "16. (1) In computing the total income of an assessee-.... (b) when the assessee is a partner of a firm, then, whether the firm has ....
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....muneration and interest to partner has to be firstly satisfy the requirements of Section 30 to 38 of the Act and then Section 40 is merely a corollary to Section 30 to 38 of the Act limiting the deduction as per Section 40 of the Act . Thus, decision in R M Chidambaram Pillai in 106 ITR 292 cannot be applied under the new changed law post Finance Act,1992 whereby the partnership firm is taxed as a separate entity. c &d) Nectar Beverages Private Limited v. DCIT(2009) 314 ITR 314(SC) & Vishnu Anant Mahajan v. ACIT in ITA no 3002/Ahd/2009(Ahd.-SB)-(2012) 22 taxmann.com 88 - The reliance of the assessee firm on the above decisions to contend that since depreciation u/s 32 of the Act is held to be statutory allowance and cannot be considered as an 'expenditure' as envisaged u/s 14A of the Act for disallowance and on the same analogy interest paid on partner capital by the partnership firm cannot be considered as an expenditure u/s 14A of the Act is again misconceived as we have already observed that Hon'ble Apex Court in Munjal Sales corporation , 168 taxman 43 has already held that interest on capital paid to partner has to firstly satisfy the mandate of Section 36(1)(iii) of ....
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....tment in Mutual Fund and by applying Rule 8D (2)(ii) of Income Tax Rules, 1962 the proportionate disallowance as per formula provided in the said rule is made by the AO, the nexus of deployment of partner capital on which interest has been paid by the assessee firm in the Mutual Fund on which exempt income is to be earned is already proved by the AO. The said Rule 8D of Income Tax Rules, 1962 is held to be applicable w.e.f. assessment year 2008-09 by Hon'ble Bombay High Court in Godrej and Boyce Manufacturing Company Limited (2010) 194 Taxman 203(Bom.), while impugned assessment year is 2010-11. Thus, this contention of the assessee firm is also rejected. We are bound by the decision of Hon'ble Supreme Court in the case of Munjal Sales Corporation (supra) and we also fully agree with the decision of Ahmedabad Tribunal in the case of Shankar Chemical Works(supra) . Moreover, under the new scheme of taxation of partnership firm introduced by the Finance Act,1992, the interest paid to the partner on capital has to be claimed as deduction u/s 36(1)(iii) read with Section 40(b) of the Act, from the income of the firm and if after allowing such interest , if the loss results in the ha....
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....re fulfilled. Thus, we hold that the interest on partner's capital to the tune of Rs. 12,66,679/- as computed by the AO u/s 14A of the Act read with Rule 8D of the Income Tax Rules, 1962 is an expenditure , which is allowable as an expenditure being incurred by the assessee firm in relation to an income which does not form part of the total income of the assessee firm under the Act , and shall be allowed as deduction from the dividend income from Mutual Funds earned by the assesse firm as envisaged u/s 14A of the Act and shall go to reduce the exempt income earned by the assessee firm from dividend income from Mutual Funds as computed by the AO after applying provisions of Section 14A of the Act read with Rule 8D of Income Tax Rules, 1962 or in other words we uphold the disallowance of interest on partners capital to the tune of Rs. 12,66,679/- u/s 14A of the Act read with Rule 8D(2)(ii) of Income Tax Rules,1962.. We further hold that these allowance / deduction of expenditure of Rs. 12,66,679/- against the exempt income u/s 14A of the Act or in other disallowance u/s 14A of the Act, will not entitle the partner to claim relief in their individual return of income which shall be ch....
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....t Aswani 2544625 5. Mahesh Rupani 109541 6. Bin Helabi Trading Est 117270 7. Al Moudi (Shafif) 50490 3444146 Less: Last year provision but not to pay 26020 Total 3418126 The AO observed that no tax was deducted at source by the assessee firm on such payments. The assessee firm was asked to explain why the expenses should not be disallowed u/s. 40(a)(i) of the Act The assessee firm submitted that circular No. 786 dated 07/02/2000 has clarified that in the case of non resident whose income is not liable to tax in India as per the provisions of the Act , on the payment of commission made to them which is either remitted through banking channels with due permission or as directly deducted from the sale proceed received in convertible foreign exchange , no tax is required to be deducted and the expenses on export commission and other related charges payable to a non-resident for services rendered outside India shall be allowed as deduction . The assessee firm submitted that CBDT has issued circular bearing no. 07/2009 dated 22.10.2009, whereby CBDT has withdrawn circular No. 23 dated 23.7.1....
