TaxTMI 
TaxTMI 
TaxTMI 
2016 (2) TMI 170
X X X X Extracts X X X X
X X X X Extracts X X X X
....pon 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. 5. The Appellants therefore pray that disallowance of Rs. 15,36,264/- uls. 14 A made by t....
X X X X Extracts X X X X
X X X X Extracts X X X X
....e 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'ble Supreme Court in the case of Nectar Beverages Private Limited v. DCIT (2009) 314 ITR 314(SC....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ear 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 Tribunal dated 11.03.2015 in assessee firm's own case in the immediately preceding assessment year i.e. 2009-10....
X X X X Extracts X X X X
X X X X Extracts X X X X
....diture 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 there is a direct relation between share in the profit of the firm and the interest on capital of the partners and hence the int....
X X X X Extracts X X X X
X X X X Extracts X X X X
....dgment 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 Rule 8D of Income Tax Rules, 1962 has disallowed the interest expenditure paid to the partners of Rs. 12,66,679/- incurred by the assessee firm in rel....
X X X X Extracts X X X X
X X X X Extracts X X X X
....rior 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 or loan advanced by them to the firm has been prescribed at 18 per cent per annum (now reduced to 12 per cent per annum ) while salary, commission or any ot....
X X X X Extracts X X X X
X X X X Extracts X X X X
....yable 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 was substituted by a method whereby the tax payable by the firm was straightway deducted from the total income of the firm before its apportionment amongst the partners. ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....tion. 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" and "'unregistered firm" have been omitted. After allowing remuneration and interest to the partners, the balance income of the firms will be subject to maximum marginal rate of tax of income-tax, which....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ip 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, bonus, commission or other remuneration to a working partner is concerned. It is also possible that a partner who is not a 'working partner' may become a 'working partner' at any point of time during a year (or vice versa). In suc....
X X X X Extracts X X X X
X X X X Extracts X X X X
....rd 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 only if- (i) the partnership is evidenced by an instrument; and (ii) the individual shares of the partners are specified in that instrument. A copy of the partnership instrument duly certified has to accompany the return of income for the relevant year for which asses....
X X X X Extracts X X X X
X X X X Extracts X X X X
....7 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 determination is : whether section 40(b) of the 1961 Act is a stand-alone section or whether it operates as a limitation to the deduction under sections 30 to 38 of the 1961 Act? 10. On the above question of law, Mr. S. Ganesh, learned senior counsel appearing on behalf of assessee, contended that prior to 1-4-....
X X X X Extracts X X X X
X X X X Extracts X X X X
....t 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.-Recurring subscriptions paid periodically by shareholders, or subscribers in Mutual Benefit Societies which fulfil such conditions as may be prescribed, shall be deemed to be capital borrowed within the meaning of this clause. 40. Amounts not deductible.-Notwithstanding anything to the contrary in sections 30 to 38, the following amounts shall not be deducted in....
X X X X Extracts X X X X
X X X X Extracts X X X X
....on 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 stand-alone section. Section 40, before and after Finance Act, 1992, has remained the same in the sense that it begins with a non obstante clause. It starts with the words 'Notwithstanding anything to the contrary in sections 30 to 38' which shows that even if an expenditure or allowance comes within the purview of sections 30 to 38 of the 1961 Act, the assessee could lose the benefit of deduction if the case falls under section 40. In other words....
X X X X Extracts X X X X
X X X X Extracts X X X X
....uction 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 read with the limitation prescribed under section 40. Since there was some confusion with regard to the status of section 40, particularly, after enactment of Finance Act, 1992, we have explained the law in the context of deductions under Chapter IV-D of the 1961 Act. We have accepted the submissions advanced by the learned Addl. Solicitor General in that regard. However, the assessee succeeds in this batch of civil appeals on the peculiar facts of this case. 19. Accor....
