DCIT Vs JLC Electromet Pvt. Ltd. (ITAT Jaipur)
In the present case, undisputed facts are that the commission has been paid to various nonresident 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 ORDER OF ITAT JAIPUR
This appeal by the Department is directed against the order of the learned Commissioner of Income Tax, Appeals-2, Jaipur [ Here in after referred to as ld. CIT(A) ]dated 10-12-2019 for the assessment year 2016-2017.
2. The hearing of the appeal was concluded through audio-visual medium on account of Government guidelines on account of prevalent situation of Covid-19 Pandemic, both the parties have placed their written as well as oral arguments during this online hearing process.
3. The solitary ground raised by the Department is as under:-
‘’Whether in the facts and circumstances of the case and in law the ld. CIT(A) was correct in deleting disallowance of Rs.2,28,86,971/- made u/s 40(a)(ia) of the I.T. Act, 1961 in respect of the payments made on account of commission, exhibition expenses and testing expenses without deduction of tax at source as required u/s 195 of the Act.
4. The facts as culled out from the orders of the lower authorities are reproduced hereunder so as to deal with contentions raised in this appeal by the Department.
‘’The assessee company filed its E-ITR for A.Y. 2016-17 on 28-09-2016 thereby declaring total income of Rs.5,50,08,880/-which was further revised on 29-09-2016 thereby declaring Rs.5,49,71,640/-. The case was selected for complete scrutiny under CASS. Therefore, notice u/s 143(2) of the I.T. Act was issued on 909-2017 by fixing the case for hearing on 26-09-2017. Further to complete the assessment proceedings, notice u/s 142(1) alongwith questionnaire was issued through ITBA Portal on 05-07-2018 and in response thereto the assessee submitted required details/ documents and on perusal of the same, the following points are emerged.
2. Disallowance u/s 40(a)(ia) of the I.T. Act
2.1 On perusal of audited final accounts of the assessee, it has been observed that the assessee has made payment of Rs.2,11,07,351/- towards Selling Commission, Rs.15,70,429/-towards Exhibition expenses and Rs.2,09,191/- towards Testing Expenses without making TDS, in view of insertion of Explanation to Section 195 by Finance Act, 20212 with retrospective effect from 0104-1962. Therefore, a show cause notice was issued to the assessee on 26-11-2018 mentioning therein as to why the above expenses shall not be disallowed u/s 40(a)(ia) of the I.T. Act and added the same to the total taxable income for the year under consideration”
Thus, the AO has issued show cause notice to the assessee stating that why the expenses towards Selling Commission of Rs.2,11,07,351/-, Exhibition expenses of Rs.15,70,429/- and Testing Expenses of Rs.2,09,191/-, totaling to Rs.Rs.2,28,86,971/- should not be disallowed u/s 40(a)(ia) of the Act. The assessee has filed the detailed reply, but the AO did not consider the reply of the assessee relying on the judgement of ITAT Panji Bench in the case of Sesa Resources Ltd (ITA No.267/PNJ/2015) dated 20-08-2015, judgement of Hon’ble Supreme Court in the case of CIT vs Gold Coin Health Food Pvt. Ltd. (2008) 304 ITR 308. The assessee also relied upon the decision of Hon’ble Supreme Court in the case of CIT vs Moser Baer India Ltd.(2009) wherein the assessee contended that amendment made by Finance Act, 2012 is retrospective in nature and, therefore, the assessee should comply and has to deduct tax while making payment to foreign entities. He has also referred to provisions of Section 9(1)(vii) of the Act and stated that income is chargeable to tax in India in accordance with the amended provision of the Act, assessee should deduct the tax and, therefore, Ld. AO has invoked the provisions of Section 40(a)(ia) of the I. T. Act and made an addition of Rs.2,28,86,971/-.
5. Aggrieved by the order of the AO, the assessee has filed an appeal before the ld. CIT(A) challenging the disallowance of three expenses namely Rs.2,11,07,351/- towards Selling Commission, Rs.15,70,429/- towards Exhibition expenses and Rs.2,09,191/- towards Testing Expenses (totaling to Rs.2,28,86,971) made by the AO.
6. As there is only one ground before the ld. CIT(A), he has recorded his detailed findings based on the written submissions filed by the assessee and he has given his findings vide para 2.3.1 to 2.3.3 in his order which includes the contention of the AO as well as detailed reply field by the assessee in the assessment proceedings, since these facts and submission are required to be swayed and is extracted as under:-
The relevant extract of the assessment order is as under
“2.1 On perusal of audited final accounts of the assessee, it has been observed that the asses has made payment of Rs. 2,11,07,351/- towards selling commission, Rs. 15,70,429/- towards Exhibition expenses and Rs. 2,09,191/- towards Testing Expenses without making TDS, in view of insertion of explanation to section 195 by Finance Act, 2012 with retrospective effect from 01-04-1962. Therefore, a show cause notice was issued to the assessee on 26.11.2018, mentioning therein as to why the above expense shall not be disallowed u/s 40(a)(ia) of the I.T Act, and added the same to the total taxable income for the year under consideration.
2.2 In response to this show cause notice the assessee submitted its reply on 28.11.2018 stating therein that:
“In this……………………………………………………………………. .Tax Act.”
3. This office considered the above reply and the case laws cited therein by the AR of the assessee, but not found tenable on merits as the assessee has not deducted TDS on selling commission payment of Rs. 2,11,07,351/-, on Exhibition expenses Rs. 15,70,429/- and on Testing Expenses Rs. 2,09,191/- to non-residents. As per section 195 of the I.T. Act, the assessee was liable to make the above payments after making TDS. But the assessee has failed to do so.
3.1 The issue as to whether the assessee was liable to deduct TDS u/s 195 and whether the disallowance was liable to be made u/s 40(a)(ia) of the Act, for non deduction of the TDS u/s 195(1) of the Act has been amended by the introduction of Explanation II to the said section by the finance Act, 2012 with retrospective effect from 1.4.1962, whereby it is claimed that:
“the obligation to comply with subsection (1) and to make deduction there under applies and shall be deemed to have always applied and extends and shall be deemed to have always extended to all persons, resident or non resident, whether or not the non-resident person has (i) a residence or place of business or business connection in India; or (ii) any other presence in any manner whatsoever in India.”
3.2 The Hon’ble ITAT, Panji Bench, Panji in ITA No. 267/PNJ/2015dated 20.08.2015 in case of M/s Sesa Resources Ltd.( Earlier know as V.S. Dempo & Co. Pvt. Ltd.) held that in view of introduction of Explanation-Il to Sec. 195 of the Act, as the assessee has not deducted TDS u/s 195, the disallowance made by the AO by invoking the provisions of Sec. 40(a)(ib) of the Act, would have to be restored.
3.3 It is also relevant here to occasion to deal with interpreta mention that Hon’ble Supreme Court has of prospective or retrospective nature of amendment in the statute in the case of CIT V/S Gold Coin Health Food Pvt. Ltd (2008) 304 ITR 308 (SC). The Hon’ble Court has held as under:
“In determining………………………………………………. existing law.”
3.4 In the case of CIT vs. Moser Baer India Ltd. [2009] 315 ITR 460 (SC) the Hon’ble Supreme Court has followed its earlier order (Supra.) which is reproduced as below for ready reference:
“On an appeal……………………………………………………………….. assessment years.”
3.5 Thus, it is abundantly clear that clarificatory nature of amendment in statute is retrospective in nature.
3.5.1 The Circular by its nature clarifies ambiguous interpretation provisions of law for the larger interest of effected parties. It is always clarificatory and, therefore, it is of retrospective character. When some circular is withdrawn with immediate effect it could simply mean that provisions of law should be interpreted as if such circular had never been issued on the subject. Provisions of the Act will have to be interpreted without taking any help from the circular.
3.5.2 Further, in the Circular No. 7 of 2009 dated 22nd October, 2009 itself it has been mentioned that:
“Even when………………………………………………………………………………….. the circular.”
3.6 In light of above and after holding that the circular is declaratory i.e. it is applicable in all cases where amendments etc. are pending irrespective of A.YS., the central issue, so far as determination of total income of the assessee is concerned, is disallowance U/s 40(a)(i) of payments made to non resident where tax has not been deducted at source as required U/s 195 of the Act and whether any payments have been made to a person which is not in accordance with the provisions of Section 9 of the Income Tax Act, 1961.
Relevant provisions u/s 195 are as under:
“(1) Any person………………………………. sub section (1)
3.7 Thus, there is no explicit provision under the Act, for making a payment to nonresident without deduction of tax at source without obtaining NOC from the income tax authorities.
3.8 In light of the above discussion and submissions filed by the assessee it is concluded that the contention of the assessee is not found acceptable as per the relevant provisions of the Act, and the following points are discussed on merit to reach at conclusion proceedings of this case:
(i) The assessee has not obtained any certificate u/s 197/195.
(ii) The assessee has not made TDS upon the commission payment.
(iii) The assessee has not taken care of any future liability of tax in the hands of nonresidence, if any arises.
3.9 Here, it would proper to examine the provisions of Section 9(1)(vii) of the Income Tax Act, 1961, which are cited as under:
“Income deemed………………………………………………………………………….. by him.
3.10 This being the stated position and the factum of the case that the payment made by the assessee to a non-resident is squarely covered by the provisions of Section 195 of the Income Tax Act, 1961 which call for deduction of tax at appropriate rate forced at the time of payment to a non-resident. In view of these provisions which find place in the Statute, the provisions of Section 40(a)(ia) is also attracted wherever TDS on payment of commission to a non-resident has not been made at appropriate rates. These provisions bar deduction of any payment on account of commission [fee for technical services] made to a non-resident, without making TDS.
3.11 In these circumstances, there is no basis to conclude that income (which is commission in our case) is not taxable under Income Tax Act, 1961. The assessee in these circumstances is liable to deduct tax at the time of credit of such income to the account of payee or at the time of payment whichever is earlier. Alternatively, the assessee has to obtain certificate for no deduction or lower deduction of tax on the payments as required u/s 1961) of act. The foreign agents can also obtain certificates for no deduction or lower deduction of tax on amount receivable / received as prescribed u/s 195(3) of act. Since, these conditions have not certified payments have been made to nonresidents without deduction of tax as required u/s 195 of the act. Consequently, the expenditure on export commission and other related charges payable to a non resident for services rendered outside India is not allowable expenditure and they deserve to be disallowed u/s 40(a)(ia) of the act. Therefore, an amount of Rs. 2,11,07,351/- towards selling commission, an amount of Rs. 15,70,429/- towards Exhibition expenses and an amount of Rs.2,09,191/- towards Testing Expenses, totaling to Rs. 2,28,86,971/ (2,11,07,351 + 15,70,429 + 2,09,191) is disallowed and added to the total income of the assessee.”
2.2 The relevant extract of the submission of the appellant is as under:
“1. Covered matter: 1.1 It is pertinent to note that the assessee-made similar payments and even almost to the same very parties i.e. the foreign payees in the past and the AO made disallowances u/s 40(a)(ia) in A.Y. 2013 14 & 2014-15, which was confirmed by the Id. CIT(A). However, in the second appeal the Hon’ble ITAT deleted the disallowance in JLC Electromet (P) Ltd. vs. ACIT (2019) 201 TTJ 811 (JP) (PB 552578) holding as under:
“23. We have…………………………………… instant case.”
1.2 Fully covered issue:-Pertinently, very recently this Hon’ble Bench of ITAT has again taken a view in favor of assessee holding that the payment of commission made to a nonresident for procuring sales order outside India, cannot be considered as Fees for Technical Services (FTS) in the case of Satyam Polyplast vs. DCIT (2019) 106 Taxmann.com 145 (JP)(II DPB-8-13). Interestingly, in this case also the ld. CIT(A), Ajmer, recorded finding in identical manner, as done in the case of the present appellant. In this case also, the Id. CIT(A) dismissed the appeal on the ground that the appellant failed to bring any ruling of the AAR u/s 245(2) of the act. Moreover, the applicability of Explanation II to Sec. 195 (1) is also a ground of dismissal in the case of the present appellant. In Para 5 it was held as under:
XXX
“5. We have……………………………… is allowed.
1.3 ” In Group case M/s Gem Electro Mechanicals Pvt. Ltd. also, similar 1.3. view has been taken by your good self in A.Y. 2012-13 to 2014-15 (PB 579-608).
This way, the issues involved in the appeals is squarely covered by the said decision in favor of the assessee.
2. The relevant provisions contained u/s 195, are reproduced hereunder.
2.1 Sec.195 with the Explanation 2thereto immediately after the amendment made by the Finance Act, 2012 stood as under and continued to till date are as under:
“S. 195. Any person ……………………………………………….. in India.”
2.2 S. 40(a)(ia) of the Act, as stood at the relevant point of time, (relevant extract only) is as under:
“S. 40. Notwithstanding.. …………………….. . sub section (1) of section 139 :]
3 Firstly, we strongly rely upon our written submissions (relevant extract only) filed before the ld. AO on dated 30.11.2016 reproduced as under:
“In this………………………………………………………………………. Tax Act.”
4. Sec. 195 not applicable: 4.1 From the Crux of the various judicial pronouncements and the guidance provided (cited later in this w/s), it is clear that the only test of applying Sec. 195 is whether the subjected payment is a sum chargeable under the provisions of this Act or not. The assessee had already submitted in great detail duly supported with all the evidences that all the subjected expenses viz. Selling 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. All the requisite details were submitted vide letter dated 17.11.2016 & 18.11.2015. The jurisdictional facts thus, are not denied and duly admitted therefore, it cannot be said that any income accrued or arose in respect of all the three subjected payments u/s 4, 5 or 9 of the Act in India.
4.2.1 Commission Expenses: The subjected payments included commission expenses of Rs.1.63 crore which was paid to the foreign selling agents who rendered their services to the appellant outside India. The payments in this respect were also made outside India only. Kindly refer ledger accounts of Selling commission (Export) 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, is enclosed. (PB 9-16) along with Copies of Agency agreement, Certificate of the payee, Foreign bills transaction advice, Letter by the assessee to the concerned bank with enclosure to make payment outside India (PB 17457). In the case of CIT vs. Toshoku Ltd 125 ITR 0525 (SC) it was held that the commission amounts which were earned by the non resident assessee for services rendered outside India cannot, therefore, be deemed to be incomes which have either accrued or arisen in India. The AO wrongly considered such payment as FTS u/s 9(1)(vii). This aspect is also covered by the ITAT order (supra). (PB 552-578).
4.2.2 Exhibition expenses: Similarly the exhibition expenses were incurred in making payment to various non-residents outside India on account of the stall booking in different conferences exhibitions held outside India. Thus, the services were rendered outside India and respective payments were also made outside India. Kindly refer the detailed ledger account (PB 458-459) along with Copies of Invoice, Foreign bills transaction advice, Letter by the assessee to the concerned bank with enclosure to make payment outside India (PB 460-527), containing the relevant details.
4.2.3 Testing Expenses: Lastly, the testing expenses were also paid to the non-resident outside India for getting the Samples / Goods which were tested by the non-resident outside India. Payments to these persons were also made outside India. Copy of the detailed ledger of Testing Expenses along with Invoices (PB 528-551), contains the relevant details (PB 1) is enclosed herewith.
4.3. From a perusal of the above submissions and the voluminous it evidences; it is evidently clear that undisputedly:
