2014 (4) TMI 1159 - AT - Income Tax

TDS u/s 195 - non-deduction of TDS on commission payment to non-resident - allowable business expenditure - P.E. in India - Held that - The business of the assessee is mainly of export of textile garments. The assessee has made payment to Shri Bharat Goel who is a non-resident and who does not own any permanent establishment or administrative office in India. Similarly, assessee is also not maintaining any permanent establishment in foreign countries. It is in these circumstances the assessee is making payment of commission to non-resident at specified rate. The recipient of the commission is also not a related party to the assessee. All these findings of facts have been recorded by Ld. CIT(A) and are not disputed by the Revenue as there is no material on record to suggest that these findings of Ld. CIT(A) are either incorrect or false. It is also the findings recorded by Ld. CIT(A) that similar payments were made by the assessee in earlier years to Shri Bharat Goel and have been accepted as allowable expenditure by the Revenue. This fact is clear from the assessment order for A.Y 2006-07 which is passed under the provisions of section 143(3) of the Act and copy is placed on the paper book. It is also a matter of fact that while making the disallowance the AO did not bring any material on record to suggest that the payment made by the assessee to Shri Bharat Goel was for any purpose other than business of the assessee. Thus it is difficult to uphold the findings of the A.O that the payments were not made by the assessee for business expediency. In absence of any contrary material and in view of the fact that similar payments have been accepted by the Revenue in earlier years as business expenditure, we are of the opinion that Ld. CIT(A) did not commit any error in holding that such amount was allowable as business expenditure and, therefore, could not be disallowed under section 37 of the Act. Coming to the alternative claim of the AO that on account of nondeduction of tax the amount was disallowable. Here the case of AO is mainly based on withdrawal of earlier circulars and this issue has been discussed in details in above part of this order. The aforementioned decision of Hon ble Delhi High Court in the case of CIT vs. Angelique International Ltd (2013 (10) TMI 17 - DELHI HIGH COURT) and CIT vs. Model Exims (2013 (9) TMI 742 - ALLAHABAD HIGH COURT) it has been made clear that withdrawal of earlier circular by the CBDT vide circular No.7 of 2009 dated 22/10/2009 will not operate prior to that date i.e. 22/10/2009. Both the financial years under consideration are prior to 22/10/2009. Therefore, we are of the opinion that there is no error in the order passed by Ld. CIT(A) vide which it has been held that even on the basis of Circular No.7 dated 22/10/2009 disallowance could not be made. - Decided in favour of assessee

Summary

Issues Involved:
1. Deletion of addition due to non-deduction of TDS on commission payment to a non-resident.
2. Genuineness of the commission payment in the absence of supporting evidence.
3. Violation of Rule 46A by the CIT(A) in accepting evidence without giving the AO an opportunity.
4. Proof of services rendered outside India for the commission payment.
5. Applicability of the decision in the case of Merilyn Shipping and Transports vs. Addl. CIT.
6. Request to set aside the CIT(A) order and restore the AO's order.

Issue-wise Detailed Analysis:

1. Deletion of Addition Due to Non-Deduction of TDS:
The Revenue challenged the CIT(A)'s decision to delete the addition of Rs. 1,72,25,650/- for A.Y. 2008-09 and Rs. 2,33,23,198/- for A.Y. 2009-10 on account of non-deduction of TDS on commission payments to a non-resident agent, Shri Bharat Goel. The AO had disallowed the commission payments under Section 40(a)(ia) of the Income Tax Act, 1961, citing the absence of TDS deduction. The CIT(A) held that the commission paid to Shri Bharat Goel was for services rendered outside India and thus not chargeable to tax in India, relying on Circular No. 23 dated 23/7/1969, Circular No. 163 dated 29/5/1975, and Circular No. 786 dated 7/2/2000, which were applicable during the relevant assessment years.

2. Genuineness of the Commission Payment:
The AO contended that the assessee failed to provide sufficient evidence to establish the genuineness and business expediency of the commission payment. However, the CIT(A) found that the commission payments were consistent with previous years (A.Y. 2006-07 and A.Y. 2007-08), where no disallowance was made. The CIT(A) emphasized the principle of consistency and noted that the AO did not bring any contrary evidence to disprove the genuineness of the commission payments.

3. Violation of Rule 46A:
The Revenue argued that the CIT(A) violated Rule 46A by accepting additional evidence without giving the AO an opportunity to examine it. However, during the hearing, the Revenue could not substantiate this claim, and the CIT(A)'s decision was upheld as there was no material evidence to suggest a violation of Rule 46A.

4. Proof of Services Rendered Outside India:
The CIT(A) observed that the commission payments were made for services rendered outside India, and the non-resident agent did not have any permanent establishment in India. This finding was supported by the assessee's consistent practice in previous years, and there was no evidence to suggest otherwise. The CIT(A) relied on the Supreme Court's decision in CIT vs. Toshoku Ltd., which held that commission earned by a non-resident for services rendered outside India is not taxable in India.

5. Applicability of the Decision in Merilyn Shipping and Transports vs. Addl. CIT:
The CIT(A) held that the decision in Merilyn Shipping and Transports vs. Addl. CIT was applicable as the disallowance was made under Section 40(a)(ia) of the Act. However, the Revenue argued that the AO's reference to Section 40(a)(ia) was erroneous. The CIT(A) maintained that the disallowance could not be made based on the withdrawn circulars, as the withdrawal was not retrospective.

6. Request to Set Aside the CIT(A) Order:
The Revenue's appeal to set aside the CIT(A) order and restore the AO's order was dismissed. The Tribunal upheld the CIT(A)'s findings, emphasizing the principle of consistency and the binding nature of the circulars in force during the relevant assessment years. The Tribunal also noted that the withdrawal of circulars by Circular No. 7/2009 dated 22/10/2009 was not retrospective and did not affect the assessment years in question.

Conclusion:
The Tribunal dismissed the Revenue's appeals for both assessment years, upholding the CIT(A)'s decision to delete the disallowance of commission payments. The Tribunal emphasized the importance of consistency in tax proceedings and the binding nature of circulars in force during the relevant assessment years. The Tribunal also clarified that the withdrawal of circulars by Circular No. 7/2009 was not retrospective and did not affect the assessment years under consideration.