2015 (12) TMI 1078 - HC - Income Tax

Commission payments made to nonresident sales agents - disallowance u/s 40(a)(i) - Held that - There was no occasion to deduct tax at source in respect of the payment made to the nonresident agent. The income of nonresident commission agent cannot be considered as income arising or accruing in India. Therefore, the provisions of Section 40(a)(i) would have no application for the two Assessment Years under consideration. Not only the entire issue stands concluded in favour of the Respondent-Assessee in the present facts by the CBDT Circular Nos. 23 of 2969 and 786 of 2000 which were in force during the subject Assessment Years but also by the decision of the Apex Court in Toshoku Ltd. (1980 (8) TMI 2 - SUPREME Court ) in favour of the Respondent-Assessee. - Decided against revenue Disallowance of interest - availability of sufficient free funds - ITAT deleted the addition - Held that - It is undisputed that the Respondent-Assessee has interest free funds aggregating to ₹ 16.09 Crore. The advances and interest made to group companies by the Respondent-Assessee is to the tune of ₹ 26.55 lakhs. The amounts borrowed in the aggregate being to the extent of ₹ 6.81 lakhs i.e. both working capital and term loans. Thus, as held by this Court in CIT v/s. Reliance Utilities & Power Ltd. (2009 (1) TMI 4 - BOMBAY HIGH COURT that where both interest bearing funds and interest fee funds are available then a presumption would arise that investments to sister companies would be out of its interest free funds - Decided against revenue

Summary

Issues:
1. Whether commission payments made to nonresident sales agents without tax deduction are disallowable under Section 40(a)(i) of the Income Tax Act, 1961?
2. Whether disallowance of interest was warranted when the company had sufficient free funds?

Analysis:

Issue 1:
The appeals challenged a common order of the Income Tax Appellate Tribunal regarding commission payments to nonresident sales agents for Assessment Years 2007-08 and 2008-09. The Commissioner of Income Tax (Appeals) decided in favor of the Revenue for 2007-08 but in favor of the Assessee for 2008-09. The main contention was whether tax deduction was necessary on commission payments to nonresident agents. The Tribunal relied on various precedents and the withdrawal of certain Circulars by the CBDT. The Tribunal concluded that the income of nonresident agents did not arise in India, hence Section 40(a)(i) did not apply. The Tribunal's decision was based on established legal principles and previous judgments, including a Supreme Court decision. The Court found no change in the law that would warrant deviating from the Tribunal's decision. The Court also noted that the Circulars in force during the relevant assessment years favored the Assessee. Therefore, no substantial question of law arose in this regard.

Issue 2:
Regarding the disallowance of interest, the Tribunal's decision was based on a previous case. The Court highlighted the importance of the Revenue providing justifications for filing appeals, especially when issues are settled by previous decisions. The Court emphasized the need for certainty in tax matters and discouraged frivolous appeals. In this case, the Court found that the Assessee had sufficient interest-free funds, which justified the investments made. Citing a relevant precedent, the Court concluded that when both interest-bearing and interest-free funds are available, investments from interest-free funds are presumed. Therefore, the Court found no substantial question of law in this aspect as well.

In conclusion, the Court dismissed the appeal, emphasizing the importance of due diligence in filing appeals and upholding established legal principles in tax matters.