Applicability of Tax deduction at source u/s 195 on Commission paid to foreign agents for procuring export orders

short overview : Commission paid to foreign agents for procuring export orders could not be treated as income taxable in India when parameters of DTAAs were applied to transactions in question. Also non-resident agents did not have PE or business connection in India. Therefore, impugned payment could not be held as taxable in the hands of non-resident agents in India and, therefore, liability to withhold tax under section 195 did not arise.

Assessee had appointed foreign agents for procuring export orders and claimed deduction of commission paid to them. AO disallowed deduction for want of TDS under section 195.

it is held that As services were rendered outside India and also the payment was made to non-resident outside India. Also, commission paid to non-resident could not be treated as income taxable in India when parameters of DTAAs were applied to transactions in question. Also non-resident agents did not have PE or business connection in India. Therefore, impugned payment could not be held as taxable in the hands of non-resident agents in India and, therefore, liability to withhold tax under section 195 did not arise.

Decision: In assessee’s favour.

IN THE ITAT, DELHI BENCH

G.D. AGRAWAL, V.P. & SUCHITRA KAMBLE, J.M.

Punjab Stainless Steel Inds. v. ACIT

I.T.A. Nos. 5532, 1107, 1147 & 6036/DEL/2016

4 June, 2019

Appellant by: Ved Jain, Advocate, Ashish Goe & Rishabh Jain, CAs.

Respondent by: Amit Katoch, Sr. Departmental Representative

Suchitra Kamble, J.M.

These four appeals are filed by the assessee and Revenue against the Orders, dated 31-12-2015 & 23-8-2016 for assessment year 2011-12 & 2012-13 passed by Commissioner (Appeals)-12, New Delhi.

2. The grounds of appeal are as under :–

I.T.A. No. 5532/DEL/2016 (A.Y 2012-13)

“1. That on the facts and in law, the learned Commissioner (Appeals) has erred in sustaining estimated disallowance of Rs. 3,87,932 @ 2.17% of the total payments of polishing of Rs. 1,78,76,711. The disallowance is entirely base less, whimsical and un-stainable for the reasons :–

(a) the appellant has admitted produced all the necessary and required evidence including their PANS, Names and addresses of the contractors and their bills containing full particulars of quantities, rates etc.

(b) all the payments has been made to them by means of account payee cheques after deduction of TDS in all the cases.

(c) the evidence filed has not been assailed by the id. Assessing officer is there any rebutted of the facts or evidence. No tangible materials.

2. That on facts and in law, the id. Commissioner (Appeals) has erred in confirming disallowance of Rs. 38,968 by reducing the rate of depreciation on some Electrical equipments and fittings for installing Plant and Machinery in the assessment year 2002-03 as forming part of the block of assets entitled to 15% and depreciation allowed till the assessment year 2009-10.

(a) There being no change facts and the W.D.V of the assets being brought forward by the Revenue since the assessment year 2009-10, there was no justification for disturbing the W.D.V. of the block of assets by isolating these items on different perception by the learned assessing officer of the nature of these items and also violating the Rule of estoppal.

3. On the facts and in law, the id. Commissioner (Appeal) has erred in confirming on addition of Rs. 2,14,220 an account on notional interest on interest free advances to eight parties aggregating to Rs. 17,85,158 on the ground that these interest free advances has no business nexus and if they had not been made the appellant had to pay lower interest on his interest carrying borrowings. The learned Commissioner (Appeal) erred in overlooking the following facts :–

(a) these advance are made in the earlier years mostly much prior to the assessment year 2010-11 and no notional interest was assessed.

(b) the fact that these allegedly interest free advances were made out of interest carrying borrowed funds has not been denied by the assessing officer.

(c) the appellants own interest free funds lying in interest free current accounts of the parties alone amounted to Rs. 22.55 crores at the being of the year and Rs. 22.22 crores at the end of year against the interest free advances of Rs. 25,97,038 at the being of the year and Rs. 17,85,158 at the end of the year. The same position prevailed during the earlier years.

(d) that it was well settled that unless there was a direct nexus between the borrowed funds and the net interest free advances which were from common pool of funds and the interest free funds available with the assessee far exceeding the assesses own interest free advances, no disallowance of interest on addition of notional interest could be made.”