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....ntry. We are acting as commission agent on your behalf canvassing your business, visit the customers and procure business of textile items after knowing requirements of various customers discussing with you telephonically / by e-mail, again communicating with customers here and then fix the price and thereafter place orders on behalf of the prospective buyers with you as per samples given to us. Sometimes, we get samples from you which we show to various customers and book orders on your behalf. It is also placed on record after the goods are shipped from India you send a duplicate copy of documents. We contact the customers to get the documents released and thereafter not only follow up for the payments but ensure the timely payments of sale proceeds are received by you. At times, during your visits in our country we take you/ accompany you to have oral discussion with the customers, know their specific requirement, colors, designs and ensure your direct interaction with them. We further confirm that for all the above services rendered by us in your country we get from you commission @..... %. We confirm that we have neither any permanent establishment in India nor are as....
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....cal or consultancy services . The AO also held that as per explanation inserted to Section 9(2) by the Finance Act,2007 with retrospective effect from 01-06-1976 , the income of the non-resident is deemed to accrue or arise in India whether or not the non-resident has a resident or place of business or business connection in India. The AO relied upon the decision of the Hon'ble Karnataka High Court in the case of CIT v. Samsung Electronics (2009) 320 ITR 209(Kar.) , the AO also relied on the decision of Mumbai Tribunal in the case of ACIT v. Anchor Health and Beauty Care Pvt. Ltd. in ITA No. 7164/Mum/2008 for the AY 2004-05 which held that: " in the light of the decision of Hon'ble Karnataka High Court and also in the absence of any contrary decision on this issue, I am of the view that the assessee cannot escape from taxation by virtue of provisions of section 40(a)(i) of the Act, in the event of non-payment of tax at source u/s 195 of the Act without obtaining clearance u/s. 195(2) of the Act. " Hence in the light of above discussions, the AO held that the services offered by the agents are covered under managerial services that are included in fee for technical services (d....
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....d upon the decision of Mumbai Tribunal in the case of Armayesh Global v. ACIT in ITA No. 8822/Mum/2010 dated 04.05.2012 whereby Mumbai Tribunal held that the taxpayer was using services of overseas commission agents for procuring export orders it was only acting as an agent on commission basis and had not been providing any managerial/technical services. The assessee firm also furnished party-wise details of commission paid to nonresident agents for procuring business from 2006-07 to 2010-11, along with copies of P & L Account and Balance Sheet for those year. The assessee firm submitted that for the assessment year 2006-07, 2007-08 and 2008-09, no disallowance on account of commission payment has been made, whereas for the assessment year 2009-10, commission of Rs. 49,31,888/- on the above ground was disallowed by the AO , but was allowed by the CIT(A). The CIT(A) observed that the commission payment of Rs. 34,18,126/- has been made to seven parties, out of which major payment of Rs. 25,44,625/- has been made to Shri Daulat Aswani a non-resident Indian, residing in Gambia, West Africa. Payment of commission to Aswani has been regularly made from financial year relevant to th....
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...., The Ld. Counsel of the assessee firm reiterated its submissions as were advanced before the authorities below which are not repeated for the sake of brevity. The ld. AR submitted that the decision of Hon'ble Karnataka High Court in the case of Samsung Electronics(supra) has been over-ruled by the Hon'ble Supreme Court in the case of GE India Technology Centre Private Limited (2010) 7 taxmann.com 18 (SC). The ld Counsel of the assessee firm submitted that amount has been paid by the assessee firm to the commission agents for procuring orders and the same was not allowed by the AO , the assessee firm also relied on the decisions of the Mumbai Tribunal in the assessee's own case vide orders dated 11.03.2015 in ITA No. 6870/Mum/2012 & 7335/Mum/2012 for the assessment year 2009-10 and submitted that these expenses should be allowed as deduction while computing income of the assessee firm. The assessee firm also relied on the decisions of M/s. Indo Industries Ltd. v. ITO in ITA No. 183/Mum/2014, for the assessment year 2010-11 whereby the Tribunal allowed the claim of the taxpayer for deduction of commission paid to various non-residents foreign brokers for rendering services outside I....
