TaxTMI 
TaxTMI 
2018 (4) TMI 517
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....ing the brought down W.D.V. of the block of assists on which 15% disallowance being allowed since the purchase of Assets to 10%. 3. That on the facts and in the circumstances of the case, in estimating and assessing being allegedly notional interest calculated on old brought forward interest free advances aggregating to Rs. 25, 97,038/- ignoring the facts that there was old advances since earlier years on which no notional interest was ever assessed and where appellant had its own interest free funds aggregating to over Rs. 23.44 Crores. 4. The revenue has filed appeal raising following two grounds in ITA No. 5997/Del/2014 : 1. The Ld. CIT(A) erred in law and on facts in restricting the disallowance out of polishing charges to the extent of 7.5% of total polishing charges despite assessee failed to justify the claim with evidence. 2. The Ld. CIT (A) erred in law and on facts in deleting the additions of foreign commission of Rs. 47,77,826/- on account of non deduction of TDS. 5. Brief facts of the case are that assessee is a partnership firm engaged in the manufacturing and export of stainless steels, utensils, and cutleries items etc. The assessee ....
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....otal Polishing Charges. He vehemently supported the order of ld AO. 10. We have carefully considered the rival contentions and also perused the orders of the lower authorities. In the present case, the Ld. CIT (A) had discussed the above issue in para No. 8 of his order. Ld. CIT (A) has obtained the remand report of the Ld. AO and after admitting the additional evidence, It was held that assessee could get the payments confirmed from only 8 out of 18 parties amounting to 91.44 % of the Polishing Charges and therefore, according to him the disallowance is required to be made. He further held that in case of the assessee the coordinate bench in earlier years have decided the identical issue 50% of the disallowance of total expenditure made by the Assessing Officer, which was restricted to 15% by the CIT (A), was upheld. Therefore, we are also of the opinion that some disallowance is required to be upheld on the facts of the present AY and the history of the assessee in previous A.Y. In the present case, the Ld. CIT (A) after discussion of the whole issue in detail in para No. 9 to 9.21 has restricted the disallowance to 7.5 % of the total payment. In the details submitted by the a....
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.... the total expenses. The Revenue's this ground deserved to be dismissed for the single reason that in earlier years disallowance was restricted to 15 %. Further, as we have narrated the complete facts of the case while deciding the above ground of the appeal of the assessee, where in the facts are quite better compared to the year in which 15 % disallowance was confirmed, we have reduced it to 5 % in assessee's appeal. Hence, ground No. 1 of the appeal of the revenue is dismissed. . Therefore, we dismiss the ground No.1 of the appeal of the revenue. 12. The ground No. 2 of the appeal of the assessee is against confirmation of disallowance of Rs. 59931/- by reducing the WDV of the block of the asset. The brief facts of the case shows that assessee has claimed depreciation of electrical fittings @ 15% whereas the Ld. Assessing Officer observed that the correct rate of depreciation is 10% as it falls under the classification of " Furniture & fittings". On appeal before the CIT (A), the same was confirmed. 13. The Ld. AR submitted that it is confirming part of the block of the asset from the earlier years. In opening balance, the rate of depreciation was 15 %. 14. The Ld. DR s....
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....o interest has been paid, exceeds the amount of advance given interest free. The Hon'ble Bombay High Court in case of Reliance Utilities Ltd. 313 ITR 340 has held that if the assessee has more interest free funds then advances given free of interest for that case presumption is available to the assessee that amount is advance out of non interest bearing funds. In view of this disallowance of Rs. 3113654/- out of interest expenditure is not sustainable. However, there is also a statement that assessee has paid interest on Fixed capital of partners. This fact requires to be verified. In the result ground, No. 3 of the appeal is set aside to the file of ld AO where the assessee is directed to show that assessee has interest free funds available in the form of partner's current account. Accordingly, this ground is allowed with above direction. 20. This leaves us with the ground No. 2 of the appeal of the revenue wherein the Ld. CIT (A) has deleted the disallowance of Foreign Commission expenditure of Rs. 4777826/- . The assessee has paid Foreign Commission and has not deducted tax at source u/s 195 of the Income Tax Act. The assessee submitted that no tax is required to be deduct....
