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2012 (12) TMI 691 - AT - Income TaxTDS on commission paid to foreign agents - disallowance u/s 40(a)(i) - commission payments were deemed to have been received in India only because the telegraphic transfer of the remittances towards commission was made from a bank in India. - held that - The provisions contained u/s 195 were not meant that the moment there is a remittance, the obligation to deduct TDS automatically arise. Considering the fact that the AO has not brought any material on record to show that the foreign agents have rendered any part of the services in India or have a permanent establishment and business connection in India, it cannot be said that any part of the commission payment made to them accrued or arisen in India requiring deduction of tax u/s 195(1) of the Act. - Deduction allowed - Decided in favor of assessee. Deduction u/s 80HHC - setting off of interest receipt against interest payment having nexus - held that - 90% of the net interest and not the gross interest which has been included in the profits of the business of the assessee as computed under the head profits and gains of business or profession is to be deducted under clause (i) of Explanation (baa) to section 80HHC for determining the profits of business. - Decision of CIT(A) sustained - Decided in favor of assessee.
Issues Involved:
1. Disallowance under section 40(a)(i) on commission paid to foreign agents without TDS. 2. Set-off of interest receipts against interest payments for deduction under section 80HHC. 3. Computation of interest under sections 234B and 234C after allowing MAT credit. 4. Disallowance of foreign commission under section 40(a)(i) due to non-deduction of tax. Detailed Analysis: 1. Disallowance under section 40(a)(i) on commission paid to foreign agents without TDS: The department contended that the CIT (A) erred in holding that no disallowance under section 40(a)(i) is warranted on commission paid to foreign agents, despite no TDS being made. The assessee argued that the payments were made to agents operating outside India, and no part of the income arose in India, thus not requiring TDS. The AO had disallowed the commission payment, deeming it received in India due to telegraphic transfers from Indian banks. The CIT (A) relied on the ITAT Hyderabad decision in Dr. Reddy Laboratories Ltd. v. Jt. CIT, which stated that commission payments to foreign agents operating outside India are not liable to tax in India. The ITAT upheld the CIT (A)'s decision, noting that the AO had no evidence of services rendered in India or a permanent establishment in India by the foreign agents. The ITAT dismissed the department's appeal on this ground. 2. Set-off of interest receipts against interest payments for deduction under section 80HHC: The AO had not allowed the set-off of gross interest income by 90% from the profit of the business for section 80HHC deduction. The CIT (A) directed the AO to verify the direct nexus between interest receipts and payments before excluding 90% thereof. The ITAT upheld the CIT (A)'s decision, referencing the Supreme Court's ruling in ACG Associated Capsules (P.) Ltd. v. CIT, which stated that only 90% of net interest is to be deducted under clause (i) of Explanation (baa) to section 80HHC. The ITAT dismissed the department's grounds on this issue. 3. Computation of interest under sections 234B and 234C after allowing MAT credit: The AO computed interest under sections 234B and 234C without allowing MAT credit. The CIT (A) directed the AO to recompute interest after allowing MAT credit, following ITAT decisions in Chemplast Sanmar Ltd. and others. The ITAT referenced the Supreme Court's decision in CIT v. Tulsyan Nec Ltd., which mandated that interest under sections 234B and 234C be computed after giving MAT credit. The ITAT upheld the CIT (A)'s order and dismissed the department's grounds on this issue. 4. Disallowance of foreign commission under section 40(a)(i) due to non-deduction of tax: The AO disallowed commission paid to foreign agents under section 40(a)(i), citing telegraphic transfers from Indian banks as income arising in India. The CIT (A) upheld the disallowance, referencing the Finance Act 2010's retrospective amendment to section 9(2). The ITAT disagreed, noting that the amendment could not be anticipated by the assessee during the financial year 2005-06. The ITAT also found no evidence of technical services rendered by foreign agents. Consequently, the ITAT directed the deletion of the disallowance and allowed the assessee's appeal. Conclusion: The ITAT dismissed the department's appeals on all grounds and allowed the assessee's appeal regarding the disallowance of foreign commission. The judgments emphasized the necessity of direct nexus for interest set-off, the retrospective application of amendments, and the requirement of evidence for services rendered in India.
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