2021 (6) TMI 606 - AT - Income Tax

TDS u/s 195 - Disallowance u/s 40(a)(i) in respect to payment made to Trans Coral Shipping, FZE ,Sharjah (UAE) arbitrarily - HELD THAT - The fact that the commission receipt earned by the assessee company is paid to the agent and the same has been determined as 1/3rd of commission receipt plus incentive where the total receipts exceeds a pre-determined threshold cannot be sole determinative of a joint venture and is mere a mode of determination of fees as agreed between the two companies. The nature of such payment is therefore clearly that of sales promotion expenditure for services rendered outside of India where the corresponding revenues have been offered to tax by the assessee company. CIT(A) has also treated the same as sales promotion expenses and has recorded a similar finding and therefore, the nature of payment is not in dispute. Such sales promotion expenditure paid and credited to the account of the non-resident entity for the services rendered outside India will not fall in the category of the income received or deemed to be received in India as well as accrues or arises or deemed to accrue or arise in India. Further, the provisions of section 9(1)(vii) are not attracted in the instant case as the assessee company has utilized the services of the non-resident service provider outside of India for the purposes of earning commission income from its customers/shipping companies outside of India. In other words, where the source of assessee s income for which the services are utilized is outside of India and the services are also rendered outside of India, the deeming provisions of section 9(1)(vii) are not attracted. Thus, the said amount paid to non-resident entity does not fall in the scope of total income of non-resident entity and consequently it is not chargeable to tax in India under the provisions of the Act. Even otherwise, the said income in the hands of non-resident has to be considered in the light of the provisions of DTAA between India and the Country of the nonresident, i.e UAE. In the absence of Permanent Establishment of the nonresident in India during the financial year relevant to impugned assessment year and any income attributable to such Permanent Establishment, such business income is not chargeable to tax in India. When the amount paid by the assessee is not chargeable to tax in India then the assessee is not liable to deduct TDS u/s 195 and consequently the provisions of Section 40(a)(i) of the Act cannot be invoked for making the disallowance. Disallowance so made by the AO U/s 40(a)(i) of the Act is hereby deleted and ground of appeal is allowed. Disallowance of expenses debited to profit loss account, i.e. vehicle, diesel Petrol expenses, entertainment expenses, telephone mobile expenses and travelling expenses - HELD THAT - We find that the expenses have been disallowed for the reason that personal use of vehicles and incurrence of other expenditure for personal purposes of the directors of the company cannot be denied. The assessee being a corporate entity, there cannot be any personal expenditure and secondly, where the directors of the company are alleged to have benefitted from use of vehicle and incurrence of other expenditure, the same can be brought to tax in their individual hands by way of perquisites being provided by the company. However, as far as the assessee is concerned, where the expenses are incurred for the purposes of the business, the same cannot be disallowed. In the result, the disallowance so made is directed to be deleted and the ground of appeal is allowed.

Summary

Issues Involved:
1. Disallowance of ?28,40,000 under Section 40(a)(i) of the Income Tax Act due to non-deduction of tax at source under Section 195.
2. Lump sum disallowance of ?1,60,000 out of various expenses debited to the profit and loss account.

Issue-Wise Detailed Analysis:

1. Disallowance of ?28,40,000 under Section 40(a)(i):
The main issue pertains to the disallowance of ?28,40,000 paid to Trans Coral Shipping, FZE, Sharjah (UAE) as sales promotion expenses, which was disallowed by the Assessing Officer (AO) for non-deduction of tax at source under Section 195. The AO argued that the payment was liable for TDS as it was deemed to accrue or arise in India under Section 9(1)(vii)(b) of the Income Tax Act. The AO also cited CBDT's Circular No. 7/2009.

The assessee contended that the payment was for procuring business outside India, and the recipient company’s income was not chargeable to tax in India. The CIT(A) upheld the AO’s decision, relying on the explanation to Section 9(2) inserted by the Finance Act 2010, which deems the income of a non-resident to accrue or arise in India.

The Tribunal examined the agency agreement and found that the services were rendered outside India for promoting the assessee’s business in UAE. It was concluded that the payment was for sales promotion and not for technical services, thus not falling under the purview of Section 9(1)(vii). The Tribunal also noted that the recipient had no permanent establishment in India, and the income was not chargeable to tax under the provisions of the Act or the DTAA between India and UAE. Therefore, the assessee was not liable to deduct TDS under Section 195, and the disallowance under Section 40(a)(i) was deleted.

2. Lump Sum Disallowance of ?1,60,000:
The second issue involved the disallowance of ?1,60,000 out of various expenses such as vehicle, diesel & petrol, entertainment, telephone & mobile, and traveling expenses. The AO made this disallowance on the presumption of personal use by the directors, which was confirmed by the CIT(A).

The assessee argued that being a private limited company, personal use disallowance is not applicable, and all expenses were incurred wholly and exclusively for business purposes. The Tribunal agreed with the assessee, stating that as a corporate entity, there cannot be any personal expenditure. Any benefit to the directors should be taxed as perquisites in their individual hands, not disallowed in the company’s accounts. Consequently, the disallowance was deleted.

Conclusion:
The Tribunal allowed the appeal of the assessee, deleting both the disallowance of ?28,40,000 under Section 40(a)(i) for non-deduction of TDS and the lump sum disallowance of ?1,60,000 out of various expenses. The judgment emphasized the importance of the nature of payments and the applicability of tax provisions based on the actual business operations and agreements.