I.T.A. No. 1107/DEL/2016 (A.Y 2011-12)

“1. Whether on the facts and circumstances of the case and in law, the learned Commissioner (Appeals) has erred in deleting the addition of Rs. 61,31,446 made on account of disallowance of commission paid to non residents without properly appreciating explanation 2 to section 9(1)(vii) and explanation 2 to section 195 of the Income Tax Act, 1961 while deciding the TDS provision under section 195, that it is not applicable to nonresident commission agent?

2. Whether on the facts and circumstances of the case and in law, the learned Commissioner (Appeals) has erred in deleting the addition of Rs. 61,31,446 made on account of disallowance of commission paid to non residents while ignoring the merits of the case i.e. assessee has not produced any contract or agreement regarding commission thereby raising a doubt over the payment of commission itself?

3. Whether on the facts and circumstances of the case and in law, the learned Commissioner (Appeals) has erred in restricting the addition of Rs. 25,74,432 made by disallowing 15% of polishing charges, to Rs. 3,73,469, while ignoring the fact that in the earlier years Commissioner (Appeals) has itself allowed disallowance of 15% which was upheld by ITAT and for the assessment year 2009-10 the disallowance in respect of polishing charges was made by assessing officer @15% against which assessee has not gone on for appeal.?

I.T.A. No. 1147/DEL/2016 (A.Y 2011-12)

Ground of Appeal No. 1

“That on the facts and the evidence of the case, the learned Commissioner (Appeals) has erred in sustaining disallowance out of the total polishing charges payments of Rs. 1, 71, 62, 870, a sum of Rs. 3, 69, 479 representing petty payments aggregating to Rs. 3, 73, 469 to five petty job workers who at the time of assessment were either not found at their old address or did not comply with the notices under section 133 (6) though the payment were duly supported by their bills specifying the quantities of the work done and the further fact that in accordance with the general practice of the appellant, the payments were made to them by means of account payee cheques.

Ground of Appeal No. 2

That the learned Commissioner (Appeals) has erred in conforming the allowance of deprecation @ 10% instead of 15% on the W.D.V. of installed electrical panels, switch boards, PVC wire and conductors and also some payments made to the electricity department for lying transmition lines for the production and plant and machinery of the appellant. The authorities below failed to appreciate that this items were not in the category of normal “furniture/fittings including electrical fittings”

Ground of Appeal No. 3

That on the facts of the case the learned Commissioner (Appeals) has erred in conforming the addition of Rs. 1, 91, 465 been the notional interest of interest free advances aggregating to Rs. 15, 97, 038. She failed to appreciate that :–

(a) As the appellant had its own interest free funds far exceeding the sum of Rs. 15, 97, 038 :–

(b) No disallowance had been made in the earlier years with reference to these advances :–

(c) There was no direct nexus between these advances and borrowed funds.”

I.T.A. No. 6036/DEL/2016 (A.Y 2012-13)

“1. Whether on the facts and circumstances of the case and in law, the learned Commissioner (Appeals) has erred in deleting the addition of Rs. 79,88,239 made on account of disallowance of commission paid to non residents without properly appreciating explanation 2 to section 9(1)(vii) and explanation 2 to section 195 of the Income Tax Act, 1961 while deciding the TDS provision under section 195, that it is not applicable to non-resident commission agent?

2. Whether on the facts and circumstances of the case and in law. the learned Commissioner (Appeals) has erred in deleting the addition of Rs. 79,88,239 made on account of disallowance of commission paid to non residents while ignoring the merits of the case i.e. assessee has not produced any contract or agreement regarding commission thereby raising a doubt over the payment of commission itelself?

3. Whether on facts and circumstances of the case and in law, the learned Commissioner (Appeals) has erred in restricting the addition of Rs. 26,81,506 made by disallowing 15% of polishing charges, to Rs. 3,87,925, while ignoring the fact that in the earlier years Commissioner (Appeals) has itself allowed disallowance of 15% which was upheld by ITAT and for the assessment year 2009-10 the disallowance in respect of polishing charges was made by assessing officer @15% against which assessee has not gone on for appeal?

4. Whether on the facts and circumstance of the case and in law, the learned Commissioner (Appeals) has erred in restricting the addition of Rs. 26,81,506 made by disallowing 15% of polishing charges, to Rs. 3,87,925, without giving any basis for arriving at the figure of Rs. 3,87,925, resulting in arbitrary deletion of Rs. 22,93,581?

3. We are first taking appeals for assessment year 2011-12 as the facts for assessment year 2012-13 is identical. The assessee firm consists of five partners namely M/s. Harvinder Singh & Sons, HUF, Preet Pal Singh, Paramjeet Singh, Harpal Singh and Prabhjeet Singh, sharing equal profit sharing ratio and is engaged in the business of manufacturing and export of stainless steel utensils, wares, cutlery etc. and trading of S.S. Shelter etc. During the year, the assessee declared gross profit of Rs. 9,81,83,341 against total sales of Rs. 56,37,53,725 yielding a GP rate of 17.41% as compared to immediate preceding years GP rate of 20.47% against the total sales of Rs. 40,52,75,216. Return of income declaring an income of Rs. 1,65,86,630 was filed by the assessee on 30-9-2011. The case was selected for scrutiny and notice under section 143(2) was issued on 9-8-2012 and was duly served upon the assessee.

Subsequently notice under section 142(1) along with questionnaire were also issued to the assessee. In response to the above notices CA and Accounts Manager duly authorized by the assessee in the case appeared from time to time and filed requisite details as called for. The assessing officer observed that there is decline in the GP rate as compared to immediate preceding year. The assessee was specifically asked to furnish the reasons for declining in the GP rate. The assessee vide submission, dated 3-1-2014 submitted a note on comparative gross profit chart. The assessee also furnished books of accounts which were examined by the assessing officer during the assessment proceedings. The assessing officer made addition in respect of foreign commission expenses amounting to Rs. 61,31,446. The assessing officer also made addition in respect of polishing charges amounting to Rs. 45,845 thereby taking into account rate of depreciation at 10% per annum. The assessing officer also made disallowance of interest amounting to Rs. 1, 91,645.

4. Being aggrieved by the assessment order, the assessee filed appeal before the Commissioner (Appeals). The Commissioner (Appeals) partly allowed the appeal of the assessee.

5. As regards Ground No. 1 & 2 of Revenue’s appeal relating to disallowance of commission paid to non-residence the learned Departmental Representative submitted that the source from which the assessee derived income was within India from the activity carried in Indian. But the payments for technical consultancy were made outside India. The assessing officer further held that in view of the Board Circular No. 7/2009, Commission paid to 3 parties situated in middle-east by the assessee deemed to accrue or arise in India. The learned Departmental Representative further submitted that payment of commission to foreign agent neither comes in the purview of section 9 of the Act as the same is not fee for technical services nor such payment of commission comes under section 195 of Income Tax Act, 1961. The learned Departmental Representative further submitted that TDS provisions are not applicable. Thus, no disallowance under section 40(a)(ia) has to be made by the assessing officer. The learned Departmental Representative submitted that this issue is squarely covered in assesee’s own case being ITA No. 6043/Del/2014, dated 9-4-2018.

6. The learned Authorised Representative further submitted that during the year under consideration, the assessee has claimed an expenditure of Rs. 61,31,446 as foreign commission. The assessee submitted party wise details of commission paid during the year with their address and since the commission was paid to foreign parties PAN was not applicable. The learned Authorised Representative submitted that that the assessee has appointed foreign agents for procuring expert orders. They render services outside India and have no establishment of business connection in India. The assessing officer disallowed the commission paid to the foreign agent on the ground that the assessee has not deducted tax relying upon CBDT Circular No. 23, dated 23-7-1969 & CBDT Circular No. 786, dated 7-2-2000.

However, these circulars have been withdrawn by CBDT. The assessing officer also relied upon the decision of authority of advance reading in case of SKF Boiler & Driers (P) Ltd. wherein it was held that withholding of tax is mandatory under section 95 on export commission paid to non resident agent. The assessing officer held that since, commission is due to accrue or arise in India, the sources from which the assessee had earned income were, therefore, inside India as the income earning activity that the payments for technical consultancy has been made outside India. The learned Authorised Representative further submitted that payment to non-resident have been made for provision of consultancy services for earning income from the ultimate source in India and hence, even under DTAAs, these payments would be taxable in India. The learned Authorised Representative further submitted that the Commissioner (Appeals) deleted the disallowance made by the assessing officer by holding that the commission written by the non-residents agents did not arise on account of ‘business connection’ of the commission agents in India and, therefore, cannot be deem to accrue or arise in India under section 9(1)(i) of the Act.