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....come can be reasonably attributable to any operation carried out in India by these foreign brokers as per the facts which has emerged from records. The payments to said foreign brokers have been sent by the assessee firm from India directly to their bank accounts abroad through banking channels with the approval of Reserve Bank of India or payments are deducted by the foreign buyers from the payment due to the assessee firm for making payment to these foreign agents directly. We have observed from the facts as emerging from records that commission income neither accrued nor arose in India in view of the decision of Hon'ble Delhi High Court in the case of EON Technology Pvt. Limited , 343 ITR 366 (Del.) Revenue has not brought on record any cogent material to substantiate that there is any PE or business association in India of these foreign agents , nor any evidence is brought on record to establish that there is any portion of services rendered by these foreign agents from India. In our considered view, these foreign agents have rendered services for sourcing export orders and for collecting payments for and on behalf of the assessee firm which is their business income not liable ....
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.... 2013 and was passed in ITA 4654/Del/2012. 3. The assessee made an application dated 16th February, 2010 under Section 195(2) for authorization to remit Euro 1,40,055.53 as commission for arranging export sales and realizing payments to Agenta World Trading and Consulting Establishment, a nonresident company registered in Liechtenstein. There is no Double Taxation Avoidance Agreement between India and Liechtenstein and, therefore, in the present appeal we are only concerned with the question of receipt, accrual or deemed accrual of the said income in India as per the mandate of the Act. 4. The Assessing Officer relying upon the decision of the Authority for Advance Rulings in In Re: Wallace Pharmaceuticals (P.) Ltd., In re [2005] 278 ITR 97/48 Taxman 347 (AAR) held that the commission payment to the non-resident company on procuring orders was taxable as 'fee for technical service' under sub-clause (b) to Section 9(1) (vii) of the Act. The initial direction that the tax should be deducted at source @ 20% recorded in the order dated 4th May, 2010, was modified/reduced to 10% vide order dated 8th November, 2010 after recording that deduction at a higher rate....
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....ason of". ** ** ** (vii) income by way of fees for technical services payable by- ** ** ** (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 ** ** ** 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".' 7. Section 5(2) states that total income of a person, who is a non-resident, includes income from all sources which (a) is received or deemed to be received in India in such year by or on behalf of such person; (b) accrues or arises in India; or (c) is deemed to accrue or arise in such year ....
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....arried out in India is deemed to be accrued or arisen in India under clause 9(1)(i). By Finance Act, 2012, Explanation 4 has been added with retrospective effect from 1st April, 1962, clarifying the expression "through" to have always meant and included, "by means of", "in consequence of" or "by reason of". There is no finding by the Assessing Officer and there is no allegation that a non-resident was carrying on any operation whatsoever in India. Thus, there is no question of attributing any income to operations carried on by the non-resident in India. No such argument has been addressed. 11. The Assessing Officer in his order under Section 195/197 of the Act has relied upon the judgment in the case of Wallace Pharmaceuticals (P.) Ltd. (supra), which has been distinguished on facts by the first appellate authority and the Tribunal. The factual matrix, including the agreement between the assessee and the non-resident and the terms, have not been spoken of by the Assessing Officer. These have been referred to and examined by the Commissioner of Income Tax (Appeals). But first, we examine Section 9(1)(vii) of the Act. 12. In the present case, clause (b) to Section 9....
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....steps to change policies when they are judged to be less effective than they ought to be." Management thus pervades all organisations. Traditionally administration was distinguished from management, but it is now recognised that management has a role even in civil services. According to the Fontana Dictionary of Modern Thought, page 366, management was traditionally identified with the running of business. Therefore, management as a process is practised throughout every organization from top management through middle management to operational management.' Recently this Court in CIT v. Bharti Cellular Ltd., [2009] 319 ITR 139/[2008] 175 Taxman 573 had observed:- 'The word "manager" has been defined, inter alia, as: "a person whose office it is to manage an organization, business establishment, or public institution, or part of one; a person with the primarily executive or supervisory function within an organization, etc., a person controlling the activities of a person or team in sports, entertainment, etc." It is, therefore, clear that a managerial service would be one which pertains to or has the characteristic of a manager. It is obviou....
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.... (a) PAL agrees and AGENTA accepts that the amount of commission payable to it shall be the difference between consideration which PAL receives in terms of the purchase contract/order form the purchaser(s) and the pre determined guaranteed consideration settled and agreed between the parties, as described in Annexure 1 annexed hereto; (b) The parties agree that all the taxes applicable and required to be deducted in India to the transaction contemplated herein at the date of execution of this agreement and at any time in future during the terms of this agreement shall be deducted from the commission (as described herein above) before the same is paid and transferred to the bank account of AGENTA (herein referred to as the commission payable)" 16. The non-resident, it is clear was appointed as a commission agent for sale of products within the territories specified and subject to and in accordance with the terms set out, which the non-resident accepted. The non-resident, therefore, was acting as an agent for procuring orders and not rendering managerial advice or management services. Further, the respondent-assessee was legally bound with the non-residents'....
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....e. The popular meaning associated with "technical" is "involving or concerning applied and industrial science".' 19. The said term was also interpreted by this Court in case of Bharti Cellular Ltd. (supra) where emphasis was laid on the element of human intervention, but we are not concerned with the said aspect in the present case. The non-resident had not undertaken or performed "technical services", where special skills or knowledge relating to a technical field were required. Technical field would mean applied sciences or craftsmanship involving special skills or knowledge but not fields such as arts or human sciences (see paragraph 24 below). 20. The moot question and issue is whether the non-resident was providing consultancy services. In other words, what do you mean by the term "consultancy services"? This Court in Bharti Cellular Ltd. (supra) had referred to the term "consultancy services" in the following words:- '14. Similarly, the word "consultancy" has been defined in the said Dictionary as "the work or position of a consultant; a department of consultants." "Consultant" itself has been defined, inter alia, as "a person who gives prof....
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....sident did not act as a consultant, who advised or rendered any counselling services. The skill, business acumen and knowledge acquired by the non-resident were for his own benefit and use. The non-resident procured orders on the basis of the said knowledge, information and expertise to secure "their" commission. It is a case of self-use and benefit, and not giving advice or consultation to the respondentassessee on any field, including how to procure export orders, how to market their products, procure payments etc. The respondent-assessee upon receipt of export orders, manufactured the required articles/goods and then the goods produced were exported. There was no element of consultation or advise rendered by the non-resident to the respondent-assessee. 23. Decision in the case of Wallace Pharmaceuticals (P.) Ltd. (supra) is clearly distinguishable as in the said case the non-resident consultant had to perform several services in the nature of attending meetings on mutually agreeable dates and providing advice and counselling, which were in the nature of consultancy services as they entailed support from a product team, compliance with all legal and administrative formal....
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....ng the service for which the fee is paid, i.e. allowing the consumer to play the computer game or consult the troubleshooting database. 42. Many categories of e-commerce transactions similarly involve the provision of the use of, or access to, data and software (see, for example, categories 7, 8, 9, 11, 13, 15, 16, 20 and 21 in annex 2). The service of making such data and software, or functionality of that data or software, available for a fee is not, however, a service of a technical nature. The fact that the development of the necessary data and software might itself require substantial technical skills is irrelevant as the service provided to the client is not the development of that data and software (which may well be done by someone other than the supplier) but rather the service of making the data and software available to that client. For example, the mere provision of access to a troubleshooting database would not require more than having available such a database and the necessary software to access it. A payment relating to the provision of such access would not, therefore, relate to a service of a technical nature. Managerial services 43. The Group co....
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....ices. Paragraphs 41 and 42 do not emanate for consideration in the present case, and effect thereof can be examined in an appropriate case [However, see CIT v. Estel Communication (P.) Ltd. [2009] 318 ITR 185 (Del) and Skycell Communications Ltd. (supra)]. 25. Thus, the technical services consists of services of technical nature, when special skills or knowledge relating to technical field are required for their provision, managerial services are rendered for performing management functions and consultancy services relate to provision of advice by someone having special qualification that allow him to do so. In the present case, the aforesaid requisites and required necessities are not satisfied. Indeed, technical, managerial and consultancy services may overlap and it would not be proper to view them in watertight compartments, but in the present case this issue or differentiation is again not relevant. 26. In view of the aforesaid discussion, the substantial question of law mentioned above has to be answered in favour of the respondent-assessee and against the appellant-Revenue. The appeal is accordingly dismissed. There will be no order as to costs". Revenue....
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....ax. Section 195 of the Act very clearly speaks that unless the income is liable to be taxed in India, there is no obligation to deduct tax. Now, in order to determine whether the Income could be deemed to be accrued or arisen in India, section 9 of the Act is the basis. This section, in our opinion, does not provide scope for taxing such payment because the basic criteria provided in the section is about genesis or accruing or arising in India, by virtue of connection with the property in India, control and management vested in India, which are not satisfied in the present cases. Under these circumstances, withdrawal of earlier circulars issued by the CBDT has no assistance to the department, in any way, in disallowing such expenditure. It appears that an overseas agent of Indian exporter operates in his own country and no part of his income arises in India and his commission is usually remitted directly to him by way of TT or posting of cheques/demand drafts in India and therefore the same is not received by him or on his behalf in India and such an overseas agent is not liable to income-tax in India on these commission payments. This view is fortified by the judgment of Apex Cour....
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..... ITO in ITA No. 183/Mum/2014, for the assessment year 2010-11 has allowed the claim of the taxpayer for deduction of commission paid to various non-residents foreign brokers for rendering services outside India in relation to export orders and recovery of sale proceeds, whereby the said foreign brokers did not have place of establishment in India as under: "9. We have considered rival contentions, carefully gone through the orders of the authorities below and also deliberated on the judicial pronouncements cited before us in the context of factual matrix of the case. From the record we found that during the year assessee has paid commission to various non-resident foreign brokers amounting to Rs. 92,14,509/- for rendering services outside India in relation to export orders and recovery of the sale proceeds. Nothing was brought on record by the AO to establish that the said non-resident brokers have their place of establishment in India because they were operating in their respective countries. The said non-resident brokers are not liable to any tax in India insofar as it is also not the case of Revenue that services were rendered in India, therefore, neither there was acc....
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....sed by the CIT u/s 263 of the Income-tax Act, 1961 (hereinafter also called 'the Act') on 8.7.14 in relation to the assessment year 2011-12. 2. Briefly stated, the facts of the case are that the assessee is engaged in manufacturing of engineering items. The AO observed during the course of assessment proceedings that a sum of Rs. 23,58,813/- was paid by the assessee as a foreign commission without deduction of tax at source. On being called upon to justify such non-deduction, the assessee tendered explanation which has been reproduced on pages 2-4 of the assessment order. Getting convinced with the assessee's submissions, the AO chose not to make any disallowance u/s 40(a)(i) of the Act. While exercising revisional power u/s 263 of the Act, the ld. CIT opined that in view of the amendment to section 195, the assessee was liable to deduct tax at source on such payment of commission to foreign parties. Having not done so, the ld. CIT held that the assessment order passed by the AO on this score was erroneous and prejudicial to the interests of the Revenue. In support of his conclusion, the ld. CIT also relied on the opinion of the Authority of Advance Ruling in S....
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....he income which 'accrues or arises in India.' Since the chargeability to tax under this segment is attracted if the income accrues or arises to the non-resident in India, it becomes crucial to find out the place where income from export commission accrues or arises. In this regard, the source of accrual or arising of income cannot be relevant because the incidence of tax is attached with the place of accrual of income and not its source. Ordinarily, there can be several places involved in a transaction, such as, a place where an agreement is entered into or a place where services are actually performed or a place where the services are utilized or a place where entries are made in the books or a place where consideration is paid or received etc. In the context of rendering of services for procuring export orders by a non-resident from the countries outside India, there can be no way for considering the actual export from India as the place for the accrual of commission income of the non-resident. One should keep in mind the distinction between the accrual of income of exporter from exports and that of the foreign agent from commission. As a foreign agent of Indian exporter ....