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....e or at the time of payment thereof in cash or by the issue of a cheque or draft or by any other mode, whichever is earlier, deduct income-tax thereon at the rates in force : Provided that in the case of interest payable by the Government or a public sector bank within the meaning of clause (23D) of section 10 or a public financial institution within the meaning of that clause, deduction of tax shall be made only at the time of payment thereof in cash or by the issue of a cheque or draft or by any other mode : Provided further that no such deduction shall be made in respect of any dividends referred to in section 115-0. Explanation-For the purposes of this section, where any interest or other sum as aforesaid is credited to any account, whether called "Interest payable account" or "Suspense account" or by any other name, in the books of account of the person liable to pay such income such crediting shall be deemed to be credit of such income to the account of the payee and the provisions of this section shall apply accordingly. (2) Where the person responsible for paying any such sum chargeable under this Act (other than salary) to a non-resident....
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....t situation being the receipt of income in India is ruled out since payment of Commission is made directly outside India, but the second situation i.e. income accruing or arising or deemed to accrue or arise requires deliberation. 12.6 In the present case, it is observed that the non resident agents did not receive the Commission in India, so it cannot be said that they had received any income in India. Further, Section 7 of the Income Tax Act lists the income which is deemed to be received in India and this does not include Commission income. Therefore, it can also not be said that the impugned Commission income has accrued or arisen to the Non Resident agent in India. The aforesaid Commission payment may, however, be deemed to accrue or arisen in India under - (i) section 9(1 )(i) of the Act if the commission agent has a 'business connection' in Indiaand the income arises through such 'business connection' or (ii) section 9(1 )(vii) of the Act if the services rendered by the commission agent could be characterized as defined in Explanation 2 to that section. 12.7 The concept of 'business connection' was dealt with in the decision of Hon'ble Sup....
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.... control. It is not possible to hold that the non-resident assessees in this case either received or can be deemed to have received the sums in question when their accounts with the statutory agent were credited, since a credit balance, without more, only represents a debt and a mere book entry in the debtor's own books does not constitute payment which will secure discharge from the debt. They cannot, therefore, be charged to tax on the basis of receipt of income actual or constructive in the taxable territories during the relevant accounting period. The second aspect of the same question is whether the commission amounts credited in the books of the statutory agent can be treated as incomes accrued, arisen, or deemed to have accrued or arisen in India to the non- resident assessees during the relevant year. This takes us to s. 9 of the Act. It is urged that the commission amounts should be treated as incomes deemed to have accrued or arisen in India as they, according to the department, had either accrued or arisen through and from the business connection in India that existed between the non-resident assessees and the statutory agent. This contention overlo....
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....ued or arisen in India in terms of section 9( 1 )(i) of the IT Act. 12.10 It is further seen that the Hon'ble Authority for Advance Rulings (AAR), in the case of Spahi Projects P. Limited, 315 ITR 374, after considering the provisions of section 9(1 )(i) of the Act, held that Commission paid to an Agent in South Africa for distribution of the products of the applicant in South Africa was not chargeable to tax in India. On similar facts, the Hon'ble AAR held in the case of Ind Telesoft P. Ltd, in Re, 267 ITR 725, that for payment of Commission thereon to nonresident companies for securing business outside India, there is no liability to deduct tax at source under the Indian Income Tax 1961. 12.11 Similar decisions have been made in the following judgments also: i. DCIT vs. Angelique International Ltd. [(2013) 55 SOT 226 (Delhi)] "Commission paid to a non-resident agent for services rendered outside India is not chargeable to tax in India and that hence, no disallowance can be made under s. 40(a)(ia).Where the relationship between the assessee and its nonresident agents is on a principal to principal basis, sales commission paid to non- res....
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....he disallowance made under 40(a)(i) of the Act." iv. AIA Engineering Ltd. vs. Addl. CIT (2012) 50 SOT 134 (Ahmedabad) v. ACIT vs. Modern Insulator Ltd. [ (2011) 140 TTJ (Jp) 715 ; 10 ITR (Trib) 147] 12.12 On the basis of the aforesaid decisions, the legal position which emerges is that income earned by a non-resident foreign agent for procuring orders from a source outside India cannot be deemed to be income accruing or arising in India for the purposes of section 9(1 )(i) of the Act. Therefore, I am of the considered opinion that the Commission paid by the Appellant to the Non-Resident Agents for services rendered outside India cannot be deemed to be income which has accrued or arisen in India in terms of section 9(1 )(i) of the Act. 12.13 The Assessing Officer has relied upon the decision of the Delhi Bench of the Hon'ble ITAT in the case of Asia Satellite Telecommunications Company Ltd. vs. DCIT, 85 ITD 478 (Delhi), where it was held that since the payment to non resident agent had been made for Commission which is originating in India due to the Indian goods, the Commission income is attributable to the operations carried in India. In thi....