The learned Authorised Representative relied upon the decision of the Banglore Tribunal in case of Exotic Fruits (P) Ltd. v. ITO being ITA No. 1008 to 1013/Bang/2012 as well as Welspring Universal v. JCommissioner being ITA No. 4761/Del/2014, dated 12-1-2015 wherein this issue of allowability of deduction under section 40 a (ia) of the Act has been dealt. The learned Authorised Representative further submitted that Commissioner (Appeals) rightly deleted the disallowance made by the assessing officer on account of foreign commission expenses for which the learned Authorised Representative relied upon the Hon’ble Delhi High Court decisions in case of Commissioner (Appeals) v. Eon Technology (P) Ltd. (2012) 343 ITR 366 (Del) : 2011 TaxPub(DT) 2179 (Del-HC). The learned Authorised Representative also relied upon the withdrawal of earlier Circular No. 23, dated 23-7-1969 and Circular No. 786, dated 7-2-2000 by CBDT.

7. We have heard both the parties and perused the material available on record. The Commissioner (Appeals) has rightly deleted this addition as the commission paid to non-resident cannot be treated as assessee’s income from other sources as the assessee had earned income, the said income outside India and also the payment was made to non-resident which cannot be taxable in India when the parameters of DTAAs are applied to such transactions. Besides this in assessee’s own case for assessment year 2010-11, the Tribunal has dismissed this ground taken by the Revenue and no contrary or distinguishing facts were pointed out during the hearing in the present assessment by the learned Departmental Representative. Therefore, Ground Nos. 1 & 2 of Department’s appeal are dismissed.

8. As regards Ground No. 3 of the Revenue’s Appeal and Ground No. 1 of the assessee’s appeal, relating to disallowance of polishing charges amounting to Rs. 25,74,432, the learned Departmental Representative submitted that the assessing officer has rightly made this disallowance and relied upon the assessment order.

9. The learned Authorised Representative submitted that during the year under consideration, the assessee claimed polishing charges of Rs. 1,71,62,871 in trading account.

During the assessment proceedings, the assessee submitted the complete details of polishing charges paid to 18 parties. The assessing officer issued notice under section 133(6) to 18 parties out of which 17 parties has not complied.

Thereafter, the assessee furnish confirmations from 8 parties to whom payment aggregating Rs. 1,63,87,62 have been made out of total polishing charges of Rs. 1,71,62,877. The assessee also furnished the photo copies of bills of copies and ledger account in respect of remaining parties. However, the assessing officer ignored the said facts and evidences furnished by the assessee and made an ad-hoc disallowance of Rs. 25,74,432 being 15% of total polishing charges at Rs. 1,71,62,877. The learned Authorised Representative further submitted that the Commissioner (Appeals) has deleted the addition of Rs. 22,00,963 on the basis that assessee has established the claim of Rs. 1,67,89, 408 in respect of polishing charges as the assessing officer did not state anything in case of remaining 12 parties. The learned Authorised Representative further submitted that the assessing officer has alleged that the assessee failed to furnish the requisite information in respect of payment made to 5 parties amounting to Rs. 3,73,469 without appreciating the fact that during assessment proceedings assessee duly furnish the copies of bills in respect of claim of Rs. 3,73,469. The learned Authorised Representative further submitted that the Tribunal in assessee’s own case for assessment year 2009-10 restricted the disallowance to 5%. The learned Authorised Representative further submitted that the company has been regularly maintaining books of account and the same are duly audited. These books of account were examined by the assessing officer during the assessment proceedings and there is no adverse finding of the assessing officer in relation to these documents. The learned Authorised Representative submitted that it is a well settled law that the ad-hoc additions cannot be made. The learned Authorised Representative relied upon the decision of the Tribunal in case of ACIT v. Modi Rubber Ltd. (ITA No. 1952/Del/2014 Order, dt. 15-5-2018). The learned Authorised Representative also relied upon the following decisions :–

Nitin Sales Corporation v. ITO (Delhi High Court) ITA No. 1809/2005 Order, dt. 11-7-2008.

Shri Devendra Kumar v. ITO ITA No. 3239/Del/2014 Order, dt. 30-8-2016 (ITAT, Delhi).

ACIT v. Amtek Auto Ltd. 2006 112 TTJ 455 (ITAT, Delhi).

Shri Gagan Goyal v. JCommissioner ITA No. 1514/Del/2015 Order, dt. 2-8-2016 (ITAT, Delhi).

10. We have heard both the parties and perused the material available on record. The Commissioner (Appeals) has rightly allowed the expenses of Rs. 22,963 and upheld the disallowance of Rs. 3,73,469. Therefore, there is no need to interfere with the findings of the Commissioner (Appeals). Ground No. 3 of Revenue’s appeal and Ground No. 1 of assessee’s appeal is dismissed.

