JLC Electromet Pvt. Ltd. Vs ACIT (ITAT Jaipur)
Coming to the provisions of section 40(a)(ia) of the Act, the said section also provides that any interest, royalty, fees for technical services or other sum chargeable under this Act on which tax is deductible at source under chapter XVII-B and such tax has not been deducted or after deduction has not been paid on or before the due date specified in section 139(1) of the Act. We therefore find that both the provisions of section 195(1) as well as 40(a)(ia) of the Act talks about deduction of tax at source where the sum is chargeable under this Act.
In the present case, undisputed facts are that the commission has been paid to various non-resident entities in respect of sales affected by the assessee outside of India, the services have been rendered outside of India and the payments have been made outside of India. In light of these undisputed facts, the legal proposition laid down in the aforesaid decision equally applies in the instant case and such commission payment cannot be held chargeable to tax in India. Similarly the exhibition expenses have been paid in respect of participation in various exhibitions held outside of India and even the testing charges have been paid for testing services outside of India. Therefore, these payments will not fall in the category of income which has accrued or arisen or deemed to accrued or arise in India. Further, payments have been made outside of India. Accordingly, we are of the considered view that there was no liability to deduct tax at source u/s 195(1) as these payments are not chargeable to tax and the provisions of section 40(a)(ia) cannot be invoked in the instant case.
FULL TEXT OF THE ITAT JUDGEMENT
These are two appeals filed by the assessee against the orders of ld. CIT(A), Ajmer dated 19.11.2018 for AY 2013-14 and 2014-15 respectively. Since the common issues are involved, both these appeals were heard together and are being disposed off by this consolidated order.
2. In ITA No. 1494/JP/2018 for A.Y 2013-14, the assessee has taken the following grounds of appeal as under:
“1. The impugned additions and disallowance made in the order u/s 143(3) dated 29.10.2009 are bad in law and on facts of the case, for want of jurisdiction and various other reasons and hence the same kindly be deleted.
2. 1,73,17,260/- The ld. CIT(A) erred in law as well as on the facts o f the case in confirming the disallowance u/s 40(a)(ia) r.w.s 195 of the Act of Rs. 1,73,17,260/- on account of non-deduction of TDS for payment made to non-resident having no PE. The disallowance so made & confirmed by the ld. CIT(A), is contrary to the provisions of law and facts.
3. 23,54,230/- : The ld. CIT(A) erred in law as well as on the facts o f the case in confirming charging of interest u/s 234B & 234C of the Act. The appellant totally denies it liability of charging of any such interest. The interest, so charged, being contrary to the provisions of law and facts, kindly be deleted in full. ”
3. In ITA No. 23/JP/2019 for A.Y 2014-15, the assessee has taken the following grounds of appeal as under:
“1. The impugned additions and disallowance made in the order u/s 143(3) dated 17.12.2016 are bad in law and on facts of the case, for want of jurisdiction and various other reasons and hence the same kindly be deleted.
2. 1,94,35,485/- The ld. CIT(A) erred in law as well as on the facts o f the case in confirming the disallowance u/s 40(a)(ia) r.w.s 195 of the Act of Rs. 1,94,35,485/- on account of non-deduction of TDS for payment made to non-resident having no PE. The disallowance so made & confirmed by the ld. CIT(A), is contrary to the provisions of law and facts.
3. 20,67,054/- : The ld. CIT(A) erred in law as well as on the facts o f the case in confirming charging of interest u/s 234B & 234C of the Act. The appellant totally denies it liability of charging of any such interest. The interest, so charged, being contrary to the provisions of law and facts, kindly be deleted in full. ”
4. With the consent of both the parties, the matter relating to AY 2013-14 (In ITA No. 1494/JP/2018) is taken as the lead case for the purposes of present discussions.
5. Briefly stated, the facts of the case are that the assessee firm is engaged in the business of manufacturing of wire and other products made of various metals including Nickel, Copper, Iron, Chromium etc. During the year under consideration, the assessee has made payment of Rs.1,54,37,362/- towards Selling Commission on export sales, Rs.17,91,586/- for payment of Exhibition Expenses and Rs.88,410/- for payment of Testing Expenses to various non-resident entities, without deduction of tax at source.
6. During the course of assessment proceedings, the assessee was asked to explain as to why these payments should not be disallowed u/s 40(a)(ia) in view of insertion of Explanation 2 to Section 195 by the Finance Act, 2012 with retrospective effect from 01.04.1962. In its submission, the assessee vide letter dated 11.01.2016 (reproduced at pg-2 to pg-6 of the impugned assessment order) submitted that the payments were made to the nonresidents towards the services rendered outside India hence, no income has accrued or arisen in India, therefore, no tax was required to be deducted u/s 195 of the Act. However, the AO rejected the submission so filed by the assessee company and the relevant findings of the Assessing officer read as under:
“I have considered the reply of the assessee carefully. I have considered the case laws cited by the assessee. It may be submitted that the decision of Hon`ble ITAT, Panaji Bench is relevant and clearly applicable in the case of the assessee. As far as the case referred by the department in ground number-4, as highlighted by the assessee are concerned, it may mentioned that the Hon`ble Tribunal has not discussed these cases while deciding appeal in favour of revenue. Hon’ble ITAT only discussed Explanation-II to the Section 195 and upheld the disallowance. The assessee has not deducted TDS on selling commission payment of Rs.1,54,37,262/-, exhibition expenses o f Rs.17,91,586/- and testing charges of Rs.88,410/- paid to non-resident. As per section 195 of the Act, the assessee was liable to make the above payment after making TDS. But the assessee has failed to do so.
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Considering the amended provisions of section with insertion o f Explanation-II with retrospective effect from 01.04.1962, the assessee was required to deduct TDS from selling commission, exhibition expenses and testing expenses paid to non-residents. Since the assessee failed to deduct TDS therefore as per provisions of section 195 read with section 40(a)(ia) the expenses of Rs. Rs.1,54,37,262/- on account o f selling commission, Rs.17,91,586/- on account of exhibition expenses and Rs.88,410/- on account of testing expenses paid to non-residents cannot be allowed. Thus Rs.1,73,17,258/- are disallowed u/s 40(a)(ia) and hereby added to the total income of the assessee. ”
7. Being aggrieved, the assessee carried the matter in appeal before the ld. CIT(A) who has since confirmed the addition and the relevant findings read as under:
“I have gone through the assessment order, statement of facts, grounds of appeal and written submission carefully. It is seen that the AO after discussing the provisions of S. 195, including the Explanation 2, has concluded that the appellant was required to deduct the tax at source while making the payment of above referred expenses even, to the non-resident persons, whether or not the non-resident person had a residence or place of business or business connection in India or any other presence in any manner whatsoever in India. The Exp. 2 has been inserted by the finance Act of 2012 with retrospective effect from 01.04.1962. I am of the considered view that the argument of the appellant that since the non-resident persons whom the payments were made did not have place of business or business connection in India, therefore, the appellant was not required to deduct tax at source on the above referred payments, is not correct. Regarding the second argument of the appellant that the income of the recipients of the above referred expenses was not “sum chargeable under the provisions of Income Tax Act, 1961 therefore the provisions of S. 195(1) are not applicable to these payments”, the A/R of the appellant was specifically requested to clarify whether any ruling was obtained from the Authority for Advance Ruling u/s 245R(2), regarding non taxability of the income of the recipient in India under the Income Tax Act. The A/R submitted that no such ruling was obtained from A/R by the recipients of the above referred expenses. There is no other evidence on record to show that the sum received by the non-residents in the form of selling commission (Rs. 1,54,37,262), exhibition commission (Rs. 17,91,586) and testing expenses (Rs. 88,410) was not chargeable to tax under the Income Tax Act. There is no order or finding by any Income Tax Authority that the above referred sum of Rs. 1,73,17,258/- was not chargeable to tax under I.T. Act, 1961. Therefore, I am of the considered view that the appellant was required to deduct tax at source while making payment of selling commission (1,54,37,262/-), exhibition commission (Rs. 17,91,586/-) and testing expenses (Rs. 88,410/-) to non-resident, whether or not the non-residents had a residence or place of business or business connection in India. The decision relied upon by the appellant are applicable only when there is evidence on record to show that the sum paid by the assessee was not chargeable to tax under the Income Tax Act. Therefore, disallowance of Rs. 1,73,17,258/- made by the AO is hereby confirmed. ”
8. Against the aforesaid findings, the assessee company is in appeal before us. During the course of hearing, the ld AR submitted that the crux of various judicial pronouncements is that before applying Section 195, it was obligatory on the part of the Assessing officer to establish beyond all reasonable doubts that the subjected payments were taxable under the provision of the Income Tax Act, 1961, then only it could be said that tax at source was deductible w.r.t. such payment/s. In other words, Section 195 r/w 40(a)(ia) of the Act could be invoked only if the subjected payment/s are found to be a sum chargeable under the provisions of this Act but not otherwise. In the context of Section 195 of the Act which deals with the liability of the payer to deduct tax at source on the specified payment/s made to a non-resident, such payment/s can be said to be sum chargeable under the provisions of this Act only if it is established that such payment was taxable u/s 4, 5 and 9 of the Act.
9. It was further submitted that Section 5(2) of the Act provides that any income received or is deemed to be received in India or any income which accrues or arises or deemed to accrue or arise in India shall be taxable. Furthermore S. 9 of the Act deems certain incomes to accrue or arise in India. Therefore, the AO is bound to show that the subjected payment/s made to the non-resident/s is liable to be taxed in India on one ground or the other. The AO however, solely relied upon the Explanation 2 to S. 195 of the Act and the ld. CIT(A) held the subjected payments as chargeable to tax because no advance ruling from AAR was produced before him.
10. It was further submitted that the assessee had already submitted in a great detail, duly supported with all the evidences that all the subjected expenses viz. Selling Commission Exp., Exhibition Exp., Testing Exp. were incurred outside India and in all the three cases, the respective services were also rendered by the respective payees, only outside India.
11. Regarding Commission expenses of Rs.1.54 crore, it was submitted that the same were paid to the foreign selling agents who rendered their services to the appellant outside India in procuring orders effecting sales and done other incidental tasks as per agreements between assessee & payees. The payments in this respect were also made outside India only. Kindly refer a detailed ledger account on day to day basis providing the complete detail as regard the name of the payee, reference to the export invoice of the appellant, the rate / amount of commission etc. and when the same was credited to the account of the payee or paid to him, which were submitted. In the case of CIT vs. Toshoku Ltd (1980) 125 ITR 0525 (SC) it was held:
“This contention overlooks the effect of cl. (a) of the Explanation to cl. (i) of sub-ection (1) of s. 9 of the Act which provides that in the case of a business of which all the operations are not carried out in India, the income of the business deemed under that clause to accrue or arise in India shall be only such part of the income as is reasonably attributable to the operations carried out in India. If all such operations are out in India, the entire income accruing therefrom shall be deemed to have accrued in India. If, however, all the operations are not carried out in the taxable territories, the profits and gains of business deemed to accrue in India through and from business connection in India shall be only such profits and gains as are reasonably attributable to that part of the operations carried out in the taxable territories. If no operations o f business are carried out in the taxable territories, it follows that the income accruing or arising abroad through or from any business connection in India cannot be deemed to accrue or arise in India. ”
12. The assessee further submitted a chart (at APB page 21) along with all the relevant papers and various evidences, in case of each of the payees as under:
