2014 (2) TMI 1384 - AT - Income Tax

Revision u/s 263 - TDS deduction on foreign agent export commission - AO allowed assessee s foreign agent commission payments as expenditure without deduction of any TDS - HELD THAT - Admittedly, the assessee had made payment to its overseas export agent in lieu of getting export orders and did not deduct any TDS qua the said payments. Per Revenue, the assessee was supposed to deduct TDS in question. The assessee places reliance on the circulars of the board bearing No.23 dated 23.7.1969, No.163 dated 29.5.1975 and No.786 dated 7.2.2000. In the first circular, the board had clarified that a foreign agent of Indian exporter is not liable to pay any income tax in India. This position continued till the year 2009. It was only in the year 2009 i.e after the impugned assessment year 2008-09 that the board decided to withdraw the circular on 22.10.2009. We notice that the hon'ble Delhi high court in the case of CIT vs Angelique International Ltd (supra) has held that the action of the board in issuing withdrawal of earlier circulars with effect from 22.10.2009 is only prospective and not retrospective. As a result, we also observe that since the impugned assessment year is 2008-09 i.e well before 22.10.2009, the circular issued in the year 2009 did not have any effect in the assessee s case. That being so, the Assessing Officer had rightly followed the circular in allowing the assessee s foreign agent commission payments as expenditure without deduction of any TDS. Rather, in the case of Faizan Shoes Pvt. Ltd 2014 (1) TMI 440 - ITAT CHENNAI the co-ordinate bench of the Chennai tribunal holds that even in assessment year 2009-10, the circular dated 22.10.2009 does not apply. Thus, we hold that the Assessing Officer had taken the only possible view by following the circular issued by the board which provided that in case of foreign agent commission payments the said income could not be taxed in India. In this manner, the argument of the assessee challenging the sole reason stated in the section 263 show cause notice succeeds. That leaves us with the latter reason in the impugned order that since the Assessing Officer did not carry out any investigation/ enquiry to determine nature of the commission payments and therefore, the CIT has only remitted the matter back to the Assessing Officer to re-examine the issue which causes no prejudice to the assessee. After considering this plea of the Revenue, it emanates from the case file that factually, the assertion is correct. However, in the show cause notice issued by the CIT, there is no such reason of lack of enquiry forthcoming. We make it clear that in section 263 proceedings, the jurisdiction of the CIT is confined to only those issues which form part of the show cause notice. In this manner, the order under challenge traverses beyond the show cause notice. Since we are dealing with a fiscal statute, the powers of the Revenue have to be strictly interpreted. Assessee s appeal is allowed.

Summary

Issues:
1. Validity of CIT's direction to pass a fresh order regarding foreign agent export commission.
2. Whether CIT's assumption of jurisdiction under section 263 of the Income-tax Act was justified.
3. Application of circulars by the Assessing Officer for allowing foreign agent commission payments without TDS deduction.
4. Adequacy of investigation by the Assessing Officer into the nature of commission payments.

Analysis:

Issue 1: Validity of CIT's direction for a fresh order on foreign agent export commission
The assessee argued that the Assessing Officer correctly allowed the foreign agent export commission as expenditure, citing circulars from the 'board' in 1969 and 2000. The assessee contended that the CIT erred in invoking section 263 proceedings. The CIT, however, supported the initiation of proceedings due to the lack of detailed investigation by the Assessing Officer. The CIT issued a notice under section 263, indicating that the assessment was erroneous. The CIT directed the Assessing Officer to re-examine the issue, leading to the appeal.

Issue 2: Justification of CIT's assumption of jurisdiction under section 263
The CIT initiated section 263 proceedings based on the failure of the Assessing Officer to conduct a thorough investigation during the regular assessment. The CIT noted that the Assessing Officer did not consider the withdrawal of circulars by the CBDT in 2009, leading to the conclusion that the order was prejudicial to the revenue's interest. The CIT rejected the assessee's explanation and directed the Assessing Officer to conduct further inquiries.

Issue 3: Application of circulars for foreign agent commission payments
The Assessing Officer allowed the foreign agent commission payments as expenditure without TDS deduction based on circulars issued by the 'board.' The CIT, however, found that the Assessing Officer did not investigate the nature of payments and the applicability of relevant sections of the Income Tax Act. The CIT set aside the assessment order and directed a fresh investigation to determine the nature of the expenditure.

Issue 4: Adequacy of investigation into commission payments
While the Revenue argued for a re-examination of the commission payments, the Tribunal noted that the CIT's order went beyond the grounds mentioned in the show cause notice. The Tribunal emphasized that the CIT's jurisdiction is limited to issues raised in the notice. Therefore, the Tribunal rejected the need for further investigation into the commission payments, leading to the allowance of the assessee's appeal.

In conclusion, the Tribunal allowed the assessee's appeal, emphasizing the adherence to the circulars applicable during the assessment year and limiting the CIT's jurisdiction to issues raised in the show cause notice. The judgment highlighted the importance of conducting thorough investigations and following established legal precedents in tax assessments.