TaxTMI 
TaxTMI 
2023 (10) TMI 1062
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.... as to whether the ld. CIT(A) was justified in deleting the disallowance made u/s 14A of the Act in the absence of any exempt income during the year. 3.1. We have heard the rival submissions and perused the materials available on record. We find that the issue in dispute is no longer res integra in view of the decision of the Hon'ble Supreme Court in the case of Maxopp Investments reported in 402 ITR 640 (SC) and the decision of the Hon'ble Jurisdictional High Court in the case of Joint Investments reported in 372 ITR 694(Del). It is not in dispute that there was no exempt income derived by the assessee during the year under consideration. The ld. DR before us vehemently relied on the amendment brought in Section 14A of the Act by the Finance Act 2022 and argued that the same need to be construed as retrospective in operation as according to him, it was merely clarificatory in nature. This argument of the ld. DR had been specifically addressed by the Hon'ble Jurisdictional High Court in the case of PCIT vs Era Infrastructure (India) Ltd reported in 141 taxmann.com 289 (Del HC) dated 20.7.2022 wherein it was held that the amendment made by Finance Act, 2022 to section 14A of the Ac....
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.... the provisions of Section 36(1)(iii) of the Act, there is no such provision that the expense be deferred over the period of loan. The Section clearly provides that if any expense is incurred on account of interest, that should be an allowable expenditure. The provision does not in any way provide for deferment of expense over the period of loan. Furthermore, it is also noted that the assessee has not taken dual benefit and the expenditure that was deferred in the books of accounts in future years, was also written back in the computation of income of future years, thus there is no loss to the revenue. Furthermore, the assessee company is a loss making company, and even after making such disallowance, the assessee remained a loss making company in this year as well as ensuing two years. Thus, this suggest that even if disallowance is made or not made, the same would be revenue neutral. 6.2.4 Thus, in view of the above, the addition of Rs. 5,37,34,610/- made by the AO is deleted. This ground of appeal is allowed." 4.2. It is not in dispute that the sum of Rs. 8 crores is incurred and paid during the year under consideration. The assessee had only sought to defer the said payment ....
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....e the ld. CIT(A) that in terms of section 5(2) read with section 9(1) of the Act, commission to a foreign agent paid outside India for services rendered abroad was not chargeable to tax in India at all and hence no tax was deductible by the assessee payer while making the payment to the commission agent. Reliance in this regard was placed on the following decisions by the assessee:- a) Decision of Hon'ble Supreme Court in the case of CIT vs Toshuku Ltd reported in 125 ITR 525 (SC) and b) Decision of Hon'ble Supreme Court in the case of GE India Technology Center (P) Ltd vs CIT reported in 327 ITR 456 (SC) 6.3. The ld. CIT(A) observed that Shye International Ltd is a resident of Hong Kong, Special Administrative Region. The commission is paid to them for procurement of solar modules from various Chinese companies. The benefit of Double Taxation Avoidance Agreement (DTAA) was not available between India and Hong Kong and that the DTAA came into force only from 21.12.2018 and hence cannot be made applicable for the year under consideration. The ld. CIT(A) distinguished the case laws relied upon by the assessee by holding that the said case laws pertain to payment of export commis....
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....aking 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 (b) accrues or arises or is deemed to accrue or arise to him in India during such year, shall be included in his total income. It is patent that the non-resident did not receive such income in India inasmuch as the assessee made payment for such commission to the non-resident outside India. Section 7 defines 'Income deemed to be received'. It refers to th....
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....come 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 amplitude, an income will fall u/s 9(1)(i) only to the extent it results from the operations carried out in India. If no operations for earning such income from business connection are carried out in India, the applicability of clause (i) to this extent is ruled out. As, admittedly, the non-resident payee carried out his operations outside India, the command of cla....
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....dent 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 the hands of the payee under the provisions of this Act. It is quite natural also because a liability for deduction of tax at source pre-supposes tax liability in the hands of the payee. If there is no tax liability in respect of the payments made to the payee, there can be no question of deducting any income-tax at source from such payment. Only if the amount is ch....
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....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 195(1) which mandates that amount should be chargeable to tax in the hands of the payee. In our considered opinion, the ld. CIT erred in invoking Explanation 2 to section 195(1) for treating the assessment order erroneous and prejudicial to the interest of the Revenue on account of non deduction of tax at source from the commission payment to the non-resident and the....
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....idents 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 section 9(1)(i) of the Act. By an independent evaluation of the matter in the light of the provisions of section 5(2) read with section 9 of the Act, we have held above that the foreign commission is not chargeable to tax in the hands of the non-resident. Be that as it may, it is important to note that it is not a solitary precedent available on the subject. The Hon'ble j....