2020 (2) TMI 417 - AT - Income Tax

Disallowance of loss on rate settlement (Contracts) - CIT(A) deleted the addition made by AO by accepting additional evidence without giving opportunity to the AO, which is in contravention of provisions of Rule 46A of IT Rule, 1962 - HELD THAT - Issue is identical to that of A.Y. 2010-11 2019 (3) TMI 1717 - ITAT DELHI . In the present assessment year as well the additional evidence was before the CIT(A) and no remand report was called by the CIT(A). Thus, the CIT(A) has not followed Rule 46A of the Income Tax Rule, 1962 and has not called for remand report from the Assessing Officer to prove the revenue s case. Therefore, it will be appropriate to restore this issue to the file of the Assessing Officer and assessee is directed to furnish all the necessary evidences before the Assessing Officer which the Assessing Officer will verify and decide the issue afresh. Needless to say the assessee be given opportunity of hearing by following principles of natural justice. Ground No.1 and 2 are partly allowed for statistical purposes. TDS u/s 195 - Whether non-residents have a PE and Back Office in India - HELD THAT - AO has not brought on record to show that such nonresidents have a PE or not, in India. In fact, the services of the foreign agents are rendered by the assessee not to use in India but are used for sales outside India. Thus, the commission paid to the foreign agents for rendering services outside India does not come under the purview of Section 195 of the Income Tax Act, 1961. Thus, the CIT(A) was right in deleting the addition made u/s 40(a)(ia)

Summary

Issues:
1. Disallowance of loss on rate settlement (Contracts) by accepting additional evidence without giving opportunity to the AO.
2. Dispute arising due to failure to fulfill contractual terms resulting in an arbitration award.
3. Disallowance under section 40(a)(ia) for violation of section 195 of the Act.

Issue 1: Disallowance of loss on rate settlement (Contracts) by accepting additional evidence without giving opportunity to the AO:
The Revenue appealed against the CIT(A)'s order deleting the addition of ?2,97,70,427 made by the AO. The ITAT found that the CIT(A) did not follow Rule 46A of the IT Rule, 1962, as no remand report was called for. The ITAT directed the issue to be restored to the AO for verification based on necessary evidence to be furnished by the assessee. The ITAT emphasized providing the assessee with a hearing opportunity following principles of natural justice. Grounds 1 and 2 were partly allowed for statistical purposes.

Issue 2: Dispute arising due to failure to fulfill contractual terms resulting in an arbitration award:
The Revenue contended that the assessee failed to establish whether any dispute arose due to contractual terms not being fulfilled, leading to an arbitration award. The ITAT noted that the issue was previously decided and remanded back to the AO for the AY 2010-11. The ITAT did not find any evidence on record to support the Revenue's claim. Therefore, the ITAT upheld the CIT(A)'s decision in deleting the addition of ?56,05,298 made by the AO under section 40(a)(ia) of the Act.

Issue 3: Disallowance under section 40(a)(ia) for violation of section 195 of the Act:
The Revenue argued that the commission paid to foreign agents by the assessee was covered under section 195 dealing with TDS for payments to non-residents. However, the ITAT found that the services of the foreign agents were used for sales outside India, not within India. As the Assessing Officer did not establish whether the non-residents had a Permanent Establishment in India, the ITAT upheld the CIT(A)'s decision in deleting the addition of ?56,05,298 under section 40(a)(ia) of the Act. Ground 3 was dismissed, and the appeal of the Revenue was partly allowed for statistical purposes.

In conclusion, the ITAT partially allowed the Revenue's appeal for statistical purposes, directing the restoration of one issue to the AO for further verification while upholding the CIT(A)'s decision on the other issues based on the lack of evidence and compliance with relevant provisions of the Income Tax Act.