X X X X Extracts X X X X
X X X X Extracts X X X X
....d 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] (unreported), the disallowance of Rs. 17,04,535 made under section 14A be deleted. As against this, the ld. D.R. pointed out that no interest-free funds were available to the assessee. Therefore, disallowance has rightly been made. It is pertinent to note that no interest-free funds were available. The investments were made from capital of the partners on which interest at the rate of 10.5 per cent per annum is paid. Therefore, this plea of the assessee's counsel is hereby rejected. ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ction 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 section 14A, which is as under : "14A. (1) For the purposes of computing the total income under this Chapter, no deduction shall be allowed in respect of expenditure incurred by the assessee in relation to income which does not form part of the total income under this Act." 6.1 As per the provisions contained in section 14A(1) as reproduced above, we find that the expenditure incurred for earning exempt income shall not be considered for computing total income under Chapter IV. It implies that ....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... 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 section 28(v) is not applicable and the partner of the assessee firm did not deserve any relief on this account. Moreover, before us is the assessee firm only and not the partners and hence, we do not give any direction on this aspect. 6.4 The ld. Counsel of the assessee also drew our attention to the provisions of sub-section (2A) of section 10 and its explanation and it has been contended that as per the provisions of this Explanation to section 10(2A), remuneration or interest, which is disallowed in the hands of the firm, will ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....rm. 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 incurred for earning exempt income cannot be allowed for computing total income under Chapter IV and hence, impliedly, the same has to be deducted from the exempt income to be computed under Chapter III. This contention of ld. Counsel of the assessee is also rejected. 6.7 One more contention has been raised by him that section 14A talks of disallowing expenditure incurred by the assessee in relation to exempt income and interest paid to partners is not an expenditure at all and it is a special deduction allowed to the firm under section 40(b). This contention o....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ence, 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 that even in case of 'nil' or small amount of dividend income, the entire interest expenditure incurred for making investment in shares is to be considered as expenditure incurred for earning exempt income and the same has to be disallowed under section 14A. Hence, this plea is also rejected. 6.9 In view of the above discussion, we are of the view that no interference is called for in the orders of the ld. CIT(A), as per which, he has confirmed the disallowance of interest of Rs. 17,04,535 which was made by the Assessing Officer under section 14A of the Income-tax....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... 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 decision has been rendered by Hon'ble Supreme Court under the Indian Income Tax Act,1922 read with Indian Income Tax Rules, 1922 for assessment years 1956-60 and 1960-61 , while the instant appeal is for assessment year 2010- 11 whereby the scheme of taxation of partnership firm has gone substantial and major change by the Finance Act,1992 . The Hon'ble Supreme Court in 106 ITR 292 held that : "First principles plus the bare text of the statute furnish the best guide light to understanding the message and meaning of the provisions of law. Thereafter, the sophisticated exercises in precedents and booklore. Here the first thing that we must grasp is that a firm is no....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... 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 made a profit or a loss, his share (whether a net profit or a net loss) shall be taken to be any salary, interest, commission or other remuneration payable to him by the firm in respect of the previous year increased or decreased respectively by his share in the balance of the profit or loss of the firm after the deduction of any interest, salary, commission or other remuneration payable to any partner in respect of the previous year; Provided that if his share so computed is a loss, such loss may be set off or carried forward and set off in accordance with the provisions of section 24;......." The anatomy of the provision is obvious, even if the explanation or motivation for it may be more than one. It....
X X X X Extracts X X X X
X X X X Extracts X X X X
....sidered 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 the Act while Section 40(b)(iv) of the Act is not a standalone section and is a corollary to Section 36(1)(iii) of the Act limiting the deduction. Thus, the contention of the assessee firm that interest paid to partner is a statutory allowance and cannot be considered as an 'expenditure' as envisaged u/s 14A of the Act for disallowance cannot be accepted and is rejected. e &f) Maxopp Investment Limited & Ors. V. CIT (2012) 247 CTR 162(Del.) & Kodak India Private Limited v. Addl. CIT (ITA No 7349/Mum/2012)- The contention of the assessee firm that the AO should have recorded his dis-satisfaction with the correctness of the claim of the expenditure made by the assessee or with the correctness of the claim of the assesssee firm that no exp....
