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2016 (5) TMI 71 - AT - Income TaxDeemed dividend addition u/s.2(22) - Held that - The provision is very clear that to become a beneficiary they must be registered as shareholder. We rely on the decision of CIT vs. Madurai Chettiyar Karthikeyan (2014 (4) TMI 825 - MADRAS HIGH COURT ) were held trade advance in relation to business transaction cannot be treated as deemed dividend within Sec.2(22) (e) of the Act - Decided in favour of assessee Addition being payment of foreign commission paid to foreign agent in procuring orders - non deduction of tds - Held that - The assessee has not substantiate with the type of works undertaken by Foreign Agent and volume of business conducted by them in proportionate to total turnover and also there is no confirmation produced in respect of commission s by foreign agent. Considering the facts, we set aside the order of Commissioner of Income Tax (Appeals) and remit the issue to the Assessing Officer for limited purpose to verify the genuineness of transaction whether foreign agent have paid taxes in their country. Deduction u/s.80IB of the Act on job works treated as business income - Held that - We considered the submissions and findings of the ld. Departmental Representative on the order of Commissioner of Income Tax (Appeals) which lacks clarity and the claim of job works by the ld. Authorised Representative does not specify the nature of work undertaken by the assessee company and the same was not reflected by the Assessing Officer in his order nor assessee has produced relevant materials on record to explain the nature of job works undertaken and job works charges takes the characteristic of business income. Even before us, the ld. Authorised Representative could not substantiate the working criteria of nature of job works with any supporting material in respect of particular product and further there is no discussion on the product used in job works by the Commissioner of Income Tax (Appeals). We are of the opinion that the matter has to be re-examined for limited purposes to verifying the nature of job works for captive consumption or for others. Therefore, we deem it necessary to set aside the impugned order of Commissioner of Income Tax (Appeals) and remit the file to the Assessing Officer to pass the order on above findings and Assessing Officer shall also provided adequate opportunity of being heard to the assessee. Allowability of Discount for computing deduction u/s 80-IB - Held that - There is no nexus provided with respect to business activities. Prime facie the assessee enters into international business transactions and such foreign exchange gain should be part of the business activity. The activity of rate difference arised directly related to the sale transaction involving export of goods of industrial undertaking. We rely on the decision of Jurisdictional High Court in the case of CIT vs. Pentasoft Technologies Ltd (2010 (7) TMI 75 - MADRAS HIGH COURT ) were it was held that in order to allow a claim under section 10A what all is to be seen is whether such benefit earned by the assessee was derived by virtue of export made by the assessee. The exchange value based on upward or downward of the rupee value is not in the hands of the assessee. Therefore, when the fluctuation in foreign exchange rate was solely relatable to the export business of the assessee, and the higher rupee value was earned by virtue of such exports carried out by the assessee, the benefit of section 10A should allowed to the assessee in respect of such gain and also relied on Bombay High Court decision in the case of CIT vs. Rachna Udhyog 2010 (1) TMI 38 - BOMBAY HIGH COURT were it was held that exchange rate difference arises and is directly related to sale transaction involving export of goods of the industrial undertakings and, therefore, the difference on account of exchange rate fluctuation is entitled to deduction under section 80IB of the Act. Considering apparent facts we are not inclined to interfere with the order of Commissioner of Income Tax (Appeals) and dismiss the ground of the Revenue.
Issues Involved:
1. Applicability of deemed dividend under Section 2(22)(e) of the Income Tax Act, 1961. 2. Tax implications of commission payments to foreign agents under Section 195 of the Income Tax Act, 1961. 3. Eligibility of job work income for deduction under Section 80IB of the Income Tax Act, 1961. 4. Eligibility of foreign exchange forward contract gains for deduction under Section 80IB of the Income Tax Act, 1961. Issue-wise Detailed Analysis: 1. Applicability of Deemed Dividend under Section 2(22)(e): The primary contention was whether the advances received from Penguin Garments Pvt. Ltd. should be treated as deemed dividend under Section 2(22)(e). The Commissioner of Income Tax (Appeals) (CIT(A)) held that the provisions of Section 2(22)(e) were not applicable since neither company held shares in the other, thus it was a commercial transaction. The Tribunal upheld this decision, stating that the provision applies only when the shareholder of the company is in receipt of the loan/advance. The Tribunal relied on the decision of CIT vs. Madurai Chettiyar Karthikeyan, which held that trade advances related to business transactions cannot be treated as deemed dividend. 2. Tax Implications of Commission Payments to Foreign Agents: The issue revolved around whether the commission paid to foreign agents for procuring orders was taxable in India and subject to TDS under Section 195. The Assessing Officer (AO) disallowed the commission payment for non-compliance with Section 40(a)(i). The CIT(A) allowed the assessee's claim, stating that the foreign agents did not have a permanent establishment in India. The Tribunal remitted the issue back to the AO to verify the genuineness of the transaction and whether the foreign agents paid taxes in their respective countries, following the decision in ACIT vs. Euro Leder Fashions Ltd. 3. Eligibility of Job Work Income for Deduction under Section 80IB: The AO treated the receipts from job work as other income and excluded them from business income eligible for deduction under Section 80IB. The CIT(A) allowed the deduction, considering job work as business income. The Tribunal noted that the nature of job work was not clearly specified and remitted the issue back to the AO to verify whether the job works were for captive consumption or for others, following the decision in CIT vs. Impel Forge & Allied Industries Ltd. 4. Eligibility of Foreign Exchange Forward Contract Gains for Deduction under Section 80IB: The AO denied the claim of deduction under Section 80IB for gains on foreign exchange forward contracts, treating them as speculative income. The CIT(A) allowed the claim, stating that the gains were directly attributable to the business of exports. The Tribunal upheld the CIT(A)'s decision, relying on the decisions of CIT vs. Pentasoft Technologies Ltd and CIT vs. Rachna Udhyog, which held that exchange rate differences related to export transactions are entitled to deduction under Section 80IB. Conclusion: The Tribunal's judgment addressed each issue comprehensively, upholding the CIT(A)'s decisions on deemed dividend and foreign exchange gains while remitting the issues of commission payments and job work income back to the AO for further verification. The appeals were partly allowed for statistical purposes.
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