Sunbeam Lightweighting Solutions Pvt. Ltd. Vs ACIT (ITAT Delhi)
ITAT Delhi held that foreign commission paid by the assessee to its foreign agent for arranging of export sales and recovery of payment could not regarded as fees for technical services under section 9(1)(vii) of the Act. Accordingly, disallowance of expenditure u/s. 40(a)(i) unjustified.
Facts- The assessee is engaged in the business of manufacturing of automotive die cast components, I.C. Engine parts and pistons for two wheelers and four wheelers since inception. During the relevant years the assessee had debited in P & L account certain amounts on account of foreign commission although the assessee has treated the aforesaid payments as foreign commission / export commission. However, AO found that services rendered by these parties are not merely for the sale of products of the assessee company but for prospecting, marketing & providing comprehensive and integrated services. Thus, soliciting of business is only a part of it. As the aforesaid would fall within the purview of section 9(l)(vii). “fee for technical services which would be liable to be taxable in India as income deemed to have accrued/arisen in India. Accordingly AO had made the disallowance considering services to be a FTS and that assessee was liable to deduct tax u/s 195 which it has failed to do so therefore, disallowance u/s 40(a)(i) of the Act was made.
CIT(A) sustained the addition. Being aggrieved, the present appeal is filed.
Conclusion- Mumbai Tribunal in the case of IHI Corporation vs. Addl. DIT (Int. taxation) that the provision of the Act or of the DTAA whichever is more beneficial shall apply and therefore, the income from offshore services though chargeable under section 9(1)(vii) but exempt under the DTAA cannot be charged to tax in the light of section 90(2) of the Act.
Hon’ble Delhi High Court in Panolfa Autoelektrik Ltd. has held that commission paid by the assessee to its foreign agent for arranging of export sales and recovery of payment could not regarded as fees for technical services under section 9(1)(vii) of the Act.
Held that on the facts and in the circumstances of the assessee’s case the impugned disallowance under section 40(a)(i) of the Act made by the Ld. AO and confirmed by the Ld. CIT(A) is not sustainable.
FULL TEXT OF THE ORDER OF ITAT DELHI
These appeals are preferred by the Assessee against the order dated 27.11.2019 of Commissioner of Income Tax (Appeals)-8, New Delhi (hereinafter referred as Ld. First Appellate Authority or in short Ld. ‘FAA’) in appeal no. 10147/16-17 & 10245/17-18, A.Y. 2014-15 & 2015-16 arising out of an appeal before it against the order dated 31.03.2016 & 28.12.2017 respectively passed u/s 143(3) of the Income Tax Act, 1961 (hereinafter referred as ‘the Act’) by the ACIT, New Delhi (hereinafter referred as the Ld. AO).
2. Facts in brief are that the assessee is engaged in the business of manufacturing of automotive die cast components, I.C. Engine parts and pistons for two wheelers and four wheelers since inception. During the relevant years the assessee had debited in P & L account certain amounts on account of foreign commission although the assessee has treated the aforesaid payments as foreign commission / export commission, however Ld. AO found that services rendered by these parties are not merely for the sale of products of the assessee company but for prospecting, marketing & providing comprehensive and integrated services. Thus, soliciting of business is only a part of it. As the aforesaid would fall within the purview of section 9(l)(vii). “fee for technical services which would be liable to be taxable in India as income deemed to have accrued/arisen in India. Accordingly Ld. AO had made the disallowance considering services to be a FTS and that assessee was liable to deduct tax u/s 195 which it has failed to do so therefore, disallowance u/s 40(a)(i) of the Act was made.
2.1 During A.Y. 2015-16, Ld. AO also made an addition of interest of section u/s 234A.
3. Ld. CIT(A) had sustained the additions for which the assessee is in appeal challenging the additions u/s 40(a)(i)(B) of the Act in both the AYs and the levy of interest u/s 234 A in A.Y. 2014-15.
4. Heard and perused the record.
5. Ld. AR relying the order in favour of the assessee in ITA no. 4378/Del/2016 order dated 06.04.2023 submitted that the issue of disallowance u/s 40(a)(i) of the Act is covered in favour of assessee.
5.1. Ld. DR however could not bring out anything contrary on facts.
6. It comes up that in para 10 to 17 the issue has been discussed in ITA no. 4378/Del/2016 and for convenience the same is reproduced below :
“10. Ground No. 3 relates to disallowance of Rs. 2,31,97,600/- under section 40(a)(i) of the Act. The Ld. AO discussed this issue in para 9 of his order. He found from the P & L Account that the assessee has debited the aforesaid sum as ‘foreign commission’. On being asked the assessee submitted two agreements with two parties, namely M/s. Asian Manufacturing LLC and M/s. ETCSLLC both of USA which were valid till 31.03.2012. The Ld. AO noted the salient point of these two agreements and rejecting the explanation of the assessee held that the services provided by the said parties fall within the purview of Fees for Technical Services (“FTS”) as per section 9(1)(vii) of the Act and Fees for Included Services (“FIS”) as per Article 12(4) of India-USA Double Taxation Avoidance Agreement (“India-USA DTAA”). Further, Explanation to section 9(2) clarified that the above shall be deemed to accrue or arise in India irrespective of where the services have been rendered. Accordingly, the assessee was liable to deduct tax under section 195 which it has failed to do. As such the claim of expenses of Rs. 2,31,97,600/- is disallowed under section 40(a)(i) of the Act.
10.1 The assessee challenged the impugned disallowance of commission paid to the parties resident of USA for sale of its products by treating the payment of export commission as a payment for technical services and applying the provisions of section 195 thereto before the Ld. CIT(A). He discussed the issue in para 9 at pages 20-24 of his appellate order and confirmed the order of the Ld. AO by recording the following finding:-
“9.5 However, from examination of the agreement of the assessee with M/s. Asian LLC and with M/s. ETCS LLC it emerges that the two foreign parties were not merely providing services for soliciting of business but were also providing services of prospecting, marketing, promotion and development of business which would give enduring benefit to the assessee. The aforesaid is discernible from the following points of the agreement:
Salient point of agreement with M/s. Asian Manufacturing LLC
