2019 (1) TMI 1400 - AT - Income Tax

Addition u/s 36(1)(iii) - loans given to the related parties/ corporate bodies without charging any interest - proof of commercial expediency - Held that - CIT-A, has given a categorical finding that the amount of INR 3,500,000 were part of the original business advances given by the assessee to the sister concern for the purchase of refrigerated vehicle as a business advance. Even otherwise the finding of the learned CIT A, cannot be disputed by the learned departmental representative that the above order was given by the assessee out of the door interest-bearing funds. No infirmity in the order of the learned CIT A, in deleting the disallowance out of the interest expenditure on account of advances given to unrelated party. Accordingly, ground number 1 of the appeal of the revenue is dismissed. Non-deduction of TDS u/s 195 - tds on commission payment to its foreign agent for rendering sales and marketing services abroad assessee had deducted TDS on part payment but not on balance payment - Held that - Undisputedly the assessee has made commission payment to its foreign agent for rendering sales and marketing services abroad for the purposes of the products to be sold to the dairy development Board, Nepal. It is also undisputed that the foreign agents have rendered the services abroad and none of the agent has any fixed base in India. Therefore, it, it can be concluded that the amount paid to them was not taxable in India and thus there was no requirement to deduct tax at source. Therefore, it is apparent that such payment did not entail any tax liability under the income tax act, as well as the double taxation avoidance agreement between India and Nepal. Further the honourable Gujarat High Court has held that the fundamental principle of deducting the tax at source in connection with the payment only arises when the sum is chargeable to tax under the act. Therefore respectfully following the decision of NOVA TECHNOCAST PVT LTD 2018 (5) TMI 1182 - GUJARAT HIGH COURT . We confirm the finding of the learned CIT A, where the disallowance has rightly been deleted - decided in favour of assessee.

Summary

Issues:
1. Disallowance of interest on intercorporate loans without charging interest.
2. Disallowance of commission payment without TDS deduction under section 195.

Issue 1: Disallowance of interest on intercorporate loans without charging interest:
The appeal was filed by the revenue against the order of the ld CIT(A)-XV, New Delhi for the Assessment Year 2010-11. The revenue contended that the ld CIT(A) erred in deleting the addition of INR 4,20,000 made under section 36(1)(iii) of the Act on account of loans given to related parties without charging any interest. The assessee, a company engaged in milk products business, had advanced INR 3,500,000 to unrelated parties without interest. The AO disallowed INR 42,000 as interest expenditure under section 36(1)(iii). However, the CIT(A) held that the advance was for a business purpose and part of it was refunded. The Tribunal upheld the CIT(A)'s decision, stating that the advance was not from interest-bearing funds, and the disallowance was deleted.

Issue 2: Disallowance of commission payment without TDS deduction under section 195:
The second ground of appeal was related to the disallowance of INR 77,11,045 for commission paid to a foreign party without TDS deduction. The AO disallowed the amount under section 40(a)(ia) as tax should have been deducted under section 195 since the recipient was a resident of Nepal. The assessee argued that the payment was not taxable in India as the recipient had no permanent establishment in India. The CIT(A) deleted the disallowance, noting that the recipient was incorporated in Nepal and no services were rendered in India. The Tribunal upheld the CIT(A)'s decision, stating that the payment was not taxable in India, and there was no requirement to deduct TDS. The decision was supported by the Gujarat High Court ruling, confirming the deletion of the disallowance.

In conclusion, both grounds of appeal were dismissed, and the Tribunal upheld the decisions of the CIT(A) in both issues.