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2017 (12) TMI 474 - HC - Income TaxTDS u/s 195 - Disallowing the payment under Section 40 (a)(i) for failure to deduct TDS - Held that - Section 40 (a) (i) could not be invoked to disallow such payment as deduction on the ground that no TDS under Section 195 (1) was deducted from such payment. Further the CBDT Circular No. 23 dated 23rd July 1969 stated that A foreign agent of an Indian exporter operates in his own country and no part of his income arises in India. It acknowledges that such commission is remitted to the agent abroad and not received by him or on his behalf in India. Such agent is not liable to income-tax in India on the commission. This was reiterated by the subsequent Circular No 786 dated 7th February 2000. Both the circulars are binding on the Revenue. The contention of the Revenue that the above Circulars cannot override the Act, was negatived by this Court in CIT v. EON Technology (P.) Ltd. (2011 (11) TMI 20 - DELHI HIGH COURT) by holding that when a non-resident operates outside the country, no part of his income arises in India. Further it was held that merely because an entry is made in the books of accounts does not mean that the nonresident received any payment in India. Since no part of the income could be deemed to have accrued to the non-resident in India, there was no obligation to deduct TDS from the payment made to such non-resident. Consequently, the question of disallowing the payment under Section 40 (a) (i) of the Act for failure to deduct TDS did not arise. - Decided in favour of the Assessee and against the Revenue.
Issues:
1. Accrual of duty drawback for taxable income 2. Addition of Customs Duty on closing inventory 3. Excessive consumption of raw material and inputs 4. MODVAT on excessive unexplained consumption of material 5. Depreciation on enhanced liability 6. Disallowance under Section 40 (a) (i) for payments to agents abroad Analysis: 1. Accrual of Duty Drawback: The Tribunal held that duty drawback of a specific amount had not accrued to the assessee and thus cannot be included in taxable income for the relevant assessment year. The High Court affirmed this decision in favor of the assessee against the Revenue based on a previous judgment. 2. Addition of Customs Duty on Closing Inventory: The deletion of the addition of Customs Duty on closing inventory by the ITAT was upheld by the High Court in favor of the assessee against the Revenue, citing a previous judgment. 3. Excessive Consumption of Raw Material: The Tribunal's decision that the Assessing Officer was not justified in making an addition due to excessive consumption of raw material and inputs was affirmed by the High Court in favor of the assessee against the Revenue based on a previous judgment. 4. MODVAT on Excessive Consumption of Material: The High Court upheld the decision of the Tribunal in allowing MODVAT on input difference due to excessive unexplained consumption of material, favoring the assessee against the Revenue, referencing a prior judgment. 5. Depreciation on Enhanced Liability: Regarding the claim of depreciation on enhanced liability, the High Court supported the Tribunal's decision to allow a specific amount out of the total claimed, favoring the assessee against the Revenue. 6. Disallowance under Section 40 (a) (i) for Payments to Agents Abroad: The crucial issue revolved around the disallowance of payments made by the assessee to agents abroad under Section 40 (a) (i) of the Act. The assessee argued that no TDS was deductible on such payments under Section 195 (1) of the Act since the non-resident agents did not earn assessable income in India. The High Court analyzed various precedents and circulars, ultimately ruling in favor of the assessee against the Revenue, emphasizing that without factual determination of income arising in India, the obligation to deduct TDS did not apply. In conclusion, the High Court's judgment favored the assessee on multiple issues related to tax implications and deductions, providing detailed reasoning and referencing relevant legal precedents and circulars to support its decisions.
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