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....hdrawn was that "some" taxpayers were apparently attempting to misuse the Circular to claim relief not in accordance with the Act. The withdrawal of the Circular No. 23 (and also the Circular No. 163 dated 29.05.1975 and Circular No. 786 dated 07.02.2000, which only provided clarification in respect of certain provisions of Circular No. 23) was only to prevent the misuse by "some" taxpayers. The withdrawal did not imply that the relief was to be denied to all taxpayers. The withdrawal of the Circular No. 23 alongwith Circular No. 163 and Circular No. 786 only left the field open for the Assessing Officer to establish that the Assessee in question was amongst those "some" taxpayers who were claiming relief not in accordance with the Act. The Ld. Assessing Officer without establishing that the present Assessee was amongst those "some" taxpayers who were claiming relief which was not in accordance with the Act, sought to use the withdrawal of Circular No. 23 alongwith Circular No. 163 and Circular No. 786, as if the relief was to be denied to all taxpayers irrespective of the facts of the case or the genuineness of the relief claimed. 12.17 The withdrawal of the relevant Circ....
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....outside India and there was no permanent establishment or business' connection in India. It cannot be accepted that by virtue of CBDT Circular No.23/1969, the commission paid to non-resident agents become not liable to income-tax in India and on such withdrawal of Circular by the CBDT, such commission paid to non-resident agents become liable to income-tax in India. Irrespective of Circular issued by CBDT, the question of taxability of such commission to income tax has to be decided as per the provisions of section 9(1) of the Act. I am of considered view that the provisions of sec. 9(1) are not applicable to the commission paid to such non-resident agents. Such income (commission) in the hands of non-resident commission agents did not accrue or arise directly or indirectly, through or from any business connection in India. Such income to the non-resident commission agents did not accrue or arise in India through or from any property in India or through the transfer of capital asset situated in India. In the facts and circumstances the provisions of sec. 9(1) were not applicable to such payment of commission by appellant to nonresident agents " Para 7.7-" in the absence of....
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.... of nonresident commission agents did not accrue or arise directly or indirectly, through or from any business connection in India. Such income to the nonresident commission agents did not accrue or arise in India through or from any property in India or through the transfer of capital asset situated in India. In the facts and circumstances the provisions of sec. 9(1) were not applicable to such payment of commission by appellant to non-resident agents." 12.19 The Assessing Officer has also relied upon the ruling of the Hon'ble AAR in the case of SKF Boilers and Driers P. Ltd., 343 ITR 385 wherein it was ruled that commission paid to agents outside India is deemed to accrue and arise in India under section 5(2)(b) read with section 9(1 )(i) of the IT Act. However, on a careful perusal, it appears that in the aforesaid case, Section 9(1 )(i) was applied without examining the concept of 'business connection'. In this context, the term 'business connection'as defined in Explanation 2 to Section 9(1) would mean: "any business activity carried out through a person who, acting on behalf of the non-resident (a) has and habitually exercises in India, an autho....
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.... Assessing Officer the said decisions lay down that tax deduction was mandatory on export Commission since Commission was deemed to accrue or arise in India. However, it is observed that the facts of the above ruling are entirely different from those of the appellant. In the case of Rajiv Malhotra, the commission was payable to non-resident agent for soliciting foreign participant abroad for a trade exhibition to be held in India. Therefore, in view of specific provisions of s. 5(2) (b) r/w s. 9(1 )(i) as the right to receive the Commission under the terms of the agency agreement had arisen in India, the Commission was held be taxable in India under the provisions of the act. But in the Appellant's case, the facts are entirely different. In this case, the Appellant has paid foreign Commission to Non Residents for Commission due on export orders procured by them, i.e. the Non Residents. These foreign Commission Agents are not resident in India. These agents operate their activities outside India in their own countries i.e. UAE & USA, and no part of their activities arise in India. They were paid Commission which relates to services provided to the Appellant from outside India .The r....
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....a. The services were rendered and utilised outside India and the payments for the services rendered were also received outside India. There was no business connection in India. In such circumstances the income of the non-resident company was not taxable in India. (iii) That the transaction would not be subjected to withholding of tax under section 195 of the Act." 12.23 The final and operative part of the order of the Hon'ble AAR in the case of Endemol India Pvt. Ltd. in RE, 361 ITR 361 is as under:- "Again, if the services are characterised as "contract work" under sec-tion 194C of the Act, then the income received should be necessarily treated as business income. The non-resident company does not have permanent establishment in India. The services are rendered and utilised outside India and the payments for the services rendered is also received outside India. There is no business connection in India. In such circum-stances, the income of the non-resident company is not taxable in India. The questions raised by the applicant are answered as follows : (1) The payments made by the applicant towards line production s....
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....rvices could qualify as technical services. For any consultancy to be treated as a technical services, it would be necessary that a technical element is involved in such advisory. Thus, the consultancy should be rendered by someone who has special skills and expertise in rendering such advisory. Circulars 23 of 1969 and 786 of 2000 ([2000] 241 ITR (St.) 132) were issued in the context of sales commission payable by a resident exporter to the agents outside India and reiterated that the income paid to an agent is not taxable if the operations are carried out by the agent outside India. Further, it may be noted that the nature of operations undertaken by a sales agent is similar to those under-taken by a buying agent and, therefore, if the income of a sales agent cannot be taxed in India the income of buying agent also cannot be taxed in India. J. K. (Bombay) Ltd. v. CBDT [1979] 118 ITR 312 (Delhi) and SkyceW Communications Ltd. v. Deputy CIT [2001] 251 ITR 53 (Mad) applied. The assessee was a tax resident of Hong Kong. Its sourcing division provided buying agency services to various customers including an Indian company, an associate enterprise. For such services t....
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....ed by the assessee was in the nature of fees for technical services and should be taxable in India in the hands of the assessee. Accordingly, it considered to be taxable on gross basis at 30 per cent, on the ground that the agreement for providing such services was entered into on June 18, 1999. The Dispute Resolution Panel confirmed the view of the Assessing Officer. On appeal to the Tribunal: Held,_ that the assessee was to receive commission for procuring the products for the Indian company and rendering incidental services for purchases. The services rendered by the assessee in this case were purely in the nature of procurement services and could not be characterised as "managerial", "technical" or "consultancy" services. Accordingly, the consideration received by the assessee was appropriately classified as "commission" as against "fees for technical services". It was not taxable in India." 12.25 It has been held by the Hon'ble ITAT Mumbai in the case of Armayesh Global vs. ACIT 45 SOT 69 as under:- "The overseas agent did not render any services in India. It had no place or permanent establishment in India. It worked abroad and procured orders. The ....
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....f procuring orders would not involve any managerial services. The agreement did not show the applicability or requirement of any technical expertise as functioning as selling agent, designer or any other technical services. There are no distinguishing feature in this case, nor do we find that the ratio of the Constitution Bench decision in Commissioner of Central Excise v. Ratan Melting and Wire Industries [2008] 11 RC 653 ; [2008] 231 ELT 22 (SC) is applicable inasmuch as in the present case there was no decision of the Supreme Court or the High Court or any statutory provision, which was contrary to the circular, which was withdrawn on October 22,2009. The questions of law are covered by the judgments of this court cited as above, and are decided in favour of the assessee and against the Department." 12.28 It is also noted that there is no requirement for the agreements with the Agents to be in writing as held by Delhi Bench of Hon'ble Income Tax Appellate Tribunal in the case of DCIT vs. Angelique International Limited [(2013) 55 SOT 226 (Delhi)]. However, the letter for appointment of the Agents dated 6.3.05 and 25.4.07 of the two Agents i.e. A1 M....
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....nd USA, the Business profits of the enterprises of USA can be taxed India only if those enterprises carry on business in India through a Permanent Establishment (PE) situated in India. Article 7(1) of the DTAA between India and USA is reproduced hereunder :- "Article 7 BUSINESS PROFITS 1. The profits of an enterprise of a Contracting State shall be taxable only in that State unless the enterprise carries on business in the other Contracting State through a permanent establishment situated therein. If the enterprise carries on business as aforesaid, the profits of the enterprise may be taxed in the other State but only so much of them as is attributable to (§)4fiat permanent establishment; (b^sales in the other State of goods or merchandise of the same or similar kind as those sold through that permanent establishment; or Jp) other business activities carried on in the other State of the same or similar kind as those effected through that permanent establishment." 12.32 Thus the existence of Permanent Establishment (PE) in India is sine qua non for bringing to tax business income of those entities in India. In other words, even if a UAE or a USA resident is he....