M/s. Model Tanners (India) (P) Ltd. Vs. ACIT (ITAT Lucknow)
Conclusion: While framing of assessment in pursuance of revisional order passed under section 263, AO was entitled to consider only those items which had been considered by CIT and was not entitled to consider any other item afresh for making addition.
Held: On perusal of the order dated 30/3/2015, CIT held that AO had not carried out any enquiry to verify the purchase of raw material from the parties and whether the parties were genuine and the submissions made by the assessee had been accepted by AO without verification, disallowing only a partial amount of Rs.1.25 lakhs. Therefore, he assessment order was set aside and the assessment was directed to be framed afresh. AO, in the assessment order dated 30/3/2016, passed in pursuance of the revisional order dated 30/3/2015, made the additions/disallowances under section 80-IB and 14A. It was held it is trite law that an order requires to be read in its entirety. There is no escape from the position that what was not the subject matter of notice issued and the order passed under section 263, cannot be made subject matter of assessment in pursuance to an order passed under section 263. It could not be disputed that the items of additions/disallowances now made by AO i.e., disallowance under section 80-IB and addition under section 14A, were not the subject matter of either the notice issued, or the order passed under section 263. Thus, the order of AO was not correct to that extent.
FULL TEXT OF THE ITAT JUDGEMENT
These are assessee’s appeals for assessment years 2010-11 and 2011-12 involving common issues. Both these appeals are being disposed of by this composite order. The facts, for convenience, are being taken from ITA No.701/LKW/2017.
2. The following grounds of appeal have been raised:-
01. Because the CIT(A) as well as the AO have exceeded and transgressed over the order passed under section 263 of the Act, as such, the additions made are bad in law and be deleted.
02. Because the authorities below should have confined themselves while framing the assessment to the directions as contained in the order passed under section 263, they have travelled beyond the order passed under section 263, which is in violation of the principles of natural justice.
03. Because the order passed under section 263 being partially set aside, the assessment framed under section 143(3) and the appeal therefrom should have been confined only to the issues on which it was set aside, the CIT(A) has erred on facts and in law in holding otherwise.
04. Because the entire assessment framed pursuant to order passed under section 263/143(3) of the Act, 1961 is contrary to facts, bad in law and be quashed,
05. Because the CIT(A) has erred on facts and in law in upholding the addition of Rs.1,699/- being interest paid for late deposit of IDS, the addition be deleted.
06. Because the CIT(A) has erred on facts and in law in upholding the addition of Rs.26,24,573/- being disallowance made by the AO in respect of claim made under section 80IB of the Act, the disallowance made be deleted.
07. Because the CIT(A) has erred on facts and in law in upholding the addition of Rs.36,310/- made under section 14A of the Act, which addition is contrary to facts, bad in law and be deleted.
3. The following notice (ABP:12-16) dated 24/10/2013 was issued to the assessee under section 263 of the Act:-
“F. No.CIT(C)/KNP/Notice u/s 263/Tech/Model Tanners/20i3-14/2479 Dated: 24 .10.2013
The Principal Officer,
M/s Model Tanners (India) Pvt, Ltd.,
C/o Sultan Tanners, Jajmau,
Kanpur-208010
Sub; Show cause notice u/s 263(1) of the I.T. Act 1961 in the case of M/s Model Tanners (India) Pvt. Ltd., C/o Sultan Tanners, Jajmau, Kanpur for A. Y. 2010-11 – Regarding
On perusal of assessment record relating to the Assessment Year 2010-11 in your case has been examined. On examination of assessment record, it is found that assessment order dated 31.03.2013 for the Assessment Year 2010-11 passed by the Asstt. Commissioner of Income Tax, Central Circle-2, Kanpur under section 143(3) of the Income Tax Act,1961 on total income of Rs.1,21,56,043/- is erroneous and prejudicial to the interests of revenue for the following facts and reasons:
Applicability of Section 195 of the Income Tax Act, 1961 on Commission paid to foreign agents (sales commission)
The assessee company has paid a sum of Rs.91,31,915/-(Rs.38,58,862/- from Unit -1 & Rs. 52,73,053/- from Unit -2) to the Overseas entities and debited in the Profit & Loss Account under head sales promotion without deduction of income tax at source u/s 195 of the I.T. Act. As per. provisions of section 195 of the Income Tax, 1961 read with section 9(1) (vii), it is mandatory to deduct tax at source. The applicable provisions contained under section 9 and 195 of the Income Tax Act, 1961 which define the term ” income deemed to accrue or arise in India” and liability of the assessee to deduct income tax at source on “other sums”.