X X X X Extracts X X X X
X X X X Extracts X X X X
....pra) 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 hands of the firm, it will be allowed to be carried forward by the firm , while the partner shall be charged to tax for the total interest paid by the firm despite the fact that the firm could not claim the entire deduction due to absence of profits and resultant loss is to be carried forward to be set off against income of the subsequent years . Thus, we hold that interest paid by the assessee firm to the partners on capital contribution is covered as an 'expenditure' as envisaged u/s 36(1)(iii) of the Act and the assessee firm has to firstly establish its claim of deduction of interest on capital by satisfying the provisions of Section 36(1)(iii) of the Act and then, Section 40(b) of the Act puts limitation on allowability of interest once it passes the ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ds 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 chargeable to tax as per the existing and applicable provisions of Section 28(v) of the Act read with Section 2(24)(ve) of the Act after including the afore-said interest income in the hands of the partners. Further, the AO has computed disallowance of Rs. 20,357/- under Section 14A of the Act read with Rule 8D(2)(i) of Income Tax Rules, 1962 being direct expenses incurred by the assessee firm having being incurred on STT paid of Rs. 18,633/- and PMS charges of Rs. 1,724/- paid to portfolio managers which is admitted to be paid by the assessee firm in relation to the earning of the exempt income, which disallowance we uphold . The AO has computed deemed expenses @0.5% of average investment under Section 14A of the Act read with Rule 8D(2)(iii) of Income ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....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 23.7.1969 as well as circular No. 786 dated 07.02.2000 . The said CBDT circular No. 7/2009 dated 22.10.2009 is applicable for the assessment year 2010-11 w.e.f. 22.10.2009 and not retrospectively and the instant assessment year is also 2010-11. The assessee firm relied upon the decision of Hyderabad Tribunal in the case of DCIT v. Divi's Laboratories Limited in appeal no 601 to 604/Hyd./2009 whereby it was held that commission paid to non-resident agent for services rendered outside India not being chargeable to tax in India could not be disallowed u/s 40(a)(ia) of the Act and Section 195 of the Act clearly speaks that unless the Income is liable to be taxed in India, there is no obligation to deduct tax at source and Section 9 of the Act does not provide scope for taxing such commission payment because the basic criteria provided in the section is a....
X X X X Extracts X X X X
X X X X Extracts X X X X
....iscussion 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 assessed to tax in India." The AO observed that these foreign agents are doing the following activities on behalf of the assessee firm:- " (i) The agent helps the company to facilitate and secure the overseas orders and collect the payments from different overseas. (ii) He gets samples of products approved by the overseas buyers and book the new orders. (iii) He helps in the development of new customized products Apart from that he helps by providing market feedbacks, information samples etc.. (iv) He carries out liaison work on behalf of the assessee. (v) He coordinates with customers and follows up for payment if and when required. (v) He gives the information about the new developments in the markets, competition and their products. (vii) He facilitates the assessee's interaction with the customers during the visits to their respective....
X X X X Extracts X X X X
X X X X Extracts X X X X
....nt 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 (defined in explanation 2 u/s 9(1)(vii) ) and since the assessee firm has not obtained the certificate u/s 195(2) of the Act, the payment made to foreign agent of Rs. 34,18,126/- was disallowed by the AO u/s 40(a)((i) of the Act , vide assessment orders dated 07-03-2013 passed u/s 143(3) of the Act. 15. Aggrieved by the assessment orders dated 07-03-2013 passed by the AO u/s 143(3) of the Act, the assessee firm filed the first appeal with the CIT(A) and submitted that the AO erred in terming the payment as management service charges while the payment were made to persons abroad purely for procuring the business at the rates and other terms of the assessee firm and they had no authority to either reduce the price or change any other term of the supply. The commission agents is helping in securing the overseas orders and help in collecting the payments from the customers, the commission is paid for procuring orders....