11. As regards Ground No. 2 of assessee’s appeal, relating to addition of excess claim of depreciation amounting to Rs. 45,845 on electrical fitting.

The learned Authorised Representative submitted that during the year under consideration, the assessee has claimed depreciation on electrical fittings at 15% per annum amounting to Rs. 1,37,534 because they are forming part of plant and machinery and as per Income Tax Act and Rules, depreciation is available at 15% per annum.

The assessing officer allowed the depreciation on electrical fitting at 10% and disallowed the excess claim of 5% holding that electrical fitting falls in the furniture and fittings and rate of depreciation on furniture and fitting is at 10% per annum. The Commissioner (Appeals) upheld the disallowance made by the assessing officer on the basis that furniture and fitting including electrical fitting as per table of rates of depreciation as per Income Tax Rules. In this regard, the learned Authorised Representative submitted that assessing officer as well as Commissioner (Appeals) has not appreciated nature and application of electrical installation items and such electrical installations form an integral part of assessee plant used for manufacturing steel utensils.

Therefore, the learned Authorised Representative submitted that depreciation was allowable at the rate applicable to plant and machinery. The learned Authorised Representative relied upon the decisions of the Tribunal in case of DCIT v. Nalwa Steels and Power Limited ITA No. 4559/Del/2010 Order, dt. 9-8-2016. Thus, the learned Authorised Representative submitted that the depreciation on electrical fittings has been rightly claimed by the assessee at 15% by treating it as part of plant and machinery, and not as furniture and fixtures. Thus, the learned Authorised Representative submitted that the addition made by the assessing officer as well as Commissioner (Appeals) amounting of excess claim of depreciation is not justified.

12. The learned Departmental Representative relied upon the order of the assessing officer and the order of the Commissioner (Appeals).

13. We have heard both the parties and perused the material available on record. The depreciation on electrical fittings has rightly been claimed by the assessee at 15% by treating it as part of plant and machinery and not as furniture and fixtures. It is necessary to have electrical fittings for the power supply to the machineries and plant without electrical fittings and power supply, there is no use of plant and machinery. Therefore, Ground No. 2 of assessee’s appeal is allowed.

14. As regards Ground No. 3 of assessee’s appeal, the learned Authorised Representative submitted that during the year under consideration, the assessee has given interest free advances aggregating to Rs. 15,97,038. The assessing officer has made disallowance of Rs. 1,91,645 notional interest at 12% on interest free advances of Rs. 15,97,38 holding that assessee has paid interest free advances and has nothing to do with the business of the assessee. The Commissioner (Appeals) upheld the said disallowance made by the assessing officer. The learned Authorised Representative submitted that assessee has its own funds which amount to Rs. 22.54 crores as on 31-3-2011 and Rs. 23.84 crores as on 31-3-2010. Therefore, advances were given out of the own funds only and thus no addition on account of notional interest should have been made by the assessing officer. The learned Authorised Representative submitted that it is well settled law that the assessee is free to use its own fund the way it wants and the revenue cannot compel the assessee to do or perform or use its fund in a particular manner. It is also settled law that when own funds are more than the funds utilized towards interest free advances there cannot be any disallowance. The learned Authorised Representative relied upon the decision of the Hon’ble Supreme Court in case of CIT (A) v. Reliance Industries Ltd. Civil Appeal No. 10 of 19 Order, dt. 2-1-2019 and Hero Cycles (P) Ltd. v. CIT (A) (2015) 379 ITR 347 (SC) : 2015 TaxPub(DT) 4897 (SC).

15. We have heard both the parties and perused the material available on record. The addition in respect of notional interest on interest free advances cannot sustain as assessee has its own funds which amount to Rs. 22.54 crores as on 31-3-2011 and Rs. 23.84 crores as on 31-3-2010. Therefore, advances were given out of its own funds only. Thus, in light of the decision of the Hon’ble Apex Court, no addition on account of notional interest can be made by the assessing officer. Ground No. 3 of the assessee’s appeal is allowed.

16. In result, ITA No. 1147/Del/2016 and 1107/Del/2016 are partly allowed for statistical purpose.

17. As regards ITA No. 5532/Del/2016 & 6036/Del/2016 for assessment year 2012-13, the facts are identical and the grounds are also identical.

Therefore, the same are partly allowed for statistical purpose.

18. In result, ITA No. 5532/Del/2016 & 6036/Del/2016 are partly allowed for statistical purpose.