Held: AO made disallowance under section 40(a)(ia) as assessee failed to deduct TDS on the commission paid by assessee to agents, who situated outside India. It was held that the commission was admittedly paid outside India. There was no situs in India. The modus operandi of assessee was clear that assessee was recipient of income in India after deduction of commission by the buyer made outside India . Thus, no income had been received or paid inside India, which attracted deduction of TDS in India and therefore, assessee was not liable to deduct TDS in India. In view of the above, the disallowance made u/s. 40(a)(ia) was deleted.
FULL TEXT OF THE ITAT JUDGEMENT
This appeal is filed by the assessee against the order dated 28.02.2018 passed by ld. CIT(A)-I, Agra for assessment year 2013-14 on the following revised grounds:
Revised Grounds of Appeal
1. Because, the authorities below have erred in law and on facts in making the addition of Rs.14,98,883/- being 5% of the turnover instead of Rs.5,58,042/-as shown by the appellant.
2. Because, the authorities below have erred in law and on facts in disallowing the commission paid by the appellant to the foreign commission agents of Rs.9,63,954/-
3. Because, the authorities below have erred in law and on facts in making the addition of Duty Drawback amount of Rs.24,84,657/- to the income of the appellant which was duly credited by the appellant in his P&L A/c and shown as his income.
2. The assessee is an exporter involved in export of shoes. The Assessing Officer issued show cause notice to the assessee requiring him to furnish various details and information. While examining the books of account, the Assessing Officer pointed out discrepancies in the books maintained by the assessee. The assessee filed reply to show cause notice. The Assessing Officer considering the reply rejected the books of account and applying the net profit rate of 5% on the turnover, made the addition. In the computation of income, the Assessing Officer has calculated the business income @ 5% on the turnover of Rs.2,99,77,659/-. Besides that, the Assessing Officer had also added disallowance on account of 40(a)(ia) to the tune of Rs.9,63,954/-. The case of Assessing Officer was that the assessee failed to deduct TDS on the commission paid by the assessee to agents, who situated outside India. Further, he has also added duty draw back shown by the assessee in the profit and loss account as income of the assessee. Thus, in total he had calculated the income of the assessee at Rs.49,47,494/-.
3. Feeling aggrieved, the assessee filed appeal before the ld. CIT(A). Before the CIT(A), the assessee drew his attention to comparative chart for assessment year 2011-12, 2012-13 and 2013-14 and submitted that net profit rate for these three years was 2.49%, 2.47% and 1.86% respectively. It was also submitted that identity of the commission agent was proved and for that purpose he had drawn attention to passport of the agent and the invoice where the commission was paid to the foreign commission agent. It was also submitted that the payments were made through banking channel. Lastly, it was submitted that the duty draw back cannot be separately added to the income of the assessee as decided by the Assessing Officer, which was rejected by the CIT(A) vide his observations in para 7.3 to the following effect :
7.3 In absence of any acceptable argument to prove the reliability of the appellant’s books of account and also in light of the discrepancies noted oy the A.O. therein, I am convinced that it is a fit case for application of the provisions of section 145(3) of the Act. The appellant has not been able to provide any evidence in support of his two arguments regarding the reason for fall in GP rate and NP rate. Hence, I am also inclined to hold that the NP rate of 5% applied by the A.O. is justified and reasonable, particularly because the appellant is an exporter and export business, in general, fetches higher profits. It may be relevant to note in this context that low Net profit of 1.86% has been disclosed by the appellant in his Profit and loss account and if we exclude the Duty Draw back amount of Rs. 24,84,6577- from it , the net profit gets reduced to a net loss of Rs. 19,26,615/-, which is 6.43% of the business turnover.. The appellant’s argument that the Duty Drawback amount of Rs. 24,84,657/- should not be added over and above the estimated net profit, is also not acceptable because there is no basis to assume that he had earned a loss during the impugned year. Thus, estimation of Rs. 14,98,8837- as appellant’s net profit is confirmed, and the A.O.’s action of adding the amount of DDB separately, is also confirmed. Grounds no. 1 and 3 are accordingly dismissed. “
4. Per contra, ld. DR submitted that the assessee in trading, profit and loss account has separately quantified the sales – direct export and thereafter has added duty draw back for Rs.24,84,657/-. Therefore, the finding of the Assessing Officer as well as of CIT(A) was correct as they have rightly adopted the method opted by the assessee. Further it was submitted that while calculating the NP rate, the effect of duty draw back has not been taken into account. Therefore, it is required to be separately added.
