2013 (9) TMI 41 - AT - Income Tax

Disallowance u/s 40(a)(i) - withholding tax - taxability of commission income in India - Held that - In the case of foreign agents who procure orders for exports to Indian Assessees, services are rendered by the agents outside India and the remuneration for such services will constitute business profits of the foreign agents. They are not rendering technical services for procuring orders and hence remuneration for procuring orders cannot be considered as fees for technical services. As the agent did not have any permanent establishment in India no part of the commission payable for procuring export orders is taxable in India - Following decision of CIT Vs EON Technology 2011 (11) TMI 20 - DELHI HIGH COURT - Decided against Revenue. Weighted deduction u/s 35(2AB) - expenditure on research and development facility (R&D) - AO disallowed the claim u/s 35(2AB) made by the assessee on the ground that the requisite certificate from the prescribed authority had not been filed - Held that - In view of the ratios laid down in CIT Vs. Sandan Vikas (India) ltd., 2011 (2) TMI 66 - DELHI HIGH COURT and CIT Vs. Claris Lifesciences Ltd., 2008 (8) TMI 579 - Gujarat High Court and in the light of certificate issued by DSIR, Government of India dated 16.06.2009, we set aside the issue to the file of the AO to grant weighted deduction u/s 35(2AB). The balance expenditure if any not approved by the DSIR will have to be considered for deduction under section 35(1) or under normal provisions of the Act. The expenditure has been incurred by the R & D facility of the assessee approved by the Government of India. Merely because part of the expenditure incurred by the approved R & D facilities is not considered for weighted deduction under Section 35(2AB) would not render expenditure is not towards R & D or not for the purposes of the business. Allowability of such expenditure u/s 35(1) or under other appropriate provisions of the Act will have to be considered - Decided partly in favour of Revenue.

Summary

Issues Involved:
1. Allowance of commission paid to foreign agents without deduction of tax at source.
2. Deduction under Section 35(2AB) for expenditure on scientific research without requisite approval.
3. Deduction under Section 35(1)(iv) for capital expenditure on scientific research.

Detailed Analysis:

1. Allowance of Commission Paid to Foreign Agents Without Deduction of Tax at Source:

The first issue pertains to the allowance of Rs. 40,48,573/- paid as commission to various foreign agents without deduction of tax at source. The CIT(A) allowed the claim based on Circular No. 786 dated 07.02.2000 issued by the CBDT, which states that commission paid to foreign agents for procuring orders does not require deduction of tax at source under Section 195, nor can the commission amount be disallowed under Section 40(a)(i). The CIT(A) also referenced previous judicial pronouncements, including ITAT Hyderabad's decisions in Dr. Reddy's Laboratories Ltd. and ACIT Circle-2(3) Vs. M/s Premier Explosives Ltd., to support the claim. The Appellate Tribunal upheld the CIT(A)'s order, noting that the services rendered by the foreign agents outside India constitute business profits and are not taxable in India as the agents do not have a permanent establishment in India. The Tribunal also referenced the Delhi High Court's decision in CIT Vs. EON Technology, which held that payment of sales commission to non-residents cannot be disallowed under Section 40(a)(i).

2. Deduction Under Section 35(2AB) for Expenditure on Scientific Research Without Requisite Approval:

The second issue involves the disallowance of the weighted deduction claimed under Section 35(2AB) due to the lack of requisite approval from the specified authority. The assessee contended that the disallowance resulted in double addition since the expenditure was already added back to the computation of total income. The CIT(A) allowed the deduction under Section 35(1) for the expenditure on scientific research, citing the assessee's R&D center's recognition by DSIR and referencing judicial pronouncements such as JCIT Vs. ITC Ltd. and CIT Vs. Yamuna Digital Electronics Pvt. Ltd. The Tribunal, referencing the Delhi High Court's decision in CIT Vs. Sandan Vikas (India) Ltd. and the Gujarat High Court's decision in CIT Vs. Claris Lifesciences Ltd., set aside the issue to the AO to grant weighted deduction under Section 35(2AB) and consider any balance expenditure for deduction under Section 35(1) or other appropriate provisions of the Act.

3. Deduction Under Section 35(1)(iv) for Capital Expenditure on Scientific Research:

The third issue pertains to the disallowance of deduction under Section 35(1)(iv) for capital expenditure on scientific research. The Assessing Officer disallowed the claim, stating that the assessee failed to substantiate that it had carried out R&D activities. The CIT(A) allowed the deduction, noting that the assessee's R&D center was recognized by DSIR and referencing judicial pronouncements such as JCIT Vs. ITC Ltd. and CIT Vs. Tube Investments of India Ltd. The Tribunal, following the decisions in CIT Vs. Sandan Vikas (India) Ltd., CIT Vs. Claris Lifesciences Ltd., and JCIT Vs. ITC Ltd., set aside the issue to the AO to grant weighted deduction under Section 35(2AB) and consider any balance expenditure for deduction under Section 35(1)(iv) or other appropriate provisions of the Act.

Conclusion:

The Tribunal upheld the CIT(A)'s decisions on the allowance of commission paid to foreign agents without deduction of tax at source and directed the AO to grant weighted deduction under Section 35(2AB) and consider any balance expenditure for deduction under Section 35(1) or other appropriate provisions of the Act. The appeals were partly allowed for statistical purposes, and the cross objections were treated as allowed for statistical purposes.