X X X X Extracts X X X X
X X X X Extracts X X X X
....,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 the assessment year 2006-07 onwards. In the assessment year 2009-10, payment of commission made was Rs. 34,95,099/-. Of the remaining six parties, from the details it was observed that the commission payment to five parties was found regularly made every year. There is only one party i.e. Tawfiq Ahmed Al Rasheed to whom payment of Rs. 90,127/- has been made for the first time. The CIT(A) observed that payment of commission was discussed in details in the appellate order for the assessment year 2009-10. The CIT(A) observed that the AO has given the findings which clearly shows that the agents did not render any managerial, technical or consultancy services including the provisions of services of technical or other personnel and they were made to facilitate and secure the overseas orders and to collect the payment from different overseas parties and to carry out liaison work, on behalf of the assessee firm. The CIT(A) obse....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ions 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 India in relation to export orders and recovery of sale proceeds, whereby the said foreign brokers did not have place of establishment in India . The assessee firm also contended that circular No. 07/2009 dated 22.10.2009 has been introduced prospectively and earlier circulars clearly stipulating no tax is to be deducted at source on payments of export commission to foreign brokers for services rendered outside India for sourcing export orders and for collecting payments which are withdrawn from 22.10.2009. The assessee firm submitted that these foreign agents did not have any PE in India and hence the disallowance cannot be made and assessee relied on the following decisions:- Sr.No. Particulars 1. Commissioner of Income Tax v. Faizan Shoes Pvt. Ltd. 364 ITR -155 (Madras High Court) 2. Commissioner of Income Tax v. Angelique International Ltd. 359 ITR - 9 (Delhi High Court) 3. Commissioner of Income Tax v. Eon Technolo....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ign 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 to tax in India . The other services such as sample approvals etc. are incidental to the main activity of sourcing of export orders by these foreign brokers for the assesssee firm . These services cannot be described as managerial, consultancy or technical services as contemplated under explanation 2 to Section 9(1)(vii) of the Act to come within deeming provisions of Section 9(1)(vii) of the Act, rather the foreign brokers have rendered services from abroad to the assessee firm for sourcing of export orders in favour of the assessee firm and collection of payments for the assessee firm. Under Section 9(1)(vii) of the Act , income is deemed to accrued or arise in India if fees payable for any technical services utilised in a business or profession in India or for earning any income from any source in India. Fees for technical services include managerial , technical or consultancy as stipulated in explanation 2 to Section 9(1)(vii) of the Act. The Hon'ble Delh....
X X X X Extracts X X X X
X X X X Extracts X X X X
....he 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 would not be applicable in the present case. 5. The Commissioner of Income Tax (Appeals), however, reversed the aforesaid finding holding that the commission payment in the present case was not in the nature of 'fee for technical service' and he distinguished the decision in the case of Wallace Pharmaceuticals P. Ltd. (supra). The said finding has been affirmed by the Tribunal in the impugned order. 6. In order to appreciate the controversy, we would first like to refer and interpret Sections 5(2), 9(1)(i) and 9(1)(vii) of the Act, though, the Assessing Officer in the present case had not invoked Section 9(1)(i) of the Act. The relevant provisions read as under:- '5. Scope of total income. - ** ** ** (2) Subject to the provisions of this Act, the total income of any previous year of a person who is a non-resident includes all income from whatever source derived which - (a) is received or is deemed to be received in India in such year by or on behalf of such p....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ccrues or arises in India; or (c) is deemed to accrue or arise in such year in India. Explanation 1 of the aforesaid section clarifies that income accruing or arising out of India shall not be deemed to be received in India by reason of the fact that it is taken into account in a balance sheet prepared in India. We are required to decide, whether the commission paid to non-resident would be income deemed to be earned in India. 8. Section 9, as is clear from the heading itself, does not deal with income which is received or accrued or has arisen in India but deals with income which does not fall under any of the aforesaid categories. Section 9 creates a deeming fiction of income which is not received in India or accrues or arises in India but is deemed to accrue or arise in India. While interpreting a deeming clause, the courts have to be cautious that they should not expand the scope beyond what is mandated and required by the deeming clause. The deeming clause by its very nature enacts a fiction to treat what is unreal as real and, therefore, unless the situation is covered under the language of the provision, its scope should not be expanded and widened beyond what is clearly ....
X X X X Extracts X X X X
X X X X Extracts X X X X
..... In the present case, clause (b) to Section 9(1)(vii) would be applicable as the respondent-assessee, the payer was a resident of India. The exceptions carved out under clause (b) are not applicable as it is not the case of the respondent-assessee that the fee paid was in respect of services to be utilised in business or profession carried out by the payer outside India, or for the purpose of making or earning of any income from any source outside India. The respondent-assessee's manufacturing unit was in India and it would be proper to hold that the source of income would be the manufacturing unit of the respondentassessee in India, even if the sale proceeds were on account of exports. 13. The main question and issue, which would arise is whether the payment made to the non-resident would be covered under the expression, "fee for technical services" as defined in Explanation 2 quoted above. There are three categories of technical services as per Explanation 2; managerial services, technical services and consultancy services, and it includes provisions for services of technical and other personnel albeit there are specific exclusions, but we are not concerned with the same ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....n "manager" and consequently "managerial service" has a definite human element attached to it. To put it bluntly, a machine cannot be a manager.' Reference can be also made to the decision of the Authority for Advance Rulings in Intertek Testing Services India (P.) Ltd., In re [2008] 307 ITR 418/175 Taxman 375, wherein it was elucidated:- 'First, about the connotation of the term "managerial". The adjective "managerial" relates to manager or management. Manager is a person who manages an industry or business or who deals with administration or a person who organizes other people's activity [New Shorter Oxford Dictionary]. As pointed out by the Supreme Court inR. Dalmia v. CIT [1977] 106 ITR 895, "management" includes the act of managing by direction, or regulation or superintendence. Thus, managerial service essentially involves controlling, directing or administering the business.' 15. The services rendered, the procurement of export orders, etc. cannot be treated as management services provided by the non-resident to the respondent-assessee. The nonresident was not acting as a manager or dealing with administration. It was not controlling the policies or ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ed by the respondent-assessee in favour of the non-resident. Thus, the respondent-assessee dictated and directed the non-resident. The Commissioner of Income Tax (Appeals) has also dealt with quantification of the commission and as per clause 4, the commission payable was the difference between the price stipulated in the agreement and the consideration that the respondent-assessee received in terms of the purchase contract or order, in addition to a predetermined guarantee consideration. Again, an indication contra to the contention that the non-resident was providing management service to the respondent-assessee. 17. The Revenue, which is the appellant before us, has not placed copy of the agreement to contend that the aforesaid clauses do not represent the true nature of the transaction. The Assessing Officer in his order had not bothered to refer and to examine the relevant clauses, which certainly was not the right way to deal with the issue and question. 18. It would be incongruous to hold that the non-resident was providing technical services. To quote from Skycell Communications Ltd. v. Dy CIT [2001] 251 ITR 53/119 Taxman 496 (Mad), the word 'technical' has be....
X X X X Extracts X X X X
X X X X Extracts X X X X
....lt" which entails deliberations, consideration, conferring with someone, conferring about or upon a matter. Consult has also been defined in the said Dictionary as "ask advice for, seek counsel or a professional opinion from; refer to (a source of information); seek permission or approval from for a proposed action". It is obvious that the service of consultancy also necessarily entails human intervention. The consultant, who provides the consultancy service, has to be a human being. A machine cannot be regarded as a consultant.' The AAR in the case of Advance Ruling P. No. 28 of 1999, In re [1999] 242 ITR 208/105 Taxman 218 (AAR - New Delhi) had observed:- "By technical services, we mean in this context services requiring expertise in technology. By consultancy services, we mean in this context advisory services. The category of technical and consultancy services are to some extent overlapping because a consultancy service could also be technical service. However, the category of consultancy services also includes an advisory service, whether or not expertise in technology is required to perform it." 21. The word 'consultant' refers to a person, who is consult....