5. In rebuttal, the ld. AR submitted that duty draw back is nothing but reimbursement of the expenditure/taxes paid by the assessee to various government authorities and was there to give incentives to various exporters. It was the case of assessee that once the expenditure has been taken into account while calculating the profit of the assessee, this should also form part of the total turnover, on which the net profit was to be calculated. It was further submitted that disallowance on account of commission cannot be separately added to the income of the assessee as u/s. 144 of the Act, the total income of the assessee was required to be compute and total income is defined u/s. 5 of the Act. He has also relied upon the decision of jurisdictional High court in the matter of CIT vs. Bhanwari Lal Bansidhar.
6. We have heard the rival contentions. Admittedly, the assessee has not challenged the rejection of books of accounts before us and has challenged the estimation of NP rate at 5% along with other grounds. As per Profit & loss account, direct sale of assessee was mentioned as Rs.29,97,76,559/- and gross profit calculated by the assessee was Rs.4403253/- and the assessee had added thereafter duty draw back of Rs.24,84,657/- making the total of Rs.68,87,910/-. If we add, as suggested by the assessee, the sale plus duty draw back then the figure would come to Rs.32462316/-. If we apply 5% of Net profit rate, it would come to Rs.16,23,115/- . In the result, the declared income of the assessee was found to be 68,87,910/- whereas if we adopt the formula as suggested by assessee it would come to Rs.16,23,115/-.
6. Undisputedly, the NP rate of assessee from previous years vary 2.49% to 1.86%. Therefore, at the best we take NP rate of 2.49%, which is NP rate for A.Y. 2011-12 or we can take 5% as proposed by the authorities below. To balance the equity, trend of industry, past NP rate of assessee and turnover of the assessee we reduce the NP rate of 5% to 4%. AO is directed to work out the income of the assessee accordingly. In the result the ground no1 of the assessee is partly allowed.
GROUND NO 2
7. With respect to disallowance u/s. 40(a)(ia), we are of the opinion as per provisions of section 144 of the Act, the total income of the assessee has to be estimated by way of best judgment assessment after giving notice to the assessee. Total income is defined u/s. 5 of the Act which says as under :
15 5.16(1) Subject to17 the provisions of this Act, the total income18 of any previous year of a person who is a resident includes all income from whatever source derived which—
(a) is received19 or is deemed to be received19 in India in such year by or on behalf of such person ;
(b) accrues or arises19 or is 19deemed to accrue or arise to him in India during such year ; or
(c) accrues or arises19 to him outside India during such year :
Provided that, in the case of a person not ordinarily resident in India within the meaning of sub-section (6)* of section 6, the income which accrues or arises to him outside India shall not be so included unless it is derived from a business controlled in or a profession set up in India.
(2) Subject to17 the provisions of this Act, the total income18 of any previous year of a person who is a non-resident includes all income from whatever source derived which—
(a) is received20 or is deemed to be received in India in such year by or on behalf of such person ; or
(b) accrues or arises20 or is 20deemed to accrue or arise to him in India during such year.
Explanation 1.—Income accruing or arising outside India shall not be deemed to be received20 in India within the meaning of this section by reason only of the fact that it is taken into account in a balance sheet prepared in India.
Explanation 2.—For the removal of doubts, it is hereby declared that income which has been included in the total income of a person on the basis that it has accrued21 or arisen21 or is deemed to have accrued21 or arisen21 to him shall not again be so included on the basis that it is received or deemed to be received by him in India.
8. The provisions of section 40(a)(ia) provides as under :
Amounts not deductible.
40. Notwithstanding anything to the contrary in sections 30 to 4 , the following amounts shall not be deducted in computing the income chargeable under the head “Profits and gains of business or profession“,—
(a) in the case of any assessee—
5 [(i) 6 7 any interest (not being interest on a loan issued for public subscription before the 1st day of April, 1938), royalty, fees for technical services or other sum chargeable under this Act, which is payable,—
(A) outside India; or
(B) in India to a non-resident, not being a company or to a foreign company, 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 8 [on or before the due date specified in sub-section (1) of section 139] :
9 [Provided that where in respect of any such sum, tax has been deducted in any subsequent year, or has been deducted during the previous year but paid after the due date specified in sub-section (1) of section 139, such sum shall be allowed as a deduction in computing the income of the previous year in which such tax has been paid:]
10[Provided further that where an assessee fails to deduct the whole or any part of the tax in accordance with the provisions of Chapter XVII-B on any such sum but is not deemed to be an assessee in default under the first proviso to sub-section (1) of section 201, then, for the purposes of this sub-clause, it shall be deemed that the assessee has deducted and paid the tax on such sum on the date of furnishing of return of income by the payee referred to in the said proviso.]
Explanation.—For the purposes of this sub-clause,—
(A) “royalty” shall have the same meaning as in Explanation 2 to clause (vi) of sub-section (1) of section 9;
(B) “fees for technical services” shall have the same meaning as in Explanation 2 to clause (vii) of sub-section (1) of section 9;
11(ia) 12 13[thirty per cent of any sum payable14 to a resident], on which tax is deductible at source14 under Chapter XVII-B and such tax has not been deducted or, after deduction, 15[has not been paid15a on or before the due date15a specified in sub-section (1) of section 139 :]
16[Provided that where in respect of any such sum, tax has been deducted in any subsequent year, or has been deducted during the previous year but paid after the due date specified in sub-section (1) of section 139, 17[thirty per cent of] such sum shall be allowed as a deduction in computing the income of the previous year in which such tax has been paid :]
18[Provided further that where an assessee fails to deduct the whole or any part of the tax in accordance with the provisions of Chapter XVII-B on any such sum but is not deemed to be an assessee in default under the first proviso to sub-section (1) of section 201, then, for the purpose of this sub-clause, it shall be deemed that the assessee has deducted and paid the tax on such sum on the date of furnishing of return of income by the 19[***] payee referred to in the said proviso.]
9. A readying of section 40(a)(ia) makes it abundantly clear that the assessee will not be entitled to deduction while computing the income chargeable under the head profits and gains from business if the assessee has not deducted tax at source under Chapter 17B of the Act. The conjoint reading of section 5 and 40(a)(ia) makes it clear that income of the assessee shall be determined under Chapter-III of the Act after taking into account the deductions permissible under law. However, in the same Chapter, the assessee is not entitled to any deduction if the assessee had not deducted tax at source under Chapter 17B. The result of conjoint reading is that under section 144, total income is required to be determined as provided u/s. 5 subject to disallowance, if any, u/s. 40(a)(ia).
10. We accordingly, do not agree with the legal submission of the assessee that after application of NP rate, any short deduction of TDS and disallowance on that count would also be subsumed in the total income calculated under section 144 of Act. Further the decision relied upon by the assessee in the matter of Banwarilal bansidhar 229 ITR 229 was not applicable , as is clear from the fnding recorded by the court, which was as under:
“8. The Tribunal observed that the Assessing Officer rejecting the assessee’s trading results under the proviso to Section 145(1) of the Act had computed the assessee’s income by applying the gross profit rate of 15 per cent, on sales, as shown in the head office as well as in the branch office. The Tribunal further observed as follows :
“… The question arises whether in such a case any deduction on account of purchases is at all allowed to the assessee, though it may be true that a gross profit rate of 15 per cent, was fixed keeping in view all relevant facts including the purchases made by the assessee. Inasmuch as we are of the view that no deduction as such having been allowed to the assessee on account of purchases, we hold that no question of any disallowance on account of purchase can be made in this case under Section 40A(3).”
9. All the three questions, referred to this court, revolve round the same controversy. The question for consideration is when no deduction was sought and allowed under Section 40A(3), was there any need to go into Section 40A(3) and Rule 6DD(j). We see force in the view taken by the Appellate Tribunal that when the income of the assessee was computed applying the gross profit rate and when no deduction was allowed in regard to the purchases of the assessee, there was no need to look into the provisions of Section 40A(3) and Rule 6DD(j). No disallowance could have been made in view of the provisions of Section 40A(3) read with Rule 6DD(j) as no deduction was allowed to and claimed by the assessee in respect of the purchases. When the gross profit rate is applied, that would take care of everything and there was no need for the Assessing Officer to make scrutiny of the amount incurred on the purchases by the assessee.”
11. This case has not dealt with the issue of disallowance under section 40(a)(ia) of the Act. Section 40(a)(ia), start with notwithstanding clause and therefore it is required to be read in the derogation of the others deduction provisions mentioned from section 30 – 38. Whereas section 40 A is not worded in the same language as that of section 40(a)(ia) , which is clear from the language used in section 40 A of the act. The language provides as under:
“The provisions of this section shall have effect notwithstanding anything to the contrary contained in any other provision of this Act relating to the computation of income under the head “Profits and gains of business or profession”.
In view of the above while calculating the estimated total income under section 144 it is not necessary to include the disallowance under section 40(a)(ia) of the act.
12. Now we adjudicate whether the disallowance made u/s. 40(a)(ia) is justified or not. The assessee’s case is that the commissions are paid outside India to his agent for procuring orders for the assessee. The element of payment of commission was duly reflected in the bills for that purpose. The commission was paid outside India and not in India. However, the ld. DR disputed the above contention.
13. We have heard the rival contentions and gone through the record. The commission was admittedly paid outside India. There is no situs in India. The modus operandi of assessee is clear that the assessee is recipient of income in India after deduction of commission by the buyer made outside India . Thus, no income has been received or paid inside India , which attract deduction of TDS in India and therefore, the assessee is not liable to deduct TDS in India. The nature of transaction is not disputed. The case of Assessing Officer was that the assessee has not deducted TDS , as the commission was paid to foreign agent, however he had not denied payment of commission by the assessee for procuring the orders. In view of the above, we allow this ground of the assessee on merit and delete the disallowance made u/s. 40(a)(ia) of the Act. In the result the ground 2 of the assessee appeal is allowed.
Ground no 3
14. The profit of the assessee would come to Rs.2,99,77,659 X 4% = 11,99,106, in term of our finding given in respect to ground no1. The net profit as per assessee was Rs.5,58,042/- , which was arrived by the assessee on applying the GP rate of 1.86% and to this duty draw back was added by the assessee. In case the submissions of the assessee is accepted than the income of the assessee would be well below the income shown by the assessee in return of income. In our view the duty drawback is required to be added, as added by the assessee, thus profit of the assessee will come to Rs.1199106 +2484657 = 3683743. For the purposes of clarity we are reproducing herein below the profit and loss account of the assessee for ready reference.
15. On perusal of the same, it is clear that while calculating the net profit, the assessee has not taken into account the duty draw back and had separately added to the NP rate calculated by him. In the result the ground 3 of the assessee is dismissed.
16. In the light of the above, the appeal of the assessee s partly allowed.
Order pronounced in the open court on 31/05/2021