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2018 (12) TMI 182 - AT - Income TaxTDS u/s 195 - payments made to non-residents - tds liability - PE in India - income accrued in India - Held that - It is noticed that the assessee company has been regularly exporting its products with the help of overseas dealers. It is undisputed fact that the commission were paid to such non-resident agents in respect of all the services rendered by them related to the export made by the assessee outside India. There was no permanent establishment / office of these agents or any infrastructure situated in India. These agents have carried out all their activities outside India and commission was paid for the activities carried out side India. Section 195 is applicable only if the payments made to non-residents are chargeable to tax. If the payment is not chargeable to tax under the act, the payer would not be liable to deduct tax at source under the act. Section 4 of the act provides that income tax shall be charged for a particular year in accordance with the provision of the act. Section 5 of the act deals with the scope of the total income of the non-residents and takes within the scope two types of income, the income which is received or deemed to be received in India and second one the income accrues or arises or deemed to accrues or arise in India. In the case of the assessee we are dealing with the second part of the scope of income pertaining to income deemed to accrue or arise in India. Section 9 of the act provides for the income deemed to accrue or arise in India. It is noticed that no income is deemed to accrue or arise in India by applying the provisions of section 9 (l)(i) as the assessing officer has failed to establish accruing or arising of any income from business connection in India or through or from any property or through the transfer of a capital asset situated in India. There was no material which can demonstrate that any of the agents had any Permanent Establishment in India as all the agents had their establishments situated in the overseas places. CIT(A) it is clear that the Provisions of section 9(1)(i) cannot be applied, therefore we consider that the CIT(A) has rightly deleted the impugned disallowance of commission payment made to the foreign agents. - Decided in favour of assessee. Addition u/s 14A - Held that - After perusal of the above facts and material on record it is noticed that during the year under consideration the assessee company has earned exempt income to the amount of Rs. ₹ 5,25,837/- only. JIVRAJ TEA LIMITED VERSUS DCIT, CIRCLE-1, SURAT 2014 (9) TMI 131 - ITAT AHMEDABAD on similar issues have restricted the disallowance u/s. 14A to the extent of exempt income earned by the assessee, therefore, we restrict disallowance u/s. 14A in the case of the assessee to the extent of exempt income earned of ₹ 5,25,837/- . On the similar reasons disallowance u/s. 14A in respect of A.Y. 2011-12 is also restricted to the extent of exempt income of ₹ 15,47,552/-Accordingly, the appeal of the assessee is partly allowed.
Issues Involved:
1. Addition on account of unrealized sales. 2. Deletion of addition on account of late delivery charges. 3. Disallowance under section 40(a)(ia) for non-deduction of tax at source on commission payments. 4. Disallowance under section 14A for expenditure incurred to earn exempt income. Issue-Wise Detailed Analysis: 1. Addition on Account of Unrealized Sales: The Assessing Officer (AO) added ?47,22,523/- to the assessee's income for unrealized sales, arguing that the amount had accrued to the assessee in the financial year 2009-10. The assessee contended that this portion of the sales was retained by customers as security and had not accrued during the year under consideration. The CIT(A) deleted the addition, referencing previous ITAT and High Court rulings that supported the assessee's consistent method of accounting for retention money. The ITAT upheld the CIT(A)'s decision, noting that similar additions had been dismissed in past assessments and the method of accounting had been consistently accepted by the department. 2. Deletion of Addition on Account of Late Delivery Charges: The AO disallowed ?31,22,445/- claimed as late delivery charges, considering it non-business expenditure under section 37 of the Act. The assessee explained that these charges were deducted by government organizations as per contractual terms. The CIT(A) allowed the appeal, stating that the expenses were incurred under business contracts. The ITAT upheld the CIT(A)'s decision, citing that such expenditures were directly related to the business activity and were not penalties for legal infractions but contractual obligations. 3. Disallowance under Section 40(a)(ia) for Non-Deduction of Tax at Source on Commission Payments: The AO disallowed ?1,89,56,798/- for commission payments to non-residents without TDS, arguing that the income was chargeable to tax in India. The assessee argued that the services were rendered outside India, and no income accrued or arose in India. The CIT(A) deleted the disallowance, referencing Supreme Court and High Court rulings that commission earned by non-residents for services rendered outside India is not taxable in India. The ITAT upheld the CIT(A)'s decision, noting that the services were rendered entirely outside India, and there was no business connection or permanent establishment in India. 4. Disallowance under Section 14A for Expenditure Incurred to Earn Exempt Income: The AO made a disallowance of ?18,03,630/- under section 14A read with Rule 8D, arguing that the assessee failed to prove that investments were made from non-interest-bearing funds. The CIT(A) partly allowed the appeal, directing the AO to exclude investments in the German subsidiary from the disallowance calculation, as dividends from the subsidiary would be taxable in India. The ITAT further restricted the disallowance to the extent of exempt income earned by the assessee, aligning with precedents where disallowances under section 14A were limited to the actual exempt income. Conclusion: The ITAT dismissed the appeals filed by the revenue and partly allowed the appeals filed by the assessee. The decisions were based on consistent judicial precedents, factual analysis, and adherence to the principles of accounting and tax law. The judgments emphasized the importance of consistency in accounting methods, the nature of business expenditures, and the applicability of tax provisions to non-resident transactions.
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