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.... or royalty or fees for technical services. 5. The argument of the ld. DR that Explanation below section 9(2) will bring the instant case within the fold of section 9(1), is devoid of any merit. This Explanation simply states that for the purposes of this section, income of a non-resident shall be deemed to accrue or arise in India under clauses (v) or (vi) or (vii) of sub-section (1) and shall be 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. A bare perusal of the Explanation divulges that if there is some income of the non-resident which is in the nature of interest or royalty or fees for technical services, then, such income shall be deemed to accrue or arise in India irrespective of the non-resident rendering services in or outside India etc. The pre-condition for magnetizing this Explanation is that the income of the non-resident should be in the nature of interest or royalty or fees for technical services. It is only in respect of these three categories of incomes that the deeming provision is attracted notwithstan....
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....ked by the ld. CIT to fortify his view that the assessee was required to deduct tax at source before making payment of commission to the non-resident. Before evaluating such a submission, it would be apposite to consider the prescription of the Explanation 2, as under:- "Explanation 2. - For the removal of doubts, it is hereby clarified that the obligation to comply with sub-section (1) and to make deduction thereunder applies and shall be deemed to have always applied and extends and shall be deemed to have always extended to all persons, resident or non-resident, whether or not the non-resident person has - (i) a residence or place of business or business connection in India; or (ii) any other presence in any manner whatsoever in India." 9. A glance at the above Explanation inserted by the Finance Act, 2012 with retrospective effect from 1.4.1962 reveals that the obligation to comply with sub-section (1), for making deduction of tax at source by the payer, applies and shall be deemed to have always applied to all the persons, resident or non-resident, whether or not the nonresident person has a residence or place of business or business connect....
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....yment. 11. We do not find any force in this argument. It is relevant to note that Circular no 23 dt. 23/07/1969 clarified that no part of the income of a foreign agent of Indian exporter arises in India and hence such an agent is not liable to income-tax in India on the commission. Then circular no. 786 dt. 7/02/2000 further elaborated the consequence of Circular no. 23 by stating that since such commission income of foreign agent is not liable to tax in India, no tax is therefore, deductible at source undersection 195 and consequently the export commission payable to a non-resident for services rendered outside India is not disallowable u/s 40(a)(i) of the Act. Thereafter, Circular no. 7 dated 22/10/2009 was issued withdrawing, inter alia, the above two circular nos. 23 and 786. The legal position contained in section 5(2) read with section 9, as discussed above about the scope of total income of a non-resident subsisting before the issuance of circular nos. 23 and 786 or after the issuance of circular no. 786 has not undergone any change. It is not as if the export commission income of a foreign agent for soliciting export orders in countries outside India was earlier ch....
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....he AO held that the commission payment was taxable as fees for technical services u/s 9(1)(vii) of the Act. That is how, when assailed, the Hon'ble High Court held that the payment of commission cannot be considered as fees for technical services in terms of section 9(1)(vii) so as to call for any deduction of tax at source. The Hon'ble Madras High Court in CIT v. Faizan Shoes (P) Ltd. [2014] 367 ITR 155/226 Taxman 115/48 taxmann.com 48, has also held that no disallowance can be made u/s 40a(i) in respect of commission paid to non-resident agent for providing services outside India. 14. At this juncture, it is pertinent to note that we are dealing with an appeal against the order passed u/s 263 of the Act. It is settled legal position that there can be no revision on a debatable issue. The Hon'ble Supreme Court has held so in Malabar Industrial Co. Ltd. v. CIT [2000] 243 ITR 83/109 Taxman 66. This view has been reiterated by the Hon'ble Apex Court in CIT v. Max India Ltd. [2007] 295 ITR 282/[2008] 166 Taxman 188. In this case, the Hon'ble Summit Court held that when two views are possible and the ITO has taken one view with which the CIT does not agree,....