“Section 9(1)(vii) of the Income Tax, 1961 read as under: The following income deemed to accrue or arise in India:
(vii) income by way of fees for technical services payable by
(a) the Government; or
(b) a person who is a resident, except where the fees are payable in respect of services utilized in a business or profession carried on by such person outside India or for the purpose of making or earning any income from any source outside India; or
(c) a person who is a non-resident, where the fees are payable in respect of services utilized in a business or profession carried on by such person in India or for the purposes of, making or earning any income from any source in India:
[Provided that nothing contained in this clause shall apply in relation to any income by way of fees for technical services payable in pursuance of an agreement made before the 1st day of April 1976, and approved by the Central Government,]
[Explanation 1. For the purposes of the foregoing proviso, an agreement made on or after the 1st day of April 1976, shall be deemed to have been made before the date if the agreement is made in accordance with proposals approved by the Central Government before that date.]
Explanation [2] – For the purposes of this clause, ” fee for technical services” means any consideration (including any lump sum consideration) for the rendering of any managerial technical or consultancy services (including the provision of services of technical or other personnel) but dose’s not include consideration for any construction assembly, mining or like project undertaken by the recipient or consideration which would be income of the recipient chargeable under the head “Salaries. “]
A subsequent amendment has also been introduced by Finance Act, 2010 with retrospective effect from 01.6.1976 which reads as under:-
“In section 9 of the Income -tax Act, for the Explanation occurring after sub-section (2), the following Explanation shall be submitted and shall be deemed to have been substituted with effect from the 1st day of June, 1976, namely;-
“Explanation- For the removal of doubts, it is hereby declared that for the purposes of this section, income of a non-resident shall be deemed to accrue or arise in India under clause (v) or clause (vi) or clause (vii) of sub-section (1) and shall be included in the total income of the nonresident, whether or not,-
(iii) The non-resident has a residence or place of business or business connection in India; or
(iv) The non-resident has rendered services in India
A perusal of these statutory provisions makes it clear that these classify and cover all income as accruing and arising in India which partake the character of payment on account of “fee for technical services” which is very preciously defined in Explanation (2) to include any payment for rendering of any managerial or consultancy services rendered by the
Non-Resident agent. In the case of the assesses since he was not able to sell his goods on his own to the foreign buyers, he had to avail the managerial acumen and the expertise of the non-resident m Ueu,of the consideration debited by the assesses in his book of accounts as Commission.. It makes it clear that the payment by the assesses in connection with hi business expediencies in India to a person outside Indian territory for availing his expertise in sale of his goods is nothing but a fee paid by the assesses to the non-resident against the technical services rendered by him.
Section 195 of the Income Tax Act, 1961 read as under;-“Other sums”.
195. [(1) 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 provision 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 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 case of interest payable by the Government or a public sector bank within the meaning of clause (23D) of section JO 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-O]
Explanation – For the purpose 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 book 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 provision of this section shall apply.]
(2) Where the person responsible for paying any such sum chargeable under this act (other, than salary) to a non resident considers that the whole of such sum would not be income chargeable in the case of recipient, he may make an application to the [Assessing] Officer to determine, [by general or special order], the appropriate proportion of such sum so chargeable and upon Such determination ,tax shall be deducted under sub – section (10) only on that proportion of the sum which is so chargeable.
[(3), Subject to rules made under sub -section (5), any person entitled to receive any interest or other sum on which income-tax has to be deducted under sub-section (1) may make an application in the prescribed from to the [Assessing] Officer for the grant of a certificate authorizing him to receive such tax interest or other sum without deduction of tax under sub -section , and where any such certificate is granted .every person responsible for paying such interest or other sum to the person to -whom such certificate is granted shall, so long as the, certificate is in force, make payment of such interest or than sum without deduction tax thereon under sub-section (1).
From the above facts , which have been brought on record that there was mandatory, liability on your part under section 195 of the Income Tax act 1961 read with section 9(1) (vii) thereof to deduct income tax at source from the sum of Rs.91,31l,915/-which you have debited in Profit & Loss Account as Sales promotion. Therefore, there was a clear cut liability to deduct tax at source and having failed in deducting the same amount was liable to be disallowed as per provisions of section 40(a)(i) of the Income Tax ,1961 .The A.O. while passing the order u/s 143(3) of foe Act in this case has not examined the above facts , Accordingly the assessment order on this point is erroneous as well as prejudicial to the interests of Revenue.
In addition to the above, it is also seen that in the following issues requisite enquires have not been made:
1. During the year the assessee has sold following assets:
