2015 (11) TMI 1447 - AT - Income Tax

TDS u/s u/s. 195(2) - maintainability or otherwise in law of section 40(a)(i) payment on Freight - Held that - With regard to freight allowed to shipping companies, the matter, in our view, is squarely covered against the assessee by the decision in the case of Orient (Goa) (P.) Ltd. (2009 (10) TMI 575 - Bombay High Court ) wherein held that payment of demurrage charges, which assume the same nature as of freight charges, to a non-resident without deduction of tax at source, would attract section 40(a)(i) of the Act, i.e., unless certified for non-deduction u/s. 195(2). - Decided against assessee. Maintainability or otherwise in law of section 40(a)(i) payment on Commission - Held that - Manner in which the business is undertaken, putting across this scenario, would fairly submit that the same is a distinct possibility, though he was not in a position to so affirm or commit in the matter. This is precisely why we stated both the assessee and the Revenue to be responsible for a complete factual indetermination of the matter. Merely stating that no services are rendered in India is under the circumstances of little consequence. It is, again, upon examining and ascertaining the nature of the services that the AAR in Wallace Pharmaceutical (P.) Ltd. (2005 (9) TMI 26 - AUTHORITY FOR ADVANCE RULINGS ) held that the services provided by Penser Group, a tax resident of USA, were not limited to USA and, further, utilized in India and, accordingly, payments thereto warranted deduction of tax at source. The AAR has, in our view, sought to correctly apply the law in the matter the issue being principally factual. It is again on account of this that the Hon ble Court in Elkem Technology (2001 (4) TMI 65 - ANDHRA PRADESH High Court ), upon examining the nature and scope of the activities, held that no question of law, much less a substantial question of law, arises. In the case of Toshoku Ltd. (1980 (8) TMI 2 - SUPREME Court ), the product was tobacco , essentially a commodity (or a generic product), and which could be sold as such, adhering to the specifications as may be stipulated by law. Under the circumstances, in view of the foregoing, we only consider it fit and proper, even as observed during hearing and to the agreements by the parties, that the matter, setting aside the impugned order, is restored for proper factual as well as legal determination back to the file of the Assessing Officer (A.O.), who shall decide the same after allowing the assessee reasonable opportunity to present its case before him. Decided in favour of assessee for statistical purposes.

Summary

Issues Involved:
1. Maintainability of section 40(a)(i) of the Income Tax Act on freight and commission payments.
2. Applicability of section 40(a)(i) on unpaid expenditure at year-end.
3. Examination of services rendered by non-resident agents and their tax implications in India.

Detailed Analysis:

1. Maintainability of section 40(a)(i) of the Income Tax Act on Freight and Commission Payments:

The primary issue in these appeals is the applicability of section 40(a)(i) of the Income Tax Act on freight and commission payments made by the assessee without deducting tax at source or obtaining a certificate for non-deduction under section 195(2). The freight payments were made to non-resident shipping companies through their agents in India, and the commission payments were made to non-resident agents for promoting the assessee's products abroad. The assessee contended that no services were rendered in India, and thus, no income accrued or arose in India. This argument was based on the precedent set by the Hon'ble Apex Court in G. E. India Technology Centre (P.) Ltd. vs. CIT and CIT vs. Toshoku Ltd.

However, the Revenue argued that freight charges are subject to tax under section 172 of the Act, as clarified in CIT vs. Orient (Goa)(P.) Ltd., and that commission payments should be considered as fees for technical services, as held in Wallace Pharmaceutical (P.) Ltd., In RE. The Tribunal found that the matter of freight charges is covered against the assessee by the decision in Orient (Goa) (P.) Ltd., where the Hon'ble jurisdictional High Court held that payment of demurrage charges to non-residents without deduction of tax at source attracts section 40(a)(i).

2. Applicability of section 40(a)(i) on Unpaid Expenditure at Year-End:

The assessee also raised an alternate plea that section 40(a)(i) should apply only to the unpaid expenditure as at the year-end, relying on the decision in Arcadia Share & Stock Brokers (P.) Ltd. vs. Dy. CIT. The Tribunal noted that this argument was accepted by the CIT(A) for A.Y. 2009-10, leading to the Revenue's appeal. However, the Tribunal observed that the decision in Merilyn Shipping & Transports v. Addl. CIT, which supported the assessee's contention, no longer holds the field following decisions by the Hon'ble Courts in CIT vs. Crescent Export Syndicate and CIT vs. Sikandarkhan N. Tunvar. Consequently, the assessee's argument on this ground was rejected, and the Revenue's appeal was allowed.

3. Examination of Services Rendered by Non-Resident Agents and Their Tax Implications in India:

The Tribunal emphasized the need for a factual determination of whether the non-resident agents had a business connection in India and whether any part of the commission income could be deemed to accrue or arise in India. The Tribunal noted that there was no examination of the activities carried out by the non-resident agents, which the Revenue claimed involved managerial and consultancy services. The Tribunal highlighted that the law could not be applied without examining and determining the facts, and the matter was remitted back to the Assessing Officer for proper factual and legal determination. The Tribunal directed the AO to decide the issue after allowing the assessee a reasonable opportunity to present its case.

Conclusion:

The Tribunal concluded that the assessee's appeals are partly allowed for statistical purposes, and the Revenue's appeal is partly allowed. The order was pronounced in the open court on November 20, 2015.