2014 (6) TMI 463 - AT - Income Tax

Deletion of disallowance u/s 40(a)(ia) of the Act TDS not deducted - Payment made to foreign commission agents Held that - Following Income-tax Officer, Co. Ward-II(1) Versus Faizan Shoes (P.) Ltd. 2014 (1) TMI 440 - ITAT CHENNAI sales commission paid by the assessees to non-residents are not chargeable to tax in India, therefore provisions of section 195 are not applicable - assessees paid sales commission to its nonresident agents for the services rendered by them outside India and the sales commission is not chargeable to tax in India so as to deduct TDS on payments u/s 195 of the Act thus, the order of the CIT(A) in deleting disallowance made u/s 40(a)(ia) of the Act is upheld Decided against Revenue. Restriction of disallowance to 50% on the 15% disallowance Held that - CIT(A) was rightly of the view that the ledgers, vouchers, etc. have also been produced during the appeal hearings and on a random test check on the same was largely found to be in order - the ad-hoc addition made by the AO of 15% of such expenses appears to be on the higher side thus, there was no reason to interfere with the order of the CIT(A) in restricting disallowance to 50% of 15% - Decided against Revenue. Deletion of interest u/s 234B and 234C of the Act Held that - CIT(A) rightly held that charging of interest u/s 234A, 234B, 234C & 234D are mandatory and he has directed the AO to re-compute correct interest u/s 234B & 234C of the Act while giving effect to the order Decided against Revenue.

Summary

Issues Involved:
1. Disallowance under section 40(a)(ia) for non-deduction of tax at source on payments made to foreign commission agents.
2. Disallowance of 15% of expenses on salary, wages, assortment expenses, and staff welfare.
3. Deletion of interest charged under sections 234B and 234C of the Income Tax Act.

Issue-wise Detailed Analysis:

1. Disallowance under section 40(a)(ia) for non-deduction of tax at source on payments made to foreign commission agents:
The Revenue appealed against the orders of the Commissioner of Income Tax (Appeals), which deleted the disallowance made under section 40(a)(ia) for non-deduction of tax at source on commission payments to foreign agents. The Assessing Officer had invoked section 40(a)(i) read with section 195, disallowing the deduction of commission payments as the assessee did not deduct TDS. The Commissioner of Income Tax (Appeals) held that the commission paid to non-residents for services rendered outside India was not chargeable to tax in India, and thus, TDS under section 195 was not required. This decision was supported by various judgments, including the Hon'ble Supreme Court in GE India Technology Centre P. Ltd. v. CIT (327 ITR 456) and other Tribunal decisions. The Tribunal upheld the Commissioner of Income Tax (Appeals)'s decision, emphasizing that the commission payments to non-residents were not taxable in India, thus section 195 was not applicable. Therefore, the disallowance under section 40(a)(i) was not justified.

2. Disallowance of 15% of expenses on salary, wages, assortment expenses, and staff welfare:
In the case of M/s. Farida Leather Company, the Assessing Officer disallowed 15% of expenses under "salary & wages tannery," "wet blue assortment coaly," and "staff welfare" due to insufficient evidence/vouchers. The Commissioner of Income Tax (Appeals) reduced this disallowance to 50% of the initially disallowed amount, noting that the expenses were largely supported by vouchers, though some were evidenced by self-vouchers. The Tribunal found no reason to interfere with this decision and upheld the Commissioner of Income Tax (Appeals)'s findings, thereby rejecting the Revenue's grounds of appeal on this issue.

3. Deletion of interest charged under sections 234B and 234C of the Income Tax Act:
The Revenue challenged the deletion of interest charged under sections 234B and 234C. The Commissioner of Income Tax (Appeals) had directed the Assessing Officer to recompute the correct interest under these sections while giving effect to the impugned order, acknowledging that charging interest under sections 234A, 234B, 234C, and 234D was mandatory. The Tribunal found that the Commissioner of Income Tax (Appeals) did not direct the deletion of interest but rather its recomputation. Thus, the grounds of appeal raised by the Revenue on this issue were rejected.

Conclusion:
The Tribunal dismissed both appeals by the Revenue, upholding the decisions of the Commissioner of Income Tax (Appeals) on all issues. The orders pronounced in the open court on April 10, 2014, confirmed that the commission payments to non-residents were not taxable in India, the disallowance of 15% of certain expenses was excessive and needed reduction, and the interest under sections 234B and 234C needed to be recomputed correctly.