X X X X Extracts X X X X
X X X X Extracts X X X X
....was in the nature of services as a consultant to the Indian assessee. It included an element of advice and was certainly recommendatory in nature. 24. The OECD Report on e-commerce titled, Tax Treaty Characterisation Issues arising from e-commerce: Report to Working Party No.1 of the OECD Committee on Fiscal Affairs dated 01st February 2001, has elucidated:- 'Technical services 39. For the Group, services are of technical nature when special skills or knowledge related to a technical field are required for the provision of such services. Whilst techniques related to applied science or craftsmanship would generally correspond to such special skills or knowledge, the provision of knowledge acquired in fields such as arts or human sciences would not. As an illustration, whilst the provisions of engineering services would be of a technical nature, the services of a psychologist would not. 40. The fact that technology is used in providing a service is not indicative of whether the service is of a technical nature. Similarly, the delivery of a service via technological means does not make the service technical. This is especially important in the e-commerce environment as....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... term should receive its normal business meaning. Thus, it would involve functions related to how a business is run as opposed to functions involved in carrying on that business. As an illustration, whilst the functions of hiring and training commercial agents would relate to management, the functions performed by these agents (i.e. selling) would not. 44. The comments in paragraphs 40 to 42 above are also relevant for the purposes of distinguishing managerial services from the service of making data and software (even if related to management), or functionality of that data or software, available for a fee. The fact that this data and software could be used by the customer in performing management functions or that the development of the necessary data and software, and the management of the business of providing it to customers, might itself require substantial management expertise is irrelevant as the service provided to the client is neither managing the client's business, managing the supplier's business nor developing that data and software (which may well be done by someone other than the supplier) but rather making the software and data available to that client. ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ave any managerial expertise and the services rendered by them is for their self-use and their own benefit to maximize commission income. Thus in our considered view, no income of these foreign agents have accrued or arisen in India or deemed to have accrued or arisen in India as contemplated u/s 9 of the Act to bring in within the fold of chargeability of tax under the Act and hence the same cannot be brought to tax within the provisions of the Act. As the instant appeal is for assessment year 2010-11 whereby vide circular no 07/2009 dated 22.10.2009, CBDT has withdrawn circular no 23 dated 23-07-1969 and circular no 786 dated 07-02-2000, we have to see the effect in context of withdrawal of earlier circulars. The Hon'ble Hyderabad Tribunal in the case of DCIT v. Divi's Laboratories Limited(2011) 131 ITD 271 (Hyd. Trib.) has discussed the effect of withdrawal of the circulars and held that : "8. We have considered the submissions of both the parties and perused the relevant material available on record. The moot question that arises out of these appeals is whether the payment of commission made to the overseas agents without deduction of tax is attracted disallowance under secti....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... remittance; the obligation to deduct TDS automatically arises. If we were to accept such contention, it would mean that on mere payment in India, income would be said to arise or accrue in India. These are the observations made in the judgment of Apex Court in the case of GE India Technology Centre (P.) Ltd. (supra), relied on by the learned counsel for the assessee, for the proposition that provisions relating to deduction of tax applies only to those sums which are chargeable to tax under the Income-tax Act. If the contentions of the department, are to be taken as correct, that any person making payment to a non-resident is necessarily required to deduct tax, then the consequence would be that the department would be entitled to appropriate the monies deposited by the payer even if the sum paid is not chargeable to tax because there is no provision in the Income-tax Act by which a payer can obtain refund. As per section 237 read with section 199 of the Act implies that only the recipient of the sum i.e., payee would seek a refund. In view of the above, hence, no tax is deductible under section 195 of the Act on commission payments and consequently the expenditure on export commi....
X X X X Extracts X X X X
X X X X Extracts X X X X
....n Technology Pvt. Ltd., 343 ITR 366 (Del). There is no dispute to the well settled proposition that provisions of Section 195 does not apply when no income is found to be taxable in India, therefore, there was no reason for making any disallowance under provisions of Section 40(a)(i) in view of decision of the Hon'ble Supreme Court in the case of G.E.India Technology Centre Pvt. Ltd., 327 ITR 456. There are also judicial pronouncements supporting this proposition, which are reported in 10 ITR 501(Trib), 86 ITD 102 and 10 ITR 147(Trib). 10. Payment of brokerage to the said non-resident brokers for non technical services is the business income of the payee and therefore, not liable to tax in India as was held in the case of Sri Subharaman Subramanian, 30 taxmann.com 236 (Bang.). We do not find any merit in the contention of the learned DR that brokerage so paid to the non-resident brokers was fee for technical services. Our view is supported by the decision of the Delhi Bench of the tribunal in the case of Adidas Sourcing Ltd., 28 taxmann.com 267 (Del). Even the amended section 9 applies only to technical services and not to brokerage. Accordingly, the payment of brokerage to non-....
X X X X Extracts X X X X
X X X X Extracts X X X X
....(i) of the Act. 3. We have heard the rival submissions and perused the relevant material on record. There is no dispute on the factual aspect of the matter that the assessee paid commission to a non-resident for procuring export orders and such commission was paid without deducting tax at source. The assessee pleaded for the correctness of its action in not making such deduction u/s 195 by stating that the non-resident commission agent provided services outside India and, hence, the amount was not chargeable to tax in his hands. It goes without saying that liability for deduction of tax at source arises only when the amount is chargeable to tax in the hands of the payee. If the amount itself is not so chargeable to tax, the liability for deduction of tax at source is also obliterated. 4. Firstly, we will endeavour to determine if the amount of commission is taxable in the hands of the non-resident agent. The scope of total income of a non-resident is governed by section 5(2) of the Act. This section provides that all income of a non-resident from whatever source derived which (a) is received or is deemed to be received in India in such year by or on behalf of such person or (....
X X X X Extracts X X X X
X X X X Extracts X X X X
....xpression - 'Income deemed to accrue or arise in India' - has been defined in section 9(1) of the Act. Sub-section (1) of section 9 has seven clauses. Clause (i) deals with income accruing or arising, whether directly or indirectly, through or from any business connection in India or from any property in India or through or from any asset or source of income in India or through the transfer of the capital asset situated in India. It is quite apparent that the commission income cannot be associated with the later contents of this clause, namely, any property or asset or source of income in India. At the most, it can be considered as having some 'business connection.' Explanation 3 to section 9(1)(i) provides that if business is carried on in India, only so much of the income as is attributable to the operations carried out in India, shall be deemed to accrue or arise in India. Thus, it is clear that in order to bring any income within the ambit of section 9(1)(i), it is sine qua non that the activity resulting into such income should be carried out in India. Notwithstanding the existence of a business connection in India, as even understood in the widest possible amp....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ue's case. 6. In view of the foregoing discussion, it is apparent that the commission income in the hands of the non-resident can neither be considered as received or deemed to be received in India or accruing or arising or deemed to accrue or arise to him in India in terms of section 5(2) of the Act. Once it is held that the commission income of a non-resident for rendering services outside India does not fall within the scope of his total income, it automatically implies that the same is not chargeable to tax in his hands. 7. Sub-section (1) of section 195 provides that any person responsible for paying to a non-resident, not being a company, or to a foreign company, any interest or any other sum chargeable under the provisions of this Act, not being income chargeable under the head 'Salaries' shall, at the time of credit of such income to the account of the payee or at the time of payment thereof, whichever is earlier, shall deduct income-tax thereon at the rates in force. A circumspection of this provision indicates that in order to attract the withholding of tax on a payment made to a non-resident, it is essential that the sum should be chargeable to tax in t....
X X X X Extracts X X X X
X X X X Extracts X X X X
....India etc. Since the main part of sub-section (1) of section 195 casts obligation for withholding of tax at source on the payer, thus, it becomes axiomatic that the Explanation 2 amplifying the scope of subsection (1) of section 195 shall also apply to a payer and not a payee. As the extant assessee payer is a resident of India, it is even otherwise obliged to deduct tax at source from the payments made to non-resident in terms of the main sub-section (1), without applicability of the Explanation 2, if the requisite conditions as prescribed in the section are fulfilled. In other words, if a payment is made on account of any sum which is chargeable under the provisions of this Act, then, there will be an obligation to deduct tax at source. Per contra, if the amount is not chargeable to tax in the hands of the payee, then, no liability to deduct tax at source can be fastened on the payer. Thus it is vivid that the insertion of the Explanation 2 has not brought any change to the factual position obtaining before us. The effect of insertion of Explanation to section 195(1) is simply to clarify about liability of deductor. It has not done away with the pre-requisite condition of section....
X X X X Extracts X X X X
X X X X Extracts X X X X
....or is received by him in India nor any deeming provision of receipt or accrual is attracted. It is further relevant to note that the latter Circular simply withdraws the earlier circular, thereby throwing the issue once again open for consideration and does not state that either the export commission income has now become chargeable to tax in the hands of the foreign residents or the provisions of section 195 read with sec. 40(a)(i) are attracted for the failure of the payer to deduct tax at source on such payments. 12. Ex consequenti, we hold that the amount of commission income for rendering services in procuring export orders outside India is not chargeable to tax in the hands of the non resident agent and hence no tax is deductible under section 195 on such payment by the payer. Resultantly, no disallowance is called for u/s 40(a)(i) of the Act. 13. It can be seen that the ld. CIT relied on two decisions of the Authority of Advance Ruling in SKF Boilers & Driers (P.) Ltd. (supra) and Rajiv Malhotra (supra). It is correct that at least in SKF Boilers (supra),the Authority has held that the payment of commission on export orders is chargeable to tax u/s 5(2)(b) read with se....