2014 (4) TMI 1092 - AT - Income Tax

Disallowance u/s 40(a)(ia) - disallowance of commission paid of foreign agent and late payment of interest to the same agent - Held that - When the assessee s status of non-resident was not in dispute and that the assessee had given the copy of the agreement, details of the services rendered, correspondence for services availed alongwith supporting evidence, and moreover at that relevant time when the TDS was required to be deducted, the said CBDT circular no. 786 F No. 500/108/98-FTD dated 07.02.2000 Withdrawn by Circular No. 7/2009 F. No. 500/135/2007-FTD-I was in operation, we hereby hold that the invocation of the provisions of section 40(a)(ia) read with section 195(2) was incorrect. The findings of the authorities below are hereby reversed and this ground of appeal of assessee is allowed. - Decided in favour of assessee

Summary

Issues Involved:
1. Disallowance of commission paid to foreign agent and late payment interest under section 40(a)(ia) of the Income Tax Act.
2. Disallowance of various expenditures under section 40(a)(ia) by the Assessing Officer.

Analysis:

Issue 1: Disallowance of Commission and Interest Payments
The appeal arose from the order of the CIT(A)-XVI, Ahmedabad dated 23.10.2010, regarding the disallowance of commission paid to a foreign agent and late payment interest under section 40(a)(ia) of the Act. The Assessing Officer disallowed the commission payment of &8377; 8,13,456 and interest payment of &8377; 11,559 for non-deduction of tax at source. The assessee argued that Circular No. 786 exempted them from TDS on payments to foreign agents. The CIT(A) upheld the disallowance, stating that the assessee should have applied under section 195(2) if exempt from TDS. The ITAT reversed the decision, citing the withdrawn circular, court decisions, and the assessee's compliance with the circular when it was in force. The ITAT held that the invocation of section 40(a)(ia) was incorrect, reversing the lower authorities' findings.

Issue 2: Disallowance of Various Expenditures
The Assessing Officer disallowed &8377; 58,200 for freight and shipment charges, &8377; 38,000 for professional fees, and &8377; 7,86,144 for stitching and packaging charges under section 40(a)(ia). The assessee contended that TDS was deducted for stitching charges but not for other expenses due to oversight. However, the CIT(A) did not adjudicate on this ground. The ITAT remanded this issue back to the CIT(A) for a fresh decision, emphasizing the need for natural justice and providing both parties with a fair hearing. As this issue was sent back for reconsideration, it was treated as allowed for statistical purposes.

In conclusion, the ITAT partially allowed the assessee's appeal, setting aside the disallowances made by the Assessing Officer under section 40(a)(ia) for commission, interest, and various expenditures. The judgment highlighted the importance of adhering to tax deduction provisions, circulars, and principles of natural justice in tax matters.