2014 (5) TMI 1072 - AT - Income Tax

Disallowance u/s.40(a)(i) - non deduction of tax at source on the commission payments made to the nonresident u/s.195(2) - CIT(A) deleted the disallowance - Held that - The assessee has paid commission to foreign agent M/s.Met-Tech International Pte, Singapore for procuring export orders for the assessee from companies located in Japan, Indonesia and UK. The Commissioner of Income Tax (Appeals) has given categoric finding that the foreign agent had not extended any technical services but had only procured export orders. The commission was paid by the assessee on various dates through banking channels for the services rendered outside India. The Commission has been remitted in foreign currency outside India. The findings of the Commissioner of Income Tax (Appeals) on the issue remain unrebutted. The Hon ble Supreme Court in the case of GE India Technology Vs. CIT reported as 2010 (9) TMI 7 - SUPREME COURT OF INDIA has held that, if the income chargeable to tax is not assessable in India, there is no question of deduction of tax at source. No error in the findings of the Commissioner of Income Tax (Appeals) on the issue. - Decided in favour of assessee. Disallowance u/s.14A - CIT(A) deleted the disallowance - Held that - The provision of Rule 8D cannot be applied in the assessment year under appeal i.e. 2007-08. However, reasonable disallowance has to be made for earning tax free income. The assessee has made additional investment of F1.33 Crores during the relevant financial year. Even if the investment is made from own funds, the assessee must have been spending some amount in managing its investment portfolio which is to the tune of F2.62 Crores. In our considered view, 5% of the dividend income earned is just and reasonable for making disallowance u/s. 14A. - Decided partly in favour of revenue.

Summary

Issues:
1. Disallowance under section 40(a)(i) for non-deduction of tax at source on commission payments made to a nonresident under section 195(2) of the Income Tax Act, 1961.
2. Disallowance under section 14A of the Income Tax Act for not allocating any expenditure on earning dividend income.

Analysis:

Issue 1: Disallowance under section 40(a)(i)
The appeal was filed by the Revenue against the deletion of disallowance under section 40(a)(i) by the Commissioner of Income Tax (Appeals). The Revenue contended that tax should have been deducted at source on commission payments made to a nonresident. The Appellate Tribunal noted that the foreign agent had procured export orders for the assessee without providing technical services. The payments were made through banking channels in foreign currency outside India. Citing the case of GE India Technology Vs. CIT, the Tribunal held that if the income is not assessable in India, there is no requirement to deduct tax at source. The Tribunal found no error in the Commissioner's decision and upheld the deletion of disallowance under section 40(a)(i).

Issue 2: Disallowance under section 14A
The second ground of appeal by the Revenue was against the deletion of disallowance under section 14A. The assessee had earned dividend income, and the Assessing Officer applied Rule 8D for disallowance. However, the Commissioner of Income Tax (Appeals) deleted the entire disallowance citing the applicability of Rule 8D from a subsequent assessment year. The Tribunal referred to the case of Godrej and Boyce Manufacturing Co. Ltd vs. DCIT, which stated that Rule 8D is applicable from a later assessment year. The Tribunal noted the additional investments made by the assessee and determined a reasonable disallowance of 5% of the dividend income under section 14A. Consequently, the Tribunal partly allowed the appeal of the Revenue.

In conclusion, the Appellate Tribunal upheld the Commissioner's decision on both issues, ruling in favor of the assessee regarding the disallowance under section 40(a)(i) and allowing a partial disallowance under section 14A. The judgment was pronounced on May 30, 2014, in Chennai.