2012 (2) TMI 654 - AT - Income Tax

Summary

Issues Involved:
1. Assessment of agency commission paid to M/s Mozambique Holdings Ltd.
2. Disallowance of Rs. 1,63,066 on the ground of diversion of interest-bearing funds for non-business purposes.

Summary:

1. Assessment of Agency Commission Paid to M/s Mozambique Holdings Ltd:
The first issue pertains to the assessment of agency commission paid to M/s Mozambique Holdings Ltd. The assessee filed a return disclosing a total income of Rs. 62,46,320, but the assessing officer determined the total income at Rs. 4,90,77,670. The assessee maintained books on a mercantile system and entered into an agreement with M/s Mozambique Holdings Ltd for marketing support to win a contract for constructing 800 borewells. The commission was paid in foreign currency outside India, and the foreign company had no permanent establishment in India. The assessing officer disallowed the claim on the ground that the commission was only a provision and not paid. The Commissioner of Income-tax(A) confirmed the disallowance on the ground that tax was not deducted u/s 195 of the Act. The Tribunal found that since the assessee followed the mercantile system, the liability for agency commission should be allowed as a deduction. The Tribunal also noted that the payment was for marketing support, not consultancy services, and since the foreign company had no permanent establishment in India, the income was not taxable in India. Therefore, the assessee was not required to deduct tax at the time of payment. The Tribunal relied on the judgment of the Apex Court in G.E. Technology Centre Pvt Ltd vs Commissioner of Income-tax (2010) 327 ITR 457 (SC) and the Delhi High Court's decision in EON Technology Services (2012) 246 CTR (Del) 40. Consequently, the addition of Rs. 4,26,26,195 was deleted.

2. Disallowance of Rs. 1,63,066 on the Ground of Diversion of Interest-Bearing Funds for Non-Business Purposes:
The second issue involves the disallowance of Rs. 1,63,066 on the ground that the assessee diverted interest-bearing funds for non-business purposes. The assessee claimed it had sufficient funds in the form of share capital, reserves, surplus, and interest-free advances from another director. The assessee argued that no amount was advanced from the loan borrowed and that it had sufficient own funds in the bank account. The Tribunal noted that the lower authorities had not examined the availability of interest-free funds in light of the Supreme Court's judgment in Munjal Sales Corporation 298 ITR 298 (SC). Therefore, the Tribunal set aside the order of the lower authority and remitted the issue back to the assessing officer to reexamine the matter in light of the Supreme Court's judgment and decide the issue in accordance with the law after giving an opportunity of hearing to the assessee.

Conclusion:
The appeal of the assessee was allowed for statistical purposes, and the order was pronounced in the open court on February 29, 2012.