Case Law Details
ITC Limited Vs ACIT (ITAT Kolkata)
TDS under section 195 not deductible on payments made to foreign commission agents
In the case of ITC Limited vs. ACIT (ITAT Kolkata), the tribunal ruled that tax deduction at source (TDS) under section 195 is not required for payments made to foreign commission agents. The commission was paid for services rendered entirely outside India, and thus, it was not taxable in India. The tribunal referenced the provisions of Section 195 and Section 9(1)(i) of the Income Tax Act, which clarify that income must be attributable to operations carried out in India to be deemed taxable in India. Since the foreign agents conducted no business operations in India, their income from commissions could not be taxed in India. The decision aligned with precedents set by the Supreme Court in the cases of GE India Technology and Toshoku Ltd., and emphasized that the withdrawal of CBDT circulars does not alter the statutory provisions. Hence, ITC Limited was not obligated to deduct TDS on these payments.
Liquidated damages are capital receipts not to be reduced from the cost of fixed assets
In this case tribunal also addressed the issue of liquidated damages, ruling that these are capital receipts and should not be deducted from the cost of fixed assets. ITC Limited had received Rs. 1,49,54,059 in liquidated damages from suppliers who failed to deliver machinery or complete construction on time. The company treated these damages as capital receipts, not taxable income. The Assessing Officer (AO) and the Commissioner of Income Tax (Appeals) (CIT(A)) disagreed, viewing the damages as business income. However, the tribunal, referencing the Supreme Court’s decision in CIT vs. Saurashtra Cement Ltd., held that such damages are intimately linked with the procurement of capital assets and are intended to compensate for delays impacting the creation of profit-making apparatus, rather than being part of the regular business income. The tribunal clarified that these damages are not to be adjusted against the block of assets or deducted from the cost of the assets, as they do not subsidize asset costs but rather compensate for delay. This interpretation aligns with the ruling in Alpha Lab vs. ITO by the Gujarat High Court. Hence, the tribunal concluded that liquidated damages are capital receipts and should not be reduced from the cost of fixed assets, allowing ITC Limited